Logistics Under Sanctions: Adaption to a new reality
In early April, the European Union announced a ban on the entry of cargo vehicles from Russia. The government of the Russian Federation, after six months of reflection, took identical “mirroring” measures: from October 1, companies from the EU countries, as well as Norway, Ukraine and the UK, are forbidden to transport goods on Russian territory. The corresponding document was signed by the Prime Minister of the Russian Federation, Mikhail Mishustin. Is this really an iron curtain for manufacturers and logisticians, from the point of view of cargo turnover? And is it all so bleak for businesses and consumers?
These and other questions from Capital Ideas magazine were answered by Olga Fedotkina, Executive Director of the National Union of Experts in the Field of Transport and Logistics (SEL).
I want to say right away that logistics companies are working, goods are being delivered, business is adapting to the new reality. There is no “iron” or any other curtain for manufacturers and logisticians.
The introduction of retaliatory prohibitive measures on the entry into Russia of road freight transport from unfriendly countries did not come as a surprise, and the Russian government ensured the smoothest possible transition. When implementing these measures, it took into account the experience of Belarus, which back in April of this year was the first to introduce “mirroring” counter-sanctions on the borders with Lithuania and Poland. During this time, solutions were found about how to carry out the “handoff” on the spot, as well as how to properly document the cargo, synchronize several carriers, and solve the legal issue of how one transport enterprise transfers trailers to another transport enterprise.
On the day of the entry into force of the decree of the Government of Russia, important nuances had been taken into account. The decree specifies the period for which restrictions are imposed: until December 31 of this year. In addition, the decree defines a list of exemptions – commodity groups for which transportation can be carried out without re-hitching or reloading. We are talking, for example, about food, alcohol, tobacco, chemicals, medicines, fertilizers, and much more.
The situation with the change in freight traffic is affected most of all by the readiness of the infrastructure to ensure the flow of vehicles, including taking into account seasonal fluctuation and additional restrictions imposed on the export of fuel. Technically, the re-hitching itself takes only a few minutes, but the registration of the relevant documents can take up to several hours. Therefore, the main resources for increasing cargo flow are in the area of accelerating the passage of documentation procedures at the border.
Business is adapting to the new realities: many companies have switched to transit through Lithuania-Belarus and Poland-Belarus in order to minimize their risks. There are carriers that have transferred their fleet to Kazakhstan or other CIS countries, and there are those who have switched to only domestic delivery within Russia.
The sanctions imposed against Russia have nearly broken all the logistics in our country, but they have become an incentive to search for new logistics corridors. This was stated by the Minister of Transport of the Russian Federation, Vitaly Savelyev. The Russian government believes that our country needs to reformat export-import corridors. What does this mean for logistics and logistics companies?
As a result of the introduction of sanctions, the geography of cargo transportation has changed: cargoes have turned to the east and to the south: through Armenia, Georgia, Kazakhstan, Azerbaijan. Part of the flow goes by sea from the UAE and Turkey to the ports of southern Russia, and then by road through the large country. New logistics corridors are being formed.
Chinese manufacturers have been chosen as alternatives to many European suppliers. A direct consequence of this is increased cargo turnover with the PRC. The trade turnover between Russia and China in the first eight months of 2022 increased by 31.4% and amounted to 117.205 billion dollars, according to recently published data from the General Administration of Customs of China. Most of these goods are transported by road, both directly from China to Russia and back, and through Kazakhstan.
As you have already said, the delivery of goods to our country continues, but with some changes. For example, goods from foreign vehicles have to be reloaded (or re-hitched) to Russian and Belarusian vehicles in customs terminal complexes in the border areas in the Pskov, Kaliningrad, Leningrad and Murmansk regions, the Republic of Karelia, and St. Petersburg. Clearly, customs work has increased. How does the logistics business develop relationships today with those who give the go-ahead for the transportation of goods?
Yes, indeed the restrictions create additional difficulties not only for transport and logistics companies, but also for the Federal Customs Service. Re-hitching or reloading is a separate procedure, and is accompanied by an additional amount of documentation. However, the difficulties are quite surmountable. As I have already said, the main resources for increasing cargo traffic are in the field of accelerating the passage of customs document clearance. Here the expansion of the geography of transportation, including the use of transit logistics routes through Belarus, can also help.
I would like to note that as the restrictions only came into force on October 10, it is too early to draw any firm conclusions. Business adapts to new conditions and rebuilds its work taking into account new challenges.
In March, the Ministry of Industry and Trade predicted that Russia would need from three to six months to rebuild export and import channels with countries ready to continue cooperation. From the point of view of the SEL, how is the restructuring going? Six months have passed – what has changed, and what new has appeared?
Reorganization is going fast. Simplification of customs procedures, legalization of parallel imports, and prioritization of cooperation with friendly countries have made it possible for Russian business to reduce the negatives of sanctions. Growing trade with the countries of Asia and the Middle East makes it possible to replace the reduction in trade with unfriendly countries, and in the future to increase further the cargo turnover in these areas.
The transport and logistics industry, under the conditions of sanctions pressure, is undergoing tremendous changes. There has been a change in the structure of the market, with the formation of new logistics corridors.
