HANNU HERNESNIEMI
Etlatieto Oy/Ltd, Finland
Forest products may become one of Russia's leading industries. There are signs that the country's domestic forest products industry is recovering. Russia also appears to be turning into one of the most interesting investment areas for international forest products companies. This is due to Russia's immense timber assets, which constitute the world's largest underutilized fibre resource. Russia's timberlands can be utilized in an ecologically sustainable manner, unlike tropical forests. This is why environmental activists are not opposing the exploitation of Russia's timber resources. Russia's domestic consumption of forest products is relatively modest but it is growing fast. There is ample room for companies serving both the export and domestic markets.
Russia's timber resources are three times larger than those of Europe. Goskomstat, the State Committee of the Russian Federation on Statistics, estimates the country's timber resources at 73 600 million m3. Estimates provided by international experts are even higher, up to 89 100 million m3 (see FAO:www.fao.org/forestry).
The forests of Northwest Russia are the easiest to exploit. Northwest Russia offers the best transportation connections to Russia's domestic markets and Western Europe alike, as well as to more distant markets by sea. Many other factors, such as the availability of skilled labour, also favour Northwest Russia over other parts of the country. Northwest Russia's forest products companies possess, as well, more export experience than their counterparts elsewhere in Russia.
Northwest Russia comprises eight regions and two republics, namely St Petersburg and Kaliningrad, the regions of Leningrad, Novgorod, Pskov, Murmansk, Archangel and Vologda, and the republics of Komi and Karelia. This area is one of seven larger administrative divisions set up by President Putin.
Timber resources in Northwest Russia amount to 8 063 million m3. This is four times more than in its Western neighbour, Finland. The region's timber resources are not fully exploited. The annual harvest stands at 35-40 million m3 - slightly more than one-half of the Finnish timber harvest.
The forests of Northwest Russia can be exploited in an ecologically sound manner. Forestry can be based on existing tree species. No massive clear-cutting is needed to oust existing species out of the way of completely new varieties, as is the case with large eucalyptus groves in tropical forests. In the Russian case, new investments can also be planned with the existing species in mind. This will help retain the diversity of forests.
The environmental movement (WWF) has carried out very detailed surveys in Northwest Russia. The timberlands they want protected mainly suffer from stunted growth or are located in areas where harvesting and transportation of timber for further processing is not economically feasible. It appears that the interests of various parties with respect to timberlands and their utilization can be taken into consideration at this time before any new investments are made.
Figure 1. The timber resources of Russia
Source: Goskomstat
The Russian environmental movement has a relatively favourable view of foreign companies. It feels that the certification of forests can be advanced through cooperation with foreign companies. Foreign companies, meanwhile, are fairly receptive to demands regarding the protection of old forests.
Northwest Russia has relatively good transport connections to the European market via the seaports of St Petersburg, Archangel, Murmansk and Kaliningrad. Finland and the Baltic countries are connected to Northwest Russia by eight rail lines. Uniform track widths in all five countries facilitate unbroken chains on transportation. Finnish and Baltic seaports can therefore also be used to export logs and timber. The closest Finnish ports of Kotka and Hamina specialize in the transportation of forest products. There are multiple unofficial border crossings along the Finnish-Russian border that are primarily meant for the transportation of logs and timber. Waterways also provide an important means of transportation. The most significant transportation routes include the Baltic Sea-Black Sea connection, canal routes to the White Sea through Lake Ladoga and Lake Δδninen, and a river passage from the inland to Archangel.
The forest products industry accounts for 11.5 percent of total industrial production in Northwest Russia. However, in terms of export revenues the industry is much more important. Its share of export income is nearly 20 percent. Together with energy, fuels and metals, timber and forest products bring most of Northwest Russia's export revenues.
The revenues produced by forestry and the forest products industry benefit all of Northwest Russia. They are especially important for Karelia and Archangel, where other industries are of limited importance (see Figure 2). Vologda and Komi, meanwhile, provide good locations for new factories with their large surplus harvest, good transportation routes, and ample supply of skilled labour. Both the local population and regional leadership appreciate the importance of the forest products industry.
