LOGISTICS OF EXPORTING TO EURASIA SERIES

Transportation, Distribution and Warehousing Services in Urals

November, 2006

Author: Dmitry Plotkin, Bisnis Representative in Yekaterinburg

1. GENERAL MARKET OVERVIEW

1.1 Opportunities in the Sverdlovsk Region

The Sverdlovsk region lies in the heart of the country, on the borderline between Europe and Asia continents. The capital of Sverdlovsk region – Yekaterinburg city -- has a well-developed network of railway, air, and automobile transport routes. Roads of federal statute go through Yekaterinburg. Its geographical position makes it possible to extend International Transport Corridor 2 (Berlin – Warsaw – Minsk – Moscow – Nizhniy Novgorod – Yekaterinburg – Trans-Siberia railway) to the capital of Sverdlovsk region. Yekaterinburg is the main hub connecting the European part of Russia and oil-and-gas producing areas of Siberia.

In 2004, Sverdlovsk region exported its production to 105 countries and imported from 88. More than 35% of foreign trade of the Middle Urals is with the countries of the Asian-Pacific Economic Community (USA, Taiwan, China, Japan, Korea); 35% with the countries of the European Union, 16% - with the partners from the Commonwealth of Independent States (Kazakhstan, Ukraine, Uzbekistan).

Below is the list of top ten trade partners of Sverdlovsk Oblast in year 2005.

№	Country	Export	Import	Turnover	Share, %	Balance
1	Netherlands	1,011,956.12	17,028.94	1,028,985.06	13.78	994,927.18
2	USA	850,027.02	64,928.08	914,955.10	12.25	785,098.94
3	Kazakhstan	460,823.59	414,419.31	875,242.90	11.72	46,404.28
4	Taiwan	674,506.42	3,745.12	678,251.54	9.08	670,761.30
5	Germany	368,011.35	223,017.70	591,029.05	7.91	144,993.65
6	China	346,109.43	113,461.24	459,570.67	6.15	232,648.19
7	Ukraine	180,729.56	132,099.10	312,828.66	4.19	48,630.46
8	Great Britain	249,914.50	10,425.46	260,339.96	3.49	239,489.04
9	Turkey	219,098.85	19,858.21	238,957.06	3.20	199,240.64
10	France	147,898.86	48,605.20	196,504.06	2.63	99,293.66

Source: Ministry for International & Foreign Economic Relations of the Sverdlovsk oblast

1.2 Transport Infrastructure

Yekaterinburg is situated at the crossroads between Europe and Asia, and serves as a major freight transportation hub. According to expert evaluation, Yekaterinburg’s transportation market is estimated at $1.5 billion and is constantly increasing. The Urals branch of the Russian Academy of Sciences predicts that the industry will expand 6.2-7.6 times its current level by 2025. However, scientific predictions may differ from the real situation, as volumes of large enterprises transported production are doubling with every year. Another interesting fact is that year-on-year growth of transportation service outsourcing does not exceed five percent. Generally speaking, a culture of outsourcing is not well developed in Russia. Most companies prefer to operate using only internal resources. The main reasons for this can be attributed to the Russian mentality and poorly developed market of third-party service solutions.

There are three main problems hindering the Urals market’s development. First among these is the lack of qualified personnel in the regional labor market. Until recently, logistics was not a subject taught at Russian universities. Consequently, the labor market for specialized personnel in the logistic industry is still at an emerging stage. Moreover, it has been extremely difficult to gain practical knowledge in this technical area in Sverdlovsk because of the lack of well-developed logistic infrastructures in the oblast. It is for this reason why educational institutions are working jointly with businesses so as to develop programs for logistic personnel education.

Statistically, 10 thousand sq. m. of logistic facilities require 200 employees. By the year 2010 there will be 1 million sq. m. of logistic facilities in Yekaterinburg that will require 20,000 employees. The lack of qualified personnel could become a barrier obstructing development in the logistic market.

