Cross-Sectoral Transfer of Budgetary Subsidies Through Differential Railway Tariffs

Abstract

The paper exposes and analyses a serious flaw in Russia’s current rail freight tariffs. Subsidized sectors of the Russian economy are overcharged while a range of other sectors are undercharged. This transfers budgetary subsidies from one sector to another in a way that is opaque to regulators. The article details how this transit subsidy is part of conveyer belt that runs from the national budget to refining, rail transport and ultimately to coal mining. Analysis shows that the transit subsidies from differential railway tariffs are quite large (from 2019 to 2021 coal industry revenues were augmented by an annual average of RUB 270 billion through this technique). The article also demonstrates that subsidizing coal production through differential railway tariffs cannot be justified by rational economic considerations, as it only prolongs the life of many hopelessly unprofitable enterprises and thus hinders sustainable economic development in coal-mining regions. The paper studies the feasibility of eliminating this kind of subsidy by making tariffs for oil and coal transportation converge. If those subsidies had been eliminated in 2023, the author concludes that it would have been relatively painless for the industry and could potentially bring about a RUB 245 billion reduction in annual state budget subsidies by 2050. The funds saved could be redirected to economic diversification and social development in the regions where the coal industry is concentrated.