The carriage leasing plan of the state-owned company EVR Cargo is the first Estonian large-scale investment in the Russian market – a market where no private firm dares to enter due to its hidden hazards. Several experts describe the move as a state-owned risky venture.
The decision in question was made early this spring without attracting much public interest. The management of EVR Cargo then approached the supervisory board with an ambitions business plan: to make loan, order 35 million euros worth of carriages from Russian factories and to start leasing them to large enterprises taking advantage of the shortage of rolling stock.
A hugely ambitions plan for a state-owned company, which has spent recent years in red especially due to the loss of Russian transit.
In particular, the company would buy 600 flatcars and 400 gondolas from two factories in Western Russia. Half of them in the first batch and, if everything should go as planned, the rest later. An EVR Cargo subsidiary would be set up in Russia to hedge the risks, which would lease the rolling stock to local firms.
The idea is to strike gold. The Russian transport supervisory institution Rostransnadzor imposed a limit last year, in order to support local rolling stock manufacturers, banning the extension of operating permits of rolling stock older than 22 years. The restriction, quite extraordinary in Europe, meant that more than 200,000 freight cars had to be written off. This meant shortage and rolling stock leasing prices skyrocketed in Russia.
The board of EVR Cargo, headed by Raul Toomsalu, understood that it was time to act fast if they wanted to get rich: rolling stock construction prices threatened to rise together with leasing costs. The supervisory board of EVR Cargo, which was as recently as in April chaired by the present minister of finance Toomas Tõniste, approved the business plan despite debates.
The first 30 brand-new Estonian-owned flatcars were completed in Russia last week. The remainder should be completed in the next few months. EVR Cargo will then pay the first amount of the cost, approximately 17.8 million euros, and the rolling stock leasing business sin Russia may start.
Only Russia benefits
The story could end right here, but there are politicians and railway experts, who consider the EVR Cargo Russian venture a highly risky investment. Some even compare it with Eesti Energia’s notorious Utah project, which eventually lost dozens of millions worth of taxpayers’ money.
“If anyone had asked me about investing in Russian transit business for 15 years, I would have thrown him out if the door”, said former minister of economy Kristen Michal (Reform Party). He claimed that EVR Cargo had no such plans as recently as last November, when his last month as the minister was running out.
In Michal’s opinion the political climate in Russia is totally unpredictable, while the transit business is governed by the law of the jungle. “Out of common sense I would like to ask: can anybody be certain what rules apply in Russia in two years?” Michal demanded.
Jüri Seilenthal, director general of the Ministry of Foreign Affairs department of foreign economic policy and development cooperation, considered it quite likely that EVR Cargo would not violate any Western sanctions by investing in Russia. But the move would be risky, since Estonian enterprises are mostly leaving the Russian market and often take a loss.
“The situation is complicated to put it mildly. Railways in Russia are clearly a strategic business, which means the people operating there are very closely linked to the state”, Seilenthal said.
Since Russia’s interest during the past decade has been directing cargo traffic to its own ports instead of the Estonian ones, there is no reason to believe that they welcome an Estonian invasion in Southern Russian railways. “No one denies that a lot of money is involved, but just the risk is so high”, Seilenthal stressed.
Andreas Laane, CEO of Alexela Grupp, who has long-time experience of Russian transit business, emphasized that the risk is not just political, but also economic: the rolling stock leading market is highly volatile. Although the lease rates are currently high and reach 1,500 rubles per day, this is the maximum level, which can only decline. The latest nadir in Russia was as recently as in 2014, when the lease rate of a gondola was only 300 rubles per day and the owners were taking a loss. Lane warned that if the lease rate should decline 50 percent, the value of the property would decline by the same amount.
According to Laane, investing the taxpayers’ money in the unstable Russian market is therefore an unprecedented move in the history of Estonia’s state-owned firms, which would only provide jobs and money to Russia’s plants, terminals and railway firms. “They are the obvious beneficiaries, while the Estonian taxpayer takes all the risks just as playing lotto or going to the casino”, he said.
But Alexela’s criticism could be viewed in the light of the firm’s possible interest in privatizing EVR Cargo. If the latter’s business in Russia should succeed, the market value of Cargo will leap upwards and the privatization would become very costly for Alexela.
