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A fur hat and a prayer.

A consortium of small Northwest companies band together to unlock the timber of the Russian Far East, the largest such venture in the region.

This is a story about 10 wood products companies who were once intense competitors. It's a story of how the small companies opened a door the big company could not. Finally, it's a story of how the gale force of global political change blew down some of the cultural fences between two great countries.

Jeffrey Fantazia remembers the day Portland attorney Michael Haglund assembled the Oregon mill owners to discuss the possibilities in Russia.

"These are companies that competed together viciously over [federal] timber sales," he says. "They never cooperated before." However, says Fantazia, vice president of Jones Stevedoring Group in Portland, it took less effort than might be expected to come to an understanding. First there was the common timber supply problem. Then there was the mutual respect each held for the other. They were competitors, not enemies. Interestingly too, says Fantazia, company principals are all about the same age -- late 30s or early 40s -- representing the new generation of management of the family-run businesses. "It was agreed at that time," he recalls, "that to be successful, we had to join together."

So, the Oregon mills, Jones Stevedoring and S.L. Follen, a Portland trading firm, came together as partners in the Global Forestry Management Group (GFMG). The other members, two mills in Washington state and two in California, signed on later. The legal structure gives each partner an equal say over the operation of the consortium, set up as a limited liability corporation to protect the individuals involved. That's important in a venture everyone agrees is high risk, says partner Howard Sohn of Roseburg's Sun Studs, although each company's assets are still on the line.

That was only half the battle. The other half has been much harder and the outcome is still uncertain. The group, though, has hammered out two joint venture agreements with Russian partners. One venture will upgrade the Pacific port of Sovetskaya Gavan in the Khabarovsk region for export trade. The other involves the lease of one million acres of softwood forest in the Amur River region north of Sovetskaya Gavan. While the Russian Far East contains vast tracts of timber -- equal to the entire U.S. "growing stock" according to one estimate -- it presents formidable barriers for American business.

First and perhaps foremost says Fantazia, the Russians are still sorting out ownership and land use after the collapse of communism. Transportation, with the exception of a few rail lines, is poor, limiting access to timber. Communications are primitive by modern standards. And it's cold much of the year with winter conditions similar to Alaska or northern Canada.

"Corporations are very confusing to them," adds Charlie Philpot, station director of the U.S. Forest Service's Pacific Northwest Research Station in Portland. Philpot, who has visited the region and whose scientists have studied its ecosystem and forest management, says there is virtually no business infrastructure. Such things as contracts and agreements are, well, foreign to the Russians.

Add cultural and language differences, toss in a good helping of political suspicion left over from the Cold War and mix with fear that American timber companies might hack and run and you've got a volatile business stew.

All of which gives Fantazia, president of the consortium, and his partners pause. However, as companies whose very survival has depended on access to public timber, they have had little choice but to look beyond the once-considered limitless forests of the Pacific Northwest. Sohn and Fantazia say the group is looking to other western states, the companies' private holdings and South America as possibles. Still, the largely undeveloped larch, pine and spruce forests beckon on the other side of the Pacific Rim.

But how to do it? Small companies like consortium members Ochoco Lumber of Prineville and Avison Timber of Mollala couldn't individually do all the analysis and make the contacts necessary to open the Russian market. Fantazia estimates GFMG spent $1 million in travel, analysis and other research and development costs. The numerous fact-finding and negotiating trips have been fascinating, "but that's an awfully expensive vacation for one company."

It no doubt was costly even for timber giant Weyerhaeuser who spent the last four years in a futile effort in the same region. Weyerhaeuser vice president of timberlands Scott Marshall said the company's interest in the area goes back at least 20 years. More recently, according to Don Flora, research economist at the U.S. Forest Service's Pacific Northwest Research Lab in Seattle, Weyerhaeuser planted a million trees from Russian seed as a demonstration of good will and saw 95% success, a remarkably high rate especially for a new effort. However, Weyerhaeuser put its initiative on hold last year after reportedly being unable to come to an understanding with the Russian "timber mafia" of former government officials who now control much of the resource.

Marshall wouldn't use the term "mafia" but says "the in-place industry structures are still by and large" run by a small group of individuals. "Finding a place where you can partner with that group is very difficult." Marshall, who says the company remains interested in the region, says the Russians would not agree to allow Weyerhaeuser operating control of the proposed venture. The company was also worried about an uncertain business climate, taxes and disagreement on long-term lease rights, he says. Sohn calls the timber mafia term "reckless" and observes that until recently in Russia "everyone worked for the government."

