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Transportation, Distribution and Warehousing Services in the Upper Volga Region of Russia

December 2006

Author: Roman Vvedensky, BISNIS representative in Nizhny Novgorod, Russia

1. GENERAL MARKET OVERVIEW

The Upper Volga region (a.k.a. Volgo-Vyatsky economic region) is located in the Western part of Russia. The population size is 3.4 million people of which 2 million live in metropolitan area, which includes Nizhny Novgorod, the capital city of the region (1.34 million people), and several satellite cities around its perimeter. Nizhny Novgorod is located 220 miles to the east of Moscow at the confluence Volga and the Oka rivers, and is one of major transportation hubs in the European part of Russia.

Nizhny Novgorod is the headquarters of a leading subsidiary of Russian Railways (http://www.eng.rzd.ru/?he_id=694) - Gorky Railways, which provides passenger and freight forwarding services to 15 regions of Russia, as well as the head office of Volga Shipping Company (Volzhskoye Objedinennoye Rechnoye Parokhodstvo – VORP), which operates over 180 cargo vessels and 50 tow-boats during a navigation season.

In 2005, the Gross Regional Product (GRP) of the Upper Volga region amounted to $13.9 billion. The GRP-2006 is forecasted at $14.8 billion, and the GRP-2007 – over $17 billion. The calculation is made at the exchange rate of $1 for every 27 Rubles.

The Upper Volga regional government reported last year’s foreign trade turnover at $2.8 billion, where exports from the region totaled $1.69 billion, and imports to the region totaled $1.11 billion. In 2006, the regional foreign trade turnover is likely to exceed $3 billion with a similar export-import ratio. Major exports go to Ukraine, Kazakhstan, Belarus, Finland and China. Major imports come to the region from Germany, Belarus, Ukraine, France and Italy. Germany is a leading foreign supplier of industrial machinery and industrial products to the Upper Volga region and other regions of the Volga basin.

The average trade turnover between local companies and the U.S. firms is around $100 million per year. The major U.S. export categories to the region include machinery and components, tools, industrial products, and electronic hardware. The share of U.S. exports to the region may start growing substantially with a recent acquisition of a Chrysler plant by the Russian holding company Russkie Machiny (Russian Machines) which has major production and manufacturing assets in the Upper Volga region such as GAZ automotive works. In November 2006, Russkie Machiny also signed a cooperation agreement with Magna International of Canada, for the production of automotive components in the Upper Volga region.

2. TRANSPORT INFRASTRUCTURE

The Upper Volga region has diverse and well-developed transportation infrastructure available to local, national and foreign companies. The total length of highways in the region exceeds 11,500 miles, where 284.5 miles are national highways with good pavement quality, and 8,150 miles are local highways with varied pavement quality from county to county. The remaining 3,100 miles of highways are regional and cross local cities with pavement quality affected by intensive traffic.

Over half of the 506.4 miles of the M-7 national highway, Moscow – Kazan, goes through the Upper Volga region. The quality of the western part, from Vyazniki in Vladimir region to Nizhny Novgorod, of the highway is quite good, with the tree-lane traffic in each direction. This major portion of the road services intensive cargo and passenger traffic between Moscow and Nizhny Novgorod.

The eastern part of the M-7 highway in the neighboring Republic of Chuvashia has for the most part only one lane for traffic in each direction from Nizhny Novgorod to Vorotynets. The average rate of speed of the eastern part is 35-37 mph, as compared to the western part where the average rate of speed is 55 mph. Currently, the federal and the regional highway administrations are investing resources in improving the conditions of the eastern part of the M-7 highway.

The M-7 national highway has well-developed infrastructure for travelers including motels and gas stations. Currently, there are no toll roads in the Upper Volga region.

Railroads are another important way of transportation in the Upper Volga region. The regional Gorky Railways is over 766 miles in length. Nizhny Novgorod is one of the key railroad junctions between the Urals and Moscow. There is an on-line tariffs calculator for cargo transportation to and from Nizhny Novgorod, and across Russia at: http://www.rtarif.ru (information in Russian language).

Waterways are less important for freight forwarding in the region, although the volume of goods delivered by river transportation, has been growing steadily for the last four years. The two main rivers: Volga and Oka are navigable only from late April to early November. The total length of local waterways is 497 miles. During a navigable season, the Nizhny Novgorod river port has access to five seas: the Azov sea, the Baltic sea, the Black sea, the Caspian sea, and the White sea. Goods from the U.S. East coast are usually delivered to Russia via the ports of the Baltic Sea, specifically the port of St. Petersburg.

