By Arina Sharipova
The planned increase of export duties on Russian round timber has been suspended at least until the autumn of 2009, Prime Minister Putin said following his meeting with Finland's prime minister. The Russian timber industry supported the decision to postpone the duty increase. The latter was intended to attract investment in the industry, however the majority of investment projects would have required credit. The suspension of the duty increase to €50 per cubic meter will mostly hurt large timber producers - prohibitively high duties helped them drive smaller competitors out of business.
The Russian government will delay export duty increases on timber processing products by nine to twelve months, Prime Minister Putin announced after a meeting with Finland's Prime Minister Matti Vanhanen on Tuesday. According to Mr. Putin, "this applies to the entire range of the Russian timber industry products." He said the decision was made to prevent the collapse of Finland's economy. "The reduction of our timber exports to Finland during the world economic crisis not only may result in reduced production volumes but also could result in job cuts."
In 2006, Putin frequently criticized the practice of exporting Russian timber abroad for processing. To address the issue, the government came up with a series of measures: the first measure established a detailed gradation of exported timber and increased the export duty rate's specific component from €2.5 to €4 per 1 cubic meter of unprocessed coniferous timber. The next step was to establish a three-stage, 30% a year, export duty increase on round timber - coniferous timber, birch wood, aspen (except paper wood), as well as precious wood and hard wood. Based on that decision, the export duty rate's specific component went up to €10 per cubic meter beginning July 1, 2007 and starting April 1, 2008 - to €15 per cubic meter.
The final increase to €50 per cubic meter was scheduled for January 1, 2009. Essentially this would have been a prohibitive duty. The government was planning on Russian timber companies to start building processing plants in 2007 and to attract foreign investment for the purpose. As an additional incentive, the duty on processed timber products was waived, and the timber companies were offered preferences during the facilities' construction period.
Finland, which is the second largest importer of Russian timber after China, came out strongly against the increase of export duties. Prior to the duty increase, Finland was importing about 16-18% of Russian timber exports, and China's share was 53-60%. According to Finnish estimates, a number of pulp and paper plants in the country would have been forced to close as a result of the Russian duty increase. However, neither the prime-ministerial meetings nor the threats to block Russia's WTO membership changed the Russian position. Some Russian experts were also skeptical about the positive effect of increasing export duties. The timber, according to them, would decay in Russia, while the processing companies would go out of business without raw materials. The UPM Company estimated that between January and August of 2008 Russia exported 8.4 million cubic meters of timber to Finland, and in 2007, Finland imported 18.2 million cubic meters of timber, 66% of which was Russian. The "blockade" did not result in a timber industry decline in China. The Chinese partially switched to importing timber from South East Asia, and partially added the duty rate to the end product cost for consumers in the US and EU.
Evidently, the Russian government had to compromise in the face of the economic crisis. "The timber industry does not have sufficient resources to invest in processing facilities," said Anastasia Kopylova, Senior Analyst with Lesprom Network. "Due to lack of investment funds, these companies are not able to modernize, hence timber needs to be exported," said Natalia Pinyagina, Department Head for relations with state agencies at the Arkhangelsk Pulp and Paper Plant. She mentioned that in the Far East there were no processing facilities at all, and the region's timber companies were on the verge of bankruptcy. Russian timber companies believe that under the circumstances the government's decision was correct. According to "Ilim" Group Board Chairman Zakhar Smushkin, "timber exports will provide a stable flow of revenue for timber companies; will improve their finances and create additional jobs." Still, industry representatives hope that the decision to suspend the duty increase is only provisional. "Export duty will still be increased in the future," Mr. Smushkin said. "In the meantime, we can take advantage of the delay during the WTO membership negotiations," Ms Kopylova said.
The duty increase delay will mainly hurt large timber producers. "They were expecting that export duty increase would force the smaller producers, undercutting market prices through small scale sales, out of business," Anastasia Kopylova said. Now they will have to wait until export duties go up again. Export duty suspension is "positive" for Finland, said Siksten Sunabaka, timber production and processing director for UPM (a company with business in Northern Europe and Russia). "It will give the country's timber industry some extra time." Still, his company will continue reducing import share and increasing the share of Finland's forests as a raw materials base.