Market Know-how: A Forest Tale

In the post-perestroika years timber became an article of merchandise, and the attitude towards it became consumerist, if not barbarous. Illegal logging trade flourished, “unofficial” timber exports began. A variety of small firms were established, involved in illegal logging and sale of timber to log home builders inside the country.

Round wood is sold for cash in Russia by criminal groups, Vitaly Nomokonov, head of the Vladivostok-based organized crime and corruption research center, insists in his article “On Specifics of Transnational Crime in Russia’s Far East”.

Timber Rich Provinces

According to WWF Russia’s estimates, illegal logging accounts for 15 to 20% of total output in northern Russia, in certain regions that figure stands as high as 50% of the entire volume of logging industry in this country. Illegal felling is rampant in all timber rich provinces – in Russia’s Northwest, south Siberia and in the Caucasus. Far East holds the lead. According to the federal forestry agency, over the past 50 years the state of forests across the country has deteriorated drastically, with softwood reserves having shrunk nearly by half.

“The so-called non-profile timber processing enterprises are widely spread in our northern provinces,” says Vladimir Dmitriyev, WWF Russia’s coordinator of Forestry Policy (World Wildlife Fund). “They are housed in sheds or derelict cow-houses, and their owners perceive a popular slogan of [a Russian company] Global Edge, which sells sawmill equipment: “Saw yourself rich” as a guide to action. It takes 2 hours to log a truckload of first-class timber. Forests in proximity to settlements and along the roads have been practically entirely felled.”

Illegal loggers “saw” themselves rich with all available means, Dmitriyev continues. Small batches of 1 to 2 logs are logged by the so-called “termites”. Their three-wheel motorcycles can carry as much timber in one day as the largest timber truck carries at a time. Timber is traded for cash, both retail by “termites”, and wholesale from trucks. “At best, illegal loggers remove 50 to 60% of all trees felled, taking only the best logs with them and leaving the rest behind in the forest. The best logs are exported. Once the log is sawn later on, at least 50% of timber goes to waste. That waste is not used in any way. In Russia’s Far East there are no pulp-and-paper mills, no wood-based panel production,” the environmentalist says.

Forest industry’s investment appeal remains low, PricewaterhouseCoopers reports. PWC experts say the potential of the industry remains largely unrealized. Over the past years, none of the country’s major timber companies announced any significant investment projects.

Meanwhile, chairman of the federal forestry agency, Valery Roshchupkin, in his numerous interviews speaks of investment projects to build pulp-and-paper mills in timber rich provinces, with a view to process soft-leaved tree wood and low-grade timber (Russia has over 5 billion cubic meters of such in the European part of the country alone), as a “vitally important issue”. Admittedly, the official understands perfectly well why investors shun the timber industry. “Each such project means long-term, multibillion investments poured in timber production proper, development of transport and energy infrastructure and conservation efforts,” Roshchupkin says.

Russia’s network of logging roads is largely underdeveloped, as compared to other world’s leading timber-producing nations. The federal forestry agency reports that Russia has only 1.2 kilometers of roads 1,000 ha of forests, which is 10-20 and or even 40-times lower than in Northern Europe or North America. Poor infrastructure, administrative hurdles and illegal logging are the main reasons why investors are not willing to enter that market. “Our country loses 5 to 19 billion rubles annually as a result of illegal felling,” Dmitriyev says. “Those are official figures. If you ask exporters or traders where their timber comes from many of them will not be able to answer.”

Experts describe such timber as timber of unknown origin. It has to be noted that while only a couple of years ago officials measured losses in cubic meters and reported very low losses – of approximately 700,000 cu.m. (versus legal annual output of 150 to 190 million cu.m. and export volumes of 42 to 44 million cu.m.), in more recent months losses are registered in rubles and figures are adjusted constantly as they grow. Experts no longer conceal that Russia is on the top list of nations where illegal logging is rampant, along with Brazil, Cameroon, Gabon, Indonesia and Malaysia.

Timber is sold on spot at prices ranging from 300 rubles for a 300-year-old tree to $43-$50 per 1 cu.m. Nomokonov notes that “many Chinese entrepreneurs arrive directly on log landing sites to purchase timber for cash. The regions along the Russian state border run a wide network of smuggling points where illegally logged timber is purchased at knock-down prices.” Timber is resold abroad at $135, while the auction price of valuable timber runs into hundreds, and even thousands of dollars per 1cu.m.

“China imports about 20 million cubic meters per year,” says Dmitriyev. “That means nearly half of all imported timber. Scandinavia is the second largest importer. Finland imports 11 million cu.m, while Sweden takes 5 million cu.m. Then comes Japan. Those are major importers. Among those who import smaller volumes there are even African nations.”

