Russian production of solid wood products to increase in 2007 and 2008

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The Russian production of solid wood products is forecast to increase in 2007 and 2008 due to growing international and domestic demand. Exports of softwood logs, lumber, and hardwood plywood are increasing with China, Japan, and Finland as the major destinations. The continued growth of the Russian economy is leading to an expansion in domestic demand for wood and wood products, primarily from the furniture, construction, and paper/pulp sectors. The Russian government has prioritized combating illegal logging. However, little progress has been made due to rampant corruption and the lack of coordination between government agencies. The new Forest Code entered into force on January 1, 2007, but its full impact on the sector is yet to be seen.

Output of softwood logs and softwood lumber is expected to increase by seven and ten percent in 2007 and 2008, respectively. This production increase is supported by strong export demand, mostly from China and Finland, and by the rapid expansion of domestic demand from the wood processing industry, as real disposable incomes continue to grow and retail sales remain strong.

Growth in the domestic wood processing sector is forecast to increase by more than seven percent annually in 2007 and 2008, boosted by 32.5 percent growth in housing construction along with steady 15 percent increase in the production of panel products (particleboard and medium density fiberboard), and a six-percent increase in veneer production. Part of the increase in the housing sector is attributed to the recent government initiative to implement the national priority project “Housing” aimed at providing affordable housing for young families primarily in rural areas. This sector is also attracting foreign investment, largely from large and vertically integrated enterprises. Higher returns on investments in wood processing facilities, along with a new export tariff policy implemented by the government, will likely maintain expansion at high levels compared to other categories of the forest sector.
However, according to trade sources, production of solid wood products in Russia will be constrained by outdated machinery, lack of accessible roads to forest sources, higher energy and oil prices, and uncertainty about the impact of the new Forest Code.

Total exports of forest products (Chapter 44 HTS) in 2006 are estimated at a record $6.6 billion (up 9 percent from 2005), while imports of forest products are also expected to set a record at $465 million (up 26 percent from 2005). Both export and import values are forecast to increase in 2007 by 15 percent and 24 percent, respectively. This increase in exports is mostly attributed continued firm demand from China and Finland, and to a lower extent from Japan, as well as an increase in exports to other markets such as Egypt, Estonia, the United States, and the European Union. However, Russian solid wood products exports are still highly concentrated in three markets – China, Finland and Japan. These markets account for 50 percent of all forest products exports from Russia. Although the share of unprocessed wood exports, such as logs, to these markets declined from 82 percent in 2004 to 78 percent in 2006, the rate remains high. On the import side, the European Union is the largest supplier of wood products to Russia, followed by Poland, China, Ukraine and Finland. Solid wood imports consist mostly of processed products. Early in February 2007, President Putin, speaking at a meeting with several of Russia’s wealthiest businessmen in the Kremlin, expressed his concern that the Russian economy suffers from an over-reliance on raw materials and called on corporations to move toward producing high-value exports. Putin acknowledged that the share of exports of Russia’s main unprocessed raw materials increased from 80 percent in 2000 to 85 percent in 2005.

After nearly three years of discussions, a new Forest Code passed its final reading in the State Duma and entered into force on January 1, 2007. According to the Federal Forestry Agency, total investment in the forestry industry is likely to reach $4 billion by 2008, up considerably from $2.4 billion in 2005. However, forestry analysts estimate that total long-term investments necessary to modernize the forest sector in Russia would total $24 billion during 2006-2010, of which 80 percent should come from the private sector, including foreign investors. About 60 additional legislative amendments to the new Code are likely to be issued before July 1, 2007, which will enable full transition of the forestry complex operation and management under the new rules.

Tariffs

The Russian Government is still working on a new proposal to apply selective tariff rates for exports of value-added forestry products. According to government resolution #340 dated June 2, 2006, export duties were reduced to zero, beginning July 2, 2006 for certain types of paper and carton. As part of the government's goal to gradually increase the export tariffs on logs, on February 5, 2007, the government published Resolution #75 (to enter into force on July 1, 2007), increasing the export tariff on coniferous logs to 20 percent, but not less than 10 euros for one cubic meter. On April 1, 2008, the tariff will increase to 25 percent, but not less than 15 euros, and as of January 1, 2009, up to 80 percent, but not less than 50 euros.

In addition to gradually increasing export tariffs on round wood, the government is planning to lower import tariffs on high-tech equipment for wood processing. The goal is to reduce exports of unprocessed timber and increase domestic processing of wood products, as stated by President Putin in early February. However, despite these changes in government policy to increase export tariffs for round wood, log exports remain high. According to Rosstat, export of this wood category increased by 7.7 percent during January-October 2006, compared to the same period in 2005.

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