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Concerns over Timber Processing in the Russian Far East

Submitted by on April 16, 2012 – 6:21 pm 4 Comments |  
As Vladimir Putin said in September 2010, “Russia is a land of forests… no other country is probably as rich in forests as Russia”. Indeed, Russia contains nearly a quarter of the world’s forestland; estimated at over 800 million hectares (or nearly 2 billion acres) it exceeds the combined forest area of Brazil and Canada. Siberia in particular has a wealth of forest resources, which if handled properly, could be a major renewable strategic resource.

But are Siberia’s forests handled properly? Several issues have been identified as high priorities for the Russian forestry industry: reforestation, clearing the aftermath of forest fires and windfall timber, creating an effective system of seed and seedling technology, and forest cultivation. But perhaps the most serious troubles concern logging and wood processing. Like a stem of a tree from which branches grow, timber processing is at the core of a gamut of problems: economic, demographic, political, and environmental. Because timber markets are highly regionalized, we shall focus here on southeastern Siberia and the Russian Far East, whose main timber market connections are with China.* Within the Russian Far East, the largest timber producing regions are those to the south: Khabarovsk and Primorsky Krais (see chart from ForestsMonitor.org on the left).

In recent years, China has become one of the world’s largest importers of timber and the biggest regional processor of wood. The dramatic increase in Chinese demand for wood products has been fueled by both export growth and increased domestic appetite (see chart on the left). The volume of wood imported to China grew sharply after the Chinese government implemented a Natural Forest Conservation Program in 1998 that reduced domestic logging . The Russian Far East now serves as one of the main supplier of unprocessed wood – so-called round-wood – for the Chinese wood processing industry.** According to Josh Newell’s The Russian Far East: A Reference Guide for Conservation and Development, from 1999 to 2002 the Chinese policy caused a tripling of Russian log exports to China. More than 70% of the timber harvested in the Russian Far East is exported, and only 7% of Russian-produced timber is processed domestically. Although the timber industry accounts for only 5-10% of total industrial production in the Russian Far East, its importance to the economic and social fabric of village life is far greater. In timber-rich Primorsky and Khabarovsk Krais, log exports contribute a large portion of hard-currency revenue. The growing exports of wood to China is not only driving deforestation and illegal logging in the Russian Far East, but also arouses fears in Russia of Chinese demographic and economic expansion, if not outright political hegemony in the region.

Russia has long been concerned by the poor state of its timber processing industry. Most of the timber produced in the Russian Far East undergoes only the minimal on-site processing: the trees are cut and delimbed. Even such coarse processing as debarking, breaking logs into cants (unfinished logs to be further processed) and flitches (unfinished planks), trimming, and drying, is typically done in China. More fine processing, such as cutting timber into 2X4s, and making plywood, veneer, millwork, pulp, or paper is likewise done outside of Russia, with many of the finished products subsequently exported back into Russia. The benefits of keeping such value-added processing in Russia itself are quite clear: sawmills create new and well-paid jobs for qualified personnel, increasing tax revenues for budgets at all levels. In many locales, such production presents the only chance for town preservation.Without modern sawmills, people will abandon the towns of the forest zone, exacerbating the depopulation of the Russian Far East. In the words of Vladimir Putin, “our niche on the global market is in products with high value added, including construction materials, paper and the like. New jobs should be created here in Russia, not elsewhere. Tax revenues should go to our budget, and our forest territories, as they are called, are the ones that should be developed”.

In 2006 the Russian government put into effect new progressive legislation regarding the use of forest resources, aimed making the industry more stable, creating transparent rules for long-term investors, and eliminating barriers that impede the industry’s development. One of the most important components of this new Forest Code was increased export duties on unprocessed timber (round-wood), supplemented by direct subsidies to companies developing timber processing capacities in Russia. The increase in export tax was designed to be gradual, so as to not shock the market, starting at 6.5% in 2007, then growing incrementally to 25% by the mid-2008. (These rates are for softwood, which constitutes the bulk of Russia’s timber export.) The original intention was to increase the export tax to 80%, starting from January 1, 2009. However, due to the global financial crisis in the late 2008, the final hike has never gone into effect, leaving the rate at 25%.

