Exporters forced to choose between sanctions risks and lengthy delays
BANGKOK/LONDON/ANKARA/BERLIN -- Moving goods through Russia used to comprise 60% of business for Rail Bridge Cargo, a European logistics company. Then President Vladimir Putin launched his invasion of Ukraine and nervous customers, particularly in the U.S., began to ask for alternative transport routes.
Seven days after the invasion, Rail Bridge Cargo announced it would stop using the trans-Russia routes on ethical grounds, save for humanitarian supplies, food and medicine. Instead, it looked southward to the so-called Middle Corridor, a key part of China's plans to build a new, iron silk road from Chongqing to Duisburg in Germany.
But the underdeveloped route was not ready for a sudden influx of cargo. Aktau, a Kazakh city on the Caspian Sea, may see more shipping containers this year than its 194,000 population. Its port authority predicts a sixfold increase in goods transit.
Other critical transport junctures in Azerbaijan, Georgia and Turkey were similarly overwhelmed, according to logistics companies who operate there.
"We were doing some testing [before the invasion], but it was never a mature route to use," Igor Tambaca, managing director of Rail Bridge Cargo, said of the alternative southern route.
His comments highlight the conundrum facing manufacturers across Europe and Asia as they attempt to navigate a world of growing conflict and political tensions: Take the faster but more fraught path through Russia, or risk lengthy delays on politically safer but less developed routes.
Trans-Russia rail had become an enticing option for companies sending goods between Europe and Asia as the pandemic squeezed maritime shipping capacity and pushed container prices to record highs. Transit times were several days shorter than shipping by sea, schedules more reliable and, importantly for European companies, less carbon intensive. Components and consumer goods flowed from China and cars and finished goods from Europe at an annual rate equivalent to 500,000 twenty-foot long shipping containers (TEU).
The Ukraine war changed that almost overnight. Now, businesses that adopt rail freight face insurance, sanctions and confiscation risks along the Russian route.
"The insurers fear they wouldn't be able to enforce claims if loads are damaged or lost while in Russia. They have no confidence left at all in cooperation with Russian authorities," said Julia Pfeil, a partner at the Frankfurt office of the Dentons law firm.
Monthly rail freight traffic passing through Russia fell in April for the first time in six years, with most of the decline coming from wary European companies. At the port of Duisburg, the German hub for China-bound cargo trains, eastbound bookings have fallen by 20% to 30% since the war in Ukraine began in late February. BMW and Audi stopped sending cars by rail to China in April.
Westbound shipments still flow via Russia from Chinese companies unhindered by sanctions. But goods can be blocked at Europe's borders if customs authorities suspect they were switched for Russian cargo en route. Trains must be sealed in China, traverse thousands of kilometers through Russia, then be verified as intact by European Union officials.
That brings big commercial risks. Dentons' Pfeil highlights the example of a customer who bought coal in China and ran the risk of it being replaced with Russian coal. "Our customer would not be allowed to move the Russian coal to his coal power generation plant in the EU. A lot of money would be lost," she said.
Some corporate compliance departments are completely unwilling to deal with Russian logistics. Lending to Russian Railways, the state-owned freight carrier, is forbidden by Western sanctions, but companies are allowed to use its services. Nevertheless, Pfeil says European companies avoid it entirely, lest a sanctioned entity appear in their transactions.
These complications mean that developing the southern route's infrastructure will be key for businesses eager to maintain the Eurasian land link. At present the Middle Corridor rail route via Turkey can handle between 5,000 TEU and 6,000 TEU annually, barely 1% of the northern route's capacity, according to Ahmet Burak Icen, general manager of Middle Corridor Logistics in Turkey.
The list of improvements needed is considerable. "Infrastructure means raising tonnage limitations, the number of locomotives, signals and wagons," said Icen. "We need electrified lines. Diesels are always more expensive."
Turkey, the Middle Corridor's linchpin, has only 800 km of two-way tracks, while the rest of its 13,000 km of railways are single lines. Governments and businesses pushing for the Middle Corridor face other technical challenges, such as the different gauges used in Turkey and former Soviet republics, which makes connecting rail lines harder.
"There is no country that can react to this fast. Even if you order additional locomotives now, it takes three to five years to deliver them as it is order-based production with a long queue," said Erol Erkan, general manager of Pasifik Eurasia, Turkey's largest rail forwarder using the route.
To meet demand, Middle Corridor stakeholders have increased seaborne shipping from the Port of Batumi in Georgia to Constanta in Romania.
"This service essentially provides a critical transport connectivity on the corridor when the other conventional alternatives fail to function," said Natiq Jafarov, director of Azerbaijan's state-owned carrier ADY Container.
ADY introduced its first vessel in June and is preparing to launch a second in September. The two will make a total of six round trips per month, depending on weather conditions on the Black Sea. The waters, however, are fraught with danger in the form of Ukrainian mines and Russian warships, as the International Maritime Organization has warned.
Building up alternative rail systems will hinge on investment by China. Construction begins next year on a third route, the China-Kyrgyzstan-Uzbekistan (CKU) railway, a Belt and Road Initiative project that will be 900 km shorter and reach Aktau more quickly than the existing Kazakh lines.
European companies, however, may find reasons to avoid the CKU railway: Its eastern terminus will be Kashgar in northwestern Xinjiang province, where China has held an estimated 2 million Uyghur Muslims in detention camps for what it calls reeducation. The U.S. and EU have sanctioned Chinese officials allegedly involved in human rights violations, as well as goods and raw materials from the Xinjiang region.
In the meantime, European logistics companies are increasing trucking capacity, with Doerrenhaus, Hellmann and DHL of Germany starting to do so as early as 2020. After the invasion of Ukraine, Rail Bridge Cargo began offering trucking services from Baku to Central Europe, the last leg of the westbound journey.
This increases the cost by about $4,000 per 40-foot container, but overall transport times are similar to those on the trans-Russia rail route. Austrian logistics company Gebruder Weiss expects trucking to become more competitive when China relaxes its tight COVID border restrictions, although there is little sign of that happening yet.
Others are holding their noses and returning to the trans-Russia route. Dutch company Nunner Logistics proposed taking cargo by rail from China through Kazakhstan, then by boat across the Caspian Sea to Azerbaijan, and again by rail through Georgia, Turkey and Italy to Duisburg. But few customers chose this convoluted option.
"Transit times are too long and a lot of customers are changing back to sea or northern rail routing," said Groot Wassink, director of special products at Nunner Logistics.
As the war in Ukraine grinds on and problems with sea freight mount, some of Rail Bridge Cargo's customers are asking to revert to the northern route.
"We all don't know how long this is going to take," said Tambaca, the company's managing director. "If it was two or three months we could say, 'OK, let's see three months and then we start off again.' But nobody knows."
While Tambaca still recommends the southern route on ethical grounds, the company has reopened its northern route business to all cargo.
"A supply chain does not stop," he said.