Take-or-pay contracts shift risks onto supplier

Russian authorities have resumed deliberations on legislation to codify take-or-pay principles for rail freight transportation. Under the proposed framework, shippers would be obligated to pay for agreed tonnage even if unmet, except in cases of carrier fault or force majeure. The initiative, heavily lobbied by Russian Railways (RZD), has drawn sharp criticism from coal and mining companies.

Financial stability for the monopoly – additional risks for business

This contract type strongly benefits RZD by securing guaranteed revenue and hedging against rail infrastructure underutilization. Nevertheless, it creates additional financial pressure for mining companies.

Shippers will be forced to freeze significant funds in advance to pay for future transport, regardless of market conditions.

In the event of a deterioration in market conditions, with a drop in demand and coal prices, suppliers find themselves in a situation where reducing production would mean an irretrievable loss of the funds paid for transportation. Otherwise, exporters will have to continue shipments at a loss in order to cover logistics costs, exacerbating their financial results. Thus, in addition to damages from the worsening market conditions, companies will incur direct losses on take-or-pay contracts.

RZD justifies the reform by citing coal suppliers’ overstatement of booking requests, which ties up limited capacity on the Eastern range. Industry representatives counter that inflated bookings are a compensatory response to RZD’s systematic reduction of approved volumes.

Key objections from shippers include:

• Discriminatory access. Take-or-pay implementation risks restricting infrastructure access for entities declining the new contracts.
• Asymmetric liability. RZD’s responsibility for unmet shipments is limited to penalties that can be contested and reduced in court, whereas shipper obligations are absolute.

Consequently, the primary risk burden falls on exporters operating in a highly volatile market. While RZD gains financial stability and a mechanism to hedge its operational risks, coal companies face rising costs and potential losses even when cutting production. This raises serious doubts about the economic viability of such a model for coal industry already under severe pressure.

Adoption of the scheme will lead to a significant reduction in coal exports. The introduction of take-or-pay will exacerbate the ongoing negative trend, as companies seeking to minimize risks will deliberately understate their transport booking volumes.

The proposed take-or-pay scheme is a tool that enables RZD to shift all risks associated with its failure to ensure logistics reliability onto shippers. This will deepen the crisis in the coal sector, forcing producers to cut exports and incur additional losses in favour of the guaranteed revenue of the railway monopoly.

Source: CCA Analysis