We should not trivialise the prospect of a widening conflict in the Middle East. Yet it would be equally naïve to ignore the operational consequences for rail freight. From energy pricing to shipping disruption, the impacts are already beginning to register. What feels abstract today can become painfully concrete tomorrow, especially in a system as tightly balanced as Britain’s modern logistics chain.

Energy shock travels fast

Before anyone in the cab of an electric locomotive feels too comfortable, consider the source. Oil shock means energy shock. It ripples through every generation mix, every tariff, and every contract. Prices rise across the board, often faster than operators can react, hedge or recover.

We are reminded from cradle to grave that everything in the modern economy depends on oil. From baby wipes to coffins, from plastics to packaging, hydrocarbons underpin production and distribution. Those goods, or the materials that make them, arrive on our shores before moving inland by rail and road. When oil markets tighten, the entire system feels the strain.

Shipping disruption is the hidden threat

Global shipping routes are the second front. The Trades, as the industry calls them, are already shifting under pressure. Ultra Large Container Vessels (those behemoths with twenty-thousand TEU on board) are being forced out of position, creating imbalances that cascade through port rotations and inland schedules. British port managers remain highly adept, masking much of the disruption for now, but the pressure is building.

Rest uneasy. The disruption will come as surely as fuel prices climb. Delays and diversions at sea translate directly into delays and diversions on land. Containers arrive late, or not at all, and the carefully choreographed dance between quay cranes, rail terminals and inland hubs begins to falter. The rhythm of the network is disturbed, and recovery is rarely immediate.

There is only so much strain the freight system can absorb. Britain benefits from a high degree of intermodal interoperability. Scheduled services connect ports to inland terminals with near-metronomic regularity. But “near” is doing a lot of work here. Even small perturbations can propagate quickly when margins for error are thin, and capacity is tightly allocated.

A just-in-time system under pressure

Britain’s logistics model compounds the problem. The country has a chronic shortage of modern storage. For years, we borrowed from the Japanese concept of Kanban and just-in-time supply. In practice, we adapted it with a distinctly British mentality. We make do, mend, and hope that timing remains perfect. That approach works until it does not. Unfortunately, Britain is not so adept at adopting Kaizen, that other Japanese technique of continual improvement.

The result is a system with minimal slack. Warehousing capacity, particularly A-grade, rail-connected space, is in short supply. There is no shortage of planning applications for new facilities, but delivery lags demand. Much of the existing stock will fall out of compliance or become uneconomic within a decade. Unfortunately, the need is immediate, not theoretical.

When ships fail to arrive just in time, Britain finds itself in a bind. Delayed shipping means delayed inventory. Without adequate storage, there is nowhere to buffer the disruption. Goods either pile up in the wrong place or fail to arrive where needed. Rail freight sits in the middle of this imbalance, expected to respond but constrained by infrastructure and capacity.

We muddle through until things go wrong. Right now, things are going wrong on a scale that could yet deepen. War in the Middle East may feel distant, but its consequences are already reaching the Midlands and beyond. Supply chains do not respect geography in the way we might like to imagine.

What happens next for rail freight

Predicting the next phase is a hazardous exercise. If you can do it accurately, you are probably already profiting handsomely. For the rest of us, the outlook is uncertain. Freight trains will continue to run. Operators have tools to manage short-term cost shocks, including fuel hedging, which can soften the immediate impact of rising diesel prices (and electricity, you smug overhead wire-types).

The greater risk lies not in the trains themselves, but in what they carry. Volumes are vulnerable to sudden swings. Intermodal services may continue to operate according to the timetable, but with fewer containers on each consist. Frequency could also come under pressure if demand weakens or becomes erratic. Operators dislike volatility, and this is volatility writ large.

There is also the broader economic context to consider. If commodity prices drive inflation higher and suppress consumer spending, the downstream effects will be significant. Warehousing schemes may stall. Projects that look viable today could remain on the drawing board. And without goods to store, the rationale for new logistics infrastructure begins to weaken.

Railways as barometer and bellwether

We often talk about freight in abstract terms, much like the railway itself. Tonnage, paths, capacity, utilisation. Yet the railway is more than a set of metrics. It is an industrial barometer, an economic bellwether, and a national lookout. Changes in flow patterns, volumes and commodity mixes tell us a great deal about the health of the wider economy.

