DOT DEPUTY SECRETARY CINO'S MEETING WITH RUSSIAN

UNCLAS SECTION 01 OF 02 MOSCOW 012161 SIPDIS SENSITIVE SIPDIS STATE FOR EB AND EUR/RUS USDOC FOR 4321/ITA/MAC/EUR/RISA EDWARDS AND BEADLE USDOC FOR 3004/CS/ADVOCACY/BLOOM NSC FOR GRAHAM AND MCKIBBEN E.O. 12958: N/A TAGS: ECON ELTN OVIP PREL RS SUBJECT: DOT DEPUTY SECRETARY CINO'S MEETING WITH RUSSIAN RAILWAY VP MOROZOV ¶1. (SBU) SUMMARY. In a October 24 meeting with Deputy Secretary Cino, Russian Railroads (RZhD) Vice President Vadim SIPDIS Morozov discussed on-going RZhD restructuring efforts and competition in the rail sector. Morozov said GE's diesel engines had been found incompatible with Russia's mostly electrified rail system, but left open the possibility of using GE's radio technology for their signaling system. Morozov supports the creation of a working group between RZhD and U.S. transportation authorities. END SUMMARY. ¶2. (SBU) On October 24 Deputy Secretary of Transportation Cino met with Russian Railroads (RZhD) Vice-President Vadim Morozov. Morozov presented an overview of RZhD's restructuring efforts and recent accomplishments. RZhD is one of three large state-owned natural monopolies (Gazprom (gas) and RAO UES (electricity) are the other two) currently undergoing reform. The first two stages of rail reform were completed by November 2005, and in August 2006, RZhD President Yakunin signed a new government approved plan for the 2006-2010 period that calls for: increasing competition in the sector; modernizing RZhD's capital stock; selling off non-essential assets; attracting investors; and eliminating cross subsidies between its freight and passenger operations. BUSINESS BOOMING -------------- ¶3. (SBU) Morozov rattled off a list of accomplishments to date. RZhD had kept rate of freight tariff (price) increases at or below inflation, and, since 2003, growth in freight and passenger operations has averaged four percent a year. RZhD transported one billion passengers this year and was increasing the quality of its services. As one of the largest employers in the country, RZhD has raised wages, in line with increases with labor productivity. The financial situation has been stable and profits in 2005 exceeded $4.2 billion. (Note: According to press reports, this is a 50 percent increase over the previous year.) The three international rating services, Fitch, S & P, and Moody's have given RZhD high ratings. RZhD is important to the economy -- one out of every four rubles of RZhD's revenue goes into federal coffers. RAIL REFORM CONTINUES -------------- ¶4. (SBU) RZhD subsidiaries have been established to deliver services in container, refrigerated, automobile, and timber transport. By the end of 2007, Morozov expects 40 new companies to be set up. After creating separate companies, they will be sold off to increase available funds for investment. RZhD was investing $6 billion a year on infrastructure and upgrading its capital stock. ¶5. (SBU) Private competition has been developing at an unexpectedly rapid pace. According to Morozov, non-RZhD companies increased the number of cars they were operating from 200,000 in 2003 to 310,000 in 2006. There has been a 50 percent growth in the high profit end of the market. Whereas RZhD works under a regulated tariff regime that is established by the Federal Tariff Service, RZhD's competitors are free to set their own prices. (Comment: the inference here is that competitors are undercutting RZhD's set prices. End comment.) Competition is also heating up in the market for passenger service. There are now four competitors operating on the busy St. Petersburg - Moscow line. RZhD is planning on forming a holding company dedicated to passenger service. However, the government will continue to subsidize RZhD's passenger service. ¶6. (SBU) Further reforms will require additional amendments to the Charter on Railroads and Rail property. RZhD is working closely with the Ministry of Transportation, inspection agencies, and both chambers of the legislature. ASIA-EUROPE CORRIDOR -------------- ¶7. (SBU) Morozov said that the distance from Nakhodka to the Baltic states was 10,000 km long and different electrical currents used by the trains along the way slowed down freight transportation. RZhD transports up to 350,000 containers from Asia to Europe. He sees great potential for the MOSCOW 00012161 002 OF 002 Trans-Siberian line to increase this number threefold. Currently, there are 17 million containers stacked up in Korea and Japan awaiting shipment to Europe. It takes 30 to 35 days to ship the containers by sea. RZhD could deliver the same containers in 12 to 15 days. Admittedly, Russia is lagging behind in transport logistics. RZhD is working on joint projects with China, Korea, Germany, and Poland to improve the integration of their transportation infrastructure. He joked that if North Korea wasn't busy blowing up bombs, Russia would already have a direct rail link to South Korea. RZhD-GE COOPERATION -------------- ¶8. (SBU) When Deputy Secretary Cino raised comparisons between the U.S. and Russian rail systems, Morozov said that U.S. freight cars are solid, but heavy, and Russian trains can travel 10-12 km faster because they are lighter. Turning to GE engines, he said that their diesel engines are not compatible with the Russian rail system, which is 80 percent electrified. In comparison tests conducted between U.S. and Russian engines, Russian engines won out when both engines were subjected to extreme weather conditions, not an uncommon phenomena in Russia. Morozov held out hope for cooperation with GE using its radio control technology. RZhD has chosen foreign equipment over Russian technology in the past, like the decision to purchase eight German high speed engines for the planned Moscow - St. Petersburg express line. The deal includes local content provisions and requires production to take place in Russia. FUTURE COOPERATION -------------- ¶9. (SBU) Morozov responded favorably to Deputy Secretary Cino's suggestion that RZhD and U.S. Transportation authorities conduct working group meetings to discuss areas of common interest in the future. ¶10. Deputy Secretary Cino's party has cleared this message. BURNS