Russia. The largest country on the planet by landmass. With a surface area larger than Pluto and the world’s ninth-largest population, the country relies heavily on trade and expansive transport and logistics (T&L) industry.
The Russian economy has been thriving and growing at a rapid pace during the last decade. Increasing government investments, expanding consumer and commodities sectors, and burgeoning industrialization, which has been aided by the entry of foreign corporations in some cases, have all contributed to the rise.
CREDO TRANS’ team of specialists presents below the insights into Russia’s current T&L landscape, outlines key trends and forecasts that could help you determine your company’s position in relation to the industry dynamics.
When it comes to the importance of logistics, it is fair to state that Russia is no exception. The Russian logistics market is very promising, with a lot of room for future expansion.
Countries in a global economy are “competing” in terms of logistics performance. The World Bank’s Logistics Performance Index (LPI) is a benchmarking tool for 160 countries. LPI helps identify problems and discover new opportunities. The index is based on a worldwide quantitative and qualitative evaluation of on-the-ground logistics operators (global express delivery services and freight forwarders) that share their viewpoint on the “friendliness” of the nations in which they operate and with which they deal in terms of logistics.
Since the LPI’s inception in 2007, Russia has progressively improved its ranking and score. The country was ranked 99 in 2007 but climbed to 90 in 2014. Within the same time, the LPI score increased from 2.37 to 2.69 on a scale of 1 to 5. The performance of customs and border crossing operations (1.94 in 2007, 2.20 in 2014), as well as shipment tracking and tracing (2.17 in 2007, 2.85 in 2014), all improved significantly.
After being affected by the economic crisis—falling oil prices, western sanctions, and a loss in consumer buying power—the Russian freight and logistics business has been steadily recovering, with numbers for imports and exports constantly growing. As a result, new transportation corridors were urgently needed to ensure a consistent flow of products into and out of the country.
The Arctic and the Far East are two regions of the most interest for the Russian T&L industry. The efforts are underway to ‘revitalize’ the Arctic—an area with ample supplies of oil and gas—with a projected investment of $136 bln by 2030. The Russian Far East, another hub of logistics growth, has long served as the springboard for trade with the Koreas, China, and Japan, increasing the nation’s stakes in the Asia-Pacific region and allowing Russia to integrate into the Indo-Pacific economy.
The Russian 3pl (third-party logistics) market, with a total value of $23.4 bln, is by far the largest in the CIS. Russia’s transportation outsourcing accounts for 22 percent of the market, a fifth of the entire T&L sector. In comparison, 3pl providers cover 65 percent of the European market and 48 percent of the Chinese market. In Russia, there are about 4,000-6,000 logistics businesses, but just 100 of them can be viewed as true 3pl service providers. STS Logistics, Eurosib, Nienshants Logistics, and RZD Logistics, a subdivision of Russia’s railway powerhouse RZD, are among the notable names.
An unsaturated 3pl market suggests that multinational companies have significant competitive advantages to enter Russia. 3pl as a business is a relatively new phenomenon in Russia. Misconceptions about the type of services exist, as well as the fact that many Russian enterprises handle transportation in-house. The 3pl market in Russia is already dominated by foreign behemoths, like Federal Express, DHL, UPS, TNT Express, etc, with Russian enterprises struggling to achieve international service standards. The emergence of Big Data is projected to be an important driving factor for the 3pl industry growth in the years to come.
Whether you’re in the logistics sector or not, if you’re operating in Russia or considering doing so, there are three key things to remember:
- Russia, along with Kazakhstan, has the best logistical performance among the CIS countries (LPI 2.76 in 2018). So, if you’re thinking about where to establish your operations, Russia has certain logistical advantages.
- Transport infrastructure (e.g. ports, highways, and railways) is a major pillar for volume-intensive business. The Federation has begun numerous projects to improve transport infrastructure. This is a good indicator, especially if you’re in a volume-intensive industry (like manufacturing).
