The economies of Russia, the CIS and surrounding countries have shown considerable growth over the past decade, driven by the resources boom and by legislative and political initiatives that have invigorated consumer activity and stimulated widespread foreign investment in Russia. The improved business environment has encouraged a wide range of Japanese businesses-including industry leaders in electronics, automobiles, machinery and other areas-to step up their business development in the region. And although this development has included the establishment of local production and assembly facilities, a large amount of parts and completed goods must still be transported from Japan and elsewhere in the Asia Pacific region to Moscow.

Mitsui has for many years played a key role in supporting logistics to and within Russia, with comprehensive shipping, trucking and warehousing operations. Now, with trade volumes placing severe pressure on existing logistics routes, Mitsui is providing Japanese manufacturers with new overland services to Moscow using one of the world's iconic railroads: the Trans-Siberian Railway.

A block train bound for Moscow

The Trans-Siberian Railway, or TSR, has been carrying passengers and freight between Russia's far eastern area and Moscow since its completion in the early 1900s. Stretching nearly 10,000km and spanning eight time zones, the TSR forms the backbone of the world's three longest continuous rail services: the Trans-Mongolian, the Trans-Manchurian and the Trans-Siberian proper. The main gateway port for container transportation using the TSR is Vostochny, and cargo from Japan currently accounts for only a small quantity of activity at this port - around 2% of total volume.

The reasons for this historic low adoption rate are varied, and include difficulties with border controls, traceability and security, delays, and even damage to sensitive goods from the shunting, coupling and uncoupling of rolling stock during transitions at a potential 2,000 stops along the route. Because of this, Japanese manufacturers have transported most of their goods by sea, either directly to Russia's main, St. Petersburg, or via adjacent countries such as Finland or Estonia.

But these sea routes, which are nearly twice as long as the TSR, are not without their own challenges: the transit time from Japan is theoretically 40 days, but crowded ports and sea lanes mean that 60 days is often a more realistic assumption. On occasions, shipping space may even be unavailable, and customs procedures with transit countries can be complex. In recent years the environmental impact of distribution has also become a factor, with detailed comparisons of sea, rail, truck and combined transportation modes indicating that in many cases rail transportation is the most efficient option.

Russia Map

Mitsui had been considering these issues closely as its logistics operations between Japan and Russia increased, so when Russian Railways, the TSR infrastructure owner, approached Mitsui in 2006 with a view to finding ways to boost train freight utilization by Japanese customers, Mitsui welcomed the idea of forming a working group.

The working group resulted in the creation in October 2007 of a three-way operating alliance between Mitsui, Russian Railways, and Russkaya Troika, a 50% owned subsidiary of Russian Railways that handles freight operations. Mitsui serves as the sales agent, offering potential customers in Japan a single-desk access point to the TSR block train route to Moscow, and eliminating many of the linguistic and procedural barriers to doing business in Russia.

A number of factors were behind Russia Railways proactively seeking to attract business from Japan. Regional freight dynamics had changed considerably following the dissolution of the Soviet Union, and with the privatization and separation of TSR infrastructure and freight operations, management began to focus on modernization and volume expansion. At the same time, Russia's bid to gain entry to the WTO led to greater transparency in customs and related regulations, which alongside burgeoning economic growth created an attractive new market for Japanese goods.

Mitsui, meanwhile, was recognized by the working group partners for its experience in Russia. Mitsui's investments in the Russian logistics market include a 35% stake in transit cargo and forwarding business OY Hamiko Agency Ltd. dating from 1998, and a 30% share in Toyo Trans Inc. taken in December 2005. In 2007 operations began at Mitsui's own high-tech warehouse complex in Moscow. Mitsui therefore had access to the specialist skills required to operate in the Russian market, along with the nationwide licenses and other regulatory approvals required, making Mitsui an ideal partner to work with Russia Railways and Russkaya Troika.

The Kuntesvo-2 cargo terminal in Moscow

The service now coming to fruition under this alliance is based on the use of 'block trains' to overcome many of the issues that had previously made rail transportation to Russia on the TSR unattractive to Japanese manufacturers.

With block trains, an entire train of up to 76 containers is booked through Mitsui's desk as a single contract with the carrier. This kilometer-long train, known as the All Japan Consolidated Block Train (AJCBT), is then driven as a complete unit from Vostochny to Moscow, stopping only for maintenance as required. The complete goods transportation process from Japan by sea to Vostochny and on to Moscow by the TSR takes only 25 days, with a defined schedule and full traceability. What Mitsui's customers end up with is a fast, punctual, environmentally friendly transportation service, with 40% lower CO2 output than freighting by sea.

One key to running a successful block train service lies in having access to a range of industrial customers with logistics needs that can be pooled together efficiently on a defined route. This has to be managed skillfully, however, as it's no secret that Japanese companies prefer to make use of a single transportation route wherever possible to reduce complications, facilitate efficient inventory management and lower costs. This means that block train customers require the certainty that they will have consistent, long-term access to the freight space they require, while also receiving the cost and scheduling benefits of freight consolidation.

This is where Mitsui's international network, logistics experience and long-term customer relationships are making the difference. Customers can draw on not only the tangible services and broad customer base of Mitsui, but also on the intangible benefit of Mitsui being one of Japan's most experienced logistics operators in the Russian market.

Vostochny, the port in the Far East of Russia where block trains are loaded.

With multiple trial consignments already successfully completed, the future for the AJCBT seems assured. Mitsui and its partners in the block train venture are hoping ultimately to expand the service to multiple block trains each week, and may also consider other destinations. Progress in electrification, double tracking and other infrastructure development means that the TSR is currently only operating at about 60% of its annual 100 million ton capacity, so significant growth potential remains.

For Mitsui's Japanese customers making use of the AJCBT, growth in the business will contribute to a virtuous cycle of greater efficiency and the potential for additional value-added services. Naturally, Mitsui and its partners are also looking closely at options for using the returning trains to transport raw materials or redistribute finished goods from west to east, and they will continue to play a role in supporting government initiatives to modernize the transportation infrastructure.

Japan's journey on the Trans-Siberian Railway is only just beginning, and the future of the block train initiative is exciting to contemplate. As trade between Japan and Russia grows, Mitsui will be doing everything it can to grease the wheels of progress.

The posted information is as of the date of issuance. The information may change without notification.