The Russian Federation's impressive advances in economic growth and political stability over the last years have caused a ripple effect across the pulp and paper industry. The middle class is growing, and Russians are increasingly using their newfound purchasing power to build new homes, buy more furniture and consume ever-more consumer goods. All of this means that more wood is needed, and Russian mills are humming at increased capacity.

In 2006 alone, approximately 170 million cubic meters of wood was harvested. But still vast stretches of Russian forests are underutilized. Current harvests are merely one-third of the total 500 million cubic meter potential.

“Russia is one of the fastest growth regions in the world in terms of relative growth. The market size is small compared to China or North America, but the growth rate is fast. Domestic consumption is growing, which is causing an increased demand for wood-based products and also for packaging,” says Petteri Pihlajamäki, executive vice president of Pöyry Forest Industry Consulting Oy, who is one of Pöyry's foremost experts in the Russian forest industry.

Pihlajamäki estimates that fastest demand growth will occur in select paper grades, with tissue paper and printing and writing paper set to grow at an estimated 7-9 percent each year until 2020. Corrugated materials are estimated to grow 6 percent annually.

Exported Softwood to Die
Active export trade is taking place with fast growing China and other countries. Of the over 170 million cubic meters harvested last year, some 50 million consisted of exported roundwood. But exports of raw materials will effectively end by 2009, due to incremental increases in export duties.

As of April 2008, export duties for softwood reached EUR 15.00 per cubic meter. By 2009, this figure will become EUR 50.00, effectively killing the export potential of softwood roundwood. Export of birch pulpwood is tax free until 2011.

“By implementing this duty, the Russian government is signaling that it wants the development of value-added processing industries to occur inside Russian borders,” says Pihlajamäki.

A shortage in raw materials looks possible in the near term for export markets, which may cause a spike in prices. “China will experience shortage situations in construction wood and fiber materials. Finland will also feel the crunch of shortages, along with other raw material export countries,” Pihlajamäki pointed out.

Modernization of Standards
Other challenges also lie ahead. The technology used at Russian paper mills is old and obsolete. Costs of wood material, labor and energy are low compared to other markets, but the “norms and standards for project implementation are arcane and complicated. Modernization of standards is required,” Pihlajamäki said.

Many small mills still remain in Russia and these are in domestic ownership. However, some of the five to six largest mills are partly or entirely foreign-owned. For example, in 2006, U.S.-based International Paper and Russian-based Ilim Paper joined forces in a 50/50 joint venture called the Ilim Group, which is the largest domestic/foreign alliance in the Russian sector.

In another positive development, Russia adopted a new Forest Code in January 2007 that has removed many uncertainties related to the country's forest policies. The legislation has been only partly implemented, and a two-year transfer period is yet to follow. Many lower level and regional regulations still need updating to conform to the new federation-level law.

“This will not be a painless process and many challenges lie ahead. With the new Forest Code, ownership remains with the federation, as it existed in the prior regime. Long term leases are available with a maximum length of 49 years. Leaseholders now have new duties regarding forest maintenance and regeneration,” Pihlajamäki said.

This article was re-written for PaperAge by Satu Jussila. The original version was published in the 2/2008 issue of Pöyry's stakeholder magazine, Know-how Wire. Readers can access the online version by visiting Pöyry's website at: www.poyry.com.