February 1998

by Padraic J. Sweeney & Derek Nowek

As U.S. companies expand their operations in the Caspian Basin, a potentially important--if overlooked--transportation corridor offers them important opportunities: as a new route for heavy equipment being shipped to the Caspian Sea, for investment in transportation infrastructure, and in sales of cargo-handling equipment and technology. The ports and inland waterways that link the Black and the Caspian seas currently operate at only a fraction of capacity, in stark contrast to heavily congested Novorossiisk, Russia's main Black Sea port (see "Regional Corner," Page 7). Until now, decaying infrastructure and restricted access to foreign shippers have limited international use of the Volga-Don waterways, but changes in Russian transport regulations and the privatization of the region's port facilities are making them better able to compete for foreign customers and investors.

The western anchor of the Volga-Don system is the port of Rostov, located near the mouth of the Don River, and the nearby ports of Azov and Taganrog. Roughly 350 kilometers upstream from Rostov lies the Volga-Don Canal, a 60 kilometer-long waterway which links the Don and Volga rivers. The canal joins the Volga near Volgograd, itself a major inland port. The eastern anchor is the port of Astrakhan, 400 kilometers downstream from Volgograd, near where the Volga enters the Caspian.

Already in Use by U.S. Companies
U.S. exporters and freight forwarders are already using the Volga-Don waterways to reach the Caspian Basin. Houston-based Independent Marine Consultants (IMC), in fact, was one of the first foreign shippers to use the lower Don, the Volga-Don Canal, and the lower Volga. In 1994, IMC shipped a number of large compressors for a pipeline being built by Pennzoil in Azerbaijan's offshore Guneshli oilfield. According to Prasad Menon, president of IMC's Marine Group, "it was very complicated and difficult" as the first non-Russian freight forwarder to use the Volga-Don route, but "we've learned a lot and we're looking at it for future shipments."

IMC used a Turkish freight forwarder to liaise with the Russian authorities. To meet Russian requirements on transit by foreign-flagged carriers, IMC used an Azeri-flagged vessel operated by Azerbaijan's Caspian Shipping Company, which the Russian authorities were willing to permit to use its inland waterways.

The managers of the Volga-Don ports are keen to work with international customers, which will be easier to do as Russia opens its inland waterways to foreign carriers. "All the ports are experiencing the same problems," Rostov Port Director Albert Sibelin told one of the authors of this article recently, "not enough cargo, not enough ships. The Port of Rostov could double its volume of cargo without any additional equipment and facilities." For that reason, he said, "in the ports, we're interested in competition" between Russian and foreign carriers.

International cargoes are of great interest in Volgograd as well. Yakov Petrenko, General Director of the Volgograd River Port, sees traffic between the Caspian Sea and the Middle East as important for the future of his port. Balancing in-bound and out-bound cargoes is also a priority in Volgograd. "We want to expand import cargoes," Petrenko said recently, since most cargo handled currently in Volgograd departs the port.

Infrastructure Needs
Virtually all the infrastructure at the Volga-Don ports dates from Soviet times. The leading Soviet-era Black Sea ports are further west in what is now Ukraine, but there are extensive, if somewhat rundown, cargo-handling facilities along the entire length of the Black Sea/Caspian Sea route. These facilities are currently operating at about 10 percent capacity, according to port managers. As a result, they could easily handle a significant increase in traffic. The drawback to existing facilities, however, is that they are not equipped to handle specialized cargoes. In shipping compressors for the Pennzoil pipeline, IMC chartered a vessel with on-board heavy-lift capability to overcome the limitations of the region's port infrastructure. Even in the case of containers, which the Volga-Don ports can handle, no modern container-handling facilities currently exist.

Weather and shallow water also impose limitations. Winters are harsh as a result of the region's cold, continental climate. The Volga-Don Canal closes to commercial traffic around the first of November and does not reopen until April. While service is available downstream from Volgograd to Astrakhan, the river upstream closes to navigation for the winter, as well. The shallow channel depths neccisitates the use of smaller vessels, typically the 5,000-ton "river/sea" type, when shipping via the Volga-Don ports.

Larger System
The Volga-Don waterways are part of Russia's larger, 100,000-kilometer network of inland waterways. In European Russia, this system not only links the Black and Caspian seas with each other, but with the Baltic Sea, the White Sea, and the Arctic Ocean. The volume of cargo moving on Russia's inland waterways has fallen dramatically in recent years, from more than 300 million tons in 1992 to 98.8 million tons in 1996. The inland waterway system is administered by 15 state-owned operating authorities, which are funded from the state budget.

Russia's post-Soviet economic crisis has hit the country's inland waterways hard, not least along the Volga-Don corridor. Capital maintenance, dredging, and the upkeep of such basic infrastructure as lighted navigation markers have fallen far below the requirements of the system. The 45-year old Volga-Don Canal, which is in need of extensive modernization, has been able to replace only three of its 18 sets of lock gates in the last four years, and no funds are currently available for more. Rosrechflot, which manages the inland waterway system, has often had trouble paying its 25,000 employees as a result of the Russian Government's budget problems.

Investment Plans
Capital is beginning to move slowly into Russia's neglected inland waterways, including the Volga-Don system. The Russian Government has a comprehensive plan for development of the country's inland waterways, although the program is seriously underfunded at present. The European Commission has already provided ecu 4.5 million ($4.9 million) for three pilot projects on the upper reaches of the Volga and in St. Petersburg, as well as an additional ecu 4.5 million for redesign of a number of river ports, including Volgograd and Astrakhan. According to Deputy Minister of Transport and Rosrechflot General Director Nikolai Smirnov, the Russian Ministry of Transport is working with the European Bank for Reconstruction and Development and other financial institutions to arrange financing for modernization of inland waterways linking the Baltic, Caspian, and Black seas which may cost as much as $500 million.

In the meantime, private capital is beginning to flow into Astrakhan. Partial funding has been obtained for construction of a new commercial seaport with a planned capacity of 8 million tons of transit cargo annually. The port will have 23 docks, 100,000 square feet of enclosed and open storage facilities, rail connections, and other facilities. Initial efforts are directed at construction of "roll-on/roll-off" facilities, which allow cargo literally to be rolled on or off a ship.

It is no surprise that Astrakhan, with its proximity to Caspian energy development and direct ties to Central Asian energy producers, is beginning to expand its facilities. Ultimately, the future of the Volga-Don ports and waterways will be determined by the fate of the larger Russian economy as well as that of the Caspian Basin. "Transportation depends on industry," Volgograd Port Director Petrenko says of the situation in his city. "When it recovers," he maintains, "so will the port." As Russia makes its economic recovery, Petrenko and his colleagues at the Volga-Don ports "have to use all our inventiveness" to plan for the future. For more information on the Volga-Don ports and waterways, visit BISNIS Online at www.mac.doc.gov/bisnis/country/9802port.htm.

Padraic J. Sweeney, who recently traveled to several Volga/Don cities, is Managing Editor of BISNIS Bulletin. Derek Nowek covers transportation for BISNIS.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)