CIS International Logistics Market. Will Tomorrow Be the Same as Yesterday or Even Harder?
Sanctions between Russia and the European Union, rupture of relations with Ukraine, problems with the exchange of permits, increase in transportation expenditure … resulting in the reduction of profitability for freight forwarders, keener competition and higher standards for logistics contractors. All these problems are not only about the present, but also about the future.
More details on the current conditions and prospects of the logistics market will be provided by TELS experts:
- Elena Sazonchik,a marketing director;
- Andrej Abragimovich, TELS Cargo director;
- Oleg Germanovich, an office supervisor;
- Evgenija Holub, an assistant manager of the legal department;
- Andrej Pavluchenko, an office supervisor.
Sanction war started in 2014 when EU imposed its restrictions on Russia – first, the ban on the export of certain equipment followed by financing restrictions against the designated Russian banks.
Along with the downturn in energy prices, the restrictions reduced foreign investment into Russian economy.
At the same time, the countersanctions restricting import of a wide range of goods from the European Union to Russia affected the freight market between the EU and the Russian Federation severely.
Elena Sazonchik: “The food embargo imposed in 2014 decreased the volume of cargoes imported from the EU to Russia by road by 19%. This happened at the time when the market faced serious contraction. As a result, imports from the EU to the Russian Federation in 2015 reduced by 28.3% against the year 2014. It is fair to underline that the decrease is expressed in terms of value. The major market players complied with the consumer demand by switching quickly to no-frills goods. Thus, the reduction expressed in tons was less, totaling approximately 19-20%.
In 2016, the rate slowed down abruptly to 5.1% over 9 months against the same period of the previous year, which happened after the collapse in 2015.”
The EAEU market made up partly for the Russian food sanctions.
Elena Sazonchik: “The end of 2014 was marked by a considerable increase in import of European fruit and vegetables to the Republic of Belarus and Kazakhstan with the increase totaling 1,500 tons at the end of 2015. A considerable part of the imports was sent to Russia. This is implied by the fact that import of these goods to Belarus and Kazakhstan reduced sharply in 2016 right after the Decree on the disruption of sanctioned food on Russian border was signed. This was also accompanied by a tighter control on EAEU borders making the attempts to import sanctioned goods to Russia financially dangerous.”
Food embargo is by far not the only reason for the reduction of cargo traffic to Russia.
Elena Sazonchik: «“The Russian economic depression reinforced by European sanctions resulted in the reduction of new manufacturing capacities in Russia and the investment potential of Russian industries.
In 2015, around 250 thousand tons of heavy industrial machines was imported to Russia from the EU, which is one third less than in the year 2014.
In 2016, there was a noticeable increase by +9% for these groups, yet there is much to be done to restore the volume of imported machines and equipment.”
In December 2016, the leaders of the EU member-countries agreed to prolong economic sanctions against Russia until July 31, 2017. The countersanctions (food embargo) posed by the Decree of the Russian President in 2014 were prolonged until December 31, 2017.
Thus, sanction war will continue at least until the middle of 2017.
At the same time, all positive and negative scenarios for Russian economy drawn by the World Bank expect the restrictions to remain up until 2018. Only the basic alternative scenario considers the lifting of sanctions next year.
However, as they say, an excellent opportunity will not go begging. Even if the sanction war will be finally over in 2017, it is unlikely that imports from Europe will increase dramatically. While the sanctions have been in effect, serious changes have taken place on the world economic arena, new business relations have been established and alternative delivery routes have been developed. Most significantly, consumer demand in Russia decreased considerably due to the economic depression.
BUSINESS STRUGGLE MULTIPLIED BY TWO
The depression along with sanctions crashed the logistics market (in terms of imports to the Russian Federation), the number of cargoes decreased rapidly, and certain cargoes are still decreasing.
Oleg Germanovich: “We sensed at once and are still sensing the reduction in the volume of cargoes resulting from sanctions – the cargo flow from Italy, the Benelux countries, Poland … has decreased dramatically. The reason is not only in the sanctioned apples, but it should be noted that commerce has declined. For instance, import of building materials, chemical products from Poland has reduced. While analyzing the customer database, one of the most popular reasons for negative profits is “went away when the sanctions were issued”…”
At the beginning of 2015, 65% of respondents to a survey prepared by TELS for the Supply Chain & Logistics Forum in Moscow reported the reduction in the volume of contracts with the non-resident exporters to Russia against the economic depression in the world, mutual economic sanctions between Russia and the EU countries.
