Ukrainian freight operators are racing to develop the country’s rail logistics and capture market share ahead of a potential end to hostilities and reconstruction. But the development of Ukraine’s private rail freight market must contend with mounting problems faced by the state railway monopolist, Ukrzaliznytsia (UZ), which are already beginning to have a damaging effect on the economy. 

“[UZ] has a huge volume of problems,” says Serhiy Vovk, director of the Centre for Transport Strategies, “The railways are extremely important for the Ukrainian economy and society. If the railways do not work, the economy doesn’t work.”

Containerisation boom

Ukraine is extremely reliant on its railway network. 65% of the country’s cargo freight is transported by rail. By comparison, in 2023 rail transport accounted for 5% of the EU’s total freight, according to Eurostat.

At the same time, containerisation of Ukraine’s freight lags far below European levels. In Germany, around half of all rail cargo is transported in containers, but in Ukraine, the figure is around 2%, according to data collected by state railway company Ukrzaliznytsia in 2021.

Lemtrans, Ukraine’s largest private freight operator, acquired container transport company Levada Cargo in 2020, and has since invested heavily in new container facilities, most notably opening a terminal in Mostyska near the Polish border in 2022.

The company, which is part of the SCM Group owned by Ukraine’s richest man Rinat Akhmetov, finished building a $15m container terminal in Vinnytsia in December 2024, and last week announced plans to build another container terminal in Fastiv, near Kyiv.

Lemtrans last year invested UAH478m (€10m) in infrastructure and logistics projects, of which 98% was invested in container and terminal facilities, a threefold increase compared to 2023.

Polish logistics company Laude Smart Intermodal, which controls 33% of Ukraine’s container rail transport market, last year also announced plans to build a new container terminal in the country.

TIS Group, which dominates the container terminal market in Odesa’s seaports, is also “actively developing its inland logistics,” says Vovk.

The race to develop new infrastructure is being driven by the nature of the container freight business: “If you want to make good money, you have to control all the segments of the market. You have to run your own terminal, your own inland logistics and the last mile – when you take the container from the station [to its final destination],” says Vovk.

According to Vovk, a key driver of this investment is companies looking ahead to a potential reconstruction phase, which will necessitate importing huge amounts of construction materials.

It’s not just container terminals that are seeing increased investment in the logistics sector; 2025 will see a record number of warehouses built in Ukraine, with a possible 500,000 square metres of warehouse space estimated to be commissioned.

Currently, most of Ukraine’s container freight is transported by road, which Vovk describes as a regulatory “grey area” where costs are kept low by disregarding regulations such as weight limits on trucks, time spent behind the wheel and environmental standards for vehicles.

These practices should be cracked down on as part of Ukraine’s EU accession process, which in turn will drive greater volumes of container freight onto Ukraine’s rail network.

 1,435mm vs 1,520mm

A fundamental challenge in Ukraine’s integration with European rail networks lies in the different track gauges used across the country’s western borders. Ukraine's railway system predominantly uses the 1,520mm broad-gauge standard inherited from the Soviet era, while most EU countries operate on the 1,435mm standard-gauge track.

The difference in track width means that goods have to be transferred onto new trains at the border, which takes time and money.

The disruption to Ukraine’s maritime trade in 2022 and 2023 led to a surge of investment in terminals along Ukraine’s western land borders, with almost three dozen companies receiving permits to develop railway infrastructure for transshipment terminals near the border.

UZ has invested in modernising rail connections along Ukraine’s western borders. A new section of 1,435mm track is set to open later this year between Chop and Uzhgorod. UZ has also announced plans to build a section of 1,435mm track from Mostyska to Lviv.

The planned projects are, however, extremely expensive. A feasibility study by the European estimated that the cost of modernisation of one kilometre of a broad-gauge railway is €1-1.1mn.

UZ’s Mostyska-Lviv project was postponed earlier this year due to a failure to attract sufficient funding, according to reporting by Interfax Ukraine. USAID was involved in the project but the US agency has since had its funding cut by the Trump administration.

With the reopening of Ukraine’s seaborne export routes, however, attention has shifted towards the centre of the country: “Right now, the investment priority is inside the country, closer to the customers. For example, Kyiv is extremely important for all the players, and the next step for them will be competing in the Kyiv region market,” says Vovk.

