By Jamie Onslow in Kyiv
Ukrainian cargo transport companies are hastening their efforts to boost the nation’s rail logistics capabilities and secure more business before an anticipated cessation of conflicts and subsequent rebuilding phase. However, the growth of Ukraine’s privately-owned rail freight sector is encountering significant challenges due to issues plaguing the national railroad monopoly, Ukrzaliznytsia (UZ). These difficulties are starting to adversely impact the overall economic situation.
[UZ] faces an enormous number of issues,” states Serhiy Vovk, director of the Centre for Transport Strategies, “The railways play a crucial role in Ukraine’s economy and social fabric. Should the railway system fail, the entire economy would be impacted.
Containerisation boom
Ukraine is extremely reliant on its railway network. 65% of the country’s cargo freight is transported by rail. By comparison, in 2023 rail transport accounted for 5% of the EU’s total freight, according to Eurostat.
Currently, the containerization of Ukraine’s freight significantly trails behind European standards. While approximately fifty percent of rail cargo is moved via containers in Germany, only about two percent of such cargo uses this method in Ukraine, as reported by Ukrzaliznytsia’s statistics from 2021.
In 2020, Lemtrans, which is Ukraine’s biggest private freight handler, took over Levada Cargo, a carrier specializing in containers. Following this acquisition, they have significantly increased their investment in modernizing container infrastructure, including launching a facility in Mostyska close to the Poland-Ukraine border in 2022.
The firm, belonging to the SCM Group controlled by Ukraine’s wealthiest individual, Rinat Akhmetov, completed construction of a $15 million container terminal in Vinnytsia at the end of 2024. Recently, they also declared their intention to develop an additional container terminal in Fastiv, located close to Kyiv.
Last year, Lemtrans invested UAH478 million (€10 million) in infrastructure and logistics initiatives, with 98% allocated to container and terminal facilities. This represents a tripling of investment compared to what was spent in 2023.
Polish logistics company Laude Smart Intermodal, which controls 33% of Ukraine’s container rail transport market, last year also announced plans to build a new container terminal in the country.
The TIS Group, which holds a prominent position in the container terminal sector of Odessa’s ports, is also “expanding its inland logistics,” according to Vovk.
The race to develop new infrastructure is being driven by the nature of the container freight business: “If you want to make good money, you have to control all the segments of the market. You have to run your own terminal, your own inland logistics and the last mile – when you take the container from the station [to its final destination],” says Vovk.
Vovk points out that a major factor driving this investment is businesses anticipating a future reconstruction period, which will require bringing in massive quantities of building supplies.
Not only are container terminals experiencing heightened investments within the logistics industry, but also in 2025, Ukraine is expected to break records for warehouse construction, potentially commissioning up to 500,000 square meters of new warehousing space.
At present, much of Ukraine’s container cargo is moved via roads, an arrangement labeled by Vovk as a regulatory “gray area.” Here, expenses remain minimal due to non-compliance with rules like truck weight restrictions, driving hours limitations, and vehicle emission norms.
These measures must be strictly enforced as part of Ukraine’s journey towards European Union membership, consequently leading to increased amounts of container cargo being transported via Ukraine’s railway system.
1,435mm vs 1,520mm
One of the key challenges for integrating Ukraine into Europe’s rail network is the difference in track gauges at its western frontiers. The majority of Ukraine’s railways follow the broader 1,520 mm gauge established during the Soviet period, whereas most European Union nations use the narrower 1,435 mm standard gauge.
The variation in track widths requires transferring cargo onto different trains at the borders, entailing additional time and costs.
In 2022 and 2023, the disturbance in Ukraine’s sea commerce prompted a significant influx of investments into facilities situated at Ukraine’s western terrestrial boundaries. Nearly three dozen enterprises were granted permissions to construct rail networks aimed at developing cross-border transfer hubs close to these regions.
UZ has put resources into updating railway links in Western Ukraine. This year will see the opening of a new 1,435 mm gauge line connecting Chop with Uzhhorod. Additionally, UZ has disclosed intentions to construct another segment of 1,435 mm gauge track extending from Mostyanka to Lviv.
The proposed initiatives, nevertheless, come with a hefty price tag. According to a feasibility assessment conducted by Europe, upgrading a single kilometer of broad-gauge railway would likely cost between €1 million and €1.1 million.
UZ’s Mostyska-Lviv initiative was delayed earlier this year because it failed to secure adequate financing, as reported.
Interfax Ukraine
USAID participated in the initiative; however, the U.S. agency’s financial support has been reduced due to cuts implemented by the Trump administration.
