EBRD study on forestry: How to attract forest industry investments to Russia

By EBRD  Press Office

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Bank suggests action plan to help Russia compete with South America and China

An EBRD-commissioned study on the international forest industry recommends a step-by-step action plan that would enable the Russian government to attract the substantial foreign investment needed to exploit the country’s vast untapped forest resources.

Russia’s 800 million hectares of forest represent nearly a quarter of the world’s forest resources yet Russia accounts for only 3.5 percent of the market in forest products.

In the last three decades there has been no investment in major green-field pulp and paper projects in Russia. Instead, international industry players prefer South America and China as locations for new pulp and paper mills needed to feed the world packaging industry and meet the global demand for paper.

It is true that over this period global giants have invested in Russia to modernize and expand existing Russian pulp and paper mills, including with EBRD co-financing.

However, the cost of building green-field pulp mill in any country is significantly higher than brown-field ones and investors, always keen on a predictable environment, want to be much more certain of the future before deciding on such a major outlay.

This is why the Russian government needs to ensure investments in this sector of the economy become attractive for the major international players. These are today the only ones with the resources and know-how needed to build high quality mills incorporating state-of-the-art environmental protection measures such as recycling waste and water and using equipment compliant with emission standards.

The survey details the benefits Russia stands to gain. Working with respected industry players would give comfort to the Russian authorities that a new mill would comply with high standards of financial transparency, social responsibility and forestry management. In addition a new mill would

  • increase Russia’s self-sufficiency in chemical pulp and support the growth of the Russian domestic paper, tissue and board industry
  • improve employment and welfare in local forest communities
  • generate economic growth and tax revenues

have a knock-on effect on other industries such as those producing solid wood products and packaging for the domestic and export markets, thus contributing to the diversification of the Russian economy away from dependence on raw material exports
The survey, carried out by Pöyry Management Consulting, a leading forest industry consulting firm, compares what is on offer in three Russian regions with extensive forest resources -- Vologda in the West of Russia, Krasnoyarsk in Siberia and Khabarovsk in the Russian Far East -- with conditions in Australia, Brazil, China, Mozambique and Uruguay.

The three Russian regions covered by the survey do hold out certain advantages compared to their foreign competitors. The low cost of wood, for instance, makes Russia a competitive location for producing pulp for the Asian market, especially in the Russian Far East, which borders China.

But given the much slower growth of trees in the north of Russia, as opposed to that of eucalyptus plantations in more southern countries now attracting international investments, the size of the forest area needed to support a world class pulp mill in Russia is many times larger.

This multiplies the infrastructure requirements and transport costs. And this is precisely when a government’s ability to compensate for such disadvantages comes into play. Russia has the option to redress the balance in its favour by drawing on the best practises of countries with a very new but already flourishing forestry industry.

  • Under the three-step action plan recommended by the EBRD, the Russian authorities first need to focus on how additional funding can be made available to develop infrastructure outside the mill perimeter, including forest roads, utilities, logistics, housing and municipal infrastructure. These costs play a huge role in investment decisions.
  • Other first steps in this phase should include the piloting of modern and tested sustainable forest management practises for wood supply. These need to comply with standards set either by theForestry Stewardship Council or by the Programme for Endorsement of Forest Certification Systems. Both are independent bodies set up to promote responsible forest management.
  • Because of the very large size of the forest area a pulp mill requires in Russia, Priority Investor Status should be granted to mill owners to cover the entire wood supply area, including where it crosses regional boundaries.
  • This should be followed up by a second package of reforms focusing on reducing implementation risks. These should include ensuring that an adequate amount of forest leases is set aside in the logical wood supply zone – with the investor having a priority right to taking control of expiring leases.
  • In addition, a pilot scheme should be introduced in the mill zone for adapting international standards on health, safety and the environment to Russian requirements. A “one-stop-shop” for filing and obtaining all legal documents and permits should also be launched as a pilot project.
  • Finally, a third package of reforms should focus on developing tax and financing incentives to increase the attractiveness of Russia as an investment destination for the major players in the world forest industry.
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