But Russian customers are not the only ones reducing the volume of imports. Global companies leave the Russian market wholly or partially due to a dramatic decline in profits. According to the data published in Kommersant newspaper, over 60 world-renowned brands and companies left the Russian market in 2014-2015.
Elena Sazonchik: “In 2016, according to our research, around 500 companies dealing with imports left the market. This negative tendency is noticeable in all the segments; primarily it concerns small companies which are forced to leave the Russian market as their businesses fell dramatically due to the reduction in the consumer demand and the decline in production. Large importers suffered least of all.”
Facing trade losses, freight owners tend to minimize the expenditures by cutting down the expenses on logistics and transportation. This results in tougher business struggle between logistics operators (primarily in terms of price).
Oleg Germanovich: “According to our research, “the average rate” from Europe to Russia decreased by approximately 3-5% in 2016 against 2015. The struggle became tougher – make a slightest mistake in meeting customer’s needs and your place is taken by another contractor. The business struggle in the new year will be as tough as it was.”
Selecting a contractor on competitive basis has become universally recognized over the past years.
Elena Sazonchik: “Bidding process has become one of the tools helping reduce the cost of logistic services, which was confirmed by the opinions of 48% of respondents (in the face of customer representatives) interviewed in October 2015; and in 2017 over 95% of our customers are tending to purchase all the logistic services through the bidding process.
A few more important tendencies have become popular lately. Besides the fact that most of the services are now sold by companies with several business units, individual companies cooperate with one another to create a shared centre selling logistics services. All this aims to enhance logistics efficiency for cargo owners via synergy.
This tendency results from the changes in purchasing technologies. Cargo owners are using outsourced bidding platforms and open auctions more and more often.”
CUSTOMER’S REQUIREMENTS AND LIABILITY
Strategic partnership as a type of relationship resembles a utopian idea for most participants of the logistics market today. Even though it allows to optimize logistics expenses, customers prefer to hire individual contractors who can be replaced at any time by those offering more profitable conditions.
The price of the service is the dominant factor in selecting a contractor. However, price is now regarded by a customer along with other contractor’s capabilities in order to be able to solve as many issues as possible by means of one contractor.
In 2016, more stringent requirements were imposed on cargo safety. The liability insurance covered by freight forwarders did not usually exceed 0.75-1 million Euro, which is not the case today as the requirements have become stricter.
Evgenija Holub: “In 2016, we increased our liability insurance up to 2.5 million Euro. We did it basically by our current customers’ requests as well as due to the fact that freight forwarding companies were offering liability insurances over 1 million Euro in bidding processes more and more often.”
Certain customers expressed their strong willingness to optimize the expenses by reducing the cost of cargo containers and packages and shifting the responsibility for cargo safety on the contractor.
Oleg Germanovich: “Some customers we have been working with for a long time started claiming that we cover all the problem issues at our own expense. This does not prevent them from cutting down their expenses, even on transportation packages. For example, the cargo is wrapped by stretch film once instead of three times. If the cargo is travelling on West European roads (Berlin-Paris), one layer of the film is not critical; but it’s not the same for Russian roads, when cargoes or packages often come damaged.”
Evgenija Holub: “Sometimes cargo owner’s policy contradicts to insurance policy. For instance, certain manufacturers do not use any transportation packages, and the goods come into the market in commercial packages as they were transported. It’s evident that the destruction of commercial packages is equal to the destruction of the goods, which underlies the contract with the freight forwarder. At the same time, insurance companies do not cover this condition.”
This is happening along with the increasing number of cases of unpaid debt services, which demonstrates low payment discipline of the customers.
WHICH CARRIERS ARE HAPPY TO WORK IN RUSSIA?
The Ministry of Transportation of the Russian Federation has been trying to restrain administratively the influence of foreign carriers in the Russian market for many years. For example, by reducing the number of permits to and from third countries issued to foreign transportation companies. Besides, restrictions are applied to ECMT permits used on the territory of Russia.
Andrej Pavluchenko: “Historically, one of the major business rivals of Russian transportation companies (besides, Lithuanian and Belarusian companies) have always been Polish transportation companies.
In 2005, Russia issued around 45,000 permits to Polish transportation companies to and from third countries, which along with ECMT permits allowed Polish carriers to work smoothly delivering cargoes from the countries of Western Europe to Russia.
Russia reduced the number of such permits yearly, and by 2011 their number had totaled not more than 25,000. At the same time, in 2011, Russia reduced the number of ECMT permits that could be used on its territory.
