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Russian Forest Industry Seeks Capital

Visiting BC recently, Russian forestry people described the vast timber resources in the Far East as "waiting to be tapped." But convincing North American investors to put up badly needed dollars isn't easy.

By John Clarke
Copyright 1996. Contact publisher for permission to use.

A group of forestry executives seeking North American investors paid a week-long visit to BC in September, a trip that wouldn’t have been possible five years ago. But according to some Canadian officials skeptical about doing any business with the former Soviets, the fact that the meeting took place at all was the only positive note about the exchange.

As they see it, the Russians would not have been so interested in North America in 1991 when privatization began after the col- lapse of Communism. But privatization has not gone well and the Russian Far East (RFE), with vast timber resources, is now desperate for Western capital.

After inspecting operations in BC’s interior, where technology and working techniques were applauded, the Russians made a pitch for Canadian joint venture partners. They called the RFE another Yukon waiting to be tapped. The RFE has many of the same tree species as Western Canada,with a total land mass of 6.2 million km 2 , 17 times the size of BC and encompassing almost 70 per cent of Canada’s total land area. This region contains 12.3 billion m 3 of mature timber compared to BC’s 8.6 billion m 3 . It has a similar climate, with long cold winters that make large-scale development difficult and even inhibiting. Its potential is beyond the capac-ity of the indigenous industry to develop. Russian

There are already some joint ventures in operation, involving the Japanese, as well as other emerging Asian countries. The Japanese have shown the greatest interest since they’re chronically short of wood and have the biggest need. They take about 50 per cent of the RFE’s production.

Inflation after 1991 and the beginning of privatization has virtually depleted all home-grown capital — or so the Russian executives told Canadians during their tour. They need modern equipment and technology. Their own is now antiquated and frequently breaks down. But as a sales representative for one Canadian supplier observes from his experience, new equipment alone isn’t the answer. He points to a $4 million sale of debarkers and chippers his company had made, only to see the machines sitting idle after shipping because the rest of the plant hasn’t been built yet.

Russians banks are charging 180 per cent interest, which essentially freezes local people out of any borrowing for investment in modernization and which is now propelling the effort to entice North American partners into joint ventures.

Canadians are as cool as the Americans to the idea of partnership with the Russians. The US giant Weyerhaeuser gave it a try but pulled out in 1994 because the economic and political climate was too turbulent. These conditions haven’t changed much . Bureaucracy, infrastructure, instability and corruption make it difficult to do business efficiently in the RFE. When foreign suppliers ask what the shipping tariffs are they’re often given six or seven different answers.

Money has to be paid to customs and railway people just to get goods moving through the system. The question for Canadian companies contemplating business in Russia is how can a monetary value be placed on these costs when negotiating a business deal with a forestry company?

The biggest barrier to Canadian investment is an apparent lack of financial commitment by the Russians themselves. Ken Stanick, a Vancouver sales representative, says many of the managers of forestry operations in the RFE have become multi-millionaires by exporting logs and putting money from profits into foreign currency accounts. Their companies were still able to make money as stumpage was virtually nothing.

Managers of plants close to port and the Japanese markets 500 km away did particularly well. Stanick spent four months in the RFE in 1994 and wrote a report for Industry Canada. He says, “These people have made an absolute killing since the breakup of the Soviet federation. Some of them are very wealthy and they’ve been reluctant to invest in their own industry. It’s a significant point. When a Canadian company looks at investment opportunities in Russia, particularly joint ventures, and a partner is not willing to put up 50 per cent of the capital, there’s a problem.”

Stanick left Russia with the impression there was no way he was going to be able to convince the presidents, CEOs or boards of Canadian companies that it would be worthwhile investing there.

Russian Japanese companies have had a 40-year history of trading equipment for logs and Stanick doesn’t think they want the Canadians there, even if the Russians do. He says, “Some years ago many of the foreign companies probably felt it was easier to do business with the government because you knew what the rules were. In the last five years there have basically been no rules. Russian business is starting to play a bigger and bigger role; it controls the rules being made. There will be no return to Communism — the government is broke and it could not buy back any industry.”

Forestry in the RFE is now in the hands of six large corporations which have many interests besides timber. Moscow retains large and often nominally controlling shares.

Under privatization forestry operations are really controlled by private i nvestors with stock bought through a voucher system set up by the central government. Foreign investors face many hurdles if they’re ever to get a reasonable foothold in the RFE.

In the short run equipment suppliers have the best opportunity for business. Stanick thinks it’s vital that they first get to know the people they will be dealing with and to understand what their competitors are doing. That is why trade tours like this one are important, he stresses. “I think the Russian companies are now looking at putting in some investment of their own.

With the same kind of climate and thesame wood species, our equipment should be suitable.”

Another Vancouver forestry sales executive, Bob Bartano, supports this view. He says there’s a window of opportunity for business but only for those with a lot of patience. It’s easy enough, he says, to sign a contract for an equipment deal in the RFE, but the deal takes on new dimensions entirely if it requires performance from the other side.

First there are logistical problems. For instance, it often takes two months to get a part through customs. Although there’s a huge timber resource in the RFE, there’s often no assured log supply for any sawmill foreign investors might be considering.

The Japanese and South Koreans will simply pay a higher price for logs if they need them and then divert production from the domestic market. And it is difficult to operate legally within the Russian tax system.

Bartano believes that Russia is five years away from solving these problems. But he does foresee opportunities, even though he doesn’t believe there is any Yukon gold in the RFE forest industry.

Despite the drawbacks there is a consensus among Canadians and particularly British Columbians that a close eye should be kept on the RFE. The Russians are now believed to be more genuinely interested in investment from here — with their initiative in pursuing this tour demonstrating that.

The tour was arranged through North Vancouver-based Salix Trading Inc., whose principal, Dr. Vlado Butora, has travelled extensively in the RFE over the last four years. He had help in arranging the trade visit from the federal government ’s Industry Canada, the forestry faculty at the University of BC, and BC Trade and Investment, which partially financed the tour.

The tourists visited an OSB plant and a stud sawmill in operation, they wat ch e d logging demonstrations, and they were b ri e fed on Canadian wood frame housing techniques and on government policy relating to forestry in BC. They were dazzled by what they saw. The difficulties surrounding investment in the RFE are acknowledged by the Canadian government and industry people. But they now see a stronger commitment to work with foreign investors.

The potential is also well acknowledged. If a stable environment for capital could ever be established, substantial profits could be made by both foreign and home investors. According to Victor Televich , chief administrator for the coastal Khoborovsk territory, his region alone has 18 million m 3 of wood available for cutting every year, but only five million have been allocated.

With such a vast resource the potential for growth is virtually unlimited, compared to Canada where annual harvesting is being cut back. With the current gap between the resource potential and actual production, there is a lot of room for productivity improvement, all of which should be attractive to Canadians, as the Russian visitors noted prior to departing for home.

The view of those potential investors has not appeared to have altered much from Stanick’s summary of the situation in his 1994 report: “In today’s investment climate the only way to earn profits appears to be through trading.

When the political situation does stabilize, there is no doubt the resources of the RFE will justify foreign investments...It is certain that investment would be focused on long-term return, sac-rificing earnings now for, hopefully, a better investment climate in the future... There is no clear indication as to when the situation will change in Russia.” L I G H T

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