Freight tariffs have long subsidized intercity, suburban, and commuter passenger operations, as well as light-density freight lines that the railroads have not been permitted to abandon. No separate rail regulator exists, and the ministry both oversees and regulates the operations of the regional railroads.

As the Russian economy begins to recover and the demand for freight services grows, so does the demand for improvements in railway services. The ministry’s dual role as both operator and regulator has given rise to widespread complaints about tariff increases. While the Ministry for Antimonopoly Policy has restrained increases in some cases, it has not stopped them.

Serious discussions about reform began in 1998 with a government resolution calling for a broad restructuring, focusing on sloughing off auxiliary activities that competitive markets could supply, such as locomotive and car repair, and including the now standard reform proposal to allow some competition among different train operating companies on a monopoly track system. The Ministry of Railways circulated a similar, but more detailed, proposal in late 2000. At this point the Ministry for Antimonopoly Policy formally objected, focusing in particular on two aspects of the reform plan, namely:

How might the system be restructured in a competition-friendly manner? Most experts would agree on the bare minimum requirements for a liberalized Russian railway system to operate in a more efficient and productive manner, namely: permitting flexible local or regional tariff setting; allowing flexible local or regional train scheduling; ending systemwide revenue redistribution; separating the ownership and regulatory functions; and implementing direct, transparent government subsidization of passenger operations rather than subsidizing them from freight revenues.

In Russia, both the road freight transport and river freight transport industries tend to be structured so they are reasonably competitive, therefore where economically feasible, they provide shippers with competitive transport alternatives and obviate the need for regulation. Thus the government should encourage competition between various modes of transportation by providing private operators with the necessary road and water infrastructure; protecting competition in the state’s procurement policies at all levels to ensure that infrastructure investments achieve the best results possible; and ensuring that tax policies, including taxes on fuel use, do not discriminate against particular transport modes.

However, regardless of any such policies, in this vast country huge volumes of commodities travel most economically by rail. Railroad competition is an important part of any liberalization program.

A number of possibilities for competition exist, as illustrated by various international models.

Currently the EU system is popular in policy debates around the world, and for good reason: it provides transparency as well as competition between the various transport modes (rail, road, and water). Like the EU, Russia should also require the railways to keep separate accounts for their track and train operations. It should also require them to charge themselves a reasonable, regulated tariff for track access, so that in the future, shippers of large volumes—who typically run their own internal railroads anyway—may be able to continue to supply their own long-distance rail transport or threaten to do so.

The EU system, however, is extremely regulator-intensive. It seems very unlikely that the Russian regulator will have the knowledge or enforcement capability necessary to ensure that this access tariff is set at the correct, efficient, nondiscriminatory level in hundreds of different situations around the country, even if economists can ever agree on how to do that conceptually.

This is even more true of the U.K. system, which requires complete enterprise separation between the track owner or operator and all train operators. Such a system may require less regulation of access terms than the EU system given that the track owner has no reason to discriminate among different train operators, but it more than offsets this advantage by the additional contract negotiation and enforcement that it requires, a burden for which the Russian legal system is unprepared, and the loss of economies of scale between train and track operators. The EU system is at this point essentially untested. The experience of the U.K. system to date is one of controversy, confusion, and failed hopes. At this point, neither seems to be a solid foundation upon which to base competition in the Russian railway sector.

As concerns the three North American systems, parallel rail service between origin and destination points provides the best economic alternatives for shippers who depend on rail and requires a minimum of close regulatory supervision and intrusion. Certain rail routes in Russia—such as the Pacific coast to Europe and some areas in European Russia—could provide sufficient parallel track, and policymakers should consider introducing this option in those areas. Shippers who remain captive to a single rail carrier in these territories could be protected in the same way the Canadian system protects captive shippers, whereby the railroad serving the shipper must provide access or connecting service to the nearest alternative railroad.

Thus options include parallel rail competition for some shippers located in the right places, regulatory protection for shippers in such areas who remain captive to a single carrier, and perhaps potential entry into long-distance haulage of their own commodities by some of the largest shippers. However, other alternatives are possible. For more than a century experience in Canada, the United Kingdom, and the United States has shown that the central idea behind the Mexican system—source competition—is an effective constraint on railroads that would otherwise have monopoly power.

The Mexican system deserves a serious look as a possible solution for Russia. In those areas where parallel railroad competition is not feasible, the most important locations for rail origins and/or deliveries would be determined. This list would probably include a few large cities, for example, Moscow and Yekaterinburg, and a few large, single-industry production areas, for example, the Kuzbass. Some of these cities may already be served by more than one railroad enterprise, with track heading in different directions from the city. The single-industry production areas are typically located in the interior of a region covered by a single railroad enterprise.

The railway enterprises would be reorganized and restructured so that each of these cities and production areas would be served by at least two independent rail enterprises, perhaps one going east and one going west, or one going north and one going south. The overall number of independent rail enterprises might be fairly small, but shippers at each of these rail termini would have at least two choices of rail service. The competition would require much less day-to-day regulation, and rely much more on day-to-day, rail-to-rail competition than alternative plans.

In such a huge and difficult to govern country like Russia, relying on source competition among vertically integrated regional railroads may well be more straightforward and lead to a superior outcome than relying on close regulation of vertically separated monopolists from the center.