Period (year)	Vacancies		Resume
Period (year)	Number	Average wage ($ per month)	Number	Average wage ($ per month)
2006	2,356	1,320.9	2,916	1,332.3
2005	2,005	1,205	5,362	1,190.9
2004	3,482	1,475.5	2,743	956.8

Source: Headhunter magazine

Secondly, in Sverdlovsk Oblast, land allocation procedures for warehouse construction have traditionally been very complex and drawn out. On average, it takes approximately one and a half years to simply acquire a plot of land on which to build.

Thirdly, it has been difficult to find investors who are prepared to make long-term investments in the region. Regional companies are currently not prepared to provide such sufficient financial resources. Likewise, foreign companies have not shown interested in this market because of the long payback period associated with warehouse construction.

1.3 Market Peculiarities

Due to its advantageous location, Yekaterinburg’s transportation infrastructure is very well developed. Yekaterinburg is a part of International Transport Corridor that links it with the Netherlands, France, Germany, Poland, and Belarus in the West to Mongolia, China, North Korea and Japan in the East. There is also a direct route through Kazakhstan to Near Asian countries along a branch of the Trans-Siberian railroad. In the future, prospects of cross-polar communications development raise the prospect of improved connections between the capital of Urals with the United States and Canada. With such present strengths and future prospects, Yekaterinburg has and will continue to play a key role in Russia’s transport infrastructure. In recent years, Yekaterinburg has even been compared to Singapore and Frankfurt – two leading transcontinental logistics centers.

The following freights transportation route pass through the city of Yekaterinburg:

- International Transport Corridor #2 is linked with Trans-Siberian railroad

- International Transport Corridor North-South, linking Middle East, South Asia and Baltic Sea region

- International Transport corridor #5

- Project of renewal of Silk Road from China to Europe

1.4 Major Infrastructure Development Projects

Year 2006 saw several infrastructure development projects being launched in the region. Among the largest of them are:

Large-scale upgrade project of Koltsovo International Airport. The project includes the creation of a multimodal transport-logistics center. This center will be a key transport hub in the Siberian-Urals Region and will be constructed on the basis of the already existing Koltsovo airport. The project is being implemented jointly by Sverdlovsk oblast government and Renova Group.

Construction of Euro-Asian international transportation-logistics center. This project was initiated in 2002 by an initiative of the Sverdlovsk regional government and Yekaterinburg city administration. The total area of the complex is planned at 130 thousand sq. m. Estimated cost of the first phase of construction is about $90 million.

The construction of a regional network of Class A warehouses by National Logistic Company (NLC). Currently, the project is close to finishing its first stage of development. When completed, the complex will serve the whole territory of Russia (2006 – Novosibirsk, Rostov-on-Don, Vladivostok; 2007 – St. Petersburg, Yekaterinburg, Samara, Kazan) by the end of the 1st half-year of 2007. Upon completion, the total area of the Class A warehouse in Yekaterinburg will amount to 40 thousand sq. meters. Investments in the first stage of the project (i.e., the construction of warehouses with an area of 10,000 sq. meters) are estimated at five million dollars. The first stage of construction is currently reaching completion.

A project by federal logistic operator “Eurasia Logistic” to construc the largest Class A warehouse in the country. Total area of the facility will exceed 270 sq. meters and will cost approximately $150-180 million.

2. PRIMARY TRANSPORTATION MODES

The most common method of getting cargo into the Urals region from abroad is by rail. Actually, rail cargo shipments constitute 80% of overall Russian cargo-turnover. Usually, freight from the US is transported to St. Petersburg via Baltic waterways and then by railroad to the Urals. Alternatively, freight arrives by air to Moscow or St. Petersburg, and is then loaded onto train cars and shipped to the Urals.

