Red Sea Crisis Boosts Russian Rail Freight and Kremlin Profits

The ongoing crisis in the Red Sea is causing a significant shift in the transport of goods between China and Europe, with an increasing number of freight companies turning to rail lines that run through Russia. This shift is not only causing delays and higher costs for shipping companies but also boosting profits for Vladimir Putin and the Russian government.

According to an analysis by The Telegraph, the volume of goods transported from China to Europe via the Eurasian Rail Alliance (Era) – a Russian freight company using Russian rail lines – has more than doubled since the Red Sea crisis began at the end of last year. In the first six months of this year, Era transported 163,000 twenty-foot equivalent units (TEUs) of goods by rail between China and Europe, representing a staggering 121% increase compared to the same period in 2023.

This surge in rail freight through Russia is particularly noteworthy as transits along this route had plunged by 61% since Russia launched its full-scale invasion of Ukraine. However, the volume of goods has nearly bounced back to its pre-war peak, with the China-Poland route, Era’s most-used route, seeing a record high of 134,000 TEUs in the first six months of the year – a 38% increase compared to its pre-war peak in 2021.

The shift towards rail freight through Russia highlights a loophole in the Western sanctions regime, as there are currently no sanctions on goods travelling by rail through Russia, provided they remain on continuous travel. While many shipping companies, such as Maersk and DSV, initially stopped using these routes after Russia’s invasion of Ukraine, some, like Denmark-based Blue Water Shipping, are now reversing their policies due to high demand from firms seeking faster shipping routes from Asia.

The Red Sea crisis, which began shortly after last October’s Hamas attacks on Israel, has led to Houthi rebel attacks on ships travelling through the Suez Canal, causing insurance premiums to spike for shipping companies operating in the region. With rail transit from China to Europe taking around 18 days compared to the average 55-day transit by sea, client requests for rail transits have increased, according to Maria Magdalena Pavitsich of Austria’s OBB rail cargo group.

As the Red Sea crisis continues to disrupt maritime shipping and drive up costs, the shift towards rail freight through Russia is likely to persist, providing a significant source of revenue for the Kremlin and potentially undermining Western sanctions efforts. Simon Johnson, an MIT professor and former IMF chief economist, commented, “This is definitely a source of revenue for the Kremlin. It looks like another case of the EU declining to incur costs and therefore only encouraging Russian aggression.”