The transition of Russian Railways to new tariffs may further increase inflation

Alexander Polygalov, oTkritie Bank. 14 October 2021 12:52

In mid-September, the management of Russian Railways again raised the topic of revising the principles of indexing the infrastructure and locomotive component of the cost of rail transportation (the Russian Railways tariff). Now, on behalf of Russian President Vladimir Putin, the issue has been sent to the government for study.

Russian Railways proposes to index such a tariff in accordance with the "Russian Railways Price Pressure Index" (RPI). This index is calculated based on changes in prices for materials and services consumed by Russian Railways. In other words, Russian Railways wants the company's revenues to change synchronously with the change in its expenses.

The current principle of the basic indexation of the Russian Railways tariff has been in effect since 2019 and is to link it to consumer inflation. The basic indexation of the tariff is now the average CPI value for four years minus 0.1%. According to this principle, the indexation of the basic tariff of Russian Railways in 2019 was 3.56%, in 2020 – 3.5%, in 2021 – 3.7%. For comparison, before that the indexation was much larger: in 2015 it was 10%, in 2016 - 9%.

Of course, there is an objective component in the proposed linking of the Russian Railways tariff to the IDC. It is difficult to call the situation correct when a state-owned company invests in infrastructure development, and its main results are used by private exporting companies. First of all, these are coal companies whose export revenue is growing, and tariffs for the transportation of coal, according to Russian Railways, do not fully cover its costs for this transportation. However, there is a collision here. On the one hand, Russian Railways, as a natural monopoly, is obliged to provide equal access to infrastructure to all shippers and cannot divide them into groups based on the amount of their export earnings. On the other hand, it is obvious that shippers are not equal with each other: some receive windfalls in favorable conditions, while others do not.

However, the problem is that the Russian Railways proposal to switch to the IDC does not smooth out the specified difference between shippers, but simply shifts the increase in prices on commodity markets and the increase in Russian Railways costs to them.

At the same time, the Russian Railways proposal contains a number of risks for the Russian economy. Firstly, it assumes that the changes in the IDI will be evaluated over the last two years, and not for four, as it is now. As a result, the principle of long-termism will be violated, and the dynamics of the tariff will become less predictable. Secondly, the consumer price index is a transparent value, whereas the IDI should be linked to the structure of Russian Railways expenses. And in them a lot is hidden under the heading of commercial secrets, in particular, the structure of commercial, administrative and management expenses. Thirdly, the growth of the Russian Railways tariff in proportion to the IDC will inevitably affect the cost of bulk cargo on the domestic market: coal, oil cargo, construction materials, ferrous metals, grain will rise even more. An inflationary spiral may occur when, in response to an increase in the Russian Railways tariff, commodity prices on the domestic market rise. This will further increase the price pressure index along the chain, which, in turn, will lead to another increase in the Russian Railways tariff.

Thus, the transition to the IDI may provoke an additional increase in inflation for the economy and end consumers – this external effect will become a payment for more comfortable business conditions for Russian Railways. Any changes in the tariffs of natural monopolies should take into account such external effects. In addition, such changes should be useful for everyone: for the carrier, for shippers, and for end users. Inflationary offers are definitely not the best way to index rail fares.

Alexander Polygalov, Managing Director of the transport sector of the analytical department "Otkritie Research".

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