I told him that the only person whom I knew to be of the necessary calibre, even though I was not acquainted with him personally, was Gennady Fadeev, who was at the time head of Moscow Railways.
‘Contact him, please. Make sure he is willing to accept the job.’
It was not long before I received another call from Mr Putin, this time to tell me that I was to become first deputy Minister of the Railways, reporting to Mr Fadeev, the minister. I did not know it then, but perhaps the most important phase of my professional life was about to begin.
Towards the end of President Putin’s first term in office, it was decided that control over the management of the rail networks should pass from the Railways Ministry to a state-owned company with responsibility to make a profit. And so, in September 2003, Joint-Stock Company Russian Railways was created, and six months later, by presidential decree, the Ministry of Railways was abolished.
This was in itself already a far-reaching reform, but when I was appointed as the company’s president in 2005, the pace at which we were working was accelerated. Broadly speaking, the strategy was to introduce the reforms that were needed to develop competition within the industry, facilitate private investment in rolling stock to renew the fleet, and help the railway system play a part in the infrastructure projects that were a central part of the country’s economic strategy. All discussions and considerations of the best way to reform were permitted, but I was given one clear directive by Mr Putin when I was appointed: we were not to commit irrevocable mistakes.
In Russia, the railways and the economy are part of the same living organism. The railways’ ability to work efficiently is inextricably bound up with every sector of the economy, and indeed with the lives of every single one of Russia’s citizens. It carries a significant proportion of the nation’s freight, employs a million of its citizens (more than any other commercial entity), and the country’s people, especially on its remote peripheries, rely on trains to an extraordinary degree. We were to be guided by the same principles as a surgeon performing an operation. If we severed the wrong nerve ending, or removed the wrong organ, then the impact on this incredibly intricate, interlinked complex – comprising not just the rolling stock, track and stations, but power supply, communication networks, traffic and safety management systems – could be catastrophic.
The most significant element that needed the Kremlin’s approval was, unsurprisingly, the shape that the reforms of Russian Railways would take. We were not responsible for making the final decision – what we were charged with was providing a suite of different proposals, each backed up with an arsenal of evidence, analysis and expert opinion so that they could not be simply dismissed out of hand.
There were a number of recent examples for us to follow, or avoid, both from close to home and from further afield. Towards the end of Putin’s first term, a few sectors of the economy had already been transformed, with varying degrees of success. The government had long wanted to reorganise the sprawling monopolies that were such a dominant, and perhaps stifling, element of the country’s economic landscape, and this process began in earnest soon after the turn of the century.
However, while the reformation of the oil industry had been largely successful, the modernisation of the energy and power-generation sectors was disastrous. For instance, the incompetent handling of the privatisation of the energy sector meant that the industry has been unable to make the substantial investments needed to improve, or even maintain, its infrastructure. For a long time, blackouts big enough to stop half the trains in Siberia from running were common. It was clear that a programme of modernisation did not always translate into increased efficiency. The experience was also a vivid reminder of how complex and fraught the process of transforming a national monopoly was likely to prove.
We were also alive to the experience of other nations who had attempted a similar process with their own railway systems. In Great Britain, for example, John Major’s government attempted to implement a very pure model of privatisation. The result was a disjointed rail network, which lacked coordination and did not deliver the expected benefits in terms of efficiency and costs, and led ultimately to two devastating crashes and the loss of a great number of lives.
So we had seen how this approach could lead to a serious setback in the development and operations of the railways, and thus we knew that if we wanted to protect our passengers and ensure that our railway system would be able to stay abreast of the fierce demands of a 21st-century economy then we had to explore other options. It was also abundantly clear to us that no model of modernisation fits all railways. They are not like off-the-peg suits that can fit any customer; the reforms must reflect local conditions.
To this end, we employed all of the leading management consultants – including Ernst & Young, McKinsey & Co. and BCG – to present us with a range of alternative approaches. Their voices were joined by government ministers, members of the Duma and civil servants, all of whom had their own priorities. We also consulted with customers (the people who would actually be using the service), businessmen and the companies that built the locomotives and carriages on which our system depended.
To a large extent, I relied on my own intuition when evaluating the recommendations that were put before us. But I was anxious at every stage to draw as heavily as I could on the expertise of the industry’s veterans, especially as there were influential groups from across the political spectrum who were keen to influence the nature and scope of the reforms.
Those pushing for an extreme model of reform that would culminate in a launch on the stock market included familiar faces such as Herman Gref at the Ministry of Economic Development and Trade, and Alexei Kudrin at the Ministry of Finance, as well as the experts in their orbits, most notably the civil servants who worked in the Anti-Monopoly Committee. Ranged against them were those who wished to preserve as much as possible of the state apparatus that we’d inherited from the Soviet Union, such as the former Prime Minister Nikolai Ryzhkov. I had to act as a bridge between all of these competing factions, to moderate both the potentially destructive instincts of the reformers and the ossified mentality of those who were determined to cling on to the old ways of running the country.
If I had any particular advantage going into the complex process of deciding the future of the railways, it was that having spent time working as both an entrepreneur and a servant of the state, and having seen how fruitfully the PPP arrangement could function at Ust-Luga, I had no prejudice in favour of either perspective. I understood the value of both, and also I had seen for myself how well they could work in tandem, and what could be achieved when they did so. My instinct, which was supported by the advice we received from experts, was that a similar balance between the best aspects of the private and public spheres was the most effective model for Russian Railways to adopt, and this is the case that I made to the President in the course of the lengthy debates that followed.
The reform package that was finally agreed upon, which would unfold over three discrete phases, was distinctly different to the approaches taken by other nations. Although there was substantial provision for competition, to be introduced through partial privatisation of Russian Railways and some of its enterprises, we retained our monopoly on infrastructure, locomotives, operational systems and the majority of the freight businesses. Funding was supposed to come from the profits of our own business activities, a mixture of federal and regional bodies, and the private sector. It was a programme that we believed represented a realistic reflection of Russia’s very particular needs: it would simultaneously allow the company to solicit substantial private investment (which was essential for the rejuvenation of the rolling stock), while continuing to provide many of the universal benefits of a state service (for instance, maintaining the network of rail lines that serviced even the most remote corners of the country). Ultimately, what we wanted was to create a new structure, which would support the railways’ re-emergence as a dynamic element within Russia’s economy.