As a result of sanctions, Russia has been forced to reorient major freight flows from the west to the east and south. This marks the most significant restructuring of trade logistics in its history. The transportation infrastructure was ill-prepared for this shift, leading to significant increases in delivery times and costs. During the initial phase of this eastward turn, road transport played a crucial role in mitigating the challenges. However, experts from the Central Bank caution that the future performance of the industry will depend on the efficient implementation of large-scale infrastructure projects. They also warn that these investments are unlikely to yield economic benefits and may result in a systematic decline in the profitability of foreign trade, considering Russia's historical economic ties with Europe. Two thirds of the population live in the European part of the country, and this is where 70% of GDP is produced and approximately 90% of imported goods are consumed. The economic repercussions are thus expected to be substantial. The distance from Moscow to Vladivostok is eight times greater than the distance to the country’s EU borders, underscoring the scale of the logistical challenge.
According to the ‘Regional Economy’ report published in July by experts from the Central Bank, Russia's volume of commercial freight transportation had not collapsed by the end of 2022; indeed, it even began to grow in 2023. However, these figures mask the most significant structural transformation in the history of Russia's trade logistics. Prior to the war, Europe was Russia's largest trading partner, accounting for 42% of its foreign trade turnover, this included the countries of the EU, the UK, Ukraine, and Moldova. As a result of the invasion of Ukraine and European sanctions, freight traffic in this direction decreased by 40%. As a consequence, a significant portion of export and import flows have been redirected from the northwest to the southeast. As a result of these tectonic shifts, there have been predictable delays (sometimes two to three times the usual) and price increases (sometimes by tens of percentage points).
Besides geography, the structure of transport routes has also undergone changes. For instance, maritime logistics saw a 66% increase in tonnage and an 11% increase in tonne-kilometers. This can be attributed to the shift in the geography of carriers’ operations and the redistribution of flows between transport modes. Moreover, air transport suffered a 61% decline. Cargo aviation accounted for more than 70% of cargo turnover on international routes before the war and the resulting sanctions forced it to suspend operations. Meanwhile, road transport has experienced a 1.8% increase in tonnage and an 8% increase in tonne-kilometers, indicating a significant lengthening of the average transportation distance. Rail transport decreased by 1.5%, but tariffs rose by nearly a quarter on average over the year.
In April, container shipments in St Petersburg portswere at a level just over 50% of the monthly average volume in 2021, while the ports in the Russian Far East (Vladivostok and Nakhodka) now handle more than half of all container traffic. Year-on-year growth reached 34%. Despite this, the port of Novorossiysk remains the leader in terms of the number of handled cargoes. Due to the redirection of trade towards the east and south, the ports' burden rose to 125% at the end of 2022, resulting in six times longer waiting times for ships. Another significant challenge was that, at the beginning of 2022, around 40% of the containers belonged to international companies that subsequently left the Russian market. Chinese companies have begun to fill this vacant space.
At the same time, railway logistics have undergone a similar eastward turn. In the second half of last year, the volume of transportation to the east (80 million tonnes) surpassed that to the west (76 million tonnes) for the first time. However, much like maritime transportation, the infrastructure was ill-equipped to handle the increased supply volumes, leading to significant delays in cargo delivery.
Before the war, road transport accounted for the majority of freight traffic between Russia and the EU. However, sanctions caused a sharp decline of 80% in transportation via this route. At the same time, an increased demand for trucks emerged in other regions for what is known as multimodal transportation. According to Retail.ru, examples of this type of route include the transportation of goods from China to Zabaykalsk: the goods are first transported by road and then continue via railway or ship from China's port of Dalian, then use road transport to reach the border in Heihe, and finally complete the journey to Moscow by rail. Experts from the Central Bank note that, on certain routes, the volume of road transport increased by 1.5 to 3 times. In general, the demand for road freight grew by 60% in the first six months of 2023, as reported by ATI.SU exchange data cited by 'Kommersant.' Accordingly, prices have also risen, with the most popular routes experiencing an average increase of 38% over the year and 10% in the last three months.
The development of transportation infrastructure to accommodate the new geopolitical trade landscape is one of the Russian government's key priorities. It is currently stimulating the economy through state and private-public investments in this area. For instance, there are plans to increase port capacities in the Russian Far East by a third over the next three years. Other major projects include the 'North-South' transport corridor (under construction since 1999), which aims to connect India, Iran, and Russia, and the development of the Baikal-Amur Mainline (BAM), the Trans-Siberian Railway, as well as the Northern Sea Route.
However, these investments cannot be deemed economically rational. First, they are mostly compensatory in nature and not directly tied to increasing freight flows. Second, a significant portion of the Russian economy remains geographically tied to Europe. According to data from Rosstat, in 2021, the Central, Northwestern, and Volga Federal Districts accounted for 56% of Russia's population, 62% of its GDP, 70% of manufacturing output, 73% of Russian exports, and 84% of imports. If we include the Southern Federal District, these figures rise to 69% of GDP, 76% of manufacturing output, 72% of agricultural production, and 89% of the total imported goods consumed in the country.
Thus, the Russian economy is predominantly located in the European part of the country. The distance from Moscow to Vladivostok is eight times greater than the distance to its border with the EU. The full-scale invasion of Ukraine and the ensuing sanctions war has deprived Russia of its main historical geo-economic advantage – proximity to European markets and technological supply chains. The investments in new transportation infrastructure are thus associated with a systematic decline in the profitability of foreign trade.
Moreover, there is no certainty that the current geopolitics of Russian foreign trade will remain stable in the long term. From an economic standpoint, it is so irrational that any easing of tensions between Russia and the West could lead to a new redirection of trade flows. Nevertheless, the Russian government has demonstrated a persistent tendency towards politically motivated infrastructure investments, which often raise questions about their profitability from the outset and may ultimately become redundant as a result of shifting geopolitical priorities. For example, during the 2010s, Russia invested in the construction of three additional gas pipelines towards Europe, which are now defunct due to the loss of European energy markets.