Ukrainian Railway recognized as dominant on freight railcar market

Ukraine’s Antimonopoly Committee concluded its
investigation on market power of Ukrainian railway operator Ukrainian Railway
(RAILUA), the committee reported in its Jan. 17 press release. Based on its
study, the committee concluded that the company is monopoly provider (with a
100% market share) in the segment of providing railway infrastructure (access
to rails), mainline locomotives (traction services) and goods transportation by
railway.

Also, the committee concluded that the company has
signs of dominance (market share exceeding 35%) in freight railcar rent on the
Ukrainian market. Based on its study, the committee “provided suggestions to
the Cabinet of Ministers, the Infrastructure Ministry and Ukrainian Railway,”
which nature it did not disclose in the press release. The committee promised
to publish a full version of its report in the nearest future.

Alexander Paraschiy: The
committee’s findings are worrying for Ukrainian Railway, which managed for the
first time to achieve deregulation of rates for freight railcar rent. Due to
such deregulation, effective as of January 2018, the company started setting
railcar rents in February closer to competitor rates (it claims its share on
the market is less than 30%), thereby having raised the rents a couple of times
from the previously regulated rates. The effect of deregulation was additional
revenue of UAH 6.7 bln, or a major part of company’s total revenue increase
from freight transportation services in 2018 (total revenue reached UAH 68.03
bln last year, or UAH 8.09 bln higher yoy, according Ukrainian Railway’s
preliminary estimates).

The key risk from the Antimonopoly Committee’s latest
decision is a return to the regulation of railcar rent, which will make the
company’s welfare again dependent on the discretion of state regulators, which
usually delay adjusting railway rates to the market.

The committee’s findings are not fair in our view as
it looks like it has expressly narrowed its definition of the railcar rent
segment in its designation of the company as a dominant player. This decision
sharply contrasts with the committee’s December ruling
that refused to recognize DTEK as a dominant market player on the coal and
electricity markets of Ukraine, where the company’s share was 88% and 27% in
2018, respectively. Notably, if the committee’s conclusion will be used to
justify the return of the regulation of Ukrainian Railway’s railcar rent
prices, that will primarily benefit DTEK’s shareholder Rinat Akhmetov, whose
steel holding Metinvest is the biggest customer of Ukrainian Railway.

We look forward to seeing the committee’s full report
and its recommendations for Ukraine’s railway market, while keeping our neutral
outlook on RAILUA bonds.