One other enhance in freight tariffs might be a catastrophe for the state, enterprise and Ukrainian Railways itself
The second half of final yr was a difficult time for enterprise not solely due to the warfare but additionally due to drastic adjustments within the tariff coverage of state monopolies. Vitality and fuel state-owned firms, in addition to Ukrainian Railways, noticed monetary gaps of their steadiness sheets and determined to fill them on the expense of commercial shoppers.
On the identical time, the monopolists attempt to not point out bettering the effectivity of their very own operations and optimizing prices, as elevating tariffs for shoppers is an easier and simpler approach. Nevertheless, nobody calculates the destructive impression of such choices on the Ukrainian economic system, and the implications may be catastrophic.
Tariff historical past
Since 2021, there was a big enhance in tariffs for the transportation of products by rail. Ukrainian Railways can elevate tariffs in several methods: a direct enhance, indexation, or convergence of tariff courses. The final enhance happened on the finish of June 2022. At the moment, tariffs for the transportation of coal, ore and limestone elevated by 140%, grain by 96%, and metallic by 70%.
In August-September final yr, Ukrainian Railways tried to extend tariffs by unifying tariff courses, which meant a 52% enhance in the price of transportation of constructing supplies, a 7% enhance in the price of ore and coal, and a 67% enhance within the return of empty automobiles. However then Ukrainian enterprise united in opposition to this concept, and it was not applied. Nevertheless, Ukrainian Railways will nonetheless attempt to return to the concept of unification.
Now Ukrainian Railways is attempting to boost tariffs by indexing them by 37%. As in earlier instances, that is motivated by the necessity to guarantee worthwhile operations and a pointy enhance in prices.
Whereas in 2022, the enterprise handled the tariff enhance with a sure understanding of the state of affairs, as after the outbreak of warfare, UZ had a pointy decline in freight site visitors and carried out essential social and protection capabilities, now the enterprise categorically rejects any makes an attempt to “impose” an extra monetary burden on itself.
“Given the 70% enhance in tariffs in the summertime of 2022, no inflation indices or financial indicators through the warfare can justify a tariff enhance in 2025,” Ukrcement Affiliation stated in a remark to GMK Middle.
The indexation would have introduced Ukrainian Railways 17.5 billion by the tip of the yr if the choice had come into impact on Could 1. In response to UZ estimates, the logistics part of the price of cargo will increase by about 2.7% for iron ore and as much as 1% for coal and ferrous metals. On the identical time, shippers count on a way more vital absolute impact.
Implications for enterprise
The destructive perspective of enterprise to the indexation of Ukrainian Railways’ freight tariffs is because of the troublesome state of affairs in most sectors of the Ukrainian economic system, that are barely surviving the warfare and obtain no assist from the state, or at the least no obstacles to their enterprise actions, however reasonably the switch of the issues of 1 single state-owned enterprise to your entire economic system.
The anticipated destructive impression of the indexation of Ukrainian Railways’ freight tariffs on the biggest sectors of the Ukrainian economic system consists of the next:
- Enhance in total logistics prices. In response to the European Enterprise Affiliation, because of Russian army aggression, logistics costs have elevated considerably, in some industries – as much as 40% of the price of manufacturing, and present tariffs already exceed the capability of market individuals. On the identical time, a 37% indexation will result in a disproportionate enhance in logistics prices for many sectors of the economic system. In response to Ksenia Orynchak, Govt Director of the Nationwide Affiliation of Extractive Industries of Ukraine (NAEIU), the whole enhance in transportation prices for the extractive business alone may exceed UAH 10 billion per year if this resolution is accepted.
- Elevated manufacturing prices and lack of competitiveness. The rise in transportation prices is robotically included in the price of manufacturing, which can result in a deterioration within the competitiveness of Ukrainian producers each on the international and home markets. In response to NAEIU calculations, the indexation of UZ tariffs may enhance the price of a ton of ore by at the least $2-3, and a ton of coal by $5-7, relying on the space of transportation.