In times of stress, that role becomes even more pronounced. The rail freight sector is both resilient and exposed. It can adapt to disruption, but it cannot escape it. What happens in distant oil fields and contested shipping lanes will, sooner or later, be reflected in train loads, terminal activity and balance sheets across the UK.

Let us hope that the coming months do not force the railway into an even more ominous role. For now, it remains a vital indicator of how well the system is coping. But if the shocks intensify, it may also sound a warning signal. That is one alarm the industry, and the country, would rather not have to hear.

Sanctions on companies too

In addition to the charge on the railway chief, the security service imposed sanctions on 185 Russian companies that “provided their own wagons, tanks and platforms to meet the logistical needs of the occupying forces”. These are economic sanctions, the security service said on Monday 6 February.

A week earlier, Ukrainian president Vladimir Zelensky signed a decree imposing sanctions on 182 Russian and Belarusian entities and three individuals (excluding Oleg Belozyorov). Among the sanctioned entities was Belarusian Railways, which collaborated with Russia in transporting over 100,000 tonnes of ammunition and 5,200 tonnes of vehicles since the war started. It is not entirely clear whether these sanctions overlap.

Sanctions and Belozyorov

Although the Ukrainian Security Council does not state this explicitly in its latest communication, a search in the sanctions database confirms that Belozyorov is also listed as a sanctioned person, and not only by Ukraine. Belozyorov is sanctioned by Australia, the US, the UK and Northern Ireland, New Zealand, Canada and Ukraine. The US only joined the ranks on 15 December 2022, while Ukraine did this on 19 October 2022.

The fact that the head of Russian Railways is sanctioned by the US does not automatically impact the ability to do business with Russian Railways by operation of US law, explains Sebastiaan Bennink, sanction lawyer of the Dutch firm BenninkAmar.

“This is because he is not the owner of the company. From a US law perspective, the assets of ‘Specially Designated Nationals’, or ‘SDN’, such as Belozyorov, are blocked and US persons are generally prohibited from dealing with them or with legal entities that are 50 per cent or more owned by them. Non-sanctioned entities are considered blocked if they are owned 50 per cent or more in the aggregate by one or more SDN. Since Belozyorov does not own 50 per cent or more of the shares of Russian Railways, Russian Railways is not considered blocked under the US Russia sanctions regime.”

Sanctions and Russian Railways

The joint stock company Russian Railways is also subject to sanctions, mainly in the form of financial restrictions, by the same countries plus the European Union and Switzerland. However, these sanctions have a limited impact on the ability to do business with the railway company.

Russian Railways has been sanctioned by the EU and the US since February 2022; these are financial sanctions. This means that it is prohibited to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments, issued after 12 April 2022. In other words, day-to-day normal business transactions with Russian Railways are still permitted until now, apart from the financial restrictions set out above. Ukraine also imposed sanctions on Russian Railways but not until October last year.

COVID-19 and the war

In the year 2022, PKP Cargo represented a market share in Poland of 39.4 per cent, and it has not managed to increase its volumes as expected.

Dariusz Seliga, President of PKP Cargo was cited explaining the reasons for this as “the Covid-19 pandemic, and then Russia’s aggression against Ukraine and the ongoing war in that country that radically changed the macroeconomic environment in which the group operates”.

It is noteworthy that some of the other objectives, such as taking a number-one position in the Three Seas Initiative and on the New Silk Road in the EU, have remained unchanged. The Three Seas Initiative is also called the Baltic, Adriatic, and Black Sea Initiative and aims for better cooperation on the network between these seas. Poland is one of the main transit countries within this network.

Role of Poland in general

The role of Poland on the New Silk Road has somewhat changed, due to the hesitance of many companies to take the route via Belarus and Russia, that enter the EU in Poland. Currently much of the traffic is between China and Russia, while the European market has diminished. However, Poland is also used as a hub for trains from China to Russia, which then carry out a final leg back to Russia. This is because the transhipment options in Russia are not enough to meet the demand.

Do you want to discuss rail freight in Poland with an international audience? You can now register for the 6th edition of the RailFreight Summit Poland, to be held on 19 & 20 April in Warsaw. Registrations for this event are now open.

Damage comparable to WO II

Since the war started, the rail infrastructure has been the target of military attacks. Since 24 February 2022, over 6,000 km of railway tracks have been damaged and become non-operational in Ukraine.

