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RZD Financial Results: The influence of the world financial crisis on the company’s business

How profitable is the company? What subsidies or help does RZD get from the state?

The financial results of RZD clearly show the success of the railway transportation reform. Compared to MPS (Ministry of Railways) which carries out an unprofitable plan-structured business, Russian Railways operates at a profit. The management of the holding was set a task to increase the profitability and by the year of 2007 we raised it three times, up to 1.3%. This is an essential increase with regard to the size of the holding and business volumes.

The holding financial results have been going up for all previous years. According to the Russian Standards of Accounting Reports in 2008, RZD revenues increased by 12.9% compared to 2007, up to 1 trillion 101.7 billion roubles. The net profit was 13.4 billion roubles.

As a result of implementing the policy of an active cut of expenditures, the company managed to get a positive financial result in the previous year, despite a considerable fall – up to 30% – of shipments in the 4th quarter. In particular, at the year end expenditures on the transportation activities were cut by 53 billion roubles.

Yet, in the 1st quarter of 2009 we found ourselves in the conditions of business recession, which consequently resulted in the reduction of cargo transportation by 27.1%, compared to the same period of 2008. In January – March of 2009, JSC RZD revenues decreased by 10% to 233 billion roubles, whereupon the dead loss was recorded at 17.1 billion roubles.

The negative quarter end financial results are concerned with the state policy of insufficient indexation, exchange rates difference (which is a result of the continued rouble devaluation), growth of electricity tariffs and fuel prices. Moreover the reduction of cargo transportation and traffic flow by 12.3% also had their impact on it.

The efforts made by the company will allow cutting losses by the year-end, yet it will not be able to even such negative factors as the decrease of shipment and fall of the traffic flow without the help of the state.

2009 is the first year of the long-term industry development stage (till 2030) realization. What will be done in this year? Will the investment plans be changed?

In June 2008, the Russian government ratified “The strategy of the railway transport development in the Russian Federation till 2030” which represents the most important document for the industry and allows the company to plan its work for decades ahead.

The Strategy-2030 defines the priority directions of the railroad industry development. It envisages the raising of the Russian Railways competitiveness by means of realization of global infrastructure projects and introduction of innovations in the sphere of cargo and passenger transportation.

The plans are so great that it is planned to build more than 20 thousand kilometers of new railroad tracks till 2030, to renew 20 thousand locomotive engines and 30 thousand passenger cars. So far, projects on creation and introduction of new equipment are being implemented: dual-system traction electrical equipment and gas-turbine locomotives are being introduced.

We are planning to increase the density of railroad network by 24% and completely get rid of limiting the traffic and transportation capacity. The area of high-tonnage traffic lines covering more than 13 thousand kilometers will be formed connecting ports of Russia’s Far East with the North-West and South, as well as ground border points on the Western border of the country.

As for the impact of the new economic conditions on the realization of the Strategy, they provide Russian Railways with opportunities to modernize its infrastructure, widen narrow train sections and develop the limiting parts of the track. Such a modernization was difficult to carry in the periods of the “peaking” transportation load.

In 2001–2007 railroad net freight turnover increased annually by 6.2% at an average. Such a heavy growth made it difficult to renew the infrastructure. Now, due to the induced decrease of cargo turnover we have got a good opportunity to improve the infrastructure conditions.

Railroad transport as well as other infrastructure industries can’t develop orienting itself on the passing market demand solely. We need to prepare transportation infrastructure in advance to serve the prospective market segments.

This is why the company, despite the crisis, is not going to step back from the nationally approved Strategy of the railway transport development in the Russian Federation till 2030.

Railway transportation is going down amid the crisis. What instruments for transportation stimulation does RZD have in its arsenal?

For the purpose of transportation stimulation in 2008, JSC RZD approved documentation allowing the practice of bank guarantees securing consignors’ payments. Such a practice is used for clients who respond to JSC RZD criteria by the volume of transportation and quality of obligations fulfillment. In January 2009 alone, the amount of assumed obligations was two billion roubles.