Law Changes

To this very day in Russia while some harvest, others restore and cultivate. The entire forest is divided in terms of economic targets and environmental values into three categories. The first group comprises rare valuable protection forests (gorge forests, water protection forests, sanitary, hillside forests, forest-tundra forests) or “historic” trees, e.g. the Peter the Great oak or Casanova bush.

In accordance with the Forest Code 1997 general-purpose cutting is heavily restricted in protection forests. Valery Roshchupkin complains that while excessive and often-unfounded restrictions impede legal logging of over 45% of adult and over-mature wood, they fail to prevent illegal logging. Attempts to alter the state of affairs were made by the authors of the new version of the Forest Code. In April 2005, the draft received first reading approval but second reading is still pending.

The government has suggested introducing the status of “long-term stable forest user” responsible for forest management and restoration on leased plots of land, and adopting a functional classification of forests as protection woods, exploitation woods and reserve forests. Reserve forests will not be exploited for at least 20 years.

The world’s richest country in forest reserves – Russia accounts for 25% of the world’s forests, with over 50% of its territory covered with woods – still faces the problem of loss-making forestry, whose share in the world forestry economy stands at only 3%, dreaming of the times when its forestry industry will compare to the oil and gas sector in terms of profits. “For the time being, forests are still being largely regarded as the last natural reserve that still has not been divided. The government is willing to partially relieve itself of responsibility for forest conservation and shift responsibility to new freehold and leasehold owners,” says Dmitriyev.

The WWF-led analysis of amendments introduced to the 1997 Forest Code in effect today, the new draft Code and other forestry-related laws shows that quite often provisions of those acts contradict one another. The Constitution allows all types of ownership in forests (private, regional and municipal) but none of the acts determines terms and conditions of forest use by new owners.

It is assumed that it is the duty of a new owner/lessee with a long-term leasehold interest to manage their forest reserves, as well as carry out logging operations. The problem is that the draft code offers no clear-cut explanation as to which operations make up forest management, which works are to be carried out by the owner/leaser at their own expense and which are to be financed from the federal budget. “The authors of the new Forest Code are doing illegal loggers a great favor,” Dmitriyev notes. “The law calls for abandoning forest exploitation licenses and switching to a notification procedure, which means that instead of applying for logging tickets or other papers sanctioning cutting, issued by the owner – today, it is the government – each forest user will be merely required to submit a declaration of his plans and volumes of planned logging. Forest poachers will only welcome such policies.”

Fighting to Protect Forests

WWF Russia first focused on combating illegal logging in 1996, as soon as the Fund launched operations in Russia’s Far East. A Russian chapter of the Traffic program compared satellite data on the size and location of cutting areas with information provided by local forest farms. It transpired that the actual size of cutting areas exceeded the size of the area where cutting is officially sanctioned 1.5-fold.

In 1998, WWF launched a project titled “Sustainable Forest Management in Amur Region”. As part of this program, WWF established a special group Kedr whose employees began with gathering and examining official data provided by the statistics department of the Maritime Region, Far-East Customs Department and Maritime Region’s Forest Management Department. Then, the group went on raids through the forests. Kedr’s inspectors detected illegal logging sites, registered the wrongdoings and forwarded the data to prosecutors. In the years 1999 to 2003 the group seized over 5,000 cu.m. of illegally felled timber. 131 criminal cases were launched.

In late 2000, WWF Russia held a pilot investigation into illegal cutting and illegal timber sale in Maritime Region. The probe and Kedr-conducted research revealed serious problems in the regional forestry sector. Illegal timber sales had reached $150 million, which amounted to 50% of the regional budget at the moment. The environmentalists established that the entire output of illegally logged timber is exported to China in raw logs. The lion’s share of earnings from sale of timber also stays there. Upon crossing the border the prices drop 2 to 10 times below their real value. Customs duties prove to be just as low. The difference between declared and actual value is paid to the supplier in cash and quite often stays in foreign bank accounts.

Kedr and WWF have found that illegal logging is practiced by well-organized criminal groups at the connivance and often with support of government bodies, law enforcers and environmental agencies. That conclusion had cost inspectors a lot. In February of 2003 Kedr was closed due to alleged “failure to fulfill the tasks set before it,” although the results of the work of the Kedr anti-poaching inspection brigade were comparable to that of the entire forest protection force of Maritime Region, which was 2,000-strong at that time, Dmitriyev says.