In general, freight from abroad is shipped first to Moscow and St. Petersburg. All the custom clearance procedures occur at those entry points, and -- subsequently – the cargo is shipped to other cities in Russia in the same manner as domestic freight would. The intention of the Sverdlovsk oblast government and Yekaterinburg city administration is to bypass Moscow and St. Petersburg and make Yekaterinburg the point of entry where custom clearance procedures would take place. This would minimize costs for foreign companies exporting their production to Russia, thereby increasing business profitability. Yekaterinburg would benefit greatly from this shift in national logistics due to wholesale trade components and creation of new jobs.

2.1 Waterways and Ports

Although waterways are not as widespread in the Urals as other transportation methods, they are still are used. For example, the Perm region (with access to Kama River is the main waterway in the Urals) links the Urals with the White, Baltic, Caspian and Black seas, as well as the Sea of Azov. Major river ports are Perm, Levshino, Berezniki, and Tchaikovsky. Annual freight turnover exceeds 5 million ton-kilometers.

River transportation is also available in Udmurtia, Bashkortostan, Yamalo-Nenetsky Autonomous District, Tyumen and Khanty-Mansiysky Autonomous District. Navigation on the Region’s waterways is open as average for five and a half months in the year.

2.2 Rail

As previously mentioned, 80% of all freight in Russia is currently transported by rail. One of the major Urals railways is the Trans-Siberian railroad, which links the Central and North-Western Federal Districts with Siberia and the Far East.

The Sverdlovsk Railroad also plays an important role in Urals region, serving as a base of transport communication to Perm, Sverdlovsk, and Tyumen. Sverdlovsk Railroad is ranked second in Russia in terms of cargo turnover and third in terms of the passenger turnover. The combined route length of the Sverdlovsk Railroad is more than 7,000 km.

2.3 Roads

The highway network built during the Soviet era provides sufficient coverage throughout the Urals region, but major repairs are needed. In 2006 major work was done in this direction. With the adoption of a federal project giving national priority to the development of transportation infrastructure, allocated both from federal and regional budgets toward remedying these problems. Even though the adoption of this project was made only recently, solid portions of regional highways have already been reconstructed and modernized.

Highway Transport Statistics for the Urals Region:

Region	Perm	Udmurtia	Bashkortostan	Kurgan	Sverdlovsk	Tyumen	Chelyabinsk	HMAO	YANAO
Paved public highway, (km)	6,000	5,700	22,089	7,313	10,757	9,361	8,933	18,023	1,009
Freight turnover, MM kT/km	300	233	N/A	N/A	2,200-2,500	N/A	58541	N/A	N/A

Source: Trade and Investment guide.

2.3 Airways and Airports

Koltsovo International Airport is the leading airport in the Urals, with 43% share of all regional air transportation. Koltsovo International Airport has two runways, a system of taxiways, a platform with 60 parking aprons for all types of aircraft, and advanced radar and approach light systems. Koltsovo Airport cooperates with 65 domestic and foreign airlines that directly connect Yekaterinburg with cities in Europe, Asia, and North Africa.

Koltsovo has been consistently rated fifth among Russia’s leading airports in terms of total domestic passenger traffic. It ranks sixth in international passenger traffic and fourth in the total freight and post. A large-scale upgrade project has been taking place at the airport since 2003, with RENOVA Group of Companies acting as strategic investor. Recently, Koltsovo has become the center of a project for the creation of multimodal transport-logistic center. This project was adopted by Sverdlovsk oblast government and Renova Group. The project implies cooperation in three modes of freight transportation: air, rail, and highway. The project also promises to become the largest of its kind in the entire country. Koltsovo has been consistently strengthening its position on the market for airport services and is turning into a major domestic hub that competes with the airports of Moscow.

Other regional airports of international status are: Bolshoye Savino (Perm), Chelyabinsk, Ufa, Orenburg, Tyumen, Kurgan, Surgut, Kogalym, and Raduzhny.

3. TRANSPORTATION AND LOGISTICS SERVICES

3.1 Shipping and Freight forwarding

There are about 2,000 transportation-logistic companies in the Urals region. More than 200 of them are operating in Yekaterinburg and approximately 20 to 25 of them are large companies offering a full line of services that hold 40-60% of the market.

