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Prospects for the Forestry Industry in a Modern Economy

While leading the world in timber resources, Russia lags behind as a global market player in both value and quality of timber products. The Russian timber industry's potential cannot be fully unlocked without addressing a number of issues, such as the lack of investor appeal, underdeveloped wood processing, and inferior technology.

Russian forests constitute over 20% of the total global forest area, which is several times more than in any country with a leading timber industry, i.e. the US, Canada, China, Sweden, or Finland. This resource is now used inefficiently, though.

  • Russia’s share of the global timber market is just about 3%, with more than 50% of its exports consisting of low value added products, i.e. logs and lumber.
  • Russia is the largest exporter of logs (16% of the global market) and the second largest supplier of lumber (18%) after Canada. But when it comes to timber products with a high added value, Russia trails far behind. Its share in the exports of pulp, for example, is just 4%.
  • Russia uses the extensive model of forest management, with mainly wild forests for cutting.
  • The industry’s contribution to the GDP is estimated at just about 1%.
  • The per capita consumption of timber products in Russia is several times lower than in the EU. According to the Ministry of Economic Development, the annual consumption of lumber per 1,000 residents is 213 cu m in the EU vs 17.8 cu m in Russia, of wood board – 119.4 cu m in the EU vs 48 cu m in Russia; of paper and cardboard – 170.8 tonnes in the EU vs 49.9 tonnes in Russia.

There are several deterrents to development of the Russian timber industry:

  • Heavily worn equipment. This results in lower product quality and competitiveness. All of the advanced equipment for the industry is manufactured outside of Russia, and so renewal of fixed assets requires significant investment.
  • Underdeveloped raw wood processing and, therefore, lower productivity and more waste.
  • Fairly low investment appeal of the industry in general.

Nevertheless, thanks to its export orientation, good resource base and stable demand, the industry demonstrates a steady production growth. In 2016, the harvest reached 214 million cubic metres of wood, which is record high for the last 20 years.

The key strand of the public policy in this regard is switching to intensive forest management, which increases forest productivity through advanced methods of reforestation, pest control, and fire and illegal harvesting prevention. The major economic effect will be achieved through efficient use of resources rather than increased areas of felling.

The timber industry nowadays is a development priority line, with government programmes to support producers underway and drafting of an up-to-date industry strategy until 2035 in progress. The plans of the Ministry of Industry and Trade include:

  • Subsidised interest rates on loans for producers and financial aid in priority investment projects (especially in the Far Eastern Federal District), including project finance.
  • Domestic demand stimulation. For instance, facilitating development of wooden house construction. In 2016, the Ministry of Construction proposed to introduce quotas in the government programmes for construction of public amenities using “wooden” technology, developer lending programmes, etc. The Ministry of Industry and Trade regards wooden house construction as a driver of timber industry development.
  • Support for the projects that are part of newly established timber industry clusters (e.g. in the Vologda, Tomsk, and Omsk Regions, the Republic of Komi, etc.).

Some of the issues are still to be addressed, however:

  • First of all, incentivising production of high value added products. As far back as in 2008, export duties on unprocessed logs were raised for that purpose. Yet, they had to be brought back to the industry average after Russia entered the WTO.
  • Restoration of the industry's R&D base.
  • Incentivising production of advanced and innovative products such as nano pulp, biofuel, high quality paper and cardboard. According to the estimates by Sergey Donskoy, Minister of Natural Resources, the developing production of fuel pellets and briquettes will help to build new markets for wood consumption and increase profitability of timber harvesting by 25–30%.
  • Improvement of the forest legislation and industry management system. In particular, improving the culture of forest management, developing of and ensuring compliance with environmental standards of forestry, and reducing the share of the grey market. In the course of its review of the industry performance in 2016, the Russian Accounts Chamber revealed a loss of RUB 11.9 billion resulting from illegal timber harvesting.

As estimated by the Ministry of Natural Resources, the aforesaid measures will provide for a 50% increase in the timber harvest from each leased hectare by 2030 while the economic return will grow by a factor of 2.0–2.5.