Russian Forestry and Wood Supply Operations Analysis
32
WOODWORKING
WOODWORKING
The Wood Based Panel Business
in Russia:
(a) Few Reasons to Invest
Is there any sense in investing in Russia in the long run? There are good reasons to say "maybe". But
it is not an easy decision, it requires some courage. Once you have it, the rest is more or less logical:
choosing regions, products, technology, and markets - we will discuss those. And, finally, we are going
to have a short look at the investor's options once the mill is running. We will skip the process of actual
investment, as it is a bit of a separate story. And, for illustrational purposes, we will focus on a narrow
product range and geography: namely, wood based panels in Russia and comparing Russia with its BRIC
counterparts, Brazil, India and China.
NO PAIN, NO GAIN...
Is there any sense in investing in Russia in the
long run?
The number of unsuccessful investment projects in
Russia in the recent decade is quite large. Among
the top causes for failure (based on sporadic
interviews) are: the difficulties of getting a
loan, lengthy decision making, the difficulties
of ensuring support from the local administration,
the difficulties of dragging the process through
a burdensome and sometimes unpredictable
permission process, the difficulties of putting
infrastructure in place (especially for greenfield
projects), the difficulties of finding a reliable
and experienced construction management team,
the difficulties of obtaining and keeping skilled
managers once the mill is running and (if you
are lucky or clever enough to get to this stage)
difficulties with wood supply and markets, as well
Table 1: Ease of doing business rank, 2014, BRIC countries
as sometimes overwhelming control from all kinds
of authorities (however, the last point would not
come as a surprise at this stage, right?).
Today, to this (already) long list, we should add
great political and economic uncertainty on the
macro-level which for an investor translates into
the risk of losing the business (if it is running
and profitable) or the risk of there being a sudden
change in the rules which almost inevitably
translates into loss of profit.
Final ranking:
Country Ease of Doing
Business Rank
Starting a
Business
Dealing with
Construction
Permits
Getting Registering Getting
Electricity Property Credit
Protecting
Minority
Investors
Paying
Taxes
Trading
Across
Borders
Enforcing Resolving
Contracts Insolvency
Russia
62
34
156
143
12
61
100
49
155
14
65
China
90
128
179
124
37
71
132
120
98
35
53
Brazil
120
167
174
19
138
89
35
177
123
118
55
India
142
158
184
137
121
36
7
156
126
186
137
Source: World Bank
#6 (2015) RUSSIAN
FORESTRY
In general, is Russia a good place to invest?
The obvious answer is "Hm... I am not sure,"
considering the 2014 Ukrainian crisis and the
rollercoaster of the national currency in 2014-
2015. But let's have a look at Russia among the
BRIC countries (Brazil, Russia, India, and China).
Of course, to perform a serious analysis of "where
is the best place to invest" we should expand the
geography far beyond the BRICs. And, of course,
the BRIC countries are not even the best short list
group at least due to the fact it is pretty diverse
at this time. But the BRIC group is a context
Russia is often put into, so it is not a bad choice
for this article and I need something to add a
sense of competition and big-picture background
while describing the situation in Russia. So, we
will use the BRIC countries, and we will begin
with the "doing business" and the "corruption
perception" ratings (see tables 1-3). It might
come as a surprise, but Russia does not look
particularly bad.
For "doing business", Russia is far from being
among the global leaders but it is the leader
among the BRIC countries (see Table 1). Please
note that the numbers represent position of the
countries from 1 (the best in the world) to 189
(the worst in the world, among 189 countries
surveyed). Saying that, Russia differs substantially
within its Federal Regions and further down to
the sub-regions. The numbers in Table 2 represent
the position of selected regions in Russia among
30 selected regions surveyed (so, the numbers
vary
from 1 for the best to 30 for the worst).
The corruption perception index provides a
gloomier picture: Russia is far behind China,
India and Brazil. Russia is quite far behind
even Argentina. And it is desperately far from
the world's leading forest industry benchmark
countries (see examples in Table 3: New Zealand,
Canada, and Finland). On the positive side, we can
note that Russia and Brazil are improving faster
than other selected countries. However, Russia
is improving from a tremendously low level - in
2014 Russia was ranked Number 136 among 175
countries around the world.
THE "BIG THREE" IN THE
INVESTOR'S EQUATION
Let's
s suppose you know it all but for some reason
you believe your case will be a success. What's
next? An investment decision in the wood based
panel business may boil down to just three
things: the location of the mill, the location of
the resources, and the location of the markets.
If you have those three right, the rest is more or
less technology and management. Of course, it
is important to have the right team to manage
the construction, loans, partners and thousands
of other things. And it is important to choose the
right technology, the right machinery and the
right capacity for it. But the big variables in the
equation are almost always outside of the "big
fun boys' toys" of construction and production
machinery.
The greatest variables are, again, the locations -
as the wood based panel business (being both
Table 2: Ease of doing business rank, 2014,
selected sub-regions in Russia
Getting Registering
Electricity Property
Selected sub-
regions
Federal
Region
Ease of
Doing
Business
Starting a
Business
Dealing with
Construction
Permits
Rank
Kaluga
Tver
Moscow
Vladivostok
Khabarovsk
Petrozavodsk
Kaliningrad
Central
6
17
9
15
Central
18
21
25
14
Central
30
25
30
30
26
Far East
15
18
22
23
Far East
23
24
29
8
North-West
11
6
16
21
North-West 19
11
3
22
Saint-Petersburg North-West 22
1
9
24
Irkutsk
Omsk
Tomsk
Novosibirsk
Ekaterinburg
Ulyanovsk
Siberia
10
8
6
10
Siberia
13
19
20
13
Siberia
20
15
6
10
25
Siberia
29
23
18
29
Ural
24
29
13
19
20
Volga
1
3
4
5
Kazan
Volga
5
4
14
17
Kirov
Volga
12
13
5
4
20
Samara
Volga
21
22
24
28
Perm
Volga
25
13
12
18
27
Source: World Bank
Table 3: Corruption perception index, 2014
18237822242228428
Improvement,
2014
compared
Average
Selected
countries*
2008 2009 2010 2011 2012 2013 2014
in 2008-
2014
with 2008
Russia
147
146
154
143
133
127
136
141
Argentina
109
106
105
100
102
106
107
105
-2
China
72
79
78
75
80
80
100
81
India
85
84
87
95
94
94
85
89
Brazil
80
75
69
73
69
72
69
72
Chile
23
25
21
22
20
22
21
22
-2
Canada
9
8
6
10
9
9
10
9
Finland
5
6
4
2
1
3
3
3
-2
New Zealand
1
1
1
1
1
1
2
1
*BRIC countries and selected countries with forest industry sector as important part of the economy
resource intensive and largely a bulk product
manufacturing process) is a business where
logistics, in a large sense, makes the largest
difference in margin: flow of resources to the mill,
fiber flow inside the mill, flow of finished products
to markets. Once again, the wood based panel
business is mostly a pure logistics business: in
terms of costs, the most important are the cost of
fiber, conversion cost, and the cost of delivery to
the market. If you have the locations right, you
have made the right strategic decision. If one of
the locations is chosen poorly, you would need
luck to make your enterprise profitable. And yes,
the location of the mill includes right capacity and
(as we are discussing Russia) it involves support
of the local authorities and some luck on the
macