Russian Forestry and Wood Supply Operations Analysis
PRIORITY INVESTMENT PROJECTS
Implementation
of Priority Investment Projects
in Forest Management in Russia
Geography of priority investment projects in forest management
in the Russian Federation
Early in 2015, the Natural Resources Institute Finland analyzed the experience of implementation of
priority investment projects in Russia. Currently, a public report is being prepared, to become available
{ priority investment projects in Russia. Curr
The institution of priority investment projects in forest management was
launched in 2007. In the last seven years, 148 projects were registered;
of these, as of January 1, 2015, 129 projects, or 87 per cent, are being
implemented according to the published data of the Ministry of Industry
and Trade, with the rest deleted or being deleted from the priority list.
However, only 108 projects are actually working, while the rest are not
Priority investment project funding sources
137 889
78
Own funds
Credits (loans)
393 548
O Public investments
Source: Natural Resources Institute Finland
Priority investment projects in forest
management registered by the Ministry
of Industry and Trade in 2008-2013
50
40
40
30
20
10
0
2008
2009
2010
2011
2012
2013
Source: Natural Resources Institute Finland according
to the Russian Federation Ministry of Industry and Trade
developing for several reasons while remaining on the list of priority projects
of the Ministry. The main cause of the lack of progress for several of the
announced projects is suspended funding or problems with the company's
timber land holding.
According to the official data on the projects registered by the Ministry, the
investments shown in the projects underway amount to 580.9 billion rubles.
This money mostly comes from loans from international financial institutions.
The average time a wood processing facility in a priority investment project
comes on stream is 3.8 years, according to design documentation. The
average payback time is 6.8 years. The priority investment projects currently
underway consume 89.1 million m³ of wood per year, which makes 46 per
centof the entire wood harvested in the Russian Federation in 2013. In
addition, 71.7 million m³ of wood is earmarked for the implementation of
priority investment projects, which is about 10 per centof the estimated
wood to be felledin the Russian Federation.
Investors are interested most of all in access to cheap wood in the form of a
large timber land holding, for which just 50 per centof the rent has to be paid.
This makes leasing forests and their subsequent subleasing very profitable,
and several companies do in the Republic of Karelia, the Krasnoyarsk Territory,
the Republic of Bashkortostan, and the Tver Oblast do in fact do this.
Investors are mostly attracted by projects related to timber sawing (66 per
centof all projects), plywood making (12 per cent) and chipboard making
(11 per cent). Ten per cent of all projects made investments in pulp and
paper making. It should be said that the average size of investment in pulp
and paper making is seven times higher than the investment in an average
timber sawing project. Most of the priority investment projects currently
underway are within the framework of already existing facilities and are
aimed at updating them, e.g. building new shops foran existing specialization.
For one half of all priority investment projects, the size of the investment
does not exceed 1 billion rubles. There are very few large investment projects
with investments of over 10 billion rubles; just 11 projects out of 129.
We have come to the conclusion that timber sawing projects supported
with a good resource base are the most attractive for investors. Investment
in timber sawing isrelatively small becausethe costs of production and
harvesting (provided theforesthasgood-quality trees and roads) are lower
than in Europe and the demand for sawn timber is growing. All this makes
such projects highly feasible, with record-high payback periods, and therefore
attractive for investors. Besides, since most new sawmills were built by
foreign corporations, export-oriented sales are generally managed via the
parent company's head office outside the Russian Federation, and many
investors believe that this also reduces risk.
It should also be noted that many investors implementing priority investment
projects have faced several problems which made them suspend a project
or re-focus it. The most frequent problems are:
1) no good-quality raw material in the timber land allocated for the project,
which has prevented launching the project;
2) despite resources beingavailable, the regional authorities did not provide
access to the leasing base;
3) investors or their partners refused to fulfill their obligations;
4) delayed scheduling, and as a result, local authorities applying to the
Ministry of Industry and Trade to delete the project from the priority list.
