Estonia's state-owned Operail involved in Russian logistics during war

Operail freight trains.
Operail freight trains. Source: Matthias Rikka/Operail

Right now, railways are connecting more than just people; tanks, fuel and ammunition are being transported by rail as well. ETV+ investigative program "Insight" looked into how the Estonian state-owned railway logistics company Operail is assisting Russian logistics and what risks — on top of loss of reputation — this may entail to Estonian taxpayers.

People outside of Ukraine who are against the war being waged there understand very well the importance of war logistics, which is why they have been waging guerrilla war against railways specifically.

The "Rail War" has been underway in Belarus for two months already, which is why so-called "partisans" attempting to block trains carrying Russian forces and military equipment through Belarus to Ukraine are being treated as terrorists.

Overnight into May 1, two signals and block system control panels in Belarus were burned to the ground. When these control panels are damaged, the entire section of rail controlled by them is paralyzed: traffic signals and switches don't work, and rail traffic essentially grinds to a halt.

At least ten relay panels throughout the country have been disabled. As such diversions have been increasing in frequency, military patrols are now on duty each night in Gomel and Brest oblasts.

Not just a coincidence

Border regions in Russia have not been spared from this unexplained trouble either. On April 12, a railway was damaged in Belgorod Oblast. On April 21, a locomotive derailed and slid together with the embankment it was traveling on in the Bryansk region. The investigation did not establish whether rain had weakened the embankment or whether anyone had contributed to the rail accident.

All of this could be chalked up to coincidence, but just four days later, three fires broke out simultaneously in Bryansk as well, all of which were connected to military objects. A fire erupted at the 120th arsenal of the Main Rocket and Artillery Directorate of the Russian Army, at a fuel tank on the property of the Snezhetsky Val complex, and at the Transneft Druzhba oil depot. TransNeft Bryansk Druzhba is a subsidiary of the state-owned TransNeft. This is an oil depot more than 3 million cubic meters in size, and its oil pipeline supplies Europe with Russian gas.

No definitive conclusions have yet been drawn regarding the cause of the blazes, however, but interested parties have already stated their opinions.

"What could be more natural than explosions and fires at fuel bases and other strategic objects in regions immediately adjacent to the region where a so-called special military operation is underway?" war criminal Igor Strelkov, former minister of defense of the so-called Donetsk People's Republic (DNR), said sarcastically.

At this point it is impossible to deny that railways and rolling stock are infrastructure that have been under attack throughout the war because they are vital to warfare. Anyone providing logistics is thus participating in the war.

Rolling stock from Russia

Operail AS, formerly EVR Cargo AS, transports freight by rail as well as both repairs and leases rail cars and locomotives. It is this wagon leasing business that is raising a lot of questions.

Several years ago, the Estonian state-owned business began seeking alternatives to declining transit volumes. The plan was to purchase 500 gondolas, or open wagons, and 500 platform wagons, for €35 million and then lease these out. In 2017, these rail cars were ordered from a Russian plant.

Several politicians were astonished by the plan back then already, including former economic minister Kristen Michal (Reform). "At one point, a state-owned public limited company decided, 'It would be a great idea to order wagons from Russia and send a pile of money there!'" he recalled.

The plan was to borrow money from the bank to order rolling stock fitted for 1520 mm gauge railways. The involvement of the political factor, however, was already clear during the procurement process. As finance expert Ron Luvištšuk explained to "Insight," Operail got into this business at the wrong time.

"Crimea was already annexed, and everything was clear," Luvištšuk said. "Even back then they should have very seriously considered whether doing this was a good idea."

Former Operail supervisory board chairman Neeme Jõgi was likewise unhappy with the project at the time. "In 2017, you didn't need to be a psychic to understand that the conflict between Russia and Ukraine would not die out on its own; it would either drag on or escalate," Jõgi said. Nonetheless, neither the Ministry of Economic Affairs and Communications nor the management at Operail considered the political risks involved at the time.

Operail: We're not doing business in Russia

"Insight's" attempts to get anyone from the Ministry of Economic Affairs or Operail to comment on the matter on camera proved unsuccessful.

The ministry refused to comment altogether, directing "Insight" journalists to contact the management at Operail instead. The latter's written responses were terse, however, and nobody was willing to provide any comments on camera.

Asked whether a representative of the state-owned company would be willing to comment on their wagon business with Russia, the company responded, "I'm afraid we don't have anything worthwhile to say on camera on the matter, as Operail AS doesn't have a wagon business in the Russian Federation and is not cooperating with Russia. The Operail group includes Estonian wagon leasing business Operail Leasing AS, which has current lease contracts only with EU and Ukrainian businesses. We do not currently nor have we ever leased wagons to Russian legal entities."