- Outsourced logistics and freight forwarding are gaining traction in Russia, with significant progress already made. However, no company can expect to succeed in Russia by merely using comparable supply chain practices as in Europe or the United States, thus acquiring this expertise from local resources is strongly recommended. Contact CREDO TRANS experts now for the advice!
Russia is a land brimming with opportunities for 3pl and freight forwarders, and the market is poised to grow.
Russian Transport Indusrty Overview and Key Trends for 2021-2022
The transport sector in Russia has evolved into an interdependent, highly complex technology-oriented industry that uses a major portion of the country’s energy and natural resources. Roughly 6.3 percent of Russia’s $1.28 trillion GDP is generated by the T&L industry. It is estimated that the sector holds $150 bln of business potential — and there are plenty of market entry points for foreign transportation service operators.
The backbone of all logistics is a well-functioning transportation infrastructure, which includes ports and terminals, rail, and highways, all of which require significant public investment. Russia’s LPI score increased from 2.59 in 2014 to 2.76 in 2018, thanks to major road, rail, and port investments.
There are two types of transport infrastructure: domestic network and foreign trade infrastructure. Road networks (particularly the Russian Federal Highways) and Russian Railways are important routes for national freight transit. Russian Railways has announced plans to construct several high-speed railways (HSR). The entry lines of the Moscow-St. Petersburg HSR will be finished by 2024. The bulk of international trade is transported via seaports. The most important ones are in the Far East Basin (Vostochny, Vladivostok) and the Baltic Basin (St. Petersburg, Ust-Luga, Kaliningrad). The throughput of Russian seaports was over 821 mln metric tons of cargo in 2020. Many of Russia’s infrastructure improvement projects have created transport system ICTs by equipping highways with state-of-the-art telematics, implementing the ERA-Glonass satellite navigation system.
As of 2020, public transportation accounted for the biggest number of passengers in Russia, with buses being the most popular mode of transport. This increase is due to a growth in air passenger traffic as well. The positive dynamics of air passenger turnover is attributed to a flexible pricing policy of the airlines, as well as current government determination to ensure the affordability of air travel.
Since 2016, Russia’s yearly road freight volume, the major bulk of which was transported through the Central Federal District, has been steadily increasing. As of 2020, Germany was Russia’s most important European road freight import partner, while Finland recorded the biggest volume of Russian road freight sent to the EU-28. While primary commodity groups transported by road were fast-moving consumer goods and small industrial products, energy commodities prevailed. The most common rail freight commodities in Russia in 2020 were coal, oil, and petroleum products.
Tank carriers moved the biggest volume of water cargo in Russia. The North Sea Route’s capacity has increased significantly in recent years, reaching 32.97 bln metric tons in 2020. Fossil fuels had the highest share of transshipments in the country, with charcoal leading in dry cargo by volume and oil leading in liquid cargo. In 2019, AirBridgeCargo Airlines, a subsidiary of the Volga-Dnepr Group, was the leading company by cargo volume moved.
A new decade heralds a dawn for Russia’s T&L sector. Here are the top five trends that will shape the freight movement in the world’s largest country in the next ten years.
1. The Far East’s growing influence
When it comes to establishing a whole new global transportation route, China is nothing short of ambitious. The Belt and Road Initiative is the world’s most ambitious logistics development, and it will have a major impact on Russia. According to China’s General Administration of Customs (GAC), bilateral trade with Russia increased by 30 percent in 2018. Russia imported $47.98 bln worth of commodities from China in 2018. Chinese imports of Russian goods increased by 42.7 percent. The total value of these transhipments was $59.08 bln.
2. Trucking is undergoing impressive development
The road transportation network in Russia moves the most freight per sector in the entire Federation. However, it has recently been in a perilous position, with rising costs and a new tax structure hurting many SMEs. We can observe, withal, the market strengthening if we look at the experience of trucking companies in Moscow. The volume of freight moved by trucks in Russia’s capital increased by 21 percent by the end of 2019. In terms of tonnage growth, the following are the top three road cargo routes: Chelyabinsk-Yekaterinburg, Rostov-Krasnodar, Novosibirsk-Omsk.