The proposed increase of the export tax to 80% would have effectively shut down most raw timber exports, making softwoods prohibitively expensive for foreign buyers. For this reason, the proposal provoked harsh criticisms from the international community. Yet such export restrictions are a common policy instrument, especially in developing countries. For example, Indonesia – another major exporter of round-wood – had at one point banned wood exports entirely and later introduced a 1,000% export tax on unprocessed timber. The only reason that this excessive export tax did not completely halt roundwood exports is that Indonesia – unlike Russia – produces significant amounts of very expensive wood, such as mahogany. Even with disproportionate export duties, exporting such timber is quite profitable. Since Russia exports much less valuable softwood, many analysts questioned the wisdom of such an export tax.

Although the full increase in customs duties to 80% was never implemented, Russia still saw some effects of the new tariff policy: a decrease in unprocessed wood exports and the development of new timber processing enterprises in the Russian Far East. According to Vladimir Putin’s presentation at a United Russia party interregional conference in September 2011, “the export of logs was reduced by more than half, from 50 million cubic meters to 21 million cubic meters per year”. Some of that decrease may be explained by the falling demand for timber in the wake of 2008 financial crisis, a large part of which involved the collapse of the housing market (and consequently, of the remodeling, furniture, and cabinetry markets as well). But evidence also suggests that the timber processing industry has finally started to develop in the Russian Far East, with new investments being initiated, new sawmills being built, and new jobs being created. Exports of Russian construction materials, paper, and pulp are growing at a good pace as round-wood exports decline. According to a report from September 2010, “From January through August in 2010, logging output increased by 8.8%. Timber production rose 11.8%, while the production of pulp, paper and cardboard increased by 7.1%. In the first six months of 2010, exports of sawn timber, pulp and paper increased by 13%, 7.3% and 1.1%, respectively. … round-timber exports declined by 3.9%.”

Yet many questions remain: Will this moderate increase in export tax on unprocessed wood be enough to solve the systemic problems of the timber industry in the Russian Far East? Will loopholes allow foreign firms to bypass the Forest Code? How will Russia’s plans to join the WTO affect the implementation of those laws? And what is the environmental impact of these economic measures?

While the introduction of export tax on round-wood has helped nurture a Russian wood-processing industry, it is not clear whether it is sufficient to break the cycle on the more systemic problems plaguing the Russian forestry sector: under-investment, poor forest management, under-developed infrastructure (in particular, transportation), and especially lack of labor force due to massive depopulation of the region, discussed in a previous GeoCurrents post in connection with Magadan. Depopulation affects not only Magadan Oblast, but nearly all regions of the Russian Far East, with the exception of Republic of Sakha (Yakutia) and Chukotka (see chart on the left). While the Russian Federation as a whole has experienced population decline, most Far East regions are either at or above the Russian average on this score. Moreover, there was no clear change in the depopulation trend between 2008, a year after the export taxes went into effect, and 2010. While in some regions, such as Amur Oblast and Primorsky Krai, the decline has slowed somewhat, in others, such as the Jewish Autonomous Oblast and Sakhalin, it actually accelerated.

Moreover, population decline in the Russian Far East affects males more than females, resulting in a shift of sex ratios towards a stronger female bias or at least a less pronounced male bias. While as late as 1989 the Far East Federal District as a whole had a slight male bias (1004 males per 1000 females), by 2002 the number of males per 1000 females had dropped to 947 and by 2010 it reached 923. The Koryak and Chukotka autonomous districts maintain a male bias, but all other regions now have more women than men. Since the forestry and timber industry mostly employ men, this skewed sex ratio translates into shortage of labor for the industry and potentially increased labor costs. Importing workers from the neighboring China is one potential solution, as we shall see below.