"Insight" thereafter asked the company to confirm whether no rolling stock owned by Operail Leasing is currently in Russia, at which point it turned out that there is after all. Operail said that rolling stock leased to European intermediaries is used wherever 1520 mm gauge railways are used, including in Russia.

This scheme, while legally allowing Operail to claim that they are not doing business with Russia, nonetheless doesn't change the nature of the matter — that Estonian taxpayers have invested €35 million into Russia's rail car production and logistics, and that Estonian rail cars are currently in use in Russia.

Rail key to Russian economy

Regardless of with whom lease agreements are formally signed, by providing Estonian-owned rail cars to partners of Russia, the state is supporting the aggressor's economy.

At a recent meeting with the management of Russian Railways, Speaker of the Federation Council of the Federal Assembly of the Russian Federation Valentina Matviyenko said, "Russian Railways is the biggest employer, investor and consumer of domestic industrial products. It is the true motor of Russia's economy, upon the work of which the situation of thousands of businesses and millions of people throughout the country rely."

Matviyenko stressed that the Russian logistics sector must continue to develop despite sanctions and despite the machinations of "hostile states." Estonia is considered one of these "hostile states."

The state-owned Russian Railways recently declared its insolvency in connection with European loans, or Eurobonds. Formally, nothing is stopping Estonia's state-owned businesses from accepting money for leasing its rolling stock — not the insolvency of the sector's most important business, not the fact that it is already prohibited to invest in it, or even the fact that individual sanctions have been placed on Russian Railways CEO Oleg Belozerov.

Not so simple to just withdraw

The problem lies within the fact that the rail car deal has since ended up a trap with no good way out. Even if Operail Leasing were to decide to terminate its existing leases and retrieve all of its rolling stock from Russia, there is no guarantee that they would be successful in doing so.

This is exactly what happened to foreign businesses with planes they had leased to Russia: the state decided to confiscate them. The president of the Russian Federation signed a law on support measures for civil aviation which provided the opportunity to register rights to foreign planes leased to Russian companies. In the case of Operail's rolling stock, it may be even easier than that, as unlike Boeing planes, Operail's wagons were even produced in Russia. Estonian rail cars will remain Estonian rail cars for so long as Russia decides to take them away.

Lease payments may become an issue as well. While contracts have stipulated payments in euros, Russian lessees could easily start making payments in rubles instead.

Should have heeded the skeptics

How is it possible that no one had noticed these risks sooner?

As a matter of fact, the risks were already well known, but both the management of Operail and the ministry chose to ignore them.

In May 2017, Operail AS was appointed a new supervisory board, of which businessman Neeme Jõgi became chairman. He reviewed the project documentation and announced that the business plan submitted by the management of the state-owned company had several shortcomings.

"Let's be honest, from a financial calculations perspective, that business plan could not withstand any closer scrutiny," he recalled. "What kind of return on equity are we talking about if the business is taking out loans equivalent in size to their balance sheet!"

Jõgi explained that by the time he was appointed chairman of the supervisory board, the previous supervisory board and ministry had already made the decision regarding the rail cars.

As the first batch of rail cars had already been ordered, the new supervisory board chairman tried to fix as much as possible. He requested the procurement documents for the next 500 rail cars from Operail's management; the only information Jõgi received regarding the already concluded transaction was, like any other bystander, from a press release.

That November, Neeme Jõgi was recalled from his position on the supervisory board.

"The reason I was recalled is quite simple — I don't fit with their plans," he commented at the time. "One could say I was swept aside."

Reputation or money

Thus Operail management pushed their rail car leasing plan through in 2017 without taking any of the criticism of the business plan itself into account.

By now it is clear that Jõgi had been right about the risks.

"Since the beginning of the war already I've told anyone who has asked me about doing business in Russia: this is going to last for a long time," Livištšuk said. "Whether five, ten, or fifteen years, I don't know, but it's clear that even if the war were to end tomorrow, sanctions will not be lifted. Russia is turning into a 'toxic' country. Whether or not to cooperate with them is a matter of reputation."

Insight from Ahti Kuningas, the Ministry of Economic Affairs' deputy secretary general for transport, would be helpful, as it was Kuningas who curated this project and participated in the Operail supervisory board meetings when the decision was made to order the rail cars using borrowed money.

Kuningas refused to comment, however, and directed "Insight" to contact Operail's management instead.

Commenting on the situation at hand, ex-supervisory board chairman Neeme Jõgi stated outright, "Starting a high-risk business like this based exclusively on loaned money is the biggest game of chance. You hope that you'll get lucky and you can pay off your debt. But should a state-owned company be involved in such things? Personally, I think not."

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Editor: Aili Vahtla

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