Competition between large companies is much stronger than between smaller ones. Experts explain this fact as client’s policy. Usually clients of logistic companies prefer not to depend on one company; they used to have several logistic companies around. So, tenders, auctions are quite similar things for this type of business. Consequently, estimated profitability of the logistic business that used to be 20-25% decreased to 10-15% by the time.

In addition, the low number of large enterprises working with big volumes of freight traffic has a strong influence on competition between transportation companies. These are such companies as: Pepsi, Coca-Cola, SladKo, Metro, Ikea, and Auchan.

A peculiar detail of Urals market that should be mentioned is that the share of small logistic companies operating with only one or two truck fleet is increasing, and currently it stands at 59% market share. Meanwhile large companies’ truck fleet’s share is decreasing at a fairly significant rate.

There are major international companies operating in Yekaterinburg, such as: DHL, TNT and UPS.

The most prominent Russian players in the transportation and logistic market that are mainly involved in express delivery services are: CPCR-Express (http://english.cpcr.ru/), Garanpost (http://www.garantpost.ru/eng/), Pony Express (http://www.ponyexpress.ru/?lang=en), Armadillo (http://www.armadillo.ru/), City Express (http://www.cityexpress.ru/Eng/) and Russian Post (http://www.russianpost.ru/). Competition between these companies is very tough.

This is how company’s press services estimate their market share:

CPCR-Express – 10%

Pony Express – 10%

Russian Post – 10-12%

Armadillo – 10%

City Express – 5%

3.3 Warehousing

According to expert evaluation, Yekaterinburg lacks “A” class warehouses to meet the growing demand of large Russian and International freight owners. These companies (e.g., Metro, Ikea, and Auchan) are stimulating demand for logistics companies that offer complex services, such as: warehousing, cargo transportation, order management, business-processes optimization, and supply chain management. So, experts predict growth of demand for third party logistics (3PL) companies. Currently, regional companies mainly provide freight transportation services, and almost none of them could supply Urals companies with 3PL services. The factor that prevented the development of 3PL operators in the region has traditionally been attributed to a lack of high-class (A and B) warehouses. At this point, year 2006 was a good year for the warehouses sector, as great number of new projects have been launched.

According to the Product Market Committee of Yekaterinburg City Administration, the total amount of warehouses in Yekaterinburg is about 670,000 sq. m. About 90,000 sq. m. of this consist of class A warehouses and 140,000 sq. m. are class B. The deficit for warehouses is approximately 900,000 sq. m., deficit for A and B class warehouses - 500-600 sq. m. For this reason, growth in the warehousing sector is estimated at the level of 25%.

The overarching trend in the Russian warehousing market is toward decentralization of logistics centers. Roads in Moscow and St. Petersburg are extremely congested and, as a result, it is taking more time to have a piece of cargo transported. Consequently, some of the largest players of Russian logistic market are building regional warehousing works.

Another trend in the Urals warehousing market is the decreased number of out of date, Soviet era facilities (C and D classes) still in operation. Being so antiquated, these structures do not meet quality requirements of the contemporary logistic market. Despite of their obsolescence, however, a large portion of Yekaterinburg’s tangible assets is locked up in warehouses.

Experts also note the increase of interest to warehousing facilities in the suburbs surrounding major metropolitan areas. Municipal administrations of these suburbs are interested in constructing new warehouses to support local job creation. To facilitate this, these localities are providing supporting warehousing companies by providing land allocations.

