Russia has the world’s largest softwood resource but much of it remains untapped due to the historical lack of internal investment and infrastructure.

Overall, the government is changing legislation to semi-privatise the forestry ownership and harvesting industry. This means that a non-Russian company can take a 99-year lease on forestry areas, for example, and harvest according to agreed levels of sustainable activity – but the state retains long-term ownership.

This is to try and offer external investors a suitable reason to invest in the infrastructure that is required to further develop the Russian market.

Russia wants to increase the efficiency and effectiveness of its harvesting activities, and foreign investors are seen as a good way of achieving this – under the appropriate level of state control, of course.

Duties are being introduced on log exports in an attempt to further encourage foreign investors, even if it is only to secure the raw material to export as machined timber. The Russians are desperate to make the most of their resources and not sell logs cheaply to companies that will process and add value outside the country.

Domestic demand

This sort of investment is expected to increase Russian demand for timber as construction picks up internally – supported by rising oil prices – and, combined with rising expectations from the Russian consumer, more and more volume will be taken by the internal market.

Activity in various regions of this vast country varies dramatically, but the overall local economy is growing at around 8% and the existing housing stock is in huge need of repair and maintenance activity.

Currently lower grades of softwood are accepted by the domestic market for building and construction, with the higher quality grades generally being exported, but again this is expected to change over the coming years and more of the higher grade material will be consumed internally too.

&#8220The Russians are desperate to make the most of their resources and not sell logs cheaply to companies that will process and add value outside the country”

The forestry resources and markets are generally split between the north-western “European Russia” forestry and eastern “Asian Russia” forestry.

European Russia is the area most strongly developed in terms of forestry resources. Close geographic links with Baltic and Scandinavian countries have led to good use of accessible wood resources. Although better infrastructure and machinery will open this up further, growing domestic demand and the existing level of forest use mean exports to Europe will be limited.

Baltic and Scandinavian manufacturers who had previously enjoyed relatively low log prices from Russia will also be faced with increased cost prices and the potential requirement to invest in Russian infrastructure to make the most of their forestry resources as president Putin tries to retain added-value processes within the country’s borders.

Foreign investment

Targeting Japan and the US for their foreign investment, Asian Russian countries may face similar issues as Baltic and Scandinavian exporters in terms of rising prices and the need to invest in Russian infrastructure.

China makes up 25% of log exports from the eastern forests and the close historical ties with China mean that log exports are set to continue growing, with a 40% increase in first-quarter softwood exports into China from 2005-2006. The longer lengths preferred by the Chinese are also more readily available and there is plenty of capacity in the forestry reserves if the appropriate infrastructure and investment is organised effectively.

One of the key reasons for international forestry businesses to invest in Russia is to secure the fibre source, not primarily for sawn timber but for the pulp and paper industry. Russia has some of the last resources of virgin, long fibre from spruce available in the world and it is much in demand for specific uses like paper packaging. This complements the faster grown products, with short fibres, which are useful for other types of products and are attracting investment in places like South America by the same international organisations.

International forestry company Metsäliitto‘s investment in the Svir mill and surrounding forestry follows this same strategy. This highlights how the benefits of investment will be enjoyed by the pulp and paper side of their business and also by Finnforest‘s solid wood customers looking for access to high quality Russian softwood.