Northwest Russia enjoys a relative abundance of other natural resources in addition to timberlands. In the Murmansk area, where the forest products industry carries only marginal significance, mining and related production, and fishing play an important role. Komi, meanwhile, has lots of oil, natural gas and coal. Vologda is the home of the very well-developed basic metal industry. Thanks to their respective energy and metals resources, the GDP of Komi ranks seventh and Murmansk eighth among Russia's 89 regions, while Vologda places seventeenth. In any event, developing the forest products industry makes it possible to raise the standard of living more evenly in Northwest Russia, and do so relatively quickly.
Figure 2. Share of forestry and forest industries in total industrial production
Source: Goskomstat
Can one talk in terms of a particular Northwest Russian forest cluster? Yes, and with good cause. Important agglomerations of forest industry companies are located in Karelia, Archangelsk, Komi and Vologda, and in the St Petersburg region close to the Finnish border. Timber and board mills have spread across the area more evenly. Furniture production is based in St Petersburg, where most of the industry's customers are located.
Companies tend to be the most diverse and smallest in timber harvesting. These businesses, however, play a very important role in exports - particularly for Finnish forest products companies. Finland imports some 13 million m3 of round logs from Russia each year. In 2001, Finnish log imports from Russia totalled 400 million.
Paper machines and parts for machines and forest tractors are manufactured in Petrozavodsk and Vologda. However, industrial companies are currently going through hard times. Timber harvesting companies' investment spending is relatively modest, and the forest products industry only makes maintenance investments and rather small-scale upgrade investments. St Petersburg is the most important centre of education and R&D. Forest products training is also available in Vologda, Archangel and Petrozavodsk.
Figure 3. Pulp and paper industry agglomerations in Northwest Russia
Source: Solid Invest and Etlatieto
The Northwest Russian forest cluster also suffers from some clear shortcomings. Forest industry chemicals are not yet locally manufactured. Another clear problem is the neglect of local energy production. Power has been available at low cost. This is why pulp processors' waste liquor and wood waste (saw dust, chips and bark) are not converted into energy at industrial facilities.
Nevertheless, the forest products industry and forestry play a fairly important role in Northwest Russia. They are also complemented by machinery and equipment manufacturing, as well as research and education. This cluster will be put to a real test if and when direct foreign investments start to flow in. The workability of timber procurement, the efficiency of transportation, sufficiency of power, availability of skilled labour, and the ability of the regional authorities to provide companies with cutting rights, mill sites and services will all be tested.
The table below includes the 25 largest Northwest Russian forest products mills. The Syktyvkarsk pulp and paper mill in Komi ranks as the largest based on 2000 revenues. The Kotlas and Archangel pulp and paper mills rank at the top of Archangel-based producers. The largest Karelian mills are the Kondopoga pulp and paper mill and Segezha pulp and paper mill, which is the biggest producer of sack paper in Russia.
The Svetogorsk pulp and paper mill, which places fifth, is owned by the US-based International Paper. According to some reports, it ranks among the company's most profitable mills in relative terms. The Syktyvkarsk pulp and paper mill is also foreign-owned. The South African Mondi Paper bought the majority part of the shares of the company in 2001. These acquisitions clearly show the rising interest of foreign strategic investors.
The ownership of Russian forest products companies is becoming more concentrated. The Ilim Pulp Enterprise, with its headquarters in St Petersburg, represents the largest concentration of ownership in the forest products industry. It controls companies with combined sales of some US$1 billion, including such producers as the Kotlas Pulp and Paper Mill and the St Petersburg Cartonboard Mill and Printing Plant. The Titan Group, based in Archangel, controls a company cluster with total revenues of US$600 million. One of the long-term advantages of this ownership concentration is that it facilitates larger pulp and paper mill investments.
How competitive is the Russian forest products industry in the world market? The table below shows the most competitive forest industry products of Russia. One criterion used for competitiveness is Russia's share in the total imports of the OECD countries. Another criterion is Russia's trade balance for a given product. The share of Northwest Russia in Russian forest industry exports is 35-40 percent. This share will grow in the future due to expected mill investments.
