The Global Emerging Market in Transition: Articles, Forecasts, and Studies

Russia's Crumbling Infrastructure

RUSSIA’S CRUMBLING INFRASTRUCTURE Russia needs investment in modern technology and more financial experience from the West if it hopes to make a difficult transition from socialism to capitalism. But Russia will have a hard time attracting foreign investment without a transportation system. Certainly, the big international lending institutions, which are providing aid to Russia, are paying a great deal of attention to its economy. Yet they have given practically no thought to its woefully underdeveloped transportation infrastructure, especially to ground transportation. A modern transportation system is crucial to Russia’s growth, to developing its vast stores of natural resources, and to playing a larger role in international business. For example, ships sailing from the U.S. and Canadian west coasts to Western Europe require 14 days of transit if they use the Panama Canal. If this cargo traveled via the Russian Arctic Seaway, it would take half the time. But this option is foreclosed because there is no modern port on the Russian Seaway. To take advantage of this money-saving route, American and Western European shipping companies first must invest in developing navigation systems and ports for the Arctic Seaway. Russia’s government also must find funds to build and improve roads. Although money in Russia is in short supply, one source of funds could come from a reduction in the military budget. The Russian army continues to have funds to build railroads, and could cut this expense by transferring the activity to building civilian roads and railroads. Russia’s crumbling aviation infrastructure also presents real and growing problems. In 1994, the air transportation industry suffered 45 accidents, including 14 crashes in which 299 people were killed. This compares with 53 fatalities in 1993. Not surprisingly, the airline industry experienced a decrease in total miles flown and a 12% decline in passenger traffic. The Journal of Commerce, Tuesday, September 12, 1995, p. 8A. 264 the emerging market of russia The former Soviet republics are trying to renovate airports and air traffic control systems, and are looking for foreign cooperation. But foreign investment is coming in only slowly. One reason is that no one has tried to place a value on potential investment properties. Potential investors do not know the real worth of investment opportunities. Still, a few positive things are happening. Recently, the United Nations Economic Mission in Eastern Europe decided to invest in the construction of an international airport in the autonomous republic of Kalmykia, on the western coast of the Caspian Sea. By and large, however, Russia’s transportation problems are pervasive , and they have led to a reduction in the volume of goods being shipped. The total decline for all modes of transportation was 75% in 1994 compared with 1993. This includes transportation by railroads, trucks, ships, river boats, air carriers, and pipelines. The transport picture for goods headed for export markets was somewhat better. Those deliveries actually were on schedule in 1994 more often than in 1993. For some goods, such as oil, the improvement was dramatic. Average waiting time for oil deliveries in 1994 decreased by 37% over 1994. The average railcar turnaround time was seven days, which shows that Russians are starting to understand the penalties for late delivery. Still, Russia has a long way to go before its transport system functions effectively. Most of its trucks do not meet international standards . During the first four months of 1995, the number of road accidents jumped by 17%, and about one-fourth of those accidents resulted from the poor conditions of the roads. In addition, the sea merchant fleet has not recovered from mismanagement under Communism. Delivery of goods declined by 17% in 1994, even though much of the Russian fleet was rented by foreigners for export/import operations. With the disintegration of the Soviet Union, Russia lost most of its important seaports on the Black Sea. Novorossiysk is an exception , but it needs substantial investment to become a modern port. Fully 60% of Russia’s ports are too shallow for modern tankers. Gas and pipelines, too, require repairs and modernization. They have a crucial function in Russia’s economy. In 1994, they were used russia’s crumbling infrastructure 265 to deliver 397 million tons of natural gas, 250 million tons of crude oil, and 15 million tons of oil products. What role can foreign industrial companies play in repairing Russia ’s infrastructure? Above all, they can pool their resources via...