Not all experts in the field of logistics agree with Mr. Savelyev’s opinion that the sanctions have nearly broken all logistics. Of course, there are many problems, but to say that everything is destroyed is a clear exaggeration. Goods arrive, except, perhaps, parts sets for the automotive industry. There is a significant increase in trade with China. In Russia, according to the Ministry of Transport of the Russian Federation, there are 313 operating border checkpoints – and 89 of them are key ones which give the country almost 80% of trade turnover. Is this enough to meet the needs of logistics?
Yes, there truly are many difficulties, of course. But, as a rule, restrictions on checkpoints are associated not with their number, but with their lack of alternatives or problems of organizing work. Therefore, we should talk about a comprehensive solution to problems in specific areas.
The importance of some checkpoints will decrease due to a decrease in cargo traffic through them, while other checkpoints on the contrary may be overloaded due to an increased flow of goods. Such issues, of course, must be taken into account when organizing the work of the Ministry of Transport, the Federal Customs Service, and the transport and logistics companies themselves.
Deliveries of new vehicles from China to Russia through the shared land border have increased markedly; the import of Chinese equipment through the Kraskino-Hunchun checkpoint in January–July 2022 increased by almost 150% in annual terms, according to the Consulate General of Russia in the city of Harbin. As of mid-September, imports through the Zabaikalsk checkpoint of equipment from China have grown by more than 70% since the beginning of the year. During the first three quarters, 7.5 thousand new buses, tractors, dump trucks, loaders, and other construction equipment were processed through this checkpoint, 72.8% more than last year.
Goods of priority import and essential goods (TNP) are processed on a priority basis. Registration of these goods takes no more than 30 minutes. The use of modern technologies avoids delays at the border. Already now, in the event of submission by a participant in foreign trade of complete preliminary information about goods in the format of a unique identification number (UIN), transit goods are processed by visiting only one window.
In the near future, it is planned to introduce an electronic queue at automobile border checkpoints. This work is now being carried out by Rosgranstroy. A unified system is being created, again operating on the principle of needing to wait at one window, with the possibility of controlling the movement of vehicles at the checkpoint. This will ensure a comfortable and fast border crossing for tourists and cargo carriers.
I would like to note that in terms of the digitalization of transport, Russia made a huge breakthrough this year: we were the first in the world to introduce electronic document management in road transport. From September 1, 2022, the State Information System of Electronic Transportation Documents (GIS EPD) was fully launched. Participants in the road transportation market can create three documents in electronic form: an electronic consignment list, an electronic accompanying statement, and an electronic purchase order.
From March 2023, an electronic waybill, an electronic contract of affreightment, and an electronic order will also become available. The development of the GIS EPD will make it possible to conduct electronic document management for all modes of transport – rail, air, sea and river – as well as for both domestic and international transportation. This functionality will appear in the GIS EPD in 2023–2025.
The Association of International Road Carriers (ASMAP) believes that due to the new regulations, tariffs for services for the transportation of goods between the EU and the Russian Federation will not only not increase, but may even decrease – since the total number of companies providing services for the transportation of goods between the EU and the Russian Federation will increase significantly. Is this true?
So far, we have not seen such a trend. The number of carriers ready to transport from the borders of Russia to other regions is increasing, because they no longer need European transport permits. At the same time, the number of carriers that deliver goods to the border with Russia, on the contrary is decreasing, due to sanctions pressure on companies. It is too early so far to draw conclusions; there must be time for the adaption of the market and normalization of tariffs, and then we can look at the dynamics.
For many years, the topic of the “North-South” International Transport Corridor, leading from India to St. Petersburg, has been discussed. What do you think of its prospects?
Back in 2000, an intergovernmental agreement was adopted to organize the International North-South Transport Corridor (INSTC) It would allow one to halve the time of delivery of goods from India to Russia. The period of passage of goods today from Mumbai to St. Petersburg along the traditional route through the Suez Canal is from 30 to 45 days, and along the North-South corridor it would be from 15 to 24.
In the current situation, in connection with the change in the geography of cargo transportation, INSTC has become especially relevant. With a length of 7200 kilometers, it runs from the Indian port of Nhava Sheva, located near Mumbai, through Iran to St. Petersburg. For transportation, sea, rail, and road transport are used.
After the 146-kilometer Rasht-Astara railway section is completed in Iran, the cargo flow from Russia to the Iranian ports of the Persian Gulf can be increased to 15 million tons of cargo per year. The new transport route can be used to supply grain, metals, machinery and equipment.
Business has an interest within the framework of public-private partnership in the development of the North-South ITC – but it needs not only large investments in the development of infrastructure, but also, for example, serious work on the organization of insurance coverage of goods. How are the relationships between logistics companies and insurers developing today?
The long-established business of cargo insurance has had to change rapidly since March of this year. In response to the international economic sanctions imposed against the Russian Federation, transport companies now have to not only revise logistics and quickly change delivery routes, but also to look for new possibilities for cargo insurance.
In the current situation, many large foreign insurance companies refused to work with Russian carriers and with cargoes for Russian customers. This, of course, complicates the interaction of transport and logistics companies and shippers, but does not block it. However, both large Russian companies and small ones from friendly countries are gradually replacing the departed insurers. At the same time, the demand for cargo protection remains high, so we can say that the issue of insurance is still in flux.
Automotive logistics is certainly one of the most change-sensitive industries, but it adapts quickly. The schemes of interaction developed over the years have become a thing of the past. Instead, new logistics corridors and insurance schemes are rapidly emerging. In addition, the previously-launched processes of digitalization of the logistics industry are helping us to overcome the emerging difficulties more quickly.