The Nizhny Novgorod International Airport (Strigino) is located 18.6 miles from the city center. It is more important for passenger turnover in the region than for the delivery of goods. Nevertheless, some local and foreign companies utilize air cargo services on a regular basis, both to import necessary industrial components and goods and/or to export their finished products. The principal foreign air carrier is Lufthansa, which operates three flights a week from Nizhny Novgorod to Frankfurt and back.

3. MARKET PECULIARITIES

The most intensive transit of goods comes from the west to the east of the Upper Volga region, which makes the local transportation infrastructure an essential component of a freight flow from Central Russia to the Urals and Siberia. This traffic direction is equally important for domestic as well as foreign cargo flows. This may lead to a number of modern logistic centers to be established in the region within the next few years to service the cargo traffic from China to Western and Northern Europe. The area next to the city of Nizhny Novgorod is particularly important for this project as being a regional intersection of the west-east and the north-south axes of freight flows.

Railroads and highways primarily service the west-east axis of cargo flow, while the north-south axis of cargo flow is usually moved via highways and waterways. The second direction is important for transportation and trade with Central Asian countries. Waterways are also the only available transportation option to deliver oversized goods (i.e. heavy construction machinery, petrochemical equipment, etc…) from the U.S. to the Upper Volga region and down to the south of Russia. Standard sized goods in 20-ft. and 40-ft. containers are, mainly, delivered to Nizhny Novgorod by railroads, and partly by waterways.

Freight flows across railroads and waterways are serviced by the companies, which are monopolists in the local market: Gorky Railways and Volga Shipping Company. The tariffs of large national transportation companies are pretty consistent due to a similar composition of costs.

4. MAJOR INFRASTRUCTURE DEVELOPMENT PROJECTS

There are two major groups of infrastructure projects in the Upper Volga region. The first group of projects deals with construction of new bridges, and it is mainly related to the construction of a beltway around the city of Nizhny Novgorod. The second group of projects focuses on the construction of modern logistics terminals next to Nizhny Novgorod.

All major infrastructure projects are developed with the active involvement of the regional government. At this time, the list of main investors includes the Russian federal and the regional governments. There are a few commercial sector investors as well, however, the share of private vs. government funding is quite small. However, the regional government led by Governor Shantsev, former Vice-Mayor of Moscow, is working on attracting funding from investors among Moscow construction firms and developers. It is quite probable that the regional government may introduce the PPP (public and private partnership) format to implement some of large-scale infrastructure projects.

(a) Bridges & Motorways

There are three projects related to the construction of bridges and motorways in the region. The two bridges on Volga River will be the necessary elements of a beltway project around the city of Nizhny Novgorod. The upstream bridge is designed next to the settlement Bolshoye Kozino between Nizhny Novgorod and its satellite city Balakna. The downstream bridge is designed next to Kstovo, another satellite city of Nizhny Novgorod. The project of an upstream bridge also provides for construction of a low-head dam across the Volga River.

The upstream bridge project is complemented with a project of a 29.5-mile bypass highway around the cities of Balakhna and Zavolzhye to ensure a better transportation between Nizhny Novgorod, Ivanovo region, and Central Russia.

The third project of a metro bridge with a motorway is currently carried out in Nizhny Novgorod. According to the plan, it should be completed by 2010. It provides for the construction of a 4,167 ft. metro bridge across the Oka River to connect the upper and the lower part of Nizhny Novgorod. By now, there are four bridges with motorways over the Oka River in Nizhny Novgorod and next to it. The fourth bridge in the suburb of Nizhny Novgorod is a part of the beltway, and will be servicing the southern and the western transportation flows through the region.

(b) Logistics Terminals

The regional government has announced a number of logistics terminal projects important for regional infrastructure development. These projects will include construction of a new air cargo terminal and a railroad cargo terminal (the projects of railroad cargo terminals are developed by private companies and by Gorky Railways with involvement of the regional government).

In May 2006, the regional government stated its interest to raise $10 million to build a new cargo terminal next to Nizhny Novgorod International Airport Strigino. The terminal will be located on a 494-acre land parcel. In early December, the regional officials announced plans to develop an air cargo terminal next to the fly ground in the Balakhna County. Both locations are close to the M-7 national highway.

A private company named Logoprom Sormovo built a modern railroad cargo terminal in Nizhny Novgorod in 2003-2006. The total area of the terminal is over 160,000 sq. feet. including the customs office, warehouses, facilities for handling and storage of containers, local railways and access roads. The design capacity of the terminal is 800 TEU per month (TEU stands for twenty-ft equivalent unit), and it is capable to store 2,000 containers per month. The railroad terminal currently undergoes certification with TransContainer Company, a subsidiary of Gorky Railways.