3. E-commerce to drive 3pl, 4pl, and intralogistics
As we enter the new decade, online shopping is gaining a foothold in Russia’s retail industry. By the end of 2021, we estimate that e-commerce will account for 8 percent of total Russian retail sales, a trend that is expected to continue. Since the beginning of the decade, the value of e-commerce purchases in Russia has doubled year after year. Based on the foregoing, 3pl, 4pl, and intralogistics have a lot of room to expand in the 2020s.
4. Food and beverage exports are expected to increase
Throughout 2021-2022, it is anticipated that Russia’s T&L sector will continue to rely on exports. When it comes to Russia’s outbound commerce, agricultural goods are quickly catching up to mineral products. Grain, livestock, finished meat products, and seafood make up the majority of Russia’s food and beverage exports, worth around $25 bln, estimated to reach $40 bln by 2025. Subsequently, there will be favorable opportunities to provide transportation services to the Russian agriculture sector. These include intralogistics equipment for warehouse complexes and distribution centers, as well as cold chain transportation and dedicated end-to-end agricultural logistics solutions.
5. Outsourced logistics will continue to develop
Domestic consumption, such as e-commerce, is proven to be a primary driver of outsourced logistics, as previously stated. Outsourced logistics currently accounts for 7.8 percent of Russia’s entire T&L. National rail carrier, RZD, holds 20 percent of this sector. In 2022 and throughout the next decade, we expect 3pl to play a key role in Russia’s T&L.
The Main Parameters of the Russian Transport System
Any nation’s transport system is divided into water (sea and river), land (rail and road), air, and pipeline. The volume and structure of transportation traffic generally reflect the level and structure of the national economy, and the geography of the transportation network and freight movements reflect the placement of productive forces. Length of communications, number of employees, freight, and passenger turnover are all quantitative measures of the transportation system. Further, we examine the main parameters of the Russian transport system, categorized by the mode of transport.
The Russian Federation’s transport network is one of the most extensive in the world. From Kaliningrad in the west to Kamchatka in the east, the country’s network of highways, rail, and airways stretches about 7,700 kilometers (4,800 mi).
The Federation has a large marine transportation footprint, with over 37,000 kilometres of coastline and maritime borders that encompass the Arctic and the Pacific Oceans, Caspian, Baltic, and Black Seas. Cargo ships transport as much as 60 percent of Russia’s international trade. There are over 1,300 ocean-going vessels in the Russian merchant fleet. St. Petersburg, Ust-Luga, Bronka, Kaliningrad, Novorossiysk, Vostochny, Murmansk, and Vladivostok are among Russia’s largest and busiest ports. The Russian River Fleet uses a total of 101,000 kilometers of navigable channels (62,761 mi).
Road transport is a major player in Russia’s T&L. The Russian highway system spans 948,000 kilometers (589,087 mi), with 416,000 kilometers (258,502 mi) of highways serving specific industries or farms. Currently, the road transport in the Russian Federation transports about 80 percent of the volume of transportation of all goods within the country and more than 50 percent of passenger traffic. Every year, the number of cars in Russia rises by six percent.
With a total track length of 85,600 kilometers (53,200 mi) as of 2019, Russia has the world’s third-largest railway network. It uses a 1,520 mm wide rail gauge. The electrified track, conducting the vast bulk of rail traffic, makes up about half of Russia’s railway network (43,800 km, or 27,200 mi). Russian Railways, the country’s state-owned rail carrier, is one of the world’s major transportation firms, with a monopoly on rail transportation in Russia. It was founded in 1992 and employs approximately 950,000 people, accounting for 2.5 percent of the country’s total GDP in 2009.
In the next 20 years, the Russian Federation’s air transport market is expected to rise by 76 percent. By 2037, there would be an additional 58.8 mln passenger travels. The Federation’s air transport industry, which includes airlines and the respective supply chain, is predicted to contribute $19.1 bln in GDP. The nation’s air transport sector employs 290,000 people. In addition, the industry employs 464,000 people by purchasing goods and services from local vendors. There were 227 airports in Russia in 2018.
