Cheque in Return for Check-list: What European Commission Should Make The Condition of Assistance to "Ukrzaliznytsya"
Yuri Shchuklin, logistics market expert, adviser to the Head of the Committee on Transport Infrastructure at the Ukrainian League of Industrialists and Entrepreneurs
The goals of the European Commission’s Transport White Paper concerning the transfer of cargo routes over 300 km from trucks to more ecological transportation are in the risk area on EU’s Eastern flank. According to this document, by 2030, 30 percent of cargo shipped in the EU by automobile transport for 300+ km, have to be transferred to railways or waterways, while this figure has to grow to 50 percent by 2050. At the same time, in Ukraine, the current policy in railway transportation results in the opposite trend: Cargo shippers migrate from railways to automobiles. The reason for this trend is not in the full-scale war itself. The outdated rules of railway shipment, not corresponding to the demand of cargo owners, created to suit the monopolist, “Ukrzaliznytsya”, as well as the prospect of tariff growth by 37 percent, are leading to further growth of the range of economic feasibility of automobile cargo shipments in Ukraine: from the current 300 to 400 km to 500 km and more. The Ukrainian policy in the railway transport sphere (or, rather, the lack of such policy), pushing Ukrainian cargo from rails to motorways and contradicting the goals proclaimed by the EU, is evidently worthy of attention of our European partners. This is not “entirely our problem” but theirs as well, to a great extent.
At present, the situation in the railway transport of Ukraine resembles a Zugzwang (a situation in the game of chess when any move by a player worsens their position), so, evidently, it cannot be solved by local players. Problem No.1 is the complicated financial situation of “Ukrzaliznytsya” (UZ). Without dedicated assistance, the state estimates the UZ’s losses at 22 bln UAH in 2025, and at almost 28 bln UAH in 2026. Episodic budget injections from the reserve fund (4.3 bln UAH last spring, and almost 8 bln UAH recently), cannot “patch the hole” and solve the problem that causes it, the unprofitability of passenger carriage. The UZ management sees the only way to improve the financial situation of the company in the indexation of cargo tariffs by 37 percent. However, this solitary tool on the table of the UZ management will destroy the competitiveness of the industry and agrarian sector, while simultaneously destroying the UZ cargo base. The classical Zugzwang: a hole in the UZ budget without the tariff indexation, and the hole plus the loss of cargo base and economic decline with the indexation.
Ukraine’s railway transport is two parallel universes at once: The passenger segment with loss-making tariffs, and the cargo segment, with profits from which they compensate for the losses resulting from passenger carriage. This balance (loss-making passenger branch/profitable cargo) was more or less holding before the full-scale war, when the railway network transported 312 to 315 mln tons of cargo annually. In the first two years of the war, the cargo flow decreased twofold to 150 to 155 mln tons per year. It went up in 2024 to almost 175 mln tons, with the predicted 162 to 165 mln tons in 2025, “in the best-case scenario”. The reasons are the loss of 122 mines, the decline in ore extraction, the decrease of the area of workable agricultural lands because of the combat moving closer, and the decrease in cereals.
Regrettably, the decrease of the cargo base was assisted by the actions of the UZ itself, while driven by the logic of short-term solutions with visible effect (without taking into account long-term consequences of these solutions). In 2022-2023, the UZ chose the maximizing of the revenue from cargo shipment of agricultural produce as their priority. The short-term effect they got was some revenue which, however, led to the thinning of the money flow in the agrarian sector, resulting in the decrease of sown lands, changes in the nomenclature of cultures, and re-orienting to automotive logistics. This became an additional factor in the loss by the UZ of the cargo base of agricultural crops.
While the revenue-bringing cargo base was diminishing, the UZ expenditure base was growing: electricity prices grew by 216 percent, diesel, by 57 percent, and the salary fund had more than 60 percent expenditure increase. The UZ management justifies the logic of tariff indexation by these arguments. It is evident, however, that any “mechanical” rise of tariffs will only make the outflow of the cargo base faster and, correspondingly, will lead to even bigger rise in the UZ costs for a unit of shipped produce. When the volume of shipments goes down, the fixed expenditure for the infrastructure is distributed for a smaller quantity of tonne-kilometers. Modelling of the results of raising tariffs by 37 percent shows that the outflow of the cargo base from railways will, in this case, amount to 10 to 15 percent. So, raising of the tariffs will bring just 12 to 16 bln UAH of additional revenue to the UZ, while simultaneously it will produce a significant negative macro effect for economy (lower production, lower export, lower tax revenue for the budget) and growth of the load on motorways. In other words, the rise in tariffs will only partially “patch the hole” in the “Ukrzaliznytsya” budget, while the price for this will be declining cargo flows, closing of production facilities, and negative macro results for the economy.
The Ukrainian business articulates clearly: the “cargo-producing” industries won’t sustain the 37-percent tariff indexation. Metallurgy works on markets with tough price competition. For “AlcelorMittal Kryvy Rih”, the 37-percent indexation means additional 26.5 mln USD (over 1.1 bln UAH) of additional expenditure per year just for railway logistics. The company says directly that this approach is not customer-oriented and clearly not European, while its expected result is stopping part of production and losing sales markets. For the agrarian sector, the 37-percent rise means +$5/ton of additional expenditure for railway logistics which will be shifted onto farmers, not traders. For the average distances of 400 to 500 kilometers, trucks are already competing with railways. Raising tariffs will stimulate a further transfer of agrarian cargos to motorways, especially in the South, where agrarians have already switched almost entirely to car shipments. The business community, on their part, suggest to change the focus: If the state deliberately preserves socially important passenger carriage with loss-making tariffs for the railways, then this deficit should be compensated for with a special program (which will include international assistance) but not be a “quasi-tax” on cargo, demotivating investors and strengthening the country’s deindustrialization.
