This huge republic has oil, gas, precious metals, minerals and vast forests. So why does it only produce around 3 million tpy of pulp and paper?

by David Price

Here in Europe we've always been historically wary of Russia. But we've become even more so recently, because it is now Europe's biggest supplier of natural gas. Soon, its oil will also flow into western pipelines.

Now, Russia is trying to buy the UK's biggest distributor of natural gas. A few months ago, Arab investors tried to buy six of the US East Coast's leading ports. That was blocked by the US authorities. In similar fashion, we're trying to figure a way to block Russia from owning the UK natural gas grid.

Russia is once again powerful, newly-rich and aggressive. Its oil minister even suggested creating a petro-euro, which caused consternation in the petro-dollar market.

Until last November, Russia had no clear policy over its forest resources. Now it has one—its forests have now been classified as a strategic resource, like its oil, gas and minerals.

So what can we expect? International Paper's chief executive, John Faraci, in an interview with PaperAge (March/April 2006, Transforming a Giant), said, “…sometimes the growing markets and good cost structures go together, like in Russia. The market there is small, but growing at more than 10% a year. As to cost structure, if you look at the combination of fiber, energy and people, that's a big chunk of the cost of making paper and pulp. A region like Russia definitely has cost advantages.”

By the Numbers
Russia's forests cover 46% of the country—making-up 22% of the world's forests or about 15 times the size of France—of which larch and birch form 30%, pine 20%, cedar 10%, fir 4%, and spruce 3%. But some of that resource is inaccessible due to permafrost and isolation.

Last year Russia produced 3.6 million tpy of paper, 2.7 million tpy of containerboard and 2.3 million tpy of market pulp. Most of that went to meet domestic demand. The country has 197 pulp and paper mills that employ 152,000 workers.

The industry in Russia is concentrated in three regions: the North-West between St. Petersburg and the Finnish border, in Siberia around Lake Baikal/Irkutsk, and in the Russian Far East. The latter is mainly a lumber reserve for Japan, China and South Korea. Most of the market pulp, or 61%, is produced by Ust Ilimsk, Bratsk and Kotlas, all part of Ilim Pulp Enterprises.

Oil and gas represents 50% of Russia's exports and forest products account for 5% or $6.1 billion, so there's room for improvement, especially when you consider that one Brazilian pulp mill can produce 1 million tpy.

But what may interest U.S. readers is that the U.S. AID has been working in Siberia and the Russian Far East since 2000. The joint project is designed to improve Russia's forests through fire prevention activities, forest pest monitoring, value-added processing of non-timber forests and secondary wood products and biomass energy development. This project, www.forestproject.ru, is working to strengthen Russian trade associations, bring Russian and U.S. companies together, as well as help Russian companies write business plans and attract investors.

This cooperation has already brought three Russian trade missions to the Pacific coast to California, Oregon and Washington, to study biomass systems and dry kiln technologies.

What's to be done?
A lot. An analysis by RAO Bumprom (Russian Association of Pulp and Paper Mills and Institutions), states that Russia's timber resources are used inefficiently, due to old equipment and lack of modern technology. Russia ranks a lowly 10th in pulp and paper production. Pricing and licensing policies for logging, certification, standards and inspection were unregulated resulting in chaotic pricing and payment—or non—payment-practices.

But all that may change sooner than we think. The Federal Forestry Agency has now been brought firmly into the Natural Resources Ministry, which oversees the oil, gas and minerals industries. Russia has recently stated it will cooperate closely in international projects to combat illegal logging and will participate in an information exchange on forest products exports and imports.

The industry already has foreign investment from Mondi, IP and SCA, and I expect more will follow as governance and trading policies become more transparent. John Faraci of IP seems in the mood to do so. But the numbers are high; Bumprom estimates that between 2004 - 2015, the industry will need $12.5 billion of investment.

I'm fairly confident that if Russia devotes the same focus to its forest products industry as it has done to its oil and gas production, then we will see a new pulp and paper colossus emerging in the next 15 years. And, it will be the only forest products producer that will be self-sufficient in energy!

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