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China considers cuts to Belt and Road rail rate subsidies

China considers cuts to Belt and Road rail rate subsidies

China is considering cutting subsidies for China-Europe rail shipments and reducing its investments in Russia’s portion of Belt and Road, according to sources in the Russian Ministry of Transport.

Cuts in shipment subsidies covering 40 to 50 percent of the total cost would lead to higher rates for shippers and could slow the strong growth in volume on the trade in recent years. The infrastructure investments under threat include modernization of the Trans-Siberian Railway (TSR) and Russia-China border crossings at Zabaikalsk-Manchuria and Makhalino-Hunchun.

“Even such high tariffs of $6,000 to $7,500 for the delivery of a 20-foot container from the Chinese northeast provinces Heilongjiang, Jilin, and Liaoning to Moscow does not fully cover expenditures of transport companies,” said Kirill Konstantinov, deputy head of logistics department in the Russian Ministry of Transport.

For the route to be profitable rates would have to hover between $8,000 and $9,000 per container. That compares with between $11,000 to $12,500 for sending the same amount of cargo by air and $1,200 to $2,000 depending on the season for ocean shipping, he said. The transit time by rail is 18 to 20 days, compared to around 35 days for ocean shipping.

For the delivery of cargo from Moscow to Germany (Hamburg, Duisburg), shippers must pay an additional $2,000 to $2,500 per TEU in the case of both rail and air.

China had planned to divert 15 percent of its overall container flows between it and Europe to rail but will now have to adjust those efforts because of how unprofitable the route is for transportation companies, Konstantinov said.

The subsidies have been a major contributor to Asia-Europe rail growth, which has been so strong it has placed a spotlight on the structural issues of Europe’s rail network and raised questions over whether it could handle continued growth.

Through August, China-Europe rail traffic grew 17 percent year over year to 835,000 TEU, according to the Ministry of Transport, which projects total growth for the year to come in between 10 and 12 percent. Rail is most popular with shippers of high-value cargo such as electronics, automobile accessories, pharmaceutical products, cosmetics, and jewels, according to Svetlana Garmonina, head of Kitaysky Tovary, a Russian distributor of Chinese-made goods.

Although higher rates from the end of subsidies are the immediate concern, if China reduces its infrastructure investment in Belt and Road, then the issue of train speeds, already problematic, will become much more pronounced.

The average train speed on the TSR is 12 kilometers per hour (7.5 miles per hour), compared with 40 kilometers per hour in China, and without sustained investment there is little room for improvement because of the network’s high level of utilization and badly needed modernization.

China may also be reluctant to invest in the TSR because of the Baku-Tbilisi-Kars railway line that bypasses Russia through Azerbaijan, Georgia, and Turkey and would be able to support train speeds between 30 and 35 kmh. It would also end the need to transship to get across the Black Sea, though containers would need to cross a shorter distance on the Caspian Sea by ferry.

Should China end its support for modernizing the TSR, Russia may suspend its cooperation in Belt and Road, as there is already tension between the new nations over delays in project implementation and funding.

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