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Oct 2004 - The Logging and Sawmilling Journal

Guest Column

Timber industry in Russia shows promise

By Irina Litvinovna

In the last column, we looked at the huge potential for the Russian forest industry. As the market matures, further consolidation of the top players can be expected, as seen in other more profitable industries of Russia. Added-value sectors of the industry are expected to grow more rapidly than the raw lumber sector due to demand factors and the lower labour costs in Russia. This trend is expected to provide Russia with decreased reliance within the “cost-basis” segment of the market.

However, growth in all sectors of the timber industry in Russia is likely for decades to come, given the political and economic stability which is widely expected by industry insiders. The demand for timber and manufactured wood products is indeed growing with each passing year, but the purchasing power of producers remains stagnant, even by Russian standards. While this may present an opportunity for the foreign investor to provide credit, careful navigation of the many risks involved is advised. Russia is burdened by a legendary bureaucracy, a fearful shadow economy, weak institutional framework and a general lack of industrial infrastructure, as well as an imperfect legal basis for repatriating profits from direct foreign investments. Indicative of the situation, many enterprises within the Russian timber industry have been forced to self-finance their projects and use outdated equipment.

Russian president Vladimir Putin recently set a target of doubling the country’s Gross Domestic Product by the end of the decade, and it’s expected the timber industry will have a major role to play in achieving that goal. Several government programs aimed at improving the sector are at various stages of implementation. The most comprehensive of these programs is the “Main directions of timber industry development ‘til 2015” developed by the Russian Ministry of Industry, Science and Technology. These programs are designed to promote the long-term development of the Russian timber industry and increase the demand for modern timber harvesting and timber processing equipment internally. While it certainly faces challenges, the timber industry is one of the most positive prospects in the Russian economy in terms of growth potential.

In fact, timber export revenues may reach the level of oil and gas industry revenues if untapped resources are exploited and optimizations of infrastructure take place according to plan. Note that Russia has more oil reserves than any country outside of the Middle East, and is a major oil exporter. Increasing timber production volumes four-fold in 12 years (according to the official forecasts) will require an intensive modernization effort of almost every major plant in the Russian Federation. The equipment required for this great modernization effort must, by definition, come largely from foreign sources. Russian producers of timber harvesting and processing equipment are unable to supply the timber industry with necessary equipment due to lack of variety, quality, and sheer volume of domestic equipment demanded.

Many types of modern equipment are not produced in Russia. Additionally, most top decision makers within Russian timber harvesting and processing firms generally prefer imported equipment over Russian counterpart equipment even if it is used or leased, or sold in the higher-price range. This approach is common in the marketplace due to output quality and maintenance cost concerns. Russian enterprises still produce a whole series of outdated products such as various models of lumber carriers, logging tractors, felling equipment, debarkers and—on the mill side—band-saw and circular saw equipment, and dryers. In the past, Russian equipment producers have not made any attempts to merge or co-operate. As a result, the players continue to use old and obsolete equipment and they continue to receive consistently low results in terms of output quality and production efficiency.

Russian buyers of timber harvesting and timber processing equipment are characterized by strong brand devotion. The name of a company, its reputation on the market and its dedication to targeting the needs of the Russian consumer are important factors relevant to purchasing decisions among Russian decision makers. Imported equipment is preferred, even when the price for domestic equivalents is many times lower. The market for secondhand foreign brands is strong. While the share of Canadian exporters in the Russian market of timber harvesting and processing equipment has been rather limited, the Canadian government offers a number of programs to help Canadian logging and sawmilling equipment companies interested in this market.

The Canadian Commercial Corporation (CCC) gives Canadian companies access to financing and better payment terms under the Progress Payment Program. It enables the exporter’s bank to open a project line of credit for the exporter’s benefit, based on CCC approval of the project and the exporter’s ability to perform. Export Development Canada (EDC) offers export financing and insurance to Canadian exporters. Additionally, insurance can be provided for larger transactions that are subject to the terms and conditions established by the buyer. EDC prefers to work through letters of credit, bank credits or bank guarantees. Approval for financing is considered on a case-by-case basis.

Irina Litvinovna is business development officer at the Canadian Embassy in Moscow, Russian Federation. Further information is available from Ms. Litvinovna ([email protected]) and Gilles Couturier, trade commissioner, International Trade Canada, Russia Desk Office in Ottawa ([email protected].). Information is also available from the Canadian Commerical Corporation (www.ccc.ca) and Export Development Canada (www.edc.ca).

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