WWF experts believe that the 2005 administrative reform brought about a golden age of forest poaching. “Following the delimitation of functions of government bodies, Rosprirodnadzor (Russia’s state environmental watchdog), was granted enormous inspection powers but at the same time a ridiculously small inspector workforce – 4 to 5 inspectors per each region of the Russian Federation,” Dmitriyev explains.

Law and Business

Illegal logging nowadays is viewed as a major challenge in most countries across the globe. Seeking a solution to the problem environmentalists hold international seminars and conferences to adopt all sorts of declarations and guidelines. Not long ago Russia joined the Forest Law Enforcement and Governance process, which aims to combat the threats posed to forests by illegal logging, trade, poaching and corruption.

Meanwhile, major international timber concerns are pursuing their projects in Russia, aimed at achieving maximum transparency in the field. For example, Finland’s Stora Enso, working together with a number of foreign publishing houses and Russian raw timber supplier Russky Les, has launched the Tikhvin Project to promote transparency in forestry industry. Stora Enso says that the goal of the project is to promote legal turnover of timber and environmental responsibility. The Tikhvin Project was launched in 2005 by five companies working in different links of the paper production chain.

Also, beginning mid-1990s Stora Enso regularly audits the origin of timber in Russia. Olga Rogozina of Stora Enso says that the first step in that direction was the creation of a map of conservation areas in the European part of the country. Then, environmental and labor safety requirements were added to the program. The audit of timber origin is part of the company’s environmental management program. Stora Enso runs a network of regional branches and subsidiaries across the country. Russky Les is the daughter company of the concern since 2004. Control and verification of origin of timber is the responsibility of regional purchasing managers. The company works with reliable partners, selected in line with certain requirements. In particular, agreements with suppliers contain environmental and legal requirements referring to origin of timber. The company carries out regular internal and external audits. Each year 30 to 35% of all sellers, logging companies and cutting areas are inspected. The data on origin of wood is stored in a general database, which comprises GIS-maps, licenses, information on certificates, environmental data and output of logging. Where grave wrongdoings are detected a contract with a faulty supplier is set aside.

Another major Finnish Concern – Metsaliitto Group – also tracks the origin of timber. The system was introduced in 2000. The company is interested in removing illegal timber from the market. Timber produced on the basis of sustainable forestation is expensive, whereas illegal logging may result in a 7 to 16% decrease in prices according to a survey by Metsaliitto Group. In 2005 alone the concern imported 3 million cubic meters of Russian wood. Company representatives claim that the origin of all supplies had been checked. All contracts contain environmental policy requirements suppliers are to meet. The fundamental principles of that policy are legality of supplies, compliance with local laws, support of forestry certification, an increase in volumes of legal timber supplies, etc.

Each contract has an attachment containing data on location of a cutting area from where timber is to be supplied and information on logging tickets held by suppliers. On the basis of those attachments, Metsaliitto’ inspectors plan spot checks. Collected information is entered into a general GIS-linked database. As a result, the data on timber origin is included in the GIS map and the system issues a warning on possible discrepancies, for example if the distance from the cutting area to the landing station is too large or the station is located in proximity to conservation areas.

The database compiled with the Geographical Information System is used as a basis for planning inspections of suppliers and logging areas. Annually, at least 60% of supplies undergo such checks. Special attention is attached to in-depth inspections into operations of new partners and intermediaries. All suppliers fall into four categories – A, B, C and D. Suppliers or logging firms falling into the D category, which happens if grave violations are detected, the company raises the question of suspending cooperation with the supplier.

Wooden Countryside

Log home construction is a traditional business in Moscow countryside. The recent years saw a rapid development of expensive wooden countryside mansions. “The interest in log country homes emerged relatively recently,” says Valery Mishchenko, development director at the investment and construction holding Rodex Group. “Log homes are, for the most part, dachas situated at a considerable distance from the Moscow outer ring road.” Countryside compounds Slavenka and Rodex were built by Rodex with Arkhangelsk pine factory finished timber, Mishchenko says. For construction of the Rancho compound the group had ordered 150-year-old larch. Rodex’ representatives would not elaborate on who the group’s suppliers are.

The Moscow Region has witnessed the emergence of large countryside compounds as well as small country-house settlements comprised of log homes, while major out-of-town property developers use brickwork and aerated concrete. Construction companies prefer working in cooperation with suppliers from northern provinces of Russia and establish contacts with them on their own. Dmitry Abramov, deputy general director at Garant-Stroi company, says that today quite a few companies are involved in log home building. Those are Severny Dom, Noverzhsky Dom, SV Stroi and others. They are catering mainly to individual clients and use coniferous trees, Abramov says.