The company also attracts the interest of potential clients with its new services. In particular, the technological novelty is a significant increase of the cargo delivery speed. One of the striking examples is “Transsib in seven days”. Last year it took a container train 12 days to travel to Moscow from the port of Nahodka and this year we managed to almost halve this time. The distance between Vladivostok and Bekasovo station located near Moscow the train travelled in 6 days and 20 hours covering 9,244 km altogether.

The company forecasts a 19% fall in transportation and losses for 2009. What are the expectations for 2010? What time does the company need to restore the pre-crisis level of transportation and financial performance?

The parameters of 2010-2011 are formed on the basis of the unsettled impact of the global financial crisis and the corresponding trend in the transportation volumes. Making the forecast for the shipment volumes, JSC RZD used the information provided by the Ministry of Economic Development and Trade of the Russian Federation and State Statistics Service. It should be noted that macroeconomic parameters are constantly changing.

The forecast rates of shipment and cargo turnover growth for 2010-2011 are kept on the level of the Company’s financial plan presented at the Russian government session on November 13, 2008. As for absolute values, they are corrected with indices changes in 2009 taken into account.

The total freight turnover of the railway transportation is forecasted to be 2046.4 billion ton-kilometers in 2010 (+1.6%) and 2084.1 billion ton-kilometers in 2011 (+1.8%).

Freight turnover without regard to the cars mileage of other proprietaries, leased and subsidiaries and associates of the JSC RZD in the empty state in 2010 will make 1750.2 billion ton-kilometers (+1.2%), in 2011 – 1779.9 billion ton-kilometers (+1.7%).

As for passenger traffic, long range travels growth for more than 0.7% is forecasted for 2010-2011.

Lately RZD announced its plans to cut expenditures in 2009 by 173 billion roubles. By what means is the company going to save such an amount? How painful would such a process be?

In order to achieve the financial stability in 2009 the transportation expenses are cut by 173.1 billion roubles, including:

  • reduction of the consumed resources by means of the traffic reduction – 36.3 billion roubles;
  • reduction of capital repair volumes – 46.6 billion roubles;
  • price reduction on the consumed materials – 18 billion roubles;
  • decrease of amortization and property tax by means of revaluation coefficient 1.0 – 26.5 billion roubles;
  • staff reduction by 53.7 thousand people – 21.6 billion roubles;
  • real wage restraints – 20 billion roubles;
  • reduction of administrative and management expenditures – 3 billion roubles;
  • savings on the fuel and power resources – 3 billion roubles;
What are RZD’s plans concerning drawing debt financing from the Western markets?

Depending on the market conditions and the company’s needs RZD will continue to stick to the policy of using the most effective means of drawing debt financing on the domestic and foreign markets, taking into account the terms and loans value as well as saving the balance of the proprietary funds, help of the State and external sources.

At the same time examining the latest trends – state guarantees lending or World Bank lending – they need additional elaboration by every participating party. Such kind of lending makes sense only in case the cost of it was reduced significantly while the financing schedule is increased at least up to ten-twenty years.

Does the economic situation have any impact on the implementation of the reform, particularly on the plans of the creation of Second Freight Company and its stocks selling?

The current economic situation influenced our plans of the First Freight Company IPO, yet the question of the Second Freight Company creation arose sharply in the new economic conditions.

In the conditions of the financial–economic crisis, many owners nearly reduced to zero buying new rolling equipment. And falling of shipping operations volumes in the current year gives a negative impact on the results of their work. As for big companies it is easier for them to overcome the negative influence of the economic situation.

This is why by the end of May JSC RZD unanimously approved the idea of Second Freight Company creation. Work on a business plan development and SFC registration has started. The terms of the documents preparation are the end of 2009 – beginning of 2010.

We are planning to invite private capital as partners in the creation of SFC i.e. operators, leasing companies, freight owners with their own rolling stock. At the stage of the company’s creation they can contribute to the company’s capital freight cars at the market price. At the stage of the creation of the company private businesses can acquire 25% + 1 share in its capital.

In the long view the decision about JSC SFC stocks public offer will be made with respect to the conditions of the financial markets. The SFC IPO will turn the company’s stocks into a liquid asset, the selling of which will allow private investors to gain profit from their initial investments. Anyway, it is hard to plan the IPO earlier than 2011.

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