Rental for high-class warehouses: (average rental warehousing rates, $/sq. m. per year)

City	Budapest	Berlin	Yekaterinburg	Helsinki	London	Moscow	Warsaw	Prague	Paris
Rental	50	65	105	110	190	140	70	60	48

Source: “Delovoy Kvartal”

Warehouse area per 1,000 inhabitants (warehouses square of world class, sq.m/ths.pers)

City	Yekaterinburg	Moscow	Budapest	Prague	Warsaw
Square	6	55	270	470	625

Source: Euro-Asian international transport logistic center

3.4 Supply chain management (third-party logistics, consultants, and IT solution providers)

Though lagging behind the global trend, the IT segment of the 3Pl services is gradually widening its share in the overall logistics services sector of the Urals market. Functions of 3PL providers include the entirety of the supply chain management functions, such as: organization of transportation, status of stock records, import-export and freight documents preparation, warehousing, pick and pack, and distribution. However, the problem across Russia in general and and Urals in particular is that two basic logistic functions such as distribution and warehousing were developing independently of one another. While in the US and European countries these two functions were being developed in tandem. The regional government of Sverdlovsk intends to change this situation by inviting local companies to participate in large logistic center projects. But construction of logistic centers requires large investments that small local companies (i.e., most of the logistics companies in the region) cannot afford.

Yekaterinburg’s market for complex logistic services is characterized by high demand and small supply. There are about 10 players that are trying to work as 3PL operators, but their services do not cover the entire supply chain. Therefore, the demand for 3PL services is not satisfied.

The market for IT service providers is also in the process of development as many large companies are adapting warehouse management systems. For example “Kalina,” one of Russia’s largest perfumery and cosmetics producers, adapted EXceed WMS 4000 (SSA Warehouse Management) as well as some others large regional enterprises.

According to expert evaluation, there are three main problems that prevent 3PL and IT solutions providers from entering the Ural market:

- Poorly developed infrastructure of road traffic routes.

- Lack of A and B class warehouses.

- Imperfect legal framework (i.e., absence of licensing for automobile freight forwarders, as a result their activities are not controlled by the government)

3.5 Other Services (Security, Insurance, Equipment and Vehicle Leasing)

The Urals market for financial services, such as leasing and insurance, is very well developed. Most of large Urals banks have affiliated leasing and insurance companies in their structure. There are also foreign companies or Russian companies with foreign capital operating on the regional market. One of them is Europlan, the leading independent leasing company with foreign capital. It receives financing from OPIC and EBRD.

4. MARKET OPPORTUNITIES FOR U.S. COMPANIES

The market of logistic equipment, vehicles, and materials in Urals region is saturated. However, the Urals logistics market is experiencing rapid growth. According to forecasts from Deloitte and Touche, the Urals logistic market (and the regional economy as a whole) will continue to expand at high growth rates until at least 2010. That is why it is an excellent time for US companies to enter the market. However, experts cite lack of information about the US logistics market as an obstacle. Regional companies simply do not have any information about developments in the US market (e.g., what equipment and innovations are being used there). It is much easier for them to work with China, which is situated closer and sells equipment at lower price.

Most of the equipment sold on Urals market is exported from China (Anhui Heli Machinery, Dalian Folrklift, JAC), Korea (Hyundai), Japan (Nissan, Toyota, Mitsubishi), Italy (Frantuzzi Reggiane, Pramac Group), and England (JCB).

5. USEFUL RESOURCES

5.1 Government Organizations (i.e., Mintrans, RosAvtodor, etc.)

Urals Branch of Federal Agency for railroad transport

11, S.-Basmannaya street, Moscow, 105064.

Web-site: http://www.mintrans.ru/

Tel: 7 (495) 262-38-41

Contact: Sergeev Nicolay Ivanovich, Head of Urals branch

Federal Agency is responsible for the prosecution of Government policy in the sphere of railroad transport. Branches of the Federal Agency conduct railroad market monitoring, construction of new railroads and other issues.

Federal Highway Agency of Ministry of Transport of the Russian Federation.

4, Bochkova Street, Moscow, 129085

Web-site: http://www.mintrans.ru/

Tel: 7 (495) 686-20-33

Fax: 7 (495) 686-29-88

Contact: Belozerov Oleg Valentinovich, Head of the Federal Agency

Federal Highway Agency is a federal body representing the executive branch and performs functions of rendering public services, of managing state property in the sphere of motor transport and highway economy, including the management of federal highways.

