With several former Soviet Union (FSU) countries talking seriously about joining the European Union (EU) and the World Trade Organization (WTO), expectations about the benefits of doing business there are on the rise. This is especially true for the increasing number of companies that are evaluating the FSU, with its low production costs and convenient location close to the EU's markets, as a base for manufacturing and distribution.

But anyone eyeing business opportunities in the FSU must ask whether that closeness to Europe equates to logistics efficiency. By most criteria the question is open, to say the least. True, change has been frequent in this part of the world, but all too often that change has been superficial and thus has rarely been effective in attacking the main sources of inefficiencies. At best, any improvement has been slight and uneven.

As a former practicing logistician who has worked in developing countries around the world, I understand the challenges shippers continue to face in what remains of the "Wild, Wild East." Granted, big multinational companies are less subject to the vagaries of the transportation system here, since they can create their own operating environments to some degree. But there are a few places where some light exists at the end of the tunnel. Herewith some observations about the current and future state of transportation and logistics in Russia, the Ukraine, and neighboring ex-Soviet states.

The physical infrastructure in the former Soviet republics certainly can use improvement and expansion, and that problem is being addressed in some areas. Take the railroads, for instance. Ukraine is trying to make its rail system more commercially viable, and the Ukrainian National Railway Administration seems to have succeeded in transforming its corporate culture from one of "make it look good" to one of "make it work good."

The Ukrainians have no easy task before them, though. Designed more than 100 years ago, rail systems in the FSU are based upon a track gage that differs from that used in the rest of Europe. Trains traveling between the FSU and Western Europe, therefore, must either change the bogies on each railcar or transload cargo to another train. A promising potential solution to the rail-gage problem appeared in June, however, when the Ukraine State Railway tested a Polish system that mechanically alters a railcar's wheel separation. The trial was deemed a success: The train was able to complete the exercise and proceed onto the European tracks within 30 minutes, rather than the several hours normally required.

The facility handling the gage switchover is located in Poland, just across the border with Ukraine and not far from the EU border. Because that facility offers quick access to European rail lines, it could prove to be quite attractive to companies that are considering manufacturing in Ukraine for distribution in the European Union.

The Ukraine State Railway also has undertaken a massive program of maintenance, repair, and modernization of rolling stock. In addition, the railway authority has implemented a service called "Con-Trail," with high-speed trains providing weekly service from Odessa and Illichevsk to the Baltic countries and the Port of St. Petersburg, Russia. The Con-Trail service provides high-speed transportation at low rates. With the railroad in charge, moreover, border-crossing formalities are minimized. Despite this promising development, freight forwarders still are reluctant to rely too much on this type of service in view of the FSU rail organizations' habit of delaying the start of a trip due to insufficient cargo.

The situation is similar in Russia, where the railroads are closely connected to the military. The Ministry of Defense, in fact, still owns all tracks and track beds, although private companies may run their own equipment over the rails. Despite such tentative steps toward privatization, shippers that try to do business with Russian railroads still come squarely up against state security interests. According to one western businessman who wanted to ship cargo on St. Petersburg's October Railroad, when he asked questions about equipment capacities, a railroad representative stared him down and asked, in a threatening tone, "Who sent you?"

This vast country has an extensive rail system, but the infrastructure is of little use to shippers. A look at the famous Trans-Siberian Railway, which spans the Eurasian continent from Nakhodka on Russia's Pacific Coast to Moscow, shows why. That rail line originally was built for defense purposes and was never intended for commercial use. For much of its length, only one train at a time can pass in either direction. Schedules look good on paper, but are seldom adhered to, and there is little interest in addressing such questions as availability of lift equipment and where it should be positioned. That's unlikely to change any time soon: Rather than modernize existing infrastructure, the Russian government seems intent on putting resources into developing a new north-south route into India.

The three Baltic countries—Latvia, Lithuania, and Estonia—suffer from some of the same deficiencies in transport infrastructure as do Russia and Ukraine. They include old and poorly maintained trackage and rolling stock. Much of the rail line in the Baltics is incompatible with that of Western Europe; Lithuania, in fact, has three different rail gages within its borders.

Air cargo transportation in the FSU has benefited from an increase in passenger travel, which has increased available capacity. That's good news, but the airlines and the shippers that rely on them are facing a serious problem. Aeroflot was broken up into regional carriers, and the aircraft in their fleets—indeed, fleets throughout the entire FSU—are approaching or already have exceeded the end of their useful lives. Although the remnants of the Soviet air industry, with its design bureaus and manufacturing facilities, are scattered about the FSU, carriers lack the money to buy long-overdue replacement aircraft. Shippers that depend on the availability of reliable air service, therefore, should be cautious.

Shipping by truck is no more reliable, though. The trucking industry is bedeviled by dangerously poor roads and poor drivers. Road accidents continue to take a toll on drivers, vehicles, and cargo with no improvement in sight. It has been reported in the press here that trucks carrying Russian insurance are being prohibited from entering EU territory.

In addition to contending with inadequate infrastructure, motor carriers may soon have to deal with pending legislation that will impose penalties on them for delay or loss of goods. Pricing, moreover, is high compared to that offered by Western European carriers, since it's based solely on the number of round-trip miles and doesn't take backhaul cargo into account. Nevertheless, truck transport remains the mode of choice due to the railroads' perceived lack of reliability and cargo safety.

