Russia Freight Transport Report Q3 2010

Russia registered a 13.3% year-on-year (y-o-y) surge in rail freight volume in April 2010, according to media reports. However, freight was down month-on-month (m-o-m), with the country's state-owned Russian Railways (RZD) recording a 1.9% drop in volumes to 101.1mn tonnes in April 2010 compared with 103.1mn tonnes in March 2010. The country's economy and the rail freight sector are not likely to return to pre-crisis levels before 2012. Growth in rail freight, which makes up around 85% of Russia's transportation, is expected to continue as the country recovers from recession.

After last year's recession, with a 7.9% contraction in GDP, the Russian economy is now looking healthier. With a fairly strong export-led component, we see GDP growth of 4.7% this year. Some after-effects of the bad times are still lingering with private consumption growth quite slow and the banking system to some extent still nursing its wounds. We expect the Russian economy to grow by an annual average of 4.5% over the medium-term forecast period to 2014, which will be ahead of the average for the global economy. Moscow is still seeking membership of the WTO, which if achieved would be a clear positive for the shipping sector; however, we believe membership will not be achieved before 2012.

We expect a reasonably strong recovery in Russian airfreight this year, with freight carried growing by 4.8%, going about one-third of the way to offsetting the big 14.1% drop in 2009. We believe the main Russian carriers are going through a period of consolidation and restructuring. Road freight carried will recover with 3.4% growth this year. Arguably, road freight faces potentially the greatest demand as Russian living standards improve and the country develops a wealthier, more consumer-oriented society. However, this potential is held back by the lack of a comprehensive, modern road network across the country. The Russian economy is heavily reliant on railfreight, which forms the backbone of its bulk transport system. We are predicting that railfreight carried will grow by a modest 1.9% this year. Looking forward, we expect low but steady growth of around 1.6% a year, slower than GDP.

Tonnage at the Port of St Petersburg will rise 7.3% on the back of domestic economic recovery and greater foreign trade, reaching 54.093mn tonnes by the end of this year. We see annual average volume growth of 5.1% in the medium term, which will be a little bit ahead of the expansion of the domestic economy. Pre-crisis throughput levels of just under 60mn tonnes a year will not be reached again at St Petersburg until 2013. At Russia's main container ports of St Petersburg and Novorossiysk, we predict that box volumes will increase by 16.1% and 34.4% respectively in 2010. This is a considerable recovery on 2009, where volumes dropped by 32.2% y-o-y at St Petersburg and 38.4% at the port of Novorossiysk. We believe that the recovery will be spurred by an uptick in Russia's trade volumes, with the Country Risk team forecasting the country's imports to rise by 15% and exports to grow by 5% following a year that saw Russia's total trade collapse by 19.0%.

Russian trade slumped by 19.0% in real terms in 2009 and is forecast to recover by 9.8% in 2010. In the medium-term forecast period to 2014, annual trade growth will be 7.4%, greater than the expansion of the domestic economy. Although we have highlighted the short-term strength of exports as a factor in the current economic recovery, in the medium term we believe imports will perform more strongly.

The risks to our Russian freight forecasts lie on the downside. The main risk is if the predicted 'double dip' global economic slowdown in 2011 turns out to be more severe than we have been predicting. A secondary risk is political - the involvement of Russia in any international dispute that could affect its trading patterns, either to the West or to the East; however, we judge this to be relatively low probability at the moment.