However, with the resumption of Ukraine’s maritime export channels, focus has turned inward toward the nation’s center: “Currently, the main emphasis for investments lies within the country, nearer to the consumers,” states Vovk. “For instance, Kyiv holds significant importance for everyone involved, and their subsequent move will likely involve vying for control over the Kyiv regional market.”
Losses at Ukrzaliznytsia
One challenge in modernizing Ukraine’s cargo logistics is the framework of the country’s railroad network, along with the economic difficulties currently experienced by UZ.
UZ is a government monopoly overseeing every facet of operations on Ukraine’s railway system. This entity possesses ownership of the railroad infrastructure and holds exclusive rights for offering passenger services. When it comes to freight transportation, although UZ retains authority over engines and rails, private enterprises are allowed to possess and manage cargo cars.
Prior to the conflict, it was common practice to criticize UZ due to inefficiency and corruption issues,” notes Vovk. However, during the initial year of the war, UZ’s standing shifted significantly. The organization became essential for evacuating people from violent areas and maintaining the flow of goods.
The conflict has led to a gradual but severe crisis for UZ, according to Vovk. The total amount of cargo moved by UZ remains significantly lower than before the war. In 2021, UZ handled 314 million tons of freight, whereas this number dropped to 174.9 million tons in the previous year.
Lowered volumes have compelled UZ to offset their losses by raising railway freight rates. “This is quite detrimental as it creates a cycle,” explains Vovk. “By boosting tariffs to make up for lower profits, they end up making rail services less attractive, which leads shippers to opt for alternative modes of transportation such as trucks instead.”
UZ is also ceding territory to private operators in the container freight industry. A little over a year or two ago, Liski, which is a UZ subsidiary responsible for managing containers, “was among the top three [freight companies],” but now it has fallen to [the position of] tenth place,” according to Vovk.
A part of the issue is that UZ uses a single pot system, imposing higher tariffs on businesses for cargo transport to offset the deficits incurred from passenger services.
Previously, during peacetime, companies were thriving and willing to cover tariffs that subsidized unprofitable sections of the railway network. However, following three years of conflict, this arrangement is now collapsing.
According to Vovk, business representatives state: ‘We wish to cover the costs of services provided during the transport of goods from location A to location B, yet we do not intend to bear the expenses related to passenger transit.’ This situation represents a significant discrepancy.
The figures are clear: merely 35% of Ukraine’s rail network produces revenue, whereas 65% runs at a deficit.
The earnings from cargo transport services have begun to drop significantly. It’s anticipated that they will decrease to roughly UAH5-6 billion (€107-128 million) in 2025, making it impossible for us to compensate for the deficits incurred by passenger service operations,” declared UZ CEO Oleksandr Pertsevsky in a recent interview with the YouTube channel Fedoriv Vlog.
Last December, UZ declared its plan to raise freight transportation rates by 37%, which led to strong opposition from Ukrainian enterprises. The country’s top six metal producers sent a letter to the Ministry of Development expressing concern that “the continuously escalating logistical expenses are swiftly pushing the sector towards an irreparable outcome,” as reported.
Interfax Ukraine
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The strain between UZ and companies is intensified due to the lack of an impartial regulatory authority for railway rates. Essentially, these rate hikes are decided solely by UZ, with minimal outside scrutiny regarding their validity or economic consequences.
Railway liberalisation
The deregulation of Ukraine’s railway sector has been widely discussed, yet it continues to be an elusive goal.
The fundamental concept involves separating the management of railway infrastructure from service operations. This allows private operators not only to supply containers and wagons but also to manage their own services using their own locomotives.
In 2019, there was significant action when President Zelenskiy directed his Cabinet of Ministers to initiate market reforms; however, minimal advancement occurred, resulting in these reform efforts being delayed.
As per the Ukraine Facility agreement with the European Union, Ukraine must implement railway liberalization laws by the end of 2025. Given a five-year timeframe for execution, Vovk expresses doubts regarding the schedule: “Frankly, the Ukrainian administration enjoys being a monopoly. I seriously doubt that this bill will pass this year.”
One significant obstacle is that liberalization might lead to the closure of many of Ukraine’s passenger services due to the lack of considerable financial backing from the government. Given the ongoing conflict, such support is improbable.
Currently, railway reforms stand as just one of many unresolved challenges that Ukraine encounters as it struggles with the impacts of three years of warfare. The devastation from the conflict has merely exacerbated the persistent structural issues plaguing the railroad industry.
Vovk recognizes the untimely nature of these issues: “During a crisis, problems tend to stand out more clearly. Nonetheless, we require this reform. It would have been ideal to implement it sooner, when both businesses and society were stronger. Unfortunately, that did not happen.”
