Increasing investments in Russian forest industry call for sustainable technology

14 November 2008
Increasing investments in Russian forest industry call for sustainable technology

Foreign and domestic companies have announced tens of billions of investments in Russian forest industry. These open new opportunities for Finnish-Russian technology cooperation and exporting Finnish sustainable technology and forest knowledge to Russia.

Currently, Russia has around 30 large projects of the processing of wood in the total cost more than EUR 30 billion, including production of cellulose, paper and paperboard as well as timber, particle board, plywood and other house-building materials.

"Even if the financial crisis will evidently postpone the realization of investment projects, Russia is foreseen to among the main growth regions in the future," says Petteri Pihlajamäki, Executive Vice President, Pöyry Forest Industry Consulting Oy.

Russia is developing its wood processing industry based on own forest resources. To withdraw of an export of wooden raw materials and to boost foreign investments in the country's forest industry, the Russian Federation has introduced raised export tariffs on a hauled round wood.

Although the realization of the next increase of wood export duties would be postponed by 9-12 months as announced by Prime Minister Vladimir Putin, the tariffs have had and will have an impact Finnish forest industry, which imports about 20 percent of its raw wood from Russia. But they are not the only reason why the Finnish forest industry has reduced its capacity.

The issue of export duties has dominated the public discussion recently, which is understandable due to their remarkable negative impacts in Finland, according to Pihlajamäki. "But reciprocally, Russia's forest sector offers interesting investment opportunities."

Several privileges for investments

Russia has in recent years been among the fastest-growing economies in the world with 4-6 percent annual GDP growth in 2004-2007, compared with 2-3 per cent in Western Europe and the United States. But financial turmoil changes this figure.

Forest area within the Russian Federation – an area comparable with the territory of Europe - holds almost half of the world’s softwood resources. The Russian Northwest has more than half of Russian European wood. Only 40% of the cutting potential is used.

"To the companies which have created in territory of Russia productions earlier than their competitors, will get considerable competitive advantages," Pihlajamäki says.

"As deciding to invest in Russia, the company takes into consideration many factors. In addition the privileges, also the fact that risks for foreign capital in Russia can in some cases be even smaller than for domestic capital."

Currently, Russia provides the priority for investment projects in value more than EUR 8 million and gives following privileges:

*granting of a forest block without an auction;
*reduction in two-times of a maximum value of rent.

Furthermore, 5% export duties have been lowered to 0% on a wood cellulose from coniferous and a hardwood, some kinds of a paperboard, etc. Removal of duties on other finished goods from wooden raw materials is under consideration.

Russia also shows its readiness to direct budgetary funds from investment fund and development bank on a creation of a transport and power infrastructure of territories where allocation of the enterprises for wood raw reprocessing is planned.

Examples of investments

In recent years, Finnish companies have invested particularly in solid wood and panel production, with Metsä Botnia, Stora Enso and UPM as good examples.

In all, the Finnish companies have completed investments of around EUR 1 billion. Investments in planning stage are worth of over EUR 2 billion.

Many international companies, including International Paper, international paper and packaging group Mondi, Norwegian-Estonian "Estonian Pulp", Swedish cellulose company SCA, and furniture company IKEA, have decided to invest in Russia.

Intensive forest management - a key for sustainable utilization chain

To achieve an environmentally sustainable utilization chain, there are development needs for intensive forest management, more intermediary cuttings, fast forest regeneration, full utilization of forest resources, biodiversity-adapted forest management, secured and long term forest tenure.

“Productivity of intensive forest management can be up to four times higher than extensive forest management. In the long term, it is the only way to secure cost and quality competitiveness,” Pihlajamaki says.

He proposes a co-operation in establishing of technology and forestry co-operation between Finland and Russia through pilot projects in order to develop intensive forest management in Russia. Thee is also a potential to support the wood procurement of large pulp and paper investment through development of wood based housing/construction concepts in North-West Russia.

“For this kind of programs Finnish actors can provide world-class expertise and technology for forestry, logging and logistics, sawmills and pulp and paper industry,” Pihlajamäki concludes.

In Russia, wood-based by-products such as bark, sawdust and waste-wood from mechanical and chemical wood processing industry consist of a huge energy resource.

Investments in forest industry increase this resource further, and also opens opportunities for Finnish, world-class bioenergy technology.

Pöyry

Related article:

17 October 2008
Development of Russian forest sector through co-operation