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Nov 11, 2005: CEO Forum with Vladimir Yakunin of Russian Railways

Vladimir Yakunin, president and CEO of Russian Railways (RZD), addressed top managers of AmCham member companies as part of the Nov. 11, 2005, AmCham Russia CEO Forum. Below are excerpts from his remarks to attendees.

Vladimir Ivanovich, tell us a bit about progress on railroad reforms in Russia.

Reform (which began in May 2001) can be divided into three important stages. As part of the first stage, which was completed in the fall of 2003, functions were divided into state regulatory and commercial activities. State regulatory activity today is carried out by the Ministry of Transport of the Russian Federation, while all questions related to transport provisions have been assigned Russian Railways.

For the past two years, Russian Railways has achieved 10 percent growth in transport volumes, maintained technological and financial stability, increased train movement safety, provided for the rebirth of domestic locomotive and carriage construction, and meaningfully increased the volume of taxes paid into the budget.

Additionally, during the second stage, the reform of the actual corporation was begun by creating wholly-owned daughter companies in its competitive areas of activities. Already one daughter company, ELTEZA, has been created and focuses on the production of automated and telemetric equipment. Nine other “daughters” focus on production and capital renovations of rails and related equipment. Stocks in these companies will be issued at some point during the next five years, Furthermore, along with regional administrations, suburban passenger train networks are being created, although stock offerings in these are not planned.

In our opinion, the most tangible results of management’s activities as the second stage of reforms ends, is the profitability and solid financial stability of Russian Railways while fully meeting growing transport demand and still providing complete safety and improved service as a passenger rail network and as a cargo transport company.

The third phase of reform is connected with the creation of a number of additional Russian Railways daughter companies and with stimulating the creation of private transport companies, which should in the end lead to the development of real competition on Russian rail lines.

Connected with this, we must also provide a division for passenger transport operating at a loss and separated from the basic market-oriented activities of the company. In the beginning of next year, a Federal Directorate for Long-Distance Passenger Transport will be created and will work as a branch of Russian Railways. It is planned that eventually this branch will become a full daughter company or a completely independent federal passenger transport company. However, this will only occur after the question of state subsidies for losses on passenger transport has been decided.

The results of the third stage of reforms will be the division of the company’s business further into cargo transport and infrastructure services. Subsequently, Russian Railways will only have a monopoly over infrastructure services.

Vladimir Ivanovich, could you clarify under which circumstances you specifically see the participation of foreign investors in Russian Railways projects? And, where specifically are you awaiting their participation most of all?

Today, Russian Railways is the first Russian company to have received three investment ratings from three of the largest international ratings agencies – Moody’s (Baa2 and a stable prognosis), Fitch (BBB and a stable prognosis) and Standard & Poor’s (BBB- with a stable prognosis). We feel that thanks to such high evaluations of Russian Railways’ work, qualified foreign investors – such as insurance companies and investment and pension funds – will use the possibility to acquire our obligations.

The investment budget of Russian Railways for 2006-2008 is RUR 539 billion. The main source of the company’s investment program is amortized deductions. Furthermore, RUR 5.9 billion in profits and RUR 53.6 billion in attracted funds will be directed toward development. A significant portion of these funds will be tagged for infrastructure development, such as on strategic transport lines to the south, northwest and east, where over three years we are planning to invest more than RUR 118 billion.

Additional investment resources for the development of infrastructure will be provided in the near future by the issue of stocks in the newly created daughter companies.

However, Russian Railways, despite its impressive investment program, doesn’t have enough resources for its complete modernization. We would welcome the participation of foreign investors, for example, in creating a next-generation locomotive, as part of a joint venture. We already have such plans. In fact, not long ago we were in Italy and agreed to examine the possible form of such cooperation with the Italian concern, Finmekkannika.

In October, Russian Railways attracted syndicated credit worth $600 million in a deal with 28 banks, among which are included RZB, Barclay’s Capital, Drezdner Keinwort Wasserstein and HSBC. These funds will allow Russian Railways to significantly widen its possibilities in carrying out investment and infrastructure projects – including international ones, such as increasing post capacity at border crossings with China, implementing faster suburban passenger transport and others. These projects show how closely the needs of the railroad correspond with the interests of the state.