Ocean shipping provides another means for moving goods within the FSU. Major seaports have been undergoing steady improvement with significant government support. The Port of St. Petersburg, for instance, has recovered much of the cargo that had previously been diverted to Kotka in Finland, which the Finns had heavily promoted as being safer, cheaper, and more efficient than its Russian neighbor. Expectations are that cargo volumes at FSU ports will continue to increase, but their future success may largely depend on how well the ports are able to compete with the railroads in respect to trade with Europe.

Russian port authorities are concerned about the impact of recently passed legislation that would require them to pay a value-added tax on their services to ship operators. Russia's Minister of Economic Development and Trade, German Gref, however, has gotten Prime Minister Vladimir Putin to state that the tax was a mistake and that it will be corrected.

Russia isn't the only FSU country that has port problems, however. The Port of Odessa in Ukraine still appears to be plagued by an inability to control the flow of railcars carrying grain into the port for export. That lack of coordination has resulted in continuing large-scale congestion and disruptions to the port's operations.

The Baltic region boasts a multitude of seaports, but few are fully developed for modern cargo handling. The Port of Klaipeda in Lithuania, though, is blessed with the natural advantage of being ice-free all year. It's also well connected by rail and road with both the FSU and Western Europe. The outlook for future development of Baltic ports is fairly positive. Not only are the governments of those three countries more attuned to free-market economics than other FSU countries, but they also will soon join the European Union.

Ocean shipping is seen, in theory at least, as an innovative means of serving the northern areas of Russia, an enticing source of many rare and valuable resources. Moving these raw materials is difficult due to the lack of connectivity between the inland waterways that serve northern Russia and Siberia, which run north to south, and the railroads serving industrial centers in the FSU and Europe, which run east to west. To remedy that situation, the Russians now are testing the somewhat exotic solution of operating atomic-powered ice breakers to keep Arctic shipping lanes open. Whether this service will prove viable remains to be seen.

Inadequate transportation infrastructure is just one of the issues confronting shippers doing business in the former Soviet Union. Equally daunting is the fact that there is little concept of logistics as it's normally defined. What is called logistics here is, in fact, simply transportation and/or (minimal) management of industrial operations. Nowhere does one see or hear any reference to "customer satisfaction" or to basic logistics methodology, such as total cost analysis, life cycle analysis, and so forth.

The focus on transportation above all other aspects of logistics may be explainable, at least in part, by the Soviet preoccupation with political geography. Just as the czarist regimes built the railroads so as to deny their use to an invading army, the Soviet concept of geography totally discounted commercial considerations. Plants were built in some of the strangest places; separated by thousands of miles from their sources of supply and their markets, and served by deliberately poor transport infrastructure. Now that there is a market-based economic system in place, everyone suffers with transportation systems that serve no useful purpose other than to keep one plant, which was poorly located in the first place, still in operation.

The development of logistics is also hampered by a lack of any concept of inventory management, as expressed in the prevailing business philosophy (a leftover from the command economy): "The customer will buy what I want to sell, not what he really wants." This attitude explains why consumers may never be able to buy the same item with the same brand name twice. Merchants typically reorder without taking customer demand into account, and they often allow inventories to fall to zero before they reorder. A local consultant, in fact, once told me that it would be difficult, if not impossible, to find a consumer goods retailer or distributor in the FSU who makes any effort to anticipate customer demand or calculate reorder points.

That's why manufacturers in this region often stockpile raw materials. One small manufacturer I know maintains a three-year supply of steel sheets because he cannot be certain that his suppliers will be willing or able to supply them when needed. If he placed more frequent orders, the suppliers would know that he would be in trouble if they failed to deliver quickly, and prices would rise exorbitantly. When it was suggested that he consider buying from foreign suppliers, he threw his hands up in surrender. "What," he said, "and then have to rely on Customs to replenish? No way!"

To top it all off, the Soviet-era discomfort with sharing information prevents the kind of communication that is critical to effective logistics and supply chain management. Every educational institution offers high-level technical programs, and students come away with a good grasp of the technology itself, but they have little idea of what to communicate, to whom, when, or why. Still prevalent in management is the unwritten Soviet-era rule to communicate as little as possible and then never in writing—and never report something that isn't working well.

The famous line from one of Lenin's works—"What Must Be Done"—is very appropriate in the former Soviet Union. After all, the situation today is at least partly a result of Lenin's revolutionary efforts. But Lenin aside, there is much that can be done to improve the state of both transportation and logistics in this region. Principally, it comes down to education and training. The school systems do perform effectively, but much of what a student acquires in early years seems to be lost when they reach institutions of higher education. The reasons, I think, are the severe shortage of modern textbooks—not just about logistics but in every subject—and the failure to acquaint teachers with the realities of today's business world.

As for logistics itself, an important missing ingredient in the former Soviet Union is a professional organization that can set educational standards and provide both teachers and students with the means to achieve those standards. What may be required is more involvement by American and European professional societies to create a framework for change.

Prof. E.F. Riccio was a practicing logistician for more than 40 years, working on project management assignments in under-developed countries worldwide. For the last 10 years he has taught logistics at major universities and educational institutions in St. Petersburg, Russia, and Kiev, Ukraine.