Expert opinions, INVESTMENT CLIMATE

Upcoming changes in transport system development

The pressure of sanctions and the new geopolitical challenges are seriously affecting the Russian economy and the transport industry is no exception. How will the situation change and what can we expect in the near future?

Maxim Blinov / RIA Novosti

In the past 30 years, Russia has quite strongly integrated with the world economy, resulting in extensive imports of consumer and industrial products. The country became heavily dependent on technology-intensive imports, from consumer electronics to production lines. Due to the recently imposed sanctions, the supply chains are already being disrupted. Therefore, it is extremely important to minimize the adverse consequences. However, the economy in general and the transport industry, in particular, may incur significant harm if the wrong sequence of alleviating steps is chosen.  

Defining priorities

It is important to first address basic issues such as stable operation of all critical systems and processes. Industrial facilities must have consistent supplies of raw materials while population must be provided with food and everyday essentials. The transport system and the logistics network must operate smoothly.

In terms of transport, it is most important to keep life support systems going. In other words, if a bus can’t move, no perfectly advanced system monitoring its condition and location will be of any use.

The government will continue to set the vector for the development of transport systems and it is important to create conditions for competition rather than natural monopolies. Russians like to refer to their past Soviet experience but even then, there was huge competition in the industry between research institutes, design bureaus and factories. Today we often hear calls for uniting for the sake of effectiveness and for developing a unified system for many things. However, without competition, the transport industry – like any other – will stagnate.

Changing transport landscape 

The sanctions will take their toll on the development of transport technology but it is still challenging to foresee the general picture as almost daily, more nuances and variables emerge in every area of the economy. Structural changes will become more apparent after the second quarter of 2022.  

It is already obvious that the cost of vehicle ownership and use will be increasing. It is logical that the motor vehicle industry will be affected the most, as more people will be shifting from cars to public transport. Bicycles and other personal mobility devices may also get a boost.

It can be expected that the green agenda will have to wait for a while. The government has already decided to permit car manufacturing without complying with environmental standards.

Public transport upgrade programs may also undergo changes – or, due to the higher cost of fleet, the scale of these programs will be smaller than expected. Another important aspect is possible suspension of budgets for ‘non-essentials’ such as public spaces.

Transport software import substitution

Significant shifts can be expected in IT for transport. Whether transport engineers will be able to work without foreign technology is an open question. Import substitution will, naturally, drive active development of Russian-made solutions. The Russian market is relatively small in size, therefore, certain balance needs to be maintained. It is not worth substituting something blindly for the sake of speed. It should still be a quality product that can compete in the world market.

Russian developers will not be able to reach US or European markets. However, their product should be competitive enough to be considered for purchase by other countries. This is the path that industries in many Asian countries took, including South Korea, China and Japan.  

There are stumbling blocks in this process as well. Russia put great emphasis on digitalization but our country makes few hardware components. The issue of optimization – something that is difficult to achieve without the direct involvement of hardware manufacturers – is becoming extremely relevant.

When it comes to the specific niche of transport planning, foreign software also dominates there and it can potentially become unavailable in Russia. Companies will have to deal with the problem by either transitioning to Russian-made software (which can be of lower quality), descend to pirating or hope that the vendor will return to the country. Anyway, everything that will not be possible to substitute will receive new analogs, often less functional and user-friendly. However, there is a chance that new, advanced solutions will appear, implemented with regard to the many-year experience of others.

Another problem with Russian import substitution is the companies’ attempts to make money out of it. We already see that Russian producers have tried to significantly increase prices after some of the vendors pulled out of the country. When there is no competition, some companies are tempted to manufacture low-quality products and sell it at a higher price.

In order to ensure the further development of the industry, it is necessary to provide transparency of purchasing procedures which will allow for dealing with corruption and creating conditions for free entrepreneurship in the transport sector.

In conclusion

We must not isolate ourselves: even having political disagreements with some other countries does not mean that we should not be interested in their experience. We need to learn the best practices regardless of where they were first implemented.

In the development of transport systems, introduction of transparent systems to assess the performance of organizations and decision-makers could be a big help. Objective criteria will help the industry experts understand how fast and in what direction the sector is developing.

Speaking of the state’s financial support for business, one should lay emphasis on the development of startups, providing tax concessions, creating business incubators and generally helping young companies, because many technology giants both in the US and China were initially small startups. In other words, it is necessary to create conditions for all market participants and not only large corporations.

By Vsevolod Morozov, Director for Analytics and Planning at Simetra

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