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Railway Industry

In our previous article, we explored the automotive industry, which quickly found replacements from Asia. However, a different situation currently applies to trains, which we will discuss in the following text.

Passenger Trains

The altered geopolitical situation has also impacted the railway engineering sector. Particularly due to the conflict in Ukraine and the inability to import spare parts for trains, European companies have ceased construction and/or servicing of their modern trains.

Spanish company Patentes Talgo, which manufactured high-speed Striz trains, unilaterally terminated its contract with Federal Passenger Company JSC (FPK, a subsidiary of Russian Railways) for servicing its trains.

Similarly, German company Siemens has taken the same route, closely collaborating with Russian Railways. It’s worth noting that the German company, in the Train Technologies joint venture established with Russian Railways and Sinara, produced cars for the Lastochka high-speed train and was also involved in servicing the Sapsan high-speed trains.

Hence, the immediate question arose: How would these trains be serviced? In some cases, they have already been abandoned: on March 10, 2022, operations of the Striz trains on the Moscow – Nizhny Novgorod route were abruptly halted without explanation.

However, as journalists from Novye Izvestiya report, who conducted interviews with industry experts, Russia will not be left without personal trains and carriages in general. This is because it has its own models that are highly independent of imports, such as EP2D, EP3D, and Ivolga trains. The question remains, however, about the quality of the trains. According to independent transportation industry expert Alexey Tuzov, Lastochka trains are 16 times more reliable than Ivolga, as demonstrated in tests conducted in 2019.

Cargo Trains

In addition to the issues with passenger trains, there is also an urgent problem with the supply of spare parts for freight cars. For example, in 2022, companies such as Amsted Rail, Timken, and SKF, which produced cassette bearings for innovative railway cars, restricted their activities in Russia.

Subsequently, one of the largest operators of gondola cars with an axle load of 25 tons per axle, the National Transport Company, made a statement predicting significant risks of a shortage of cassette bearings for coal transportation and called for the abolition of customs duties on bearings imported from China. According to the company, due to the shortage, there were up to 7,500 idle 25-ton gondola cars in Russia in August 2023.

As noted by experts cited by RBC, this has largely led to a 20.4% decrease in freight wagon production last year, and according to calculations by the Rollingstock industrial agency, deliveries of new freight cars to the Russian Railways network in 2023-2025 may decrease by 19.2% compared to 2020-2022.

During this period, import initiatives were possible: bearings from Chinese Wafangdian and Luoyang LYC, as well as from Uzbek SPZ Bearings, were approved for use in repairs and wagon production.

Meanwhile, the production of Russian cassette bearings has been increased by EPK-Brenko and TEK-KOM Production companies, which signed special investment agreements with the Russian Ministry of Industry and Trade for the complete localization of cassette bearing production.

In the fall of 2023, a complex situation with covered wagons also came to light. Maxim Zinchenko, the CEO of RailSpetsTrans, noted that “the deficit is growing, and it is difficult to compensate for sales due to high car prices – in the first half of the year, they increased by 20%, and compared to the beginning of 2022 – by about 55 percent.”

The challenges faced by the Russian railway industry, including disruptions in the supply of spare parts, a decrease in freight wagon production, and a complex situation with covered wagons, underscore the significant impact of geopolitical factors and sanctions. While efforts have been made to address these issues through import initiatives and increased domestic production, the industry continues to grapple with shortages and rising costs. These developments highlight the need for strategic planning and investment to ensure the resilience and sustainability of Russia’s railway infrastructure amidst evolving geopolitical dynamics.

Despite statements by several Russian politicians that sanctions imposed on Russia by Western countries largely stimulate the development of the national economy, restrictive measures have led to serious problems for many sectors. In the article, you will learn how a year and a half after the introduction of new sanctions, Russian businesses are seeking a way out of the crisis.

From Crisis to Adaptation

According to a survey of employees conducted by the Institute of National Economic Forecasts of the Russian Academy of Sciences in April to May 2022, sanctions affected nearly 60% of the surveyed companies. According to employees in the surveyed entities, sanctions particularly led to difficulties in obtaining imported raw materials and components (67.40% of responses); to price increases within the country (62.00%); to an increase in general economic uncertainty (44.20%); to higher import prices (40.30%), and to a decrease in effective demand in Russia (38.80%).

Companies responded to the challenges by seeking alternatives to departing suppliers within Russia (69.70% of responses), reducing investment costs (36.90%), exploring new markets (31%), and introducing new products (21.30%).

The same team of authors conducted a survey a year later – in spring 2023, which indicates that companies have generally adapted to the new reality: 31.5% of surveyed companies believed that they were not affected by anti-Russian sanctions, compared to 19.2% in April to May of the previous year.