These systemic problems are not helped by the fact that the Forest Code loopholes allow companies, chiefly Chinese ones, to circumvent the law. Specifically, the law imposed export duties only on round-wood, offering financial incentives for companies building timber-processing plants of any kind. While the goal was to encourage keeping value-added timber processing in Russia, many firms obtain those benefits by engaging in minimal processing. In many mills, round-wood is merely cut into cants, which are then exported for further processing. As a result, much of the value is added in China or elsewhere. Such mills create few jobs, and have little demand for skilled workers. Many of these new processing firms are joint ventures between foreign companies – mostly Chinese, but also South Korean, Japanese, Canadian, and others – and Russian partners. For example, in November 2010 Chinese companies partnered with the Irkutsk regional government in Russian to establish 161 small- to medium-scale forestry projects. According to an article by E. Katsigris et al. published in 2004 in International Forestry Review, Chinese processing enterprises in Primorsky Krai are “small (ranging from 7 to 15 employees), fully staffed by Chinese labor, and purchase timber mainly from illegal loggers” (p. 243). Illegally logged timber is also smuggled into China. Such operations give Russia no export taxes, no domestic supply of processed timber and wood products, and no new jobs for Russians. It often seems that such mills bring Russia little but environmental problems (discussed in more detail in the next GeoCurrents post).

While the current export tax rate of 25% may not be sufficient to propel the development of a wood-processing industry, Russia may now have to lower that rate, as a precondition for entering the World Trade Organization (WTO). Russia first applied for membership in 1993. In December 2011, in a historic moment, a deal was finally struck for Russia to become a WTO member. If Russia ratifies this deal within 220 days, it will become a full-fledged WTO member by the end of the summer 2012. According to the Russian press, domestic supporters of the WTO membership think that it will allow Russia to increase its GDP by 1% a year, but the opponents fear that Russian industry will suffer under the conditions of free trade, as many Russians will prefer imported goods, considered to be of better quality than domestic products. The WTO accession also means that the Russian Federation must fully apply all WTO provisions, with recourse to brief transitional periods only for a few products. One provision is bringing down export tariffs on a variety of products, including timber and wood-products, to acceptable levels. The average tariff on wood and paper will be reduced to 8%.

In effect, this would mean a 180-degree turn for Russia’s policy on timber exports. For many years, Vladimir Putin stressed “that our strategic objective remains unchanged: Russia must transition away from the outdated raw-materials export model” (from his speech at the round table discussion on issues of the timber industry, September 2010). As late as September 2011, he promised to “not abandon our strategy of reducing exports of rough timber. This is a position that we stand by on principle”. In the next few months these principles will need to be reconsidered, a tough pill which Mr. Putin may just need to swallow.

________________

*Wood from European Russia and Western Siberia usually ships to Scandinavian countries, especially Sweden and Finland, for processing and thence to European markets.

**Another big consumer of timber from the Russian Far East is Japan. Its share of the Russian Far East timber exports was 43% in 2004.

[Many thanks to John Simeone for his help in working on this post!]

 

 

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  • Rob

    This has been an important issue for Canadian environmentalists for many years. British Columbia used to have a law that logs must be processed within a certain distance from where they were harvested, but the current government scrapped that law, resulting in the closure of many mills and the collapse of their towns. The forest industry has come to focus on unprocessed exports, rather than multi-staged addition of value. This, together with the advances in harvesting technology (grapple yarders, feller-bunchers, etc.) have put tens of thousands of forest workers out of work.

    • http://www.pereltsvaig.com Asya Pereltsvaig

      Thank you for your comment, Rob! British Columbia must be exporting most of its timber to China and Japan as well…

      • Rob

        It looks like that is so. 

        Here’s a link to a short document on log exports from the BC government: http://www.bcstats.gov.bc.ca/Files/db574e87-6228-4feb-98f1-5a4a1d1810c7/LogBoomforBCExporters.pdf

        It looks like the Pac Rim countries are buying even more logs in proportion to the US because of the collapse in US housing. Of course, it doesn’t necessarily matter who buys the logs, but that BC (and Canada) has a banana-republic mentality towards the disposition of natural resources.

        • http://www.pereltsvaig.com Asya Pereltsvaig

          Thank you for the link, Rob! I wonder if BC’s mentality is as bad as Russia’s though…