Losses at Ukrzaliznytsia

Complicating efforts to modernise Ukraine’s freight logistics is the structure of the Ukrainian railway system, and the financial predicament faced by UZ.

UZ is a state monopolist that controls all aspects of transport on Ukraine’s railways. The company owns the rail infrastructure and has the sole right to provide passenger services. In freight transportation, while UZ maintains control over the locomotives and tracks, private companies are permitted to own and operate cargo wagons.

“Before the war it was popular to criticise UZ for being inefficient and corrupt and so forth. But during the first year of the war, its reputation changed dramatically,” says Vovk. UZ played a critical role in transporting those fleeing the violence, and ensuring freight kept moving. 

The war has nevertheless created a slow-burning crisis for UZ, says Vovk. Total volumes of freight transported by UZ are still way below their prewar level. In 2021 UZ transported 314m tonnes of freight; last year the figure was 174.9m tonnes. 

The reduced volumes have forced UZ to cover its losses by increasing railway freight tariffs. “This is very bad, because it's a vicious circle. They try to compensate for low profit by increasing the tariff, but that makes it less competitive, so cargo goes to other modalities, like road transport,” says Vovk.

UZ is also losing ground to private operators in the container freight business. Liski, a UZ subsidiary that handles container freight, “a year or two ago used to be in the top three [container freight companies], now it’s [in the] top ten,” says Vovk.

Part of the problem is that UZ operates a one-pot system, where increased tariffs are charged to businesses for moving freight to cover losses from passenger transportation.

Whereas before the war businesses were in a better condition and happy to pay tariffs that supported loss-making parts of the rail network, after three years of war this system is falling apart.

"Business says: 'I want to pay for services given to me when transporting goods from point A to point B, but I don't want to pay for passenger transportation,'" Vovk explains. "This is a serious conflict."

The statistics are stark: only 35% of Ukraine's railway infrastructure generates income, while 65% operates at a loss.

"The profitability of cargo transportation services has started to decline considerably. In 2025, it is expected to fall to around UAH5-6bn (€107-128m), which will not allow us to offset losses from passenger [transportation] services at all," UZ CEO Oleksandr Pertsevsky recently stated in an interview with YouTube channel Fedoriv Vlog.

In December last year, UZ announced that it intended to increase freight transportation tariffs by 37%, prompting a fierce backlash from Ukrainian businesses. The six largest metallurgical companies wrote a letter to the Ministry of Development warning that “already high logistics costs are constantly bringing closer the time when the consequences for the industry will become irreversible," according to reporting by Interfax Ukraine.

Exacerbating the tensions between UZ and businesses is the absence of an independent regulatory body for rail tariffs. Tariff increases are essentially determined by UZ itself, with limited external checks on their justification or economic impact.

Railway liberalisation

The liberalisation of Ukraine’s rail system has been much talked about, but still remains a distant prospect.  

The basic idea is to unbundle control of the railway infrastructure and the running of services, allowing private operators not just to provide the containers and wagons, but to run their own services with their own locomotives.

2019 saw a flurry of activity when President Zelenskiy instructed his Cabinet of Ministers to set the wheels in motion for market reform, but little progress was made, and the reform measures have been put on hold.

Under the terms of the Ukraine Facility signed with the European Union, Ukraine has committed to adopting railway liberalisation legislation by the end of 2025; with a five-year implementation period, Vovk remains sceptical about the timeline: "To be honest, the Ukrainian government feels very comfortable as a monopolist. I doubt this bill will be voted on this year."

A major sticking point is the potential for liberalisation to result in the shutting down of much of Ukraine’s passenger services in the absence of substantial budgetary support from the state, which, given the war, is unlikely to be forthcoming.

For now, railway reforms remain one of a number of intractable problems Ukraine faces as it grapples with the effect of three years of war. The conflict's toll has only intensified long-standing structural issues within the rail sector.

Vovk acknowledges the unfortunate timing of these challenges: "In a crisis period the problems become more obvious. But we need this reform. It should have been done earlier, when business and society were in a better condition. But we didn't do it, unfortunately."