The country also has a large oil and gas pipeline network, with 48,000 kilometers (29,827 mi) of crude oil pipelines, 15,000 kilometers (9,321 mi) of refined petroleum product pipelines, and 140,000 kilometers (86,996 mi) of natural gas pipelines. The Druzhba pipeline, the world’s longest and one of the largest oil pipelines, is located in Russia. It transports oil over a distance of 4,000 kilometers (2,500 mi) from the Russian Far East and Kazakhstan to Germany, Ukraine, Belarus, Hungary, Slovakia, Poland, and the Czech Republic.
The Impact of the Government on the Development and Functioning of Transport in Russia
The Russian government considers the T&L as the national economy’s top priority. Around 6.3 percent of Russia’s USD 1.28 trillion GDP is allocated to T&L.
Here are the Major Russian Government Programs and Industry Development Strategies at a glance:
- Strategies and Development Plans: Russian Transport Strategy ‘2030, Development Plan for High-Speed Railway Transport ’2030, Strategy of Domestic Water Transport Development ’2030.
- State Programs for Transportation System Development in 2013-2030: Mainline Railway Transport, Civil Aviation, and Air Navigation Services, Traffic Management, Sea and River Transport, Development of High-Speed Vehicular Roads via Government-Private Partnerships.
The Transport Strategy of the Russian Federation ‘2030 (developed in 2008, a revised version approved in 2013), outlines directions of government policy, and the authorities are now rightly placing the Strategy provisions at the center of decision making. In particular, the key multi-year federal financing program, the State Program for Development of Transport System, is now well synchronized with the Strategy.
To develop infrastructure projects, the government is willing to actively utilize public-private partnership (PPP) tools. The government has enacted a concessions law and established a special investment fund to finance infrastructure projects facilitating PPP.
The Russian government is working on measures to shift the country’s export structure away from primary products and resources toward integrated and sophisticated technologies and services. Existing transportation corridors will be improved, and new ones will be developed.
Integration of Russia Into the International Transport System
The international transport industry is entering a period of rapid change. Globalization, logistical integration, and the advancement of IT all contribute to the restructuring of international trade models and, as a result, real trade flows. Economic growth, more efficient allocation of resources, better customer choice, and enhanced competitiveness are all benefits of such reorganization. One of the important phases in the development of the transport sector and building effective national transportation infrastructure is the integration of the Russian T&L industry into global transport systems.
The Russian Federation is one of the EU’s, APEC’s, and CIS’s most important allies. Russia actively takes part in different summits on international trade cooperation (within the bounds of G20, Black Sea Economic Agreement, CIS summits, etc.). Russia’s beneficial geographic position allows the country to connect the economic heavyweights of Asia and Europe. The country is an essential transit logistics link between China and Europe, with the Belt and Road Initiative expected to expand this link even further.
According to the Global Competitiveness Report 2015-2016, Russia is ranked 35th out of 140 nations in terms of the quality of transportation infrastructure development (World Economic Forum, 2015), 123rd in the world for road infrastructure development, 24th for railway infrastructure, 75th for port infrastructure quality, 77th – for air transport infrastructure.
The development of trade logistics is directly tied to any country’s participation in global value chains (GVCS). According to the World Bank, developed economies are the leaders in the field of transportation logistics. Russia today has a raw material role in world processes with a high degree of participation, which is associated with the mining industry. A promising way to transform this role in the direction of transition to the provision of high-tech and, in the future, innovative services is to strengthen the role of regional transport and logistics systems toward developing the export of transport services. Global variables, such as geographical location and resource availability, dictate Russia’s role in the GCVs.
The world now is facing a transport revolution, which will have an impact on how we all move and live, as well as on the movement of goods over the globe.
Russia’s T&L industry may gain more in the future from its geographic location connecting East Asia and Europe. The establishment of port special economic zones will boost intra- and inter-regional trade flows between Europe, Asia, and North America.
With CREDO TRANS, you will learn how to rethink your supply chain and plan for future success. Our team is well-versed in all segments of Russia’s T&L sector, including key trends and forecasts in the industry that could probably affect your business. Call our experts now!