In May 2006, Valery Shantsev, Governor of the Upper Volga region, and Vladimir Yakunin, President of Russian Railways (a parent company of Gorky Railways) signed a cooperation agreement to develop a project of an international transport and logistics center. The project provides for construction of a combined highway-railroad logistics center at Gorky Railways. Russian Railways, the regional government, and private investors will finance the $115 million project. A group of Chinese companies expressed interest to participate in the project as well.

5. PRIMARY TRANSPORTATION MODES

There is no comprehensive official statistics available on the cargo turnover in the Upper Volga region. The approximations provided below are made on the basis of publications and statements of local officials and experts on transportation issues.

In 2005, cargo turnover in the region exceeded 70 million short tons. Most of the cargo was delivered through highways and railroads, where 45-48 million short tons of cargo were delivered through highways, and 24-26 million short tons by rail. The amount of cargo, delivered by waterways exceeded 1.7-2 million short tons, and only 650 short tons by air. These statistics cover cargo turnover either delivered to, or shipped from the region, and it does not include transit.

Transportation by waterways has been growing rapidly at about 10% annually. One of the prominent carriers, the Volga Shipping Company, increased the volume of cargo delivered from the region to the European market.

6. TRANSPORTATION AND LOGISTICS SERVICES

As mentioned above, there are two sectors of shipping and freight forwarding, which are dominated by regional monopolists: railroads and waterways. A U.S./international company, which plans to apply for these services directly in the region, may address the following offices:

Gorky Railways, a monopolist in railroad transportation in the region

78, Oktyabrskoy revolutsii str., Nizhny Novgorod 603011 Russia

Tel.: +7 8312 484412

Fax: +7 8312 424142

E-mail: grw@grw.ru

www.grw.ru

This is the contact address of the company’s headquarters, and the provided information may be helpful mainly for arrangement of official and business missions to negotiate with senior management of the company. Gorky Railways is a large corporation with high levels of bureaucracy, so a U.S. firm should not expect an immediate reply to its letter, especially, when it refers to a particular business case.

Railway Shipping and Freight Forwarding Department

(Dorozhny Tsentr Firmennogo Transportnogo Obsluzhivania – DTsFTO)

42, Oktyabrskoy revolutsii str., Nizhny Novgorod 603059 Russia

Tel.: +7 8312 484 613 / 486 966

Fax: +7 8312 488 819 / 488 220

E-mail: odcfto@grw.mps

This is the contact address of an operating unit of Gorky Railways, which deals with the issues of cargo shipment. A U.S. company should address the department, when it needs freight forwarding by rail, including rail car lease.

Logistic centre of Gorky Railways

This is a department of Gorky Railways which deals in cargo terminal and customs services (http://tlc.grw.ru). It has three affiliated companies and units specialized in customs clearance, freight forwarding in containers, and shipment with trucks.

(a) Customs and brokerage department

Tel.: +7 8312 486 593

Tel./fax: +7 8312 488 927 / 489 523

E-mail: tlc@gorky.grw.ru

(b) TransContainer

Tel.: +7 8312 484 253

Fax: +7 8312 483 019

E-mail: n-nkp@grw.ru

This company is authorized by Gorky Railways to deal in container shipment with the railroad.

2, Kostarikha station, Nizhny Novgorod 603033 Russia

Tel.: +7 8312 488 587 / 482 285 / 482 158

Fax: +7 8312 488 945 / 483 746

E-mail: kalmykla@grw.ru

Volga Shipping Company is another local monopolist, which deals in freight forwarding by waterways. A U.S. company should address it on the issues of domestic and international shipments from Nizhny Novgorod by waterways. The contact information on Volga Shipping Company and Nizhny Novgorod Cargo Port is provided below.

Volga Shipping Company

23, Rozhdestvenskaya str., Nizhny Novgorod 603600 Russia

CEO – Mr. Alexander A. Shishkin

Tel.: +7 8312 313 001 / 333 430

Fax: +7 8312 301 441

E-mail: office@volgaflot.com

http://www.volgaflot.com

(a) Shipment department:

11, Sibirskaya str., Nizhny Novgorod 603086 Russia

Tel./fax: +7 8312 166 141

Nizhny Novgorod Cargo Port

21, Strelka, Nizhny Novgorod 603600 Russia

CEO: Yuri N. Sintsov

Tel.: +7 8312 495817, 440786, 491801

Fax: +7 8312 417969

Business English is not common among employees of the railroad and waterways companies, so it is advisable for a U.S./international company to use services of a professional translator or to be ready to conduct negotiations in Russian.