So how did GFMG succeed where Weyerhaeuser failed? A look at the structure of the American consortium and the joint Russian-American venture is revealing. First, all the consortium members are small, 500 or fewer employees, and family-owned. Says Fantazia, that appeals to the Russians, who have small mill towns like those where consortium partners operate. The joint port venture, in partnership with the Russian Exprales Holding Company, has a board of directors consisting of three Americans, three Russians, and a Russian chair. Similarly, the harvesting venture has an even split in its governing board, but with an American chair. Both ventures are headquartered in Russia, not the United States, and meetings of the boards will rotate between the two countries. Any disagreements not solved by the boards goes to international arbitration, says GFMG attorney Michael Haglund.

Fantazia says his group went in with the attitude "let's remember we're coming from different cultures and from different business climates. Neither is right or wrong, just different." GFMG tried to match up Americans with Russians of similar professional backgrounds whenever possible, he says, and worked at developing trust before talking business. Adds Haglund, "We literally consumed a month's worth of days" talking through the structure and governance of the ventures, he says. The Russians are still developing their business law, says Haglund, but have made good progress in making the region friendly to foreign investment.

However, significant hurdles remain before a single log or board makes its way to the United States. Two of them are environmental. One major concern is introduction of forestry pests to American forests. Oregon State University associate forestry professor Greg Filip, a forest pathology and integrated forest protection scientist, says the United States is worried about the Asiatic gypsy moth, the nun moth and maladies like annous root disease hitchhiking to this country. Heat or radiation theoretically will do the trick, he says, but not enough research has been done to satisfy American officials. Russia lacks the facilities to heat treat raw logs, but has some facilities for lumber.

The other key concern, of course, is logging in an area with its own special ecosystem. The cold forests of eastern Russia are the home of the Amur (Siberian) tiger, unusual smaller cats, salmon, a rare species of salamander and various species of bear, to name a few. By most accounts Russians are very sensitive to foreign companies coming in to exploit their resources. The Forest Service's Flora says a Korean company was sent packing for reportedly not displaying concern about tiger habitat.

The cold conditions make for slow growing trees says OSU's Filip, which means "it will take a fair amount of time to grow back." He adds "it's easy to go over and look at lots of timber over there and just slick it off and mine it. The real challenge for the Russians and whoever is involved with them is it will take some years to learn how to do it right. We're still learning here and still have a long way to go."

Sohn says the consortium plans "a light touch" in the forests with riparian zones to protect water, restrictions on steep-slope logging and winter operations when the ground is frozen to reduce erosion. GFMG also plans to selectively cut and use clear-cuts only when absolutely necessary.

Meanwhile, GFMG shipped $3.5 million in tractors, trucks, log loaders and other equipment to Russia in September to begin initial operations. Work has begun on the port expansion and refurbishment. The consortium plans initially to ship whole logs or some form of finished lumber to Japan, Korea and other Pacific Rim countries. It hopes product will come to the United States by late 1995. GFMG has about $9 million in its venture and plans up to $70 million in investment.

The final but perhaps greatest hurdle will come from blending two peoples with much in common, but markedly different business experience. As Filip, who toured the region just before the break-up of the USSR, put it: "It was like going back in a time machine." Russian forestry practices, indeed the whole of east Russian society, is 50 years behind the United States, he said. Filip got the impression the former Soviet government kept it that way on purpose. Russians would half-jokingly tell him "if the U.S. attacks they won't be able to move."

Now, however, with the Cold War over and millions of Russians without work, the country is in great need of hard currency from exports and jobs, both of which foreign investment can provide. Flora notes that there is a workforce already in place in the region in the form of one million former Soviet soldiers.

GFMG's Fantazia says a key element of the joint venture will be to educate their Russian partners in modern forest management and capitalist business practices, without offending them.

He seems aware that the Russians will have a few lessons for their American partners as well.

REFERENCE DESK

The Barefoot Shoemaker: Capitalizing on the New Russia; Vladimir Kvint, Arcade Publishers (Little Brown) 1993.

Soviet Natural Resources in the World Economy (essays), edited by Robert G. Jensen, Theodore Shabad, Arthur W. Wright, University of Chicago Press, 1983.

The Russian Century: Photo History of Russia's 100 Years; Brian Moynahan, Random House 1994.

Russian Far East Update (monthly newsletter, $275 year); Elisa Miller, editor and publisher; P.O. Box 22126, Seattle, WA, 98122. (206) 447-2688.

The Russian Forestry Sector Outlook (partial title), working paper 46, U. Washington College of Forest Resources, AR-10, Seattle, WA 98195; $10.

Global Forestry Management Group, Portland. (503) 228-2291. Members: Avison Timber; Croman Corp.; Freres Lumber; Hanel Lumber; Ochoco Lumber; Sun Studs; Columbia Vista Corp.; SDS Lumber; Sierra Forest Products; Hi-Ridge Lumber; Jones Stevedoring; S.L. Follen.
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Title Annotation:Global Marketplace; forest products and international trade
Author:Dodge, Steve
Publication:Oregon Business
Date:Jan 1, 1995
Words:1889
Previous Article:The shape of things.
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