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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

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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

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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