Our analysis of the stoppage of priority investment projects, based on
published data, shows that the main reason forinvestors' refusal to implement
such projects was difference between the actual structure of the forest in
the allotted land and the declared one. The main reason for local authorities'
applications for project deletion from the priority list was disruption of
project implementation deadlines.
The number of new priority investment projects isdecreasing; the highest
number of such projects was registered in 2009 (44 projects), and the lowest,
in 2013 (6 projects). New projects are prepared very slowly, and investors
face bureaucratic problems and high requirements for priority projects
by the Ministry of Industry and Trade. The largest number of investments
was attracted in the first two years of the priority investment project
in 2008-2009. Since 2010, the investments have dropped by an order of
magnitude. The lowest amount of investments was attracted in 2011.
The leading authoritiesinterms of the number of priority investment projects
that have been initiated are the Vologda Oblast, the Perm Territory and
the Krasnoyarsk Territory. Of these, the largest investment and allotted
felling area is in the Krasnoyarsk Territory. Since the institution of priority
investment projects was set up in order to increase timber harvesting and
processing in the Russian Federation, the actual quantity of harvested and
processed wood as a result of project implementation must be the basic
criterion of the successful implementation of any project. From this point
of view, the institution of priority investment projects has been most
successfully exploitedin the Republic of Komi, whichleadsin the quantity of
wood harvested and processed under priority investment projects.
It should be noted that although the institution of priority investment
projects has not yet satisfied the expectations that existed in 2007for
forest industry modernization in Russia, investments in several projects
have helped to develop it positively. Of course, the scope of investments
in the timber industry is not sufficient for its complete modernization; this
is explained by the risk related to the investment in the industry and by
the lower competitive advantages of such projects related to investment
in tropical timber.
Source: Natural Resources Institute Finland
From the technical point of view, and in the context of ruble devaluation
and raised refinancing ratesfrom the Russian Central Bank, investments in
priority investment projects for forest management are becoming more
affordable for foreign investors. More expensive loanable funds in Russia may
be replaced with cheaper credits from abroad, which makes such investment
attractive. But this affordability is restricted by the existing risks and
known problems (lack of quality forest in the desired region, influence of
authorities on access to resources, etc.) in the implementation of priority
investment projects.
The downgrading of Russia's credit rating by international agencies in
February 2015 will lead to more expensive loans and capital drain -from
the timber industry in particular. On February 19, 2015 a report was read
in the State Duma aboutthe legislative transition that needs to be made
toward an intense model of forest industry development, in whicha rise
of the minimum cost of a priority investment project was mentioned
(currently this figure is 300 million rubles). In our opinion, such a rise
under the current conditions will not enhance the inflow of investment
into the timber industry. The number of potential investors and project
initiators is already quite small, and a higher threshold will reduce by
even more the number of those willing to get involved and favor large
companies. A reduction in the number of participants will increase the risks
related to forest earmarking for a project and increase the chances that
its implementation will be refused. Despite the large potential for timber
harvesting in the Russian Federation, estimated felling is utilized to 27.7
per cent (for the country in general). This indirectly suggests that there are
resources for implementation of priority investment projects if we neglect
the differences in the transport accessibility of forests in different regions.
There are alreadyregions with a deficit of wood harvesting resources and
a surplus of wood processing capacities.
Economic sanctions imposed on Russia in 2014 have caused problems
for funding large investment projects in the timber industry. Meanwhile,
the devaluation of the ruble has enhanced the competitiveness of timber
processing in Russia - but only until inflation increases local production costs.
Nevertheless, in our opinion, investments in Russia are attractive under the
current conditions, especially in the production of pulp for Asian markets.
Evgeny LOPATIN,
Senior Researcher, Institute of Natural Resources Finland,
Doctor of Agriculture (University of Joensuu, Finland),
Candidate of Agriculture
(St. Petersburg Forest Technical University, Russia)
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