Exports are still mainly based on round logs, timber and plywood, pulp, and newsprint. Lacking product development and outdated machinery have relegated the industry to the production of lower value added products. This makes for a lower price per kilogram of exports than with Western competitors.
Foreign trade statistics also make it possible to evaluate production opportunities within the domestic Russian market. Table 3 presents a number of products where Russian production could substitute for imports. The following criteria were considered: 1) Russia's share of OECD exports is larger than Russia's average market share. In other words, Russia is a fairly noteworthy customer for these products. 2) Imports significantly exceed exports, and considerable market share can therefore be gained from imports. The growth potential of the domestic market for the subject product must also naturally be estimated. For example, the total consumption of writing and printing paper in Russia is only half of that in Finland. 3) The world market for the product is large. The export market will initially absorb small amounts. True longer-term growth opportunities exist in exports.
Table 1. Top 20 companies in the Northwest Russian forest products industry
Rating |
Company |
Region |
Sales, US$ million |
Profit after tax, US$ million |
Employees, thousand |
12 |
Syktyvkarsk LPK |
Komi |
242.7 |
67.4 |
5.4 |
13 |
Kotlas PPM |
Archangel |
240.9 |
27.2 |
9.7 |
16 |
Arkhangelsk PPM |
Archangel |
214.4 |
35.8 |
7.6 |
19 |
Kondopoga PPM |
Karelia |
191.9 |
42.9 |
6.9 |
21 |
Svetogorsk PPM |
Leningrad |
184.8 |
23.3 |
3.2 |
39 |
Segezha PPM |
Karelia |
88.2 |
12.0 |
5.2 |
45 |
Solombala PPM |
Archangel |
65.5 |
6.4 |
2.1 |
46 |
St Petersburg Cartonboard Mill and Printing Plant |
Leningrad |
59.5 |
7.8 |
1.9 |
78 |
Solombalski LDOK (sawn timber producer) |
Archangel |
31.9 |
0.4 |
2,7 |
81 |
Pitkyaranta Pulp Mill |
Karelia |
30.9 |
5.4 |
1.6 |
82 |
Cepruss PPM |
Kaliningrad |
30.6 |
3.8 |
1.9 |
86 |
St Petersburg Gosznak PM |
St Petersburg |
29.4 |
5.6 |
1.1 |
91 |
Onezhski LDOK (sawn timber producer) |
Archangel |
27.0 |
0.9 |
1.7 |
92 |
Chudovo-RWS |
Novgorod |
25.9 |
3.9 |
0.5 |
94 |
Syasski PPM |
Leningrad |
25.4 |
0.1 |
2.8 |
102 |
Sokolski PPM |
Vologda |
24.1 |
-0.2 |
2.9 |
108 |
Sovetski PPM |
Kaliningrad |
23.1 |
-1.1 |
2.0 |
112 |
Syktyvkar Plywood Mill |
Komi |
22.1 |
3.7 |
1.2 |
118 |
Vyborgskaya Tselluloza PPM |
Leningrad |
19.5 |
-2.7 |
2.4 |
127 |
Severnoe Lesopomyshlennoe Tovarischestvo |
Archangel |
18.1 |
0.2 |
1.8 |
Source: North-West Top 150 rating, 2001, carried out by 'Expert North-West' magazine.
* Rating among Northwest Russian companies.
The Russian economy has grown quickly since 1998. This growth is expected to continue, although at a slower pace (see Seija Lainala's article). This is also reflected on the demand side. With some products, such as furniture, local preferences sway purchase decisions strongly in favour of domestic products. When end products are locally manufactured, local demand for the inputs needed for such products as furniture and high-end printed matter, for example, will increase. Businesses will want less expensive and duty-free raw materials on flexible terms. MDF board serves as a good example of this in furniture production.