Raivo Vare, transit expert and long-time board chairman of Eesti Raudtee, began commenting on the transaction that it is scary. The Russians’ interest in the deal is understandable, he said – as their railway enterprises cannot afford purchasing rolling stock due to the unstable ruble and high interest rates, the Estonian partner shouldering all the risks is ideally suitable to them.
“But the crucial problem is how high the risk is for us. How long are the lease agreements, at which terms can we get the loan for purchasing the cars and how are the risks shared between us and the Russian operators”, he said.
Furthermore, it has to be considered that rail transport operates under the Russian jurisdiction. “This doubles the risk, since the cars could be arrested for some reason. Then arises the question – what now and who will pay?” he speculated.
Although Vare understands that EVR Cargo as a business enterprise wants to expand to new hunting grounds and earn money, it would be a very daring move at the political level.
Besides the competitors already operating in Russia, EVR Cargo also steps on the toes of Estonian tycoon Oleg Ossinovski. The majority owner of Skinest Grupp owns thousands of carriages in Russia via Spacecom and he is also expanding his fleet of rolling stock.
What is the risk?
Experts consulting Postimees revealed that the analysis of EVR Cargo itself had identified several risks. For example, it could happen that Russia may decide to grant a new lease of life to old cars not yet scrapped. Although the Ukrainian plans are closed to Russia, the largest operator, Russian Railways (RZhD), can find a way of obtaining quickly the necessary rolling stock.
If the leasing rates should drop below the minimum allowed by the business plan, EVR cargo may find itself in trouble with repayment of the loan. But a definite mortal blow to the whole plan would be the devaluation of the ruble as well as a policy decision trapping the cars in Russia for some time without use.
Toomas Tõniste, the current minister of finance and EVR cargo supervisory board chairman during the making of the decision, told Postimees in his brief written answer that he has always believed that railway business and the accompanying risks should be the sphere of private enterprise. “The supervisory board proceeded from the same viewpoint when considering the project and recommended involving private investors”, Tõniste recalled. The same was later required by Kadri Simson, Minister of Economy and Infrastructure, who approved the plan as the sole shareholder.
Ahti Kuningas, deputy secretary general of the Ministry of Economy and Communication, who represents the Ministry on the EVR Cargo supervisory board, said that although business related to Russia is always riskier than usual, he cannot see major threats. Leasing rolling stock is only one of the several business fields of the state-owned firm. The management is well acquainted with the Russian market. The cars would be leased only to those firms, which have subsidiaries in Europe – thus the possible disagreements would be handled by Western courts rather than the Russian ones. The lease agreements would be for three years and should anything go wrong, the rolling stock could be moved to Estonia. “One cannot say that we are entering the realm of the unknown”, Kuningas summed up.
But the background is wider than that. The plan for privatizing EVR Cargo, which was valid only six months ago, has been suspended. The task of the management is to boost the value of the enterprise. If it should be sold some time in the future, the old interested parties like Alexela and Skinest Grupp would not be able to buy it for a song.
Raul Toomsalu, CEO of EVR Cargo, said that the past years have not been easy for the company: traditional cargo traffic has dried up due to Russia’s decisions and it was necessary to find new ways of doing business.
In his words, the advantages of EVR Cargo in Russia are cheap loans and necessary know-how. Russia operated 1.1 million railcars and Estonia’s share is the tiny 1,000. “This is not too ambitious. Besides, we are cooperating with Russia’s largest railway operators. Our deal is not a high-risk one, business-wise. It is not possible that our property could somehow disappear”, Toomsalu said.
The promised subsidiary is still being established. Private investors have not been involved either.
Toomsalu does not share the main fear of the critics – that rolling stock leasing rates could plummet. Economic forecasts promise better growth rate for Russia. Several Western firms have allegedly returned to the market. “We do not forecast that the demand could steeply decline during the next seven years”, the board chairman said.
According to Toomsalu, EVR cargo expect high yield from the transaction: approximately 3.3 million euros worth rental income per year. “While state-owned firms are expected to earn ten percent income on their investments, we shall exceed that limit several times.”
But if something should really happen in Russia, EVR Cargo has a ready exit, Toomsalu promises: “We shall return the cars to Estonia, since they could be used here anyway".