Russia is the third largest forest harvester in the world, after only the United States and Canada. Despite this ranking, the overall statistics for the forest industry in Russia do not look good: 1
- Russia produces up to 150 million cubic meters of wood products annually, only about a third of the government’s estimated total annual allowable cut of 576 million cubic meters per year.
- Russia accounts for 22 percent of the world’s wood trade in terms of volume, but only 3 percent in terms of value.
- Russia has the capacity to process only 2 percent of its annual harvest; as a result of its minimal processing capacity, it exports logs instead of higher priced forest products, like paper, furniture, doors and windows.
Faced with these facts in 2006, Russian President Vladimir Putin said, “Our neighbors continue to make billions of dollars out of Russia’s forests. We, meanwhile, are doing little to develop our own wood processing industry. We still have not put in place new customs duty regulations that would encourage the establishment of processing facilities on Russian soil rather than exports of unprocessed wood. 2 Never subtle in dealing with problems military or economic, Putin and his government implemented a new Forest Code in February 2007. Most industry observers believe that this measure signals “a fundamental structural change in the global market for logs.” 3 The code’s provisions include disincentives for exporting logs and incentives for increasing timber processing facilities and investments within the country.
Disincentives include :
- Increases in export taxes: on February 5, 2007, taxes increased from 6.5 percent to 20 percent; in April 2008, they increased from 20 percent to 25 percent (roughly $22 per cubic meter); in January 2009, taxes are scheduled to increase from 25 percent to 80 percent (roughly $73 per cubic meter) 4
- Decreases the number of customs houses along the borders that can process exports, leading to increased transportation costs and wait times
Incentives include :
- Provides companies that invest in Russian forestry projects with a guarantee of wood fiber supply through an auctioned based lease system
- Extends lease terms from 50 years to 99 years
- Provides companies that invest in projects valued at $193.7 million or more with leases not subject to auctions
- Allows companies that process a certain amount of harvests from leased lands to export some logs at a reduced tax rate
- Provides infrastructure development for investment projects valued at $193.7 million or more
The effects of this legislation have already begun to be felt around the world. Russia exported $2.9 billion of logs in 2005. A total of 81 percent of Russian logs went to these three countries—46 percent went to China, 22 percent to Finland, and 13 percent to Japan. In the 1Q2008, however, after timber tariffs started to climb, Russia’s exports to Europe dropped 44 percent, and its exports to Asia decreased by 15 percent. In addition, International Wood Markets Group President, Russ Taylor suggested that “the effect of the proposed tax increase in North America could exceed price increases caused by the withdrawal of U.S. National Forest timber to save the habitat of the northern spotted owl” in 1993, when prices hit $495 per thousand board feet. 5
Finland
Finland, which receives 80 percent of its round wood supply from Russian forests, has been affected most directly by these changes. In 2007 alone, Russia’s exports to Finland decreased by 20 percent. Despite the tariff increase, Finland’s wood imports reached a six-month high in May, most of it coming from Russia. The January 2009 increase is predicted to bring Finland’s imports from Russia to a screeching halt, and many of Finland’s largest wood fiber users have begun the rigorous process of planning for a future without Russian timber. The government in considering a decrease in sales taxes on domestic timber by 50 percent through 2009 and by 25 percent throughout 2011, a move that is expected to increase domestic harvests. Because the tax incentives have not yet been passed, however, many private forest owners in Finland have put a freeze on sales; timber sales have decreased by two-thirds in the two weeks prior to September 23, 2008. Pulp and paper companies are likely to see the costs of production rise by 130 percent if the 80 percent tariff increase takes effect. In anticipation of this event, Stora Enso, UPM-Kymmene, and M-real have begun cutting capacity, decreasing use of Russian wood and adjusting their wood supply strategies. Most of the alternative supply for Scandinavian countries is likely to come from other European countries.
Asia
Because they are among the most prolific users of Russian logs, Japan, China and South Korea have already begun to adjust to the new realities. Japan, which has limited domestic supply of timber, sources 47 percent of its annual imports from the Russian Federation, totaling almost 5 million cubic meters in 2006. Japanese veneer log and plywood markets have been most significantly impacted. China and Korea have also begun to feel the effects. The largest producer of plywood in the world, China continues to import an increasing amount of timber from Russia. With its bourgeoning economy, demand grows so quickly in China that it must increase imports from all available sources to meet the demand. While China will almost certainly continue to import Russian timber (even after the January 2009 tariff increase) it too has begun searching for new sources of timber.
