The activities of Ukrainian Railways require an international audit

Ukrainian Railways (UZ) is once again trying to raise freight tariffs by harmonizing tariff classes. This will have catastrophic consequences for the iron and steel industry, as companies will be forced to cut production or even shut down facilities, as the industry is already on the verge of survival. The industry believes that UZ’s operations need to be subject to an international audit, and given the state-owned company’s profitability, it is advisable to consider reducing its tariffs by 15-20%.

This was stated by Oleksandr Kalenkov, President of Ukrmetalurgprom, at the press conference “Reducing Ukrainian Railways freight tariffs as an incentive to improve Ukraine’s economic security”. GMK Center provides a summary of his speech.

Tariff situation

The last tariff increase took place in the summer of 2022, by 70%. Despite the fact that it was carried out without discussion, shippers were sympathetic to this fact, as at the beginning of the war, Ukrainian Railways’ cargo transportation sharply declined and the state company’s financial condition deteriorated. However, in 2023-2024, the volume of railroad transportation increased significantly, and everyone believed that there would be no more stories of unreasonable tariff increases.

However, Ukrainian Railways recently announced its intention to harmonize tariff classes, but in reality, this is another increase in freight rail tariffs. This will have significant implications for all shippers, as Ukrainian Railways’ freight tariffs, converted into dollars, are already 25-60% higher than in 2019-2021.

Implications for the industry

Railroad logistics plays a key role in the operations of mining and metals companies. The cost of logistics in the price of products can reach 40% (for iron ore). Although working with UZ is unpredictable, due to its monopoly position, iron and steel companies cannot refuse the services of the state-owned company. Therefore, we depend on Ukrainian Railways, as it depends on us.

Now our industry is on the verge of survival. Since 2022, the industry’s logistics costs have already increased 4-5 times. We believe it is unfair that Ukrainian Railways is making a profit and wants to raise tariffs further, while mining and metals companies continue to operate at a loss.

Such a decision will result in our companies not only cutting production but also closing down. This will immediately lead to a decrease in Ukrainian Railways’  transportation volume and a drop in freight revenues.

Business proposals

At present, Ukrainian Railways is actually a black hole, so it needs an international audit, which can involve international partners. We believe that there can be no increase in tariffs until the conclusions of the international audit are received.

In our opinion, it is not necessary to raise tariffs, but to improve the efficiency of the monopolist, and given the profitability of Ukrainian Railways, we should consider reducing tariffs by 15-20%. With stable operation of the sea corridor, this will lead to a significant increase in the volume of cargo transportation by Ukrainian Railways, which will remain profitable.

In general, Ukrainian Railways needs a real reform with the division of services into separate segments (infrastructure, freight transportation, passenger transportation) and legal entities. This will help to avoid cross-subsidization, which is the main reason for the inefficiency of the current tariff setting system. It is also necessary to introduce the activities of the NCRT, which will allow setting economically justified tariffs.