Federal Air Traffic Agency of Ministry of Transport of the Russian Federation.

37, Leningradskiy prospect, Moscow, 125993
Tel: 7 (495) 155-50-09

Web-site: http://www.mintrans.ru/
E-mail:rusavia@scaa.ru

Contact: Urchik Alexander Alekseevich, Head of the Federal Agency

Urals Customs Agency

31, Sheinkmana Street, Yekaterinburg, 620014

Web-site: www.ural.customs.ru

Tel: 7 (343) 350-53-27, 359-53-88

Fax: 7 (343) 261-43-34

Sverdlovsk Railway, branch of JSC “Russian Railways”

11, Cheluskincev Street, Yekaterinburg, 620013

Web-site: www.svrw.ru

E-mail: info@svrw.ru, svrw@svrw.ru.

Tel: 7 (343) 358-52-33

Fax: 7 (343) 358-48-48

Ministry of Economy and Labor of Sverdlovsk Oblast

1, Oktyabrskaya square, Yekaterinburg, 620031

Tel/fax: 7 (343) 377-16-89, 377-18-33

E-mail: mvl@midural.ru, lvovna@midural.ru, Web-site: www.midural.ru/minek

Contact: Galina Alekseevna Kovaleva, 1^st Deputy President of Sverdlovsk oblast Government, Minister of Economy and Labor of Sverdlovsk oblast

Coordination of development of government priority SME support programs
Creation of favorable conditions for SME development
Consultations on licensing matters

Sverdlovsk Regional Fund of Business Support

13, 8 Marta, office 426, Yekaterinburg, 620014

Tel: 7 (343) 355-14-68, fax: 377-67-67

E-mail:aa@uralonline.ru, Web-site: fond.uralonline.ru

Contact: Andrey Aleksandrovich Chasovskih, Executive Director

· Financial support of SME providing loans and guarantees

· Establishing municipal funds of business support, jointly with city’s administrations

· Education and Consulting services of the entrepreneurs and municipal funds personnel, development of financial technologies of business support.

NOTE: include very brief info, i.e.: Org’s name, website address, and contact info and area of responsibility/expertise. Please include primarily sources that can support English-language. If you have to make an exception, and include Rus-lang resource, please make an explicit note to that effect.

5.2 Trade associations and information portals

Urals branch of Association of International Motor Transporters.

10, Krasnoarmeyskaya, Business-center Antey, Yekaterinburg, 620075

Tel: 7 (343) 379-57-61

Fax: 7 (343) 379-57-62

E-mail: shpreyer@asmap.ru

Contact: Spreyer Georgiy Ferdinandovich

Amb. Sverdlovsk Oblast Non-Commercial Fund Of The Entrepreneurship Development. Yekaterinburg Sme Association

59, Rosi Luksemburg, Yekaterinburg, 620026

Tel: 7 (343) 251-65-91

E-mail: amb@amb.ur.ru Web-site: www.amb-ural.ru

Contact: Vladimir Mihailovich Lobok

Founded in 1990. The organization provides:

Informational and consultative support of entrepreneurial activities on the following questions: taxing, accounting, economic law by publishing the weekly magazine “AMB-Express”
Various printing services
Representation and protection of SME interests in governmental institutions

Union of Industrialists and Entrepreneurs of Sverdlovsk Oblast

16b, Vainera, Yekaterinburg, 620014

Tel: 7 (343) 371-29-02, Fax: 371-05-62

E-mail: sospp@r66.ru

Contact: Vladimir Nikitovich Semenov, Chairman

Oleg Leonidovich Podberezin, General Director.

Founded in March 1992 and has 220 members.

Urals Chamber of Commerce and Industry

6, Vostochnaya, Yekaterinburg, 620027

Tel: 7 (343) 353-04-49, Fax: 353-58-63

E-mail: ucci@dialup.mplik.ru Web-site: www.ucci.ur.ru

Contact: Jury Petrovich Matushkin, President