Has the Chinese Miracle become passé? To be sure, China's growing demand for paper products and its capacity to produce low-cost goods is not going to fade away any time soon. But China has been evaluated to death during the past two years and industry observers are looking for some fresh meat, and Russia looks to be the prime cut right now.

Russia's pulp, paper and forest industry surely has potential. The country's forests extend from the Baltic Sea to the Pacific Ocean and make up over 20% of the world's forestlands—more than Canada and Brazil combined. However, Russia's timber resources are significantly underutilized and the capacity of its pulp and paper industry has been stagnant despite a regional shift in global demand.

Most of the blame for this "troubled growth" is directed towards the Russian government, which up until a few years ago had focused on its primary bread winner—gas and oil. The government is also guilty of not having in place a clear national policy on forestry and of delaying the approval of the new Forestry Code.

But the Russian government is gradually warming up to the fact that the pulp, paper and forestry sector could become a GDP growth engine for years to come. Russia's consumption for paper and board from 2003 - 2005 rose nearly 600,000 tons from just over 4.2 million tons in 2003 to about 4.8 million in 2005, according to PricewaterhouseCoopers (PwC) recently published report, Risks & Rewards - Forest, Paper & Packaging in Russia.

Additionally, RAO Bumprom, the Russian Association of pulp and paper organizations, forecasts that the estimated annual increase in consumption to 2015 in Russia will be 3.7 - 4.5% for market pulp, 5 - 6% for paper, and up to 8% for board.

With the growing domestic demand for paper and board, Russia's internal consumption of pulp has increased and this has had a negative affect on its export capacity in recent years. Considering the current and future fiber needs from nearby Eastern European countries and Asia—China in particular—Russia simply cannot afford to let opportunity slide by. In fact, PwC says that pulp producers in Russia are already operating at or near capacity and the industry is hard-pressed to keep up with demand.

On the paper side, it's worth mentioning an item in the PwC report about new capacity, or lack of it, in Russia. When North-West Timber Company announced in October that it would be installing a new 60,000 tpy paper machine at its Newman Pulp and Paper Mill in Northwest Russia, the company claimed the machine would be the first new capacity since the post-Soviet era. And according to North-West, the last machine installation in the private sector was in 1988, and that machine was in actuality a second-hand machine from the UK rebuilt to produce quality uncoated woodfree papers.

As touched on earlier, the key to stable growth and the future success of Russia's forest products industry lies within its government's willingness and ability to create an economic environment favorable to the Russian people and industry, develop enforceable forest policies, and clearly define the rules of engagement for foreign investors.

It will be a formidable challenge.

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