The Bear Upstairs

The economies of China's three northeast provinces (Liaoning, Jilin and Heilongjiang) have also benefited from regional economic growth initiatives and today rank among the country's top growth performers. The block registered a GDP increase of 12.9 percent year-on-year in the third quarter last year and exports were up 25 percent. Freight on existing railways across China's frigid northern border to Russia, having fallen by as much as 55 percent during the financial crisis, is again on the rise – Heilongjiang's garment exports to its ursine neighbor jumped 70 percent in 2010.

For exports to Europe, the default route from China's northeast has been by truck or rail to the ports of Tianjin or Dalian before slow-boating the length of China's coast and on round Eurasia. Although the trans-Siberian railway should halve travel time, the modernization of Far East Russia's creaking railway infrastructure has progressed much slower than hoped.

The Trans-Siberian route suffers from high, inflexible freight rates, unfavorable customs rules and corruption at borders, shortages of platforms, bottlenecks and delays along low capacity tracks and outdated technology. Government owned Russian Rails' wagon inventory is rapidly deteriorating, and today the average wagon has been in use for 22 years. If modern technology is to be brought in, upgrading this aging wagon inventory is necessary.

At last year's APEC summit in Honolulu, a study presented by the Marshall School of Business on APEC supply chains ranked Russia's logistics infrastructure in second-last place among the forum's members. Only Papua New Guinea performed worse.

In the last few years, Russia's Far East authorities have glowered down at the development of the Chongqing-Germany route and realized they may have "missed the boat" on train freight from China to Europe. In 2005, the Russian Ministry of Transport approved policies to modernize and integrate its network, and efforts have slowly got begun. Of particular significance to China's northern exporters, work to reconstruct and electrify existing rails to China is underway. Last year Russian Rail ploughed 5.6 billion rubles (US $186.6 million) into reconstructing part of the route that connects the Trans-Siberian at Chita to Manzhouli at the Chinese border. An additional railway line to connect the Chinese border town of Tongjiang to the Trans-Siberian network is also in the works. But all this may be a case of too little, too late.

Russian Railroads needs to invest at least 400 billion rubles (US $12 billion) in improving its train network before 2015 to transport an additional 230 million tons of freight, said the former Vice President of Russian Rail Vadim Mikhailov in June 2011. Last year, Russian Railroads reported limited capacity on 7,000 kilometers of its network, meaning in five years of active efforts bottlenecks have been reduced on only 1,500 kilometers of rail.

A recent report by Hong Kong Logistics Research Center says the main problem in trans-Siberian transit is low capacity bottlenecks near ports, and that Russian Railroads is not investing enough to deal with current levels of freight, let alone to build for future in trans-Eurasian freight. According to the official report published on Russian Railroads' website, a full 30 percent of Russia's rail has never been upgraded since its original construction between 1891 and 1917. Modernization projects underway often come with significant delays. By the end of 2011, major rebuilding projects were overdue on 20,110 kilometers of track – 16.2 percent of the length of Russia's arterial routes.

Deutsche Bahn, for one, still sees potential in Trans-Siberian freight. In November last year, the company announced a daily service from Leipzig to Shenyang, Liaoning Province, to transport auto parts and components to BMW's plant in the Chinese city. The company didn't say which goods would fill its wagons on the return leg.

According to Trans-Siberian Railway expert Hisako Tsuji, cost, not time, is the most important determining factor in the viability of railway freight. When deep-sea freight prices are low, ships remain in favor. When high, rail provides a cost-effective alternative. Accordingly, as deep-sea charges rose after the recession, freight on the Trans-Siberian line picked up – registering 52 percent increase in the first half of 2011.

China's economy continues to grow. Despite tough times for exporters last year, trade with Europe is still set to grow substantially. Railway networks need to cut red tape and continue to be modernized and expanded especially in bottlenecks. China continues to plough billions of US dollars into its railway infrastructure every year, and countries along the China-Europe route, especially Russia, need to increase capacity to bring costs down and realize rail's great potential. Trains won't replace ships, but there's no reason they shouldn't provide a viable, clean and reasonably priced alternative. The Silk Road lives.