According to the Ukranian Ministry of Infrastructure, a preliminary review of the condition of railways in the de-occupied regions shows that, on average, about 10 per cent of the railways in the areas where hostilities took place were damaged, and that is excluding the occupied regions.

Rail more important than ever

At the same time, the importance of rail transportation has significantly increased since the start of the war. Rail allowed for the evacuation of almost 7 million people from eastern and central parts of the country to its western borders (and abroad) and ensured regular supplies of humanitarian and military cargo.

The restoration of the railway network is therefore high on the agenda. As Oleksandr Kamyshin, CEO of Ukrzaliznytsya pointed out: “It is important to restore the railway connections with the de-occupied cities, because this brings life back to them. As soon as we restore passenger traffic, we will look for a way to restore cargo traffic.”

Although the urgency is high, restoration is a timely and costly matter. Kamyshin adds that restoration may take years, and significant funds. According to last year’s estimates provided by State Highway Service of Ukraine (Ukravtodor), the reconstruction of destroyed rail roads costs an average of UAH 29 million per 1 km of road, or about US$26.6 billion in total. Despite ongoing constant restoration of the Ukranian railwas network, experts believe that the current condition of the Ukrainian rail transportation system is comparable to that in the first year of World War II.

Drop of cargo

This also explains how the cargo volumes handled by Ukrainian Railways have dropped. Although there is a clear increase in the demand for the transportation of grain by rail since the limitations of sea shipping, it has not actually led to more cargo on the rails. In 2022, the railway company transported 28.9 million tons of grain, which is 14.2 per cent less than in 2021.

In terms of overall cargo traffic, the volumes handled by Ukrainian Railways fell by half (49.8 per cent) in the first ten months of the year, compared to the same period last year; to 129.8 million tons. The official data for the entire year will be announced later. This may affect the overall image, as the last two months of the year witnessed an uprise in the transportation of grain.

Rolling stock

Another challenge for the development of rail transportation is the availability of rolling stock. Prior to the war, one of the main problems of the Ukrainian railway sector was a high level of depreciation of the rolling stock. Half of the fleet of Ukrainian Railways was produced before 1970. The fleet even includes VL8 electric locomotives, which are 65 years old. In Russia, these were decommissioned 30-35 years ago.

In order to solve this problem, Ukrainian Railways attracted serious investments for its fleet modernisation, both from domestic and foreign businesses (including joint projects with the American General Electric). However, this was before the war. In recent months such contracts have been suspended.

Currently, there is a lack of new locomotives in the country, both electric and diesel ones. One of the few factories producing locomotives in the country was located in the city of Luhansk, which is currently controlled by Russia. There is also a shortage of components and parts for locomotives in Ukraine, as the country generally experiences a lack of production.

Going strong

Despite these challenges, the Ukrainian rail business keeps going strong. What is damaged can be restored, and what was discontinued can be resumed, seems to be the motivation. It is therefore not surprising that Ukrainian Railways has won the Rail Champion Award, organised by UNIFE and CER.

“These efforts demonstrate the enormous resilience and crisis fitness of the railway system and the importance of strong railway companies. The ongoing achievement is highly deserving of our honorary recognition, with which we would also like to underline the EU community’s solidarity and support”, the companies write.

‘If you block rail, you stop hostilities’

This has been well understood by Stop the Wagons. “The cheapest transportation of equipment, fuel and ammunition is by rail. If you block the railway communication or slow it down as much as possible, the hostilities will come to naught”, they write on their website. “By sabotaging the work of the railway, you are saving lives on both sides of the front.”

This is not just a war narrative, but it is actually what the group does. Seven months ago, when the war in Ukraine started, it decided to form resistance against the Russian aggression in Ukraine by sabotaging small sections of the railways. This includes destroying switches, tracks or blocking tracks for a short period of time.

Although these are ‘small acts’, they have a heavy impact, the group argues. “It turned out that stopping the war is quite within the power of ordinary people. Let it be for a couple of hours while the tracks are being repaired. But it is possible”, it writes on Telegram.

6 attacks so far

According to an update of the UK Defense Intelligence, the attack in Bryansk was at least the sixth act of sabotage of the group since June. Stop the Wagons does not confirm or deny, but comments: “Yes, the “incident” in Bryansk is only a small part of what we are doing to stop the war.

