High Interest Rates Squeeze Russia's Railway Industry, Impacting China Trade

Sanctions and Russia's war in Ukraine are creating a perfect storm for Russia's railway industry, severely impacting its crucial trade channel with China, reports Business Insider.

The Russian railway sector is experiencing its most significant slowdown since the Great Financial Crisis, according to an analysis by MMI Research cited by the outlet. Freight volume transported by Russian Railways, the state-owned rail system, plummeted 5% in the first eleven months of 2024 compared to the same period in 2023.

The slowdown is attributed to several factors, including the diversion of resources to support the war effort, leading to supply chain disruptions and affecting the transportation of key commodities such as coal and aluminum.

High interest rates, a consequence of Russia's economic instability driven by the conflict, are further exacerbating the situation. Russian Railways is planning a significant cut in its investment program for 2025, allocating just 890 billion rubles ($8.5 billion), representing a 30% reduction from 2024 levels, according to a report by the state-owned news agency TASS.

The company is even considering a further one-third reduction in investment through the end of the decade, according to Kommersant. Russian Railways did not respond to a request for comment from Business Insider.

These developments pose significant challenges for Russia's trade with China, which has increasingly relied on rail transport amidst Western sanctions. Earlier this year, Russia invested billions in its railways to accommodate the surge in trade with China.

The impact of the war on the Russian economy is undeniable. Russia's central bank raised interest rates to a record 21% earlier this year to combat soaring inflation. In last week's policy decision, the bank maintained interest rates, expressing concerns about an "excessive cooling" of the wartime economy, according to Russia's top central banker.