“Our company uses domestic timber, just as the majority of other companies. In 1997 we traveled to Kirov Region and looked for suppliers on site,” Abramov says. “The price of 1sqm for our buyers is $400 to $900. The log home market today has clearly dumping offers, there are also projects, which would cost $100,000 in Finland, while here they are sold for $270,000. None of the Russian companies can compared to Honka in terms if quality.”

Speaking on condition of anonymity countryside developers admit the following: a construction firm seeks to minimize cost and sell its product as soon as possible. Those who have been in that business for years cannot afford cheap construction that is why they look for ‘inexpensive’ subcontractors and thus economize on quality. The main timber suppliers are Kirov, Irkutsk, Vologda and Arkhangelsk regions of Russia. As to the origin of their timber, whether it is legal or not, is hard to tell. Those regions have already developed a system of their own. All the developers polled by Vedomosti insist that their wood is of legal origin.

Nonetheless, construction firms do not feel in the least embarrassed to place ecologically dubious ads such as: “Log homes built of relic pine wood” on over-the-road posters across the city. Glossy real estate magazines abound with offers of lakeside sites and country houses in a protection relic forest. “It should be noted that the law bans cutting relic woods and certain individual species such as cedar or chestnut,” Dmitriyev says. “Construction is banned in forests, especially in conservation areas. That is why buyers should inquire about the origin of timber their home is built of. Relic forests are virginal forests preserved from time immemorial. Those forests saw dinosaurs, the Ice Age. Time had spared them but Russian builders did not.”

“We launched construction of log homes 14 years ago. In those days, the market was practically vacant,” says Pyotr Karpov, deputy general director at Vivat, Moskva company. “Today we have production facilities in Kaluga Region. Those are workshops where we process raw logs purchased from our suppliers in Kirov and Arkhangelsk regions. We established contacts with them ourselves, we visited the northern provinces. The northern timber is more solid, that is why it is traditionally used for construction of wall structures. Timber produced in the middle belt of Russia is more porous, that is why it is used for floor panels, fences, etc. A cubic meter of raw timber costs $50, while 1 cu.m. of glued wood is sold at prices of $600 and over.”

Earlier, Vivat Moskva tried to establish ties with the Chelyabinsk-based woodworking factory Ekodom, the manufacturer of glued wood products. But the company had to wait for the order for more than 12 months although the payment was paid in due time. “We were told the factory was experiencing financial difficulties,” Karpov said. “As a result we nearly lost our customer who was angered by the delay. Today we are building the countryside compound Serebryany Vek, which will be comprised of 20 homes built of glued wood. In outward appearance our homes are similar to those made in Finland, interiors are designed to meet all requirements of Russian clients, with large rooms, high ceilings, large pools and saunas. A site measuring 30 to 35 hundreds of a hectare with a house of 400sqm decorated on a turn-key basis costs $1.5 million and over.”

“We had worked with many suppliers before we found those who are able to meet our requirements,” says Taras Nechiporenko, general director at the company Farm House, which is currently developing a countryside settlement Derevnya Ozerna. “A 200-square-meter house requires 50 to 40 cubic meters of timber. Each year we build 41 homes. Timber for our dachas arrives from Vologda Region, our supplier is the National Timber Company (NLK). 1 cubic meter of raw round wood costs 5,000 to 6,000 rubles on average, dry wood costs 10,000 rubles.” (NLK is the management company with a group that comprises timber companies in northwest Russia and other parts of the country. – Vedomosti).

Developers of economy-class compounds seek to minimize costs that is why log homes are rare. For, when working with raw timber it is necessary to wait for a year before the structure is dry enough to begin decoration works. There are no such problems with glued wood, but it is much more expensive. “Companies developing business-class settlements prefer glued wood while economy-class builders use raw timber,” Nechiporenko says.

“Some developers who build out-of-town settlements use timber but wooden construction is not as popular as, say, in Finland,” Andrei Sarmin, head of out-of-town real estate at Novoye Kachestvo, says. “In Finland, wooden home construction is cost-saving, it belongs to economy class. Their middle income earners live in such houses, while in Russia a square meter of space in a Finnish home costs over $1,000, which hardly falls within the economy category.

“Russian construction companies are not as well-known, they don’t have their brands, and buyers don’t trust them as much as they trust Honka. Developers cannot expect them to honor all contractual obligations that is why they rarely contact our firms. Besides, timber restricts the choice of design solutions while with stonework any architectural style is possible. That is why today timber is used more often in individual projects, not in compound development. Those are, for the most part, countryside settlements in remote location of the Moscow Region. People buy land parcels and build on their own. There is a possibility that log home construction will create a basis for mass countryside development, but that is not likely to happen any time soon.”