When planning cargo shipment by air, a U.S. company should address the state-owned company Nizhny Novgorod International Airport through the following contact address:

Settlement Strigino, Nizhny Novgorod 603056 Russia

Tel.: +7 8312 596 557 / 540 833

Fax: +7 83123 943 981

E-mail: airportnn@nts.nnov.ru

(a) Air freight department:

Tel.: +7 8312 596 539

The list of air companies, which provide airfreight services that fly regularly to Nizhny Novgorod includes, but is not limited to, Lufthansa, and Volga-Dnepr.

The sector of highway transportation is greatly decentralized, and it accounts for many dozens of local and national companies, which are engaged in freight forwarding by trucks. Although, specialized truck cargo carriers take only a 10-15% niche of the regional truck cargo market, while the remaining niche is serviced by a truck fleet of local large companies, a U.S. company should address the first group of firms because their business is organized in compliance with international practice of freight forwarding by trucks, and they address all the major issues of security, insurance, delivery schedule, and others. The principal operators envisage a growing competition in the sector, and they are trying to develop a wider range of services for their customers. The list of major local operators of cargo trucks and local offices of national and international freight forwarders is provided at the end of the report.

(a) Distribution and Warehousing

The warehousing infrastructure is under-developed in the region. Currently, there are only two local companies in the market, which provide warehousing services closely to international standards for its customers. All major trading companies operate their own warehouses to store and to distribute their products (food, beverages, household items, etc.).

The local company Alidi was the pioneer of the Nizhny Novgorod market with a 107,600 square feet Class A warehousing terminal. Currently, its customers are represented by local companies, which trade in consumer goods, household items, and apparel. The warehouse terminal has no equipment to store food and pharmaceutical products. At present, three more wholesale trading companies have announced plans to build modern warehouses, open for other companies: VKT (322,900 sq. ft. project), Enko (215,300 sq. ft. project), and Fructi & Producti (64,500 sq. ft. project).

Large warehousing facilities are also owned by international and national trading companies in Nizhny Novgorod: IKEA, Metro Cash & Carry, Auchan, Perekryostok, Kopeika. In total, there are 3,875,000 sq. ft. of warehousing facilities, operated in the Upper Volga region (with over 70% of them, concentrated in the city of Nizhny Novgorod), but only 30% of existing facilities are equipped with heating systems.

The 1,076,000 sq. ft. logistics terminal of Logoprom has Class B rating, and it is the only large logistics terminal, which currently exist in Nizhny Novgorod.

Customs logistics services are also under-developed, and at the moment, they are provided by a local office of the national customs brokerage company named Rostek.

7. MARKET OPPURTUNITIES FOR U.S. COMPANIES

Similarly to many other sectors of the Russian economy presented in the Upper Volga region, transportation and logistics provide U.S./international companies with a number of investment opportunities. A relatively weak local sector of warehousing and logistics facilities, and a growing demand for quality services, revealed by international and national companies, are the features, which are clearly defined in the local market. A relatively low price on commercial real estate (compared to the prices on houses and apartments) in the market is another serious reason to pay attention to this investment opportunity. Return on investment will not take longer than 5-6 years, because of an important location at the crossroads of national and international transportation flows, supported by an economic potential of the region, which economy is based more on trade, services, and processed industries (automotive, aerospace, mechanical engineering, ship-building, petrochemical, pharmaceuticals, agribusiness), than on development of natural resources.

Sales opportunities for U.S. companies are mostly related to large infrastructure projects that are being implemented in the region. Due to a strong support of the regional government to these projects, a U.S. company should consider participation in events and presentations run by the regional government overseas (i.e. the presentation of the Upper Volga region in London in April 2006). A direct application of a U.S. company to the regional Governor or 1st Vice-Governor is less efficient due to local bureaucracy.

Another way to promote services/products of a U.S. company in the infrastructure sector is a thorough research of the local market to define potential subcontractors on related projects. This method is more labor-intensive, but it may bring positive results for suppliers of construction machinery, equipment, construction consulting, and financial services, especially when the research is carried out simultaneously in a number of Russian regions located in the area of Upper and Middle Volga.

The features inherent for local infrastructure, logistics, and transportation sectors are described in the report, and they may help a U.S. company better understand demands and opportunities of the local market to define business partners and potential customers.

Useful contact information:

Nizhniy Novgorod International Airport - Lufthansa office

Nizhny Novgorod Airport, Nizhny Novgorod 603056 Russia

Tel.: +7 8312 759 085 / 759 086

Fax: +7 8312 759 085

E-mail: Lufthansa.Nizhny@dlh.de

http://www.lufthansa.com/online/portal/lh/ru/nonav/local?l=ru&nodeid=1887983

Truck cargo carriers:

DU-TRANS

1a, Bazovy proezd str., Nizhny Novgorod Russia

Tel.: +7 8312 792 676

Fax: +7 8312 795 813