Comment: The Crimean crisis and the possible repercussions for the European timber market

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Recent escalations of tensions in Crimea between Russia and Ukraine have hit the worldwide markets on Monday. The Russian stock market was the most affected and slumped over 11% when trading began on Monday, according to the Moscow Interbank Currency Exchange (MICEX). European markets declined an average 1% yesterday: the German DAX fell 2%, Spain’s IBEX decline 1,9% and the Italian FTSE MIB is down 2,3%. Moreover, the gold price jumped more than US$ 20 per ounce to US$1,347/oz, and the oil price by over US$ 2 per barrel to US$ 111.32.

Apart from the political aspects of the tensions between Russia and Ukraine, there are some concerns over the stability of the European and global timber market.

Russia is the world’s largest log exporter and the fourth softwood lumber export country in the world. Moreover, Russia covers more than one fifth of the global forests and accounts for almost 5% of the worldwide timber trade.

After a decline in forest products shipments from 2007 to 2012, due to high tariff export quotas (ex.:25% for softwood logs) Russian timber deliveries revived after the long-awaited membership to the World Trade Organization (WTO) in 2012. Russia had to make some concessions: after tough negotiations the Russians agreed to decrease export taxes on timber exports by almost half. Since then, an upward trend could be felt in Russia’s wood products exports worldwide.

What are the possible economical consequences of the Crimean crisis?

If the Ukrainian crisis continues, Russia is in danger to be both politically and economically isolated at least by the Western countries. The US Secretary of State, John Kerry, said on Sunday that ‘Western leaders are prepared to respond with economic sanctions, asset freezes and visa bans on Russia for its actions in Crimea’. US’s President Barack Obama also said that Russia will have ‘to support costs’ over recent actions in Crimea. European leaders joined the American position and warned Russia with economical sanctions and even exclusion from the WTO.

In terms of sanctions the scale depends very much on the evolution of the events. If the conflict further escalates it is certain that the first measure the West is going to take is to economically sanction Russia. What this could actually mean is not quite clear yet, as the market inter-dependency (Russia-Western countries) is very deep, but there are some precedents that can give as a bit of a clue.

For example, in 1990, the Iraqi invasion of Kuwait led to a near total financial and trade embargo imposed by the United Nations Security of Council. A more close scenario to the present one is the sanctions imposed to Iran’s nuclear programme. Without a UN mandate, US and EU alone imposed harsh restrictions on: foreign trade, energy sector etc.

In the Russian case, it is impossible that the UN itself would impose economical sanctions to Russia as a decision should be taken by the Security of Council, where Russia has a veto right. Thus, a possible economical punishment decision against Russia could be taken alone by the US and the EU countries.

Crimean crisis and its potential implications in the European timber trade

What could worry most the timber industry in this case is a trade embargo Russia/Western countries that might dis-balance the entire global timber trade functionality.

There some tight connections between Russia and the EU concerning the wood industry. First of all, many major European timber companies have operations in Russia, especially the Northern European companies. Plus, Russia is the second extra-EU wood products exporter to the EU, after China. By November 2013, Russia exported wood products (under HS code 44) worth EUR 2,7 billion and has at the present a market share (excluding EU member states) of 15% on the EU market. The EU also exports wood products to Russia of nearly 1,2 billion per year.

Overall, the EU-Russia timber trade is over 4 billion annually. If the Crimean crisis deepens, a possible trade embargo (partial or total) scenario will become very feasible, which could have disastrous consequences for the European timber industry.

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