Russia: opportunities and barriers in forest products.
Russia holds almost half of the world's softwood resources. The cutting potential exceeds 500 million cubic meters per year, compared with an actual harvest of 120 million. In spite of the growing demand for paper, paperboard and panels, cutting potential will remain largely underutilized in the foreseeable future and beyond.
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The future growth of the Russian industry will depend on the country's success in:
* Maintaining a continuing positive cash flow from existing wood export and forest industry operations
* Increasing investments in expansion and modernization of production capacity by domestic and foreign owners
* Developing the country's infrastructure to serve the growing export and domestic markets
* Improving the institutional framework, including new forest legislation and a clarification of the role of different public organizations in the forestry sector.
We see a number of macroeconomics and strategic drivers supporting the growth of investments in the forest industry sector. However, the growth has been impeded by several constraints.
The investment constraints are manifold, including gaps in the legislative framework and its implementation and an underdeveloped banking system and inadequate infrastructure. One key constraint, the inadequacy of the Russian forest legislation, is discussed below.
The Russian Government has recently been active in forest industry development. Forest Industry Development Priorities were accepted in the Fall 2002 and the forest legislation is under renewal (the draft Forest Code was preliminarily accepted by the Government in March 2004, but still forwarded for adjustments). The new Forest Code focuses on macro-level issues. Most of the details are still under development and a huge amount of lower-level regulations and decrees remain to be renewed before the reform is completed.
It is still somewhat questionable how and when the new Forest Code will be able to establish a legal and institutional framework where:
* State forest administration units would not both control that the law is followed and implement forest management operations (such as forest regeneration and thinnings) that they are assumed to control, and
* There is only one company/organization responsible for all forest management activities in a certain forest area, facilitating a rational and sustainable long-term management (not one carrying out final cuttings, another regeneration and thinning operations, as is the current practice).
The lack of the above conditions is significantly slowing the development of the forestry sector and investments in forest industries. Other important regulatory issues include:
* Transparent principles to allocate forest resources, auction and competition procedures
* Responsibilities and structure of state forest administration at the local, regional and federal levels
* Procedures to define stumpage and other payments, and the obligations of leaseholders
* Responsibility and financing of forest infrastructure (road) development (see Figure 1.)
Russia will be among the fastest-growing markets globally, although volumes are still low for many forest products and paper grades. The declining country risk is stimulating investment and capital inflow (Moody's defined Russia as an investment-grade country in October 2003). This will likely continue if legal proceedings related to past privatizations do not escalate. We believe that outstanding corporate ownership issues in the pulp and paper sector will be resolved in the short term. We already see investment growth in Russia's forest industries, focusing on the wood product sector in the short term and on the pulp and paper sector in the longer term. Infrastructure investments will translate into higher related costs in the future.
Note: This article is part of a series by Jaakko Poyry Management Consulting, Tarrytown, New York, USA, a provider of marketing and consulting services. Contact Soile Kilpi by email at firstname.lastname@example.org, or by phone at +1 914 332-4000.
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|Title Annotation:||Inside the Numbers|
|Publication:||Solutions - for People, Processes and Paper|
|Date:||Jun 1, 2004|
|Next Article:||OK days are here again!|