The first open struggle between the two Ministries of Transportation took place in January-February 2011, as neither of the two parties could reach compromise. The yearly number of permits to be issued for each party for 2011 was finally agreed upon only in February of the same year.
Polish carriers were forced to search new coupling and reloading schemes by means of vehicles from other countries, while Russian companies were getting used to RO-RO shipment of their transit cargoes via the Baltic States.
The agreement was reached only when a speaker for the Ministry of Transportation of the Russian Federation suggested lifting the ECMT restrictions making it possible for both parties to decide on the number of permits for 3 years (even though the words never met the actions).
At the same time, it did not prevent the two parties from coming to an agreement on the use of Russian bilateral permits for Polish companies in cases when transportation of the cargo was from Germany, for example, with further reloading on the territory of Poland.”
The following agreement on transportation types was recorded in a protocol to Polish-Russian Joint Committee, which took place in August 2012, on questions of partnership in foreign road transportation: “The place of loading and unloading is important to define a transportation mode. Other factors, such as the country of freight’s origin and the seller’s country of origin do not influence the definition of the transportation mode.”
In 2015, changes to federal law №127-FZ On state control of foreign road transportation and liability for violating the procedure of transportation were adopted, and Order №301 On the peculiarities of foreign road transportation to and from third countries was approved by the Ministry of Transport of the Russian Federation.
In fact, new laws cancelled the agreements made in 2012 resulting in another conflict between Polish and Russian Ministries and a delay in the exchange of permits. The situation of the year 2011 repeated itself.
Andrej Abragimovich: “Russian international transportation companies felt keenly the absence of Polish permits at the beginning of the year 2016. Additional expenses arisen from RO-RO shipment of cargoes delivered from/into Europe bypassing Poland decreased the competitive capacity of Russian carriers. Customers did not want and did not agree to cover additional expenses. As a result, we lost a number of customers with whom we haven’t been able to resume our business relations so far.”
Andrej Pavluchenko: “Redistribution of a greater part of cargoes transported by Russian companies to ferry lines resulted in additional expenses. One round trip with Baltic (Latvian and Lithuanian) ferry lines costs about 1,500-2,000 Euro. Polish transportation companies also met expenses reloading their vehicles at the terminals of Belarus and Lithuania. Moreover, tensions in bilateral relations between Russia and Ukraine after the year 2014 also had its negative effect on the alternative ways of cargo delivering by Russian transportation companies.”
In April 2016, the Polish party managed to convince the Russians to make changes in Order №301 issued by the Ministry of Transport of the Russian Federation. The changes were introduced in summer 2016. And in September 2016, the two Ministries of Transport agreed and signed the Rules defining transportation types, which was necessary for unambiguous application of the order by supervising bodies.
In the period from 2014 to 2016, the permanent conflict between Russian and Polish carriers as well as the economic depression in Russia, which reduced import traffic, forced Polish companies to develop in a more stable European market. Their success helped them reduce their dependence on the Russian market and conditioned firmer positions in negotiations.
Andrej Pavluchenko: “Considering the results of the meeting of the Polish-Russian Joint Committee on questions of partnership in foreign road transportation, which took place in Krakow on November 8-9, 2016, each party exchanged 190,000 permits for the following year. The number of Russian permits to and from third countries for Polish carriers totaled 48,000, which is 3,000 more than in 2005.”
The reduction in the number of permits to and from third countries for foreign carriers had its effect. According to the Association of International Road Transport Carriers, the number of trips to Russia from third countries reduced by 3 times in 2015 against the year 2014 – from 50.6 to 16 thousand trips. The greatest decrease of trips was from Belarus, Poland, Moldova and Ukraine.
Unfortunately, such protection of national interests does not entail favourable conditions for the Russian companies in the international logistics market. The decrease in traffic flow, low profitability due to lower freight rates, high credit interests … According to the Association of International Road Transport Carriers, the vehicle park of member-companies of this association decreased by 12.2% in the Central Federal District in the period from 2013 to 2015.
Unlike the Polish carriers having the chance to develop in the logistics market of the European Union, the carriers from the CIS don’t have any appealing markets in sight. So, everyone has to adapt to working in such condition.
Oleg Germanovich: “Taking part in biddings of our current clients for the year 2017, we cannot exceed the bids made in 2016. (Besides, we have agreed to reduce the price by at least 3% each year for one of our clients.) Recently, we had to decrease the bid by 20%, and it did not help us fit. Price competition is extremely high.”