“Seven months ago we only took the first “steps”, often at random. We googled the methods used by our partisan ancestors during the Great Patriotic War. We spied on life hacks from Belarusian brothers. We were shaking with fear, expecting that somewhere we would probably ‘burn out’ and the FSB would come for us”, the group says on its Telegram page.

However, the latter did not happen. The website was hacked and social media sites were down, but only for a while. Their current website and telegram channel is up in the air, and they are posting regular updates. “They probably underestimated us”, they conclude on their channel.

Larger attacks

The explosion in Bryansk is one of the larger incidents on the Russian railways. On 8 October, the Kerch bridge was bombed. This bridge connects the Crimean Peninsula with mainland Russia. Both its road and rail section ended up being damaged. Although traffic partly resumed the same day, the bridge is expected to be back in full operation by July 2023. Stop the Wagon remains ambiguous about their role in the attack.

Also read:

• Rail guerrillas in Russia bomb railway section to Belarus
• Aftermath of Kerch bridge: rail freight comes to the rescue, for now
• Freight traffic resumed after bomb blast on Crimea Bridge

The document states that once the ban is passed and published, it will take effect 10 days after the public announcement and be valid until 31 December, 2022.

Response to Russia

The proposed ban is seen as Kazakhstan’s response to Russia cutting off its oil exports. On 17 June 17, Kazakh President Kassym-Jomart Tokayev met with Russian President Vladimir Putin when he participated in an economic forum in St. Petersburg, and publicly stated that he did not recognise Luhansk and Donetsk as independent regions.

Perhaps the Russian government made a counterattack. On 6 July, a Russian court ordered a Black Sea terminal in the country that provides oil export services to Kazakhstan to stop operations for 30 days, citing possible ‘environmental damage’. About 80 per cent of Kazakhstan’s oil exports to Europe pass through the terminal in the southern Russian port of Novorossiysk, which transports 67 million tons of oil a year.

This article was originally published on RailFreight.cn, our Chinese sister publication.

Diversification

Customers shipping to and from Gdansk will have access to one of the most important deep-sea ports in the Baltic Sea, with the largest container ships from North and South America and Asia arriving here. This logistics centre is the only port in the region that regularly receives freight from the Far East.

At the beginning of April, LTG Cargo successfully launched an intermodal service to Duisburg in Germany, and it already completed its first trip with full loads. “Why Duisburg? As we say jokingly, it is a banana for logistics”, Skuncikas said.

Potential of Lithuania

“We offer our clients to leverage the potential accumulated by the group in Poland…We see Lithuania as a hub for intermodal transportation in three ways. First, rising from the possibilities of the Klaipeda Port, where we have terminals connected with the standard gauge and broad gauge”, Skuncikas said.

The company’s other two intermodal terminals operate in Kaunas, Lithuania’s second-largest city, and Sestokai, near the Lithuanian-Polish border. “Because of the chaos in the market, the result of the war, we are developing solutions for logistics of general cargo, also for metal”, he said.

Scandinavian option

Touching up the topic of the intermodal corridor from Scandinavia to Western Union, the LTG Cargo official said the company “had a very nice discussion” about it with respective officials from Latvia and Estonia on 14 June 14.

“At the moment, we’re finalising solutions on how and how fast we can start the Amber train (an intermodal train, which runs on the route Sestokai / Kaunas – Riga – Talinn, thus connecting the three Baltic States by railways and opening new business opportunities for freight shippers- L. J) and we should be seeing some results already later this summer. We see demand from Nordic countries, especially Finland, short-term – cargo will go by ferries to and from Muuga Port and from there we will connect, on standard and broad gauge, to Vilnius terminal”, Skuncikas said. It could accept containers as well.

Kaunas terminal

And then there are not yet fully tapped capacities of Kaunas terminal, from which trains go to Duisburg in Germany – they travel three times back and forth a week, the LTG Cargo manager noted. Since last September, a fourth train has been launched on the route and, Skuncikas says, that, in total, five trains could potentially run between the two cities.

He says that LTG Cargo plans to develop the Duisburg destination further, meaning that a cargo loaded in Finland will smoothly reach Italy, the Netherlands and other destinations.

Lithuania has a 1520-mm and 1435-mm wide rail gauge and therefore, it is capable to deliver freight to Western and Eastern Europe as well as to Asia. Rail freight transportation on 1435-mm gauge is operating in Europe westward from Finland, the Baltic countries, Belarus and Ukraine, excluding Spain, Portugal and Ireland.

