With around 22% of the world’s timber resources, a total of 878 million ha of forest land, Russia is clearly a force to be reckoned with in the global trade.
Russia’s strength in the international market, however, is still predominantly as a raw material supplier. Last year it exported 20 million m3 of sawn timber, a rise of 18% on 2004, but its log exports were also up around 16% at 105 million m3. The latter comprised around 43% of the timber sector’s revenue while sawn timber represented 29%, with the rest coming from pulp, paper and plywood.
Traditionally key markets for Russian log exports have been Latvia, Finland and Sweden. Their imports actually fell in 2005, largely, it is thought, due to the volumes of windblow timber on the market after the Nordic storms at the start of last year. However, this was offset by export volumes to China which increased by about 15%. And China’s appetite for raw material is forecast to continue to grow in line with rapid expansion of the country’s construction and manufacturing industries. Certain regions, notably Irkutsk and Krasnoyarsk in Siberia, already export more than the national average to China.
Despite this background, the clear long-term ambition of the Russian government is to wean the timber industry away from raw material exports and increase value-adding. In fact its forest programme has set a target of doubling further processed output by 2010 with the aim of making the industry “profitable and self-financing”.
Government strategy
The strategies for achieving these goals include introducing an element of forestry privatisation, with independent investors awarded long-term leases.
The government also seems intent on removing another traditional disincentive for the industry to move into value-added production – low export taxes on raw material, with further rises in duties on unprocessed timber expected by the year end. A continuing rise in forestry costs and taxation, which pushed up industry overheads a further 10% in 2005, is theoretically also pushing the industry towards adding value.
Another brake on further processing to date has been low levels of capital investment in plant, machinery and logistics. Low labour costs have historically given mills little motivation to put in more efficient processing technology. And the sheer distances involved in getting goods to market, combined with the poor state of road and rail transport, have made it still less attractive to switch to value-added products that need greater protection from the elements and are more vulnerable to in-transit damage. Some logging areas are up to 500km from the nearest rail terminal and 1,000km from the nearest sawmill. According to local sources, some remote mills need two weeks just to get their products to a port.
Recently there have been added problems: reported shortages of rail wagons, plus rising energy and social costs. The rolling privatisation of ports, some feel, has also put up obstacles to shipping further processed product, with St Petersburg, for example, now only offering 30 days’ free storage where previously it was unlimited.
But, the government is endeavouring to help the industry surmount these difficulties too. It has lowered export taxes on sawn timber and, at the same time, reduced import tax on machinery, leading more of the big name western European technology producers to target the market.
To encourage capital spending, state banks are also offering timber processors low interest loans. And the new system of long-term forest leases going to private companies is reported to be making investment in mills and processing plants more attractive by improving security of raw material supply and making it less vulnerable to the whims of central and local government.
Illegal logging
A big question mark – perhaps the biggest – still hanging over the Russian industry is its ability to deal with illegal logging and to implement internationally recognised systems of sustainable forest management and harvesting. Of course, it depends on definitions of what constitutes legal, but some estimates put illegal exports as high as 40% of Russia’s total.
Environmentalists are also raising concerns about the impact of forestry privatisation especially in previously unexploited tracts of old-growth forest in the north of the country. The government has stressed that it will remain very much in control of the way the overall forest resource is managed. Despite the assurance, however, its plans remain a topic of fierce debate among the green NGOs which are concerned that environmental safeguards are not being taken sufficiently into account in the privatisation/leasehold strategy.
But there is some good news on this front. The influence of foreign companies which have longer experience in such areas as certified management and chain of custody is having an impact. Among the pioneers was UPM with the introduction of its timber tracing system in Russia, an initiative which won a UN ICC (International Chamber of Commerce) award in 2003 and a European Commission-organised European Business Award for the Environment this year. The company now insists on a “statement of origin” with every bit of timber from Russia which includes details of each delivery, a map grid reference for the logging site and notification of any protection areas nearby.
Forest industry forum
Highlighting growing appreciation of the importance of environmental performance, last October around 30 leading Russian and foreign players in the forest sector met to discuss the issue at the seventh Forest Industry Forum in St Petersburg. They agreed that gaps in forest “information and transparency” remain an block to legal and sustainable forest management and, subsequently, approved the formation of a Russian Forest Information Forum. This will “promote sustainable management by providing information and analysis and by promoting communication and co-operation among stakeholders”.
Participants at the meeting included representatives of IKEA, UPM, Stora Enso, Metsäliitto, International Paper and Segezha PPM. Among the NGOs present were Greenpeace and the WWF. The Forest Stewardship Council and the World Bank also sent delegates.
Another key development last year was the release of a new map of protected forest areas by the World Resources Institutes Global Forest Watch Forest Initiative. This, it is hoped, will help prevent deliberate and inadvertent straying into protected woodlands by the timber sector and other industries, notably the oil exploration and mining sectors.
While there are problems to overcome, there seems little doubt that Russia is set to become an even more significant player in the International Timber trade, with the momentum into value-added production increasing. Rising demand for sawn timber, especially in China, the rest of the Far East and the Middle East, should underpin prices, push up Russian mills’ profits and provide them with resources to invest in processing technology.
The next big growth in terms of exports is forecast to come from Siberia, as log supplies in the old, established sawmilling regions in Archangel and Karelia are becoming tighter and more of their timber is being consumed at home in the Moscow and St Petersburg areas. By contrast, Siberia has minimal production capacity relative to log availability and is well placed to serve both Europe and the Far and Middle East. The question everyone is asking is who will be brave enough to commit to the much-needed capital expenditure in this remote, relatively underdeveloped area? But, given global forest products demand and the Russian government’s commitment to overall economic development, there can be little doubt that the investment will eventually come.
