Russia holds off on timber export duty increase

Prime Minister Putin says economic diversification will see increased timber export duties in the longer term, after delaying rises for a further year to encourage more investment in domestic processing.

Russia has 25% of the world's standing timber reserves but, despite this, has made little of its potential. Its domestic timber processing and manufacturing sector is relatively small, and it generally exports unprocessed whole logs. This means that Russia generally gets low prices, and misses out on added value – both for the end product and the wider economy.

Finland and Sweden, Russia’s main timber export markets, are the opposite. Large scale timber processing industries there often export high value finished products back into Russia using Russian resources imported cheaply.

Despite a weekend commitment, made at a timber industry summit, to hold off on a threefold increase in timber export duties for a year Prime Minister Putin has made it clear significant export duties on unprocessed timber will come.

"We will still do it, but we will not do it stupidly…as the situation will change, you have time to calmly prepare."

The move will placate concerns about Russia’s intentions, but the Prime Minister has made it clear that he wants the Russian industry revitalised, and more processing done in Russia. He is pushing for those currently processing outside Russia, to bring more work inside the country.

“Modernisation of the industry will stay our priority. We want to develop domestic deep-processing of wood. Demand has dropped during the crisis. Therefore we'll delay the wood export duty hike. It will remain unchanged for the next year and may be extended into 2011. I hope investors will take their time and diversify their business interests in Russia.”

The welcome mat for international players to set up in Russia also sees subsidies on loans and a new Forestry Code with improved woodland rental terms. Zakhar Smushkin, CEO of Ilim Group, also wants the government to introduce privatisation.

“We hope that sooner or later privatisation will be allowed. The world's largest economies which dominate the forestry market have already sorted out this issue. The only country which still uses rent is Canada, but Canada is not competitive any more.”

There are currently 75 priority joint projects in Russia worth almost $15 billion a year, but investors like Alex Williams, General Director from Rusforest Management, say there could be more, but corruption often gets in the way.

“Russia probably has potentially the best forestry sector in the World, but investment is strained, because you have all these problems on the local level, like access to power, access to forest land.”

The government and industry are also taking steps to address infrastructure issues affecting the profitability of domestic processing, with improved transport and logistics helping to reduce output costs for local processors. With an additional year and improved support mechanisms in Russia to encourage domestic processing, more money for the domestic economy will grow in Russia’s forests.