Sustainability

Finally, there is the issue of sustainability. “At LTG Cargo, we believe that with the new train connection linking Scandinavia and Western European countries we can push forward to promote more sustainable solutions in the Baltic countries, especially in a couple years from now”, Skuncikas said.

In its strategy, the company had set eyes on becoming the primary transport corridor for transporting freights between the Black Sea and the Baltic Sea by connecting Northern Europe with the Black Sea region, i. e. Ukraine, Turkey, Transcaucasia (implementation of international shuttle projects).

The war situation

But the regional plans had to be put mostly on hold due to the ongoing war. LTG Cargo has also recently opened an office in Ukraine, eyeing expansion in the Black Sea market.

In 2022, the Lithuanian company expects to transport around half the cargo compared to 2021, resulting in 150 million euros lost. “This will be the largest drop in cargo volumes and the lowest volume of cargo transported in the company’s history”, stressed LTG in a statement.

Lithuanian Railways, LTG, has said it is planning to lay off around 2,000 of its 9,000-plus employees, with around a quarter of the state-owned group’s managerial staff at various levels set to leave. LTG has lost around 11 million tons in annual freight because of EU and US sanctions against Belarus’ potash giant Belaruskali, which will trim its annual revenue by 61 million euros.

EU sanctions

The railway company is set to lose another 2.6 million tons of freight and 12.8 million euros in revenue due to EU sanctions on the owner of Lithuania’s phosphate fertiliser producer Lifosa. The EU’s sanctions on Russian coal and Poland’s refusal to buy it will result in a loss of 2.5 million tons of coal shipments and 12 million euros in revenue for LTG.

The railway group will lose another 1.4 million tons of freight and 17 million euros in revenue as a result of Belarus’ ban on the transit of oil and oil products and fertilisers from Lithuania. 95 per cent of these shipments were destined for Ukraine. Lithuania’s draft revised 2022 budget, approved by the Cabinet, earmarks 155 million euros in additional financing for LTG.

Since the beginning the war, infrastructural damages also include the destruction of at least 23.8 thousand kilometers of roads, 643 healthcare facilities and 1123 educational institutions. As estimated by the Ministry of Economy and KSE, the overall Ukraine’s economic losses due to the war range from 528 billion to 561 billion euros, taking into account all physical infrastructure including buildings. This includes both direct losses calculated in the project and indirect losses such as GDP decline, investment cessation, outflow of labor, additional defense and social support costs.

This article was originally published on RailTech, our sister publication.

More is needed

Since the start of the war in Ukraine, Poland has collaborated intensively with Ukraine in providing the needed rail links, but this cooperation can be strengthened even further.

“By blocking Ukrainian ports, Russia is trying to provoke a global food crisis. We must prevent this. The signed memorandum on strengthening cooperation in the railway sector between Ukraine and Poland will increase our export capacity, including agricultural products. Convenient logistics solutions for Ukrainian business allow us to quickly deliver the necessary goods anywhere in the world. This is very important for the sustainability of our economy,” the Ukrainian Prime Minister was quoted as saying.

The parties also noted the importance of modernizing the border infrastructure, in particular the development of transport hubs and border checkpoints.

Grain export

Ukraine was the world’s fourth largest grain exporter in the world in 2020-2021, Russia ranks third. Together, the countries account for almost 30 per cent of global wheat exports, almost 20 per cent of corn exports, and more than 80 per cent of the world supply of sunflower oil.

However, most of this export was taking place via seashipping; railways are only accounting for a fraction of this transport. Ukrainian Railways earlier called on private companies to invest and build rail freight terminals in the country’s western territories. It claims that rail will be the most reliable transport mode even after the war ends.

Also read:

Ukraine’s rail link to the west is EU’s top priority

EU sanctions

VR had already decided at the end of March to stop all passenger and freight transport with Russia, but revised this decision a few days later after it became clear that the Western sanctions against the Russian state railways had no consequences for VR’s activities in Russia.

Rail transport between Russia and the EU is not subject to EU sanctions against Russia. However, the freight trains have been subject to stricter controls by the EU member states since the beginning of March for the presence of strategic goods that do fall under the boycott.

This article was originally published on our sister publication Nieuwsblad Transport.