However, “discussions” about tariffs can hardly be called such because the UZ does not generate any other ideas except the word “Give!”, while everyone close to “decision-making centers” invariably articulates that railway transportation reform is not “timely”, although the problems of the UZ’s financial situation emanate from its unreformed state: Not just the lack of changes but an entire set of structural problems directly leading to chronic financial difficulties for the UZ.
Railway cargo shipments that provide for the basis of export are working according to the outdated paradigm: data input by hand, fragmented interaction of the parties, and weak integration of digital systems. This results in a cascade of inefficiencies. First of all, there are operational problems of the railway: delays, excessive idle times for railway cars, replica operations, and high dependence on data input by hand, prone to mistakes. Besides, because of the lack of modern methodology and information system, it is impossible to accurately calculate and optimize the UZ spending. This obscures the real cost of shipping cargo and blocks the possibility of adopting decisions based on verified data. The lack of through planning results in the fact that the management system of railway shipping does not work on time: Instead of advance and automated planning of train movement and resource distribution (locomotives, railway cars, teams), the system reacts to the events that had already happened and meets only current requests without seeing the overall picture, as well as possibilities for the optimum resource distribution. At the same time, various parties of the shipping process work separately from one another and do not share information in real time. This digital separation means that the railway systems of Ukraine and Europe cannot “talk” to each other in digital format. The lack of automated interaction via API between Ukrainian parties, the impossibility of “seamless” (i.e. smooth and continuous) cross-border operations, which are a norm in Europe, is a key barrier on the way of integrating the Ukrainian railways into the European transport network.
Without solving these issues, any attempts to “patch the holes” or raise tariffs will be only temporary solutions which won’t remove the root of the problem. Regrettably, the consequence of the UZ’s monopoly position and of the outdated legislation is the lack of internal stimuli for updating technical processes in the UZ. A big part of the UZ’s infrastructure is low-active and generates losses. These expenditures continue to overburden the company’s aggregate budget, raising the costs of shipping. The reform of the railway transport would allow to not only separate the infrastructure from the shipping operations and raise the efficiency of management. The reform would make the company change, compete, calculate expenditure and make it transparent, while the sector would become attractive for investment. However, as they note in the Verkhovna Rada’s Transport Committee, the topic of railway infrastructure optimization is politically toxic for MPs (similar to closing down rural schools). So, for the time being, there won’t be enough votes or political will for reforming the railway transport, same as for the increase of prices for railway tickets to the economically feasible level (because passenger carriage is viewed as the state’s “social function).
Evidently, in order to escape the Zugzwang, another subject frame is needed, and a higher level of decision-making: the state as a shareholder of the UZ, international partners and Eurointegration institutions taking care of the directives’ implementation. Our argumentative leverage in negotiations with European allies should be their own goals spelt in the language of their policies. The problem of the Ukrainian railway transportation system cannot be considered local: The policy which pushes Ukrainian cargo off the rails and to motorways runs contrary to the EU’s official course to move long-haul cargos from motorways to rails. The modal choice of cargos on the Eastern flank of Europe has an impact on the fulfillment of European goals. So, if in Ukraine, because of price wars and organizational incapacity, the cargo migrates to trucks, this disrupts the very modal shift in the joint EU-Ukraine corridor. European taxpayers are already investing in Solidarity Ways and the expansion of TEN-T to Ukraine; when the Ukrainian traffic moves from rails to asphalt, the profitability of this investment will decrease, while the sense of the policy will be lost.
We shall request not “exceptions for Ukraine” but the kind of assistance that will not allow for the reverse modal shift of cargo flows in the EU-Ukraine region. This assistance on the part of European donors could be a targeted program of financing the mobility of Ukraine’s population in the time of the war: compensation for the losses of railway passenger carriage in return for the fulfillment by “Ukrzaliznytsya” of clear-cut requirements on moving towards reforming. The EU recognizes the PSO compensation of loss-making passenger carriage as a normal mechanism (“compensation for the citizens’ social mobility, no punishment of cargo”). As the adoption of the railway transportation reform in the Parliament is of low probability now, a pilot project is necessary that will test the norms of the future law and the EU directives’ requirements. The voluntary parties to the pilot will be cargo owners, railway car pool owners, terminals, the UZ as the engine and infrastructure operator.
The essence of the pilot project is in the change of technical processes and in organizing the shipping process as a compromise between cargo owners and shippers: organized consolidated route shipments (in flows) instead of “sending out” small batches; planning of adjoining schedules and responsibility for delivering cargo within agreed time frames; joint removal of unnecessary maneuvering operations while moving in exchange for the adjustment of loading schedules on the part of the customer; digital contracting of shipping capacities; transparent methodology of calculating the cost of tariff for every concrete shipment, route or set of services, not the “common grave” of average spending. Running such a pilot project does not require the adoption of the Law “On Railway Transport” but can be done within the current competence of the Cabinet of Ministers of Ukraine.
We should not ask for the abstract “assistance to Ukraine” from our European partners but call upon them to protect the EU’s own goals: to contain the modal shift on the Eastern direction, lower pollution, alleviate the load on motorways, raise the predictability of deliveries. The EU has lawful tools for this: the compensation for the citizens’ social mobility (PSO) as a condition for the introduction of transparent methodology of calculating costs and testing (in pilot projects) of technological processes matching realities. It is updated and efficient technological processes that will guarantee that cargos on the Eastern flank of the EU will remain on rails and not become dissolved in convoys of trucks.
If we do not jointly change the vector in the Ukrainian railway junction, Europe will get the mirror effect of more cargo on motorways, more CO₂ and evermore expensive deliveries. This, then, will be not “just our” failure but a fault in implementing the European transport and climate policy.