- Decreased manufacturing and exports. The logical response of companies to the rise in transportation prices and decreased competitiveness could also be to scale back manufacturing volumes and, in some instances, even to cease operations. Earlier, ArcelorMittal Kryvyi Rih introduced a decline in manufacturing attributable to rising electrical energy costs and unfavorable market situations. Now, a rise in rail freight tariffs could also be added to the destructive components.
- Shift to motorized transportation and accelerated highway deterioration. Because of rising tariffs, freight homeowners will swap to highway transport, which is able to enhance the load on roads and speed up their destruction, which shall be particularly noticeable within the context of restricted funding for highway infrastructure through the warfare.
- Rising inflation. Any enhance in UZ tariffs will result in a sequence of value will increase by cargo homeowners. Thus, the actions of Ukrainian Railways make a big contribution to the rise in industrial inflation.
- Accumulation of commercial losses. Many Ukrainian firms are already making losses or are working on the sting of profitability. Specifically, Metinvest Group suffered losses of $1.15 billion in 2024, and ArcelorMittal Kryvyi Rih’s operations are literally supported by its mum or dad firm, which has supplied monetary help value $1+ billion because the starting of the warfare.
- Multiplier impact on associated industries. Issues in a selected sector of the economic system will inevitably have a destructive impression on different sectors, even when they’re doing higher. For instance, issues in metallurgy or mining may have a domino impact on logistics, vitality, engineering, and so on.
“The mere enhance in tariffs with out compensatory measures could have a destructive impact. The probably enhance in tariffs may have a distinct impact on totally different sectors of the economic system, however the building business would be the most negatively affected. Not solely is the financial justification for the adjustments necessary, but additionally the variation of freight transportation requirements to worldwide necessities in reference to European integration processes. It’s value noting that UZ has proposed compensation mechanisms for numerous industries, similar to long-term contracts at mounted charges, and so on.,” Anatoliy Kinakh, President of the Ukrainian League of Industrialists and Entrepreneurs, commented to GMK Middle.
As well as, the indexation of tariffs will result in vital destructive penalties not just for giant industrial enterprises but additionally for small firms.
“The rise in tariffs for freight transportation by Ukrainian Railways could have a big destructive impression on the agricultural sector of Ukraine, particularly on small and medium-sized farms. This might result in decrease yields, decreased manufacturing and exports, and a common deterioration of the financial state of affairs in communities. On this regard, farmers are calling for a assessment of the tariff coverage and the introduction of a clear tariff setting mechanism that may take into consideration the pursuits of all market individuals,” the Ukrainian Agrarian Council informed GMK Middle.
An necessary downside is that the rise in railroad tariffs just isn’t accompanied by actual adjustments and enhancements within the high quality of cargo transportation. Throughout the earlier will increase in the price of freight transportation, the set targets weren’t achieved, specifically, a rise within the quantity of capital investments, and in line with shippers, the extent of service of UZ is kind of low.
“Throughout the latest intervals of rail tariff will increase, Ukrainian Railways has not renewed the rolling inventory of cement automobiles. We now have repeatedly supplied to interchange cement hoppers with larger carrying capability or technical modernization,” Ukrcement Affiliation emphasizes.
On Could 16, intermodal market operators appealed to Oleksiy Kuleba, Deputy Prime Minister for Reconstruction and Minister of Group and Territorial Improvement, to stop Ukrzaliznytsia from elevating the value of container transportation.
Penalties for the state and the economic system
It’s troublesome to estimate the losses for the state and your entire Ukrainian economic system by way of GDP decline, decreased international trade earnings and taxes, however they are going to be within the tens of billions of hryvnias. Hundreds of jobs shall be in danger if the plant is shut down or fully ceases manufacturing. Elevated manufacturing prices and lack of competitiveness.
“If we use medical terminology, the 37% indexation of tariffs is a blood clot. If it breaks, it is going to be virtually not possible to pump out the affected person (the Ukrainian economic system). Personally, I consider that such intentions of Ukrainian Railways are a deliberate diversion, a chaotic try to search out further funds someplace with out some other adjustments, similar to creating further providers, working an environment friendly state-owned enterprise, and so on.”, stated Konstantin Saliy, President of the All-Ukrainian Union of Constructing Supplies Producers, in a commentary to GMK Middle.