Furthermore, it is worth noting that the percentage of respondents who stated that they only experience negative consequences of sanctions decreased from 56.9% at the end of 2022 to 46.5% in spring 2023, while the proportion of those who believe that sanctions had a positive impact increased from 16.2% to 18.9%.

“In spring 2023, Russian companies increasingly preferred active adaptation methods – searching for new suppliers and markets, modernizing production, etc., while reducing the scope of using passive adaptation methods based on reducing various types of costs,” summarizes one author from the study of survey results.

According to information from an analytical report prepared for the Central Bank of Russia in 2023, manufacturers of industrial products for export remain sensitive to sanctions. The problem lies not so much in the formal and informal restrictions imposed on Russian exports, but in the consequences of reduced imports due to sanctions in conditions of higher import dependence of exporters.

However, the level of sensitivity varies depending on the industry, so after reviewing the general situation of the Russian industry, you can proceed to analyze the situation in specific areas.

Automotive Industry

The Russian automotive industry and car enthusiasts were among the first to feel the effects of economic sanctions.

Recall that foreign companies such as Mercedes-Benz, Ford, Nissan, Toyota, Renault, Mazda, and many others left the Russian market – partly out of solidarity with Ukraine, and partly due to logistical difficulties with component deliveries. This affected factories that assembled these cars in Russia. At the same time, it became almost impossible to import European cars directly from the Old World: as part of the eleventh package of sanctions, it was prohibited to export any cars with an engine capacity greater than 1.9 liters to Russia.

All this led to a triple decrease in car production in 2022 compared to the same period in 2021.

In 2023, the situation began to improve slightly: new cars began to be assembled in factories abandoned by foreign companies. For example, production of Moskvich cars began at the former Renault plant in the capital, and at the Elabuga plant, where Ford Transit was previously produced, licensed assembly of Sollers brand vans began, as well as in the Lipetsk region.

In addition, contacts were established with new foreign partners: in 2023, the import of passenger cars to Russia almost tripled compared to the previous year – in the first 10 months of 2023, 889,400 cars were imported. China is the main supplier of new cars to Russia in 2023 – 80% of them. Cars are also imported through Kazakhstan, Kyrgyzstan, and to a lesser extent through Armenia and the UAE.

The most popular brands of newly imported cars are Chery (23%), Changan (10%), Omoda (9%), Geely (8%), and Exeed (7%). Omoda and Exeed are sub-brands of Chery, which means that this automaker as a whole represents almost 40% of imports.

The changed foreign policy situation affected not only the countries from which cars were purchased but also their age: Russians began to massively switch to imported used cars – in the first 10 months of 2023, 4.84 million used passenger cars were sold in Russia, which is 23% more than in the previous reporting period. The most popular brands are Toyota with a share of 27.4%. This is followed by Honda (16%), Kia (7%), BMW (6.5%), Nissan (6.3%), and Hyundai (5%).

However, servicing used cars is not so easy – there is still a shortage of spare parts for many cars, especially premium and rare brands, which, according to experts, will last at least until the end of the year. In July 2023, problems with deliveries of several items were reported – electronic components, body parts, interior parts, engines, and transmissions for Hyundai, Audi, BMW, Jaguar, Lexus, and Cadillac – had to wait six months.

The shortage of spare parts leads to their price increase. According to car experts, in the summer of 2023, there was a significant increase in prices for:

– body parts for foreign cars;

– engine control units;

– spark plugs;

– control units for Volkswagen power units;

– Brake pads and discs (especially for Japanese cars);

– air flow sensors.

Conclusions

The Russian automotive industry has faced significant challenges due to economic sanctions and the withdrawal of foreign automakers from the market. Despite initial setbacks, there are signs of adaptation and resilience within the industry.

Shifts in Production: The departure of foreign companies prompted domestic factories to begin assembling new car models, such as Moskvich, and to explore licensing agreements for the assembly of other brands, like Sollers vans.
Increased Imports: Russia has seen a surge in imports of passenger cars, primarily from China. This influx of new vehicles has diversified the market, albeit with a heavy reliance on a single source.
Rise in Used Car Sales: With limited access to new European cars, Russian consumers have turned to imported used vehicles. This shift has led to increased sales in the used car market, particularly for brands like Toyota, Honda, and Kia.
Challenges in Spare Parts: While the influx of used cars has boosted sales, servicing these vehicles has become more challenging due to shortages of spare parts. This has led to price increases and longer wait times for repairs, particularly for premium and rare brands.

Overall, while the Russian automotive industry continues to face obstacles, there are signs of adaptation and resilience as companies seek new partnerships and explore alternative solutions to mitigate the impact of sanctions and supply chain disruptions.