With 22% of the world’s forest area and 21% of its timber volume, Russia has the potential to be a major player in the global forest products industry. However, the industry is inefficient, non-transparent and lacks a stable, legally-sound timber exploitation system.
Some progress is being made with the new Forestry Code, to be adopted this year, which allows other types of ownership, including privatisation, without scrapping the premise “the forest is federal property”.
Russia could produce over 500 million m3 of timber a year without causing timber exploitation instability; the actual output falls short of this at 120-130 million m3 a year. This compares with an annual yield of 500 million m3 in the US and 180 million m3 in Canada.
Russia looks to be proactive in exporting its timber but again is way below its potential with just 3% of the global market. Also, raw materials account for a large proportion of the country’s exports: rough logs generate a third of the timber export revenue and 36% of its volume. This is six times more than the world average – and the exports are sold cheaply, with profit per hectare 10-15 times less than that of the Nordic countries.
In addition, the scale of timber theft in Russia is impressive: the national budget is fleeced of US$1bn a year. The theft is encouraged by the lowest forest excise in the world of US$1-2/m3. In contrast, the Chinese pay US$30/m3 rough logs. There is an endless flow of the timber to Russia’s eastern border where the Chinese subject it to primitive processing and resell it for US$100/m3.
Illegal felling is a big problem. Russia’s Natural Resources Ministry will not divulge estimates of the scale, but independent experts estimate that about 50% of the forest in the Russian Far East is felled illegally, while in the north-west it ranges from 25-50%. Catching the perpetrators at the border is difficult as even legitimate companies sell timber on the quiet. The discrepancy between production volume and sales is usually spotted only by correlating felling and customs balance sheets.
The government has declared war on illegal felling. This year, the first 50 million ha have been monitored by aerial and satellite equipment, and Russia’s entire forested area is to be monitored routinely in 2006. In Siberia there were 243 criminal investigations into illegal felling and timber buying last year, with 14 cases taken to court.
Value-added market
Russia’s has only 10% of Europe’s value-added timber market. Three times less advanced-processing products are made out of 1m3 of timber in Russia than in the west.
The government is addressing this by raising duty on logs, slashing tariffs and cancelling customs duty for value-added products and reducing the duty on imported wood-processing equipment. As a result, last year log conversion was up 34% on 2003 and converted timber output and exports grew 36% and 29% respectively.
When the centralised economy collapsed and privatisation began in the early 1990s, two types of timber company emerged – traditional integrated logging/lumbering enterprises, which survived to a large extent through their links with the authorities, and commercial companies that evolved in line with business laws. They spawned the current leaders, pulp and paper mills. As far as sawmills are concerned, there are the Onezhsky and Salambai sawmills in the Arkhangelsk region and the Novoyeniseisky sawmill in Lesosibirsk, Siberia.
Russian and foreign investments could breathe new life into the industry but investors are deterred by the lack of transparency and reputation for crime. Russian banks are reluctant to lend money for the same reasons.
However, some foreigners have dared enter the Russian timber business. US company International Paper has bought the Svetogorsky pulp and paper mill; Austria’s Neusiedler has acquired Syktyvkar; and talks are under way in the Komi-Permyak autonomous area with a number of other companies. Recently, the administration of the Kostroma region in central Russia and Swedish company Rurik Industries Forests signed an agreement to build a large wood-processing factory in the Antropovo settlement. The company also plans to build a furniture factory to assemble ready-made parts.
Analysts say Russia’s timber industry needs at least US$2-3bn. According to other estimates, the industry’s optimal development calls for 1.3 trillion rubles over the next 15 years. Russian companies are apparently unwilling to shoulder such a burden and the government cannot afford it. Most timber producers do not expect a direct cash injection by the government but hope it will create conditions for a steady inflow of capital by removing obstacles for investors. The new Forest Code promises the tools necessary for reviving the industry.
Russian timber producers have realised that environmental certification aids sales. Seven companies carry certification and over two million ha have been certified. More companies in the Far East and Siberia are undergoing the process.