Table 2. The competitiveness of Russian wood-based products in OECD markets
HS6-digit |
Article |
Share in OECD imports |
OECD imports, US$ M |
Exports from Russia, US$ M |
Trade balance*, US$ M |
440320 |
Logs, poles, coniferous, nes |
27.9% |
4279 |
1189 |
1189 |
440399 |
Logs, non-coniferous, nes |
15.2% |
2087 |
317.7 |
317.6 |
441212 |
Plywood, at least 1 outer ply of non-coniferous wood, nes (ply's <6 mm) |
8.4% |
1865 |
157 |
156 |
441219 |
Plywood, nes, at least 1 outer ply of coniferous wood (ply's <6 mm) |
3.7% |
1200 |
44.2 |
44 |
480100 |
Newsprint, in rolls or sheets |
3.4% |
8146 |
275 |
274.7 |
470321 |
Chemical wood pulp, soda or sulphate, coniferous, semi-bleached or bleached, nes |
3.3% |
6847 |
224.3 |
208.6 |
480411 |
Paper, kraftliner, in rolls, unbleached, uncoated |
3.2% |
1814 |
58.6 |
56.2 |
440710 |
Timber , coniferous (softwood) 6 mm and thicker |
3.2% |
16490 |
523 |
521 |
470329 |
Chemical wood pulp, soda/sulphate, non-coniferous, semi-bleached/bleached, nes |
2.9% |
4920 |
141.7 |
141.7 |
Source: OECD statistics (1999).
*Russian trade balance in trade with OECD countries. Note that imports from Russia and the trade balance figures are almost the same. This is due to the fact that, for the most part, Russia does not import these products.
Table 3. Potential wood-based products for import substitution in Russia
HS6-digit |
Article |
Share in OECD exports |
Imports to Russia, US$ M |
OECD exports, US$ M |
Trade balance, US$ M |
940360 |
Furniture, wooden, nes |
2.26% |
189 |
8401 |
-178 |
481920 |
Cartons, boxes and cases, folding, of non0corrugated paper or paperboard |
3.62% |
105.5 |
2918 |
-105.5 |
490290 |
Newspapers, journals and periodicals, nes |
1.88% |
67 |
3572 |
-66 |
940340 |
Kitchen furniture, wooden, nes |
2.87% |
63.6 |
2219 |
-63.2 |
481011 |
Paper, fine, woodfree, in rolls or sheets, </=150 g/m2, clay coated |
0.99% |
58 |
5849 |
-57.5 |
481840 |
Sanitary articles of paper, including sanitary towels and napkins (diapers) for babies |
1.37% |
53 |
3876 |
-52.9 |
940350 |
Bedroom furniture, wooden, nes |
1.71% |
49.7 |
2901 |
-44 |
482110 |
Paper labels of all kinds, printed |
2.66% |
40 |
1489 |
-40 |
441820 |
Doors and their frames and thresholds, of wood |
3.06% |
34 |
1126 |
-33.6 |
940330 |
Office furniture, wooden, nes |
1.90% |
33.5 |
1767 |
-31.7 |
Source: OECD statistics (1999)
It is clear that the Russian forest products industry needs a well-defined strategy and cluster-specific industrial policies for upgrading its competitive edge and also making the business environment more attractive for FDI. The following simple measures could be part of this strategy:
The yield of forests can be raised through such measures as planting more trees and pruning existing stands.
The efficiency of timber harvesting and transportation can be increased by building logging roads, for example. The cutting permit system needs to be improved as well.
Forest products companies would attract more capital if their ownership and management were more transparent. Stock exchange listings and the implementation of international standards in the dissemination of information would help here.
Companies should pay more attention to the development of new products and focus on quality. They should also invest in making production more efficient.
It should be made easier for foreign investors to invest in the Russian market. A proper investment protection agreement and clear rules at all administrative levels are needed.
Sufficient investment in the infrastructure (roads, water routes to ports, communication networks, power generation) as well as in education and research should be guaranteed.
Environmental, quality and product standards should be set at internationally accepted levels. Companies should also apply and conform to audited environmental and quality systems.
This paper is based on material from a "Northwest Russian Forest Cluster" project, which is a subproject of an Advantage Northwest Russia project. These projects are carried out by The Research Institute of the Finnish Economy ETLA and Etlatieto Oy/Ltd, together with the Russian organizations Solid Invest (St Petersburg) and Centre for Strategic Research (Moscow). For more information, please see the Web site www.competitiveness.ru