The international logistics market between Europe and the CIS has changed considerably countrywise for the past two years. This resulted not only from the lack of permits.
Oleg Germanovich: “Two years ago, Polish transportation companies offered the best prices for their services. Yet everything has changed. Our employees attended a meeting with the Polish partners, where the latter declared that driving to Russia lost its sense. So, their prices are not low any more. Our pool of contractors is growing though owing to Russian, Belarusian and Lithuanian companies.”
Overall, the future of the logistics market of the CIS stays uncertain. Additional expenses carried by transportation companies add up to it.
In 2017, the tolls on heavy trucks in Russia in Platon system will rise. But the changes will vary from operator to operator.
Andrej Abragimovich: “The tolls in Platon system will rise, but the fee won’t rise much for deliveries from Europe to near regions of Russia - +10 Euro for transportations going to Moscow. The rise in road charges will mainly affect those transporting at long distances, especially private companies adopting shady cash schemes. Platon system made transportations more transparent, so bigger companies may even take advantage of the whole situation.”
A new Order of the Ministry of Transport of the Russian Federation №87 of March 31, 2016, on the Procedure granting carriers a certificate of professional international carries through a special examination came into force on November 20, 2016. From now on, all international drivers besides the driving license category are obliged to pass the exam and receive the certificate of a professional international driver. A trucker should take an advanced 36-hour training and pass a written test, which increases the expenses especially for companies with large vehicle fleets.
Andrej Abragimovich: “The examination of professional competence of international drivers puts additional load on Russian drivers. At the same time, Belarusian carriers drive Russian vehicles quite often. So, they will also have to take the exam to be able to drive on the territory of Russia. This also implies additional expenses in terms of time and money, especially for the companies employing many truckers.”
WILL THE “VARANGIANS” COME?
One of the traditional ways to see the future of developing markets is to learn the processes inherent in the markets outstripping the regions under consideration. Thus, the experts are drawing parallels between the international logistics market of the CIS countries and the processes that took place in the Polish logistics market.
Once the Polish market became a favourable place for a great number of global logistics operators. Some of them took the lead on the market mainly due to significant financial capacities, aggressive steps in market capture and well-established connections with transnational corporations.
Can anything of the kind happen to our market too? Partly. A transnational logistic operator can service local business units of transnational customers due to good business relations with their headquarters.
However, it’s unlikely that the logistics market of the CIS will follow the steps of Poland, the EU member-country.
Oleg Germanovich: “The transnational companies that have been operating here for many years will undoubtedly struggle for the market. But there are no reasons for new market players to come and capture the market aggressively. The European economy shows positive tendencies overall, working conditions are much better and more stable. It’s not the case with Russia where market is characterized by the economic depression, growing number of unpaid services, worsening of the criminal situation, increasing toll roads charges…
The facts show that the Russian market is becoming less and less interesting for Western forwarders. In 2016, the number of Western contractors decreased considerably allowing Russian and Belarussian transportation companies to take their place.”
It’s difficult for European forwarders to capture the Eurasian logistics market today, that’s why they are rather reducing their presence in it.
However, global logistics operators think long-term. It’s natural for them to develop in the prospective markets, even though the prospects may be long term. Especially that it’s almost impossible to take no notice of a large Russian market. Thus, the global companies do not stop their aggressive strategies to capture the Russian market, which becomes possible due to significant financial capacities and well-established connections with transnational corporations (and so far, Russia has not “grown” its own transnational logistics “stars”).
Elena Sazonchik: “Undoubtedly, the market of the CIS countries is much less attractive and more problematic compared to the European market, but it does not mean that it’s not interesting for transnational corporations, including logistics companies. Some of them have already taken the leading position in the Russian market and are participating actively in it, they are distinguished by products and offer large clients individual, comprehensive and hi-tech solutions.”
The Ministry of Economic Development and the Central Bank of the Russian Federation are forecasting mildly positive growth for 2017, 2018 and 2019. They forecast an insignificant growth of GDP (though, the Central Bank has revised its forecasts from 1.4% to 1% growth), growth of retail trade up to 1.8% in 2019. They also foretell the increase of investments up to 1.3% in 2018-2019.
Anyway, all the forecasts (made both by the experts and Russian public officers) suggest that there won’t be any significant changes in the Russian economy in 2017, which will affect the logistics market of Russia. Most probably, the sanctions will be prolonged, the struggle between the logistic contractors will increase, the consumer demand will not grow and the investments will also be undecided. Let’s hope everything will change for the better in future.