North America
As Finland will search the rest of Europe to replace Russian timber, Asia will turn to other Asia-Pacific nations (Australia and New Zealand) and to North America (British Columbia and the Pacific Northwest region of the United States) to furnish this supply. Japan is looking at the United States and British Columbia to supply veneer logs. Its plywood sector has increased the ratio of Japanese domestic species they use and have begun importing Radiata pine from Australia and New Zealand and Douglas fir from the Pacific Northwest in the United States. China and Korea are also importing whitewood (hemlock and spruce) from British Columbia and the Pacific Northwest.
A look at shipping details for timber going from North America to Asia provides key insights into how serious Japan, in particular, is about maintaining steady supply. Most of the logs (Douglas fir) shipped from the Pacific Northwest to Japan are shipped to a single large mill in six dedicated log ships break bulk, each between 23,000-30,000 tons. (As a point of comparison, Russian logs are transported by small coastal vessels, between 10,000-15,000 tons.) The mill insists upon a very tight shipment schedule; they refuse to have their ships diverted for other cargo to make the return trip. The rest of the shipments going to Japan are also break bulk, but they return to either the Pacific Northwest or Canada with cargo—usually some aggregate, cement, or bulk mineral. Whitewood going to China and South Korea are generally loaded into containers. Export data also indicates that shipments of pine from the U.S. South to China are increasing.
Russia
Russia has started to feel some of the intended effects of the Forest Code. Exports have decreased to all of its major trading partners except China; as a result, the availability of logs has increased and timber prices decreased in 1Q2008. In 2Q2008, however, log prices started to climb once again, a result of increased domestic demand from sawmills.
Incentives for investments in the Russian timber industry are starting to pay off for Russia. Investments rose from $1.7 billion a year in 2006 to $2.6 billion a year in 2007. 6 Indeed, with China, Japan, and South Korea in close proximity, the potential markets for Russian wood products provide ample revenue generating opportunities for those willing to assume the risk.
Whether the level of investment that Russia desires will ultimately materialize is debatable, as significant barriers to investment exist. According to CIBC Managing Director, Don Roberts, one of these barriers is “lack of transparency in regard to both cost structure and the negotiations surrounding access to timber and associated responsibilities.” 7 Infrastructure is another barrier. While Russia has said that it will invest hundreds of millions of dollars to build access roads, whether or not it will follow through with these promises is unclear.
One example of the difficulties in investing in Russia is Finland’s Ruukki Group, which was scheduled to build a $1.5 billion dollar sawmill and pulp mill in Kostroma. The Kostroma regional authorities pulled their support for the project earlier this year, however, and Ruukki decided to invest most of the money in a Turkish mine. While Ruukki is currently looking for a new partner in Russia to build a more modest $440 million dollar pulp mill, investors are clearly paying attention to the negative press.
There is speculation, as well, that the implementation of the Forest Code will backfire. According to Wood Resources International (WRI), consumption of softwood roundwood in Russia has increased an average of 4 million cubic meters per year; if exports cease due to the large tariff increase in January, an additional 35 million m3 will be on the market. WRI believes that Russia will be unable to grow its production capacity fast enough to accommodate this supply for many reasons: “poor infrastructure, lack of investment capital, corruption, burdensome bureaucracy, lack of respect for property rights, and political uncertainty.” 8 What will this mean for the Russian forestry industry? The export forestry industry in Russia accounts for anywhere from 2,500 to 4,000 jobs. In all likelihood, there will be a gap between the winding down of the timber export industry and the gearing up of the timber processing industry that will lead to job and revenue losses. Many in the industry believe that this discrepancy will encourage Russia to reduce or delay the tariff increase that is proposed for January 2009.
Resources:
1All statistics in this paragraph come from Alexander Aginsky’s “Weekly Market and Industry Report: Russia’s Forestry Industry Overview.” ( http://www.russiablog.org/2008/08/russias_forestry_industry_over.php )
2Cann, Chris. “Russian Roulette.” International Forest Industries (June 2008), p. 9. ( http://corporate.internationalforestindustries.com/PDFs/Issues/2008_06.pdf )
3From CIBC World Markets report, 2007, in Cann, p. 8.
4In U.S. Dollars, exchange rate on September 23, 2008.
5Forestweb Weekly Report, 8.33 (August 25, 2008), p. 8.
6Cann, p. 12.
7Cann, p. 12.
8Wood Resources International, “Russian Log Export Taxes Will Raise Unemployment in Russia Says WRI. Press Release. September 23, 2008.
Read the update to this article that appears in the December issue.
Suz-Anne Kinney
Forest2Market: July 14, 2023