The destructive penalties can even have an effect on Ukrainian Railways straight, as cargo homeowners shall be compelled to change to various modes of transportation, which is able to trigger the state provider to lose its cargo base, which is able to negatively have an effect on Ukrainian Railways’ revenues and considerably worsen its present monetary place.
“The decline in industrial manufacturing can even have a destructive impression on Ukrainian Railways itself, as the one supply of its earnings is shippers, who shall be compelled to scale back transportation volumes attributable to extreme tariff burden,” the American Chamber of Commerce in Ukraine (ACC) explains.
In truth, Ukrainian Railways began dropping it final yr. Within the second half of 2024, in comparison with the primary half, the whole quantity of UZ freight site visitors decreased by 6.2% or 5.6 million tons, whereas export site visitors decreased by 10.8% or 4.9 million tons.
“On account of the indexation of Ukrainian Railways tariffs, transportation of sure forms of merchandise shall be in danger – they are going to both lose their aggressive place or swap to highway transport. For instance, this is applicable to the transportation of liquefied fuel, which was once carried out by rail, however is now largely carried out by highway. The same pattern applies to the transportation of sunshine oil merchandise. There are additionally extra delicate classes, such because the transportation of timber within the frontline areas for the development of fortifications,” stated Serhiy Vovk, Director of the Middle for Transportation Methods, in a commentary to GMK Middle.
Most significantly, the tariff enhance doesn’t clear up the systemic issues of Ukrainian Railways which were accumulating over time: inflated costs throughout procurement, inefficient infrastructure that generates solely losses and cross-subsidization of unprofitable passenger transportation.
“As an alternative of elevating tariffs, which is able to enhance monetary strain on companies and result in a discount in transportation volumes, it is very important concentrate on supporting exports. Stopping the expansion of logistics prices will assist maintain cargo on the railroad, protect international trade earnings to the finances and contribute to financial stability,” the European Enterprise Affiliation believes.
What to do?
Initially, tariffs for freight transportation must be economically justified. This method is the one acceptable one within the present state of affairs, particularly within the context of the nation’s post-war restoration and the arrival of international traders fascinated about creating Ukraine’s uncooked supplies and manufacturing base.
“The one proper approach out is to not enhance tariffs, however to recalculate them by kind of cargo and degree of infrastructure utilization, for which a brand new honest tariff e book must be accepted.” It’s also essential to decide on restructuring UZ’s property, spinning off sure firms, and so on. All of this may take a number of time, however we have to begin immediately,” stated Olexander Kalenkov, President of Ukrmetprom, in a commentary to GMK Middle.
Growing tariffs will enhance the monetary burden on companies, which, given the present situations by which the Ukrainian economic system is working, appears ill-advised and may have extraordinarily destructive penalties. In response to Serhiy Vovk, it’s essential to search for different choices to enhance the monetary situation of Ukrainian Railways: to scale back losses and search for budgetary compensators for passenger transportation, to work on optimizing, specifically, inactive infrastructure, as a result of the present cross-subsidization mannequin has exhausted itself and requires basic reform.
The reserve for rising effectivity lies in optimizing prices and overlaying losses. Ukrainian Railways’ annual uncovered losses from passenger transportation quantity to UAH 20+ billion, and the price of sustaining inactive infrastructure is roughly UAH 16 billion per yr.
You will need to be aware that on the best way to EU membership, Ukraine should undertake the European mannequin within the discipline of transportation. In response to Directive 2014/34/EU, losses from passenger transportation cannot be covered by revenues from freight transportation. Which means that the state should search for some sources to cowl losses from passenger transportation, and Ukrainian Railways will in all probability not need to considerably enhance freight tariffs yearly.
Nevertheless, all these are post-war prospects, and the important thing job of the state now’s to keep up the army and financial entrance, with out which there shall be no prospects.
“Ukrainian shippers have the fitting to count on a civilized perspective. I consider that through the warfare, Ukrainian Railways can not focus solely on revenue, as the principle purpose now’s to maintain the economic system from collapsing,” summarizes Konstantin Saliy.
