FIRST PRIVATIZATION OF A FORMER SOVIET RAILWAY:  
Bringing International Experience and Best Practice to Estonia

Differences between Former Soviet railways and other continents

Let me exercise some caution here and point out that there some fundamental differences (Table A) between the Former Soviet railways and even those of other continents. In particular, we’ve heard a lot at this conference about how Russia compares with Germany and other European countries. But I think it is important to consider that the Russian Railways have more in common with North America than with Europe.

The prime business of the Russian Railways is freight, just as in North America; there are long distances in Russia, just like North America; and so there are more similarities between North America and Russia than there are between Europe and Russia.

Table A

	North America	Europe	Former Soviet
DISTANCES	Long	Short	Long
TRAFFIC PATTERNS	Concentrated	Fragmented	Fragmented
COMPETITION	Other Rail	Truck	Other Producers, Pipelines
CAPACITY CONSTRAINTS	Line Capacity	Clearances	Line Capacity
ORIENTATION	Freight	Passenger	Freight

Differences between Estonian Railways and Russian Railways

And in examining the differences between Estonian Railways and Russian Railways, I think there are some extremely important differences (Table B). For the most part, Russia is full of producers and Estonia is basically a transit corridor for Russian products. Another way of looking at it is: if you have a factory in the middle of Russia, you have one railway to deal with; but in terms of how you get it out of the country, you have many choices–send it to Russian ports, Estonian ports, Latvian ports or Lithuanian ports.

So Estonian Railways is in an intensely competitive market and our strategy has been to try to stay ahead of that competition by making the ports more competitive, which we’ll discuss next.

Estonian Railways’ market position

Estonian Railways is heavily dependent on Russian traffic. We are nothing more than the middle link between the Russian producers, the Estonian ports and the ultimate market; and there are many ways for that traffic to go. And we have very little ability to influence the physical capacity of Russian Railways or the tariff policy of Russian Railways. If you look at our tariffs and the percent of the haul that occurs in Estonia, it is a very small piece of the cost of moving the traffic. We have to work very hard, very smart and very fast in order to succeed in this business.

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Suggestions for Russia

At this point let me be highly presumptuous and come up with some suggestions for Russia, given that you are in a critical stage as far as the future of the railways. The most important thing to remember is that Russia’s environment is much different from that of North America and Europe. For this reason and more, restructuring should be undertaken very carefully. Most of the countries in which RDC does business privatized their railways because they had nothing to lose, the classic example being Argentina; there, the railways did not have a major role in the economy, so if we screwed up it would not be a big problem. But given the heavy dependence of Russia’s economy on the railways, this is not something that should be done lightly, and this is not something that should be done for political reasons to get done before the next election, as was done in the United Kingdom. Another reason is that in North America we have a highly developed road system, which is one of the reasons we only handle 30 percent of the traffic; if the railways failed in North America, it would not be as bad as if the railways failed in Russia.

At this point in the year 2004, there are many countries that have gone down this road—many countries that have privatized, many countries that have restructured—and there are lots of models from which to pick and choose. There are probably more failures than successes, but that is what Russia gets to benefit from—that others have made mistakes and paid for them.

My other advice is to focus on the Customer, which is how the North American railways have evolved. What is left of the North American railway system is a vigorous and privately financed system that exists to do nothing other than serve our Customers.

Finally, I would like to extend a personal invitation to come to Estonia and see for yourself how a Former Soviet Railway has been restructured, and you can do so by taking the overnight private sector passenger train from Moscow to Tallinn. We are very proud of what we have accomplished and we want to have a closer relationship with Russia.

These are very exciting times for railways.  As somebody who in my younger days admired the Russian Railway system for being the world’s biggest—handling at that time half of the world’s rail traffic—Russia still has 25% of the world’s railway traffic. I’m personally proud to be associated with a little railway that is a gateway for Russia to the outside world, just as it represents an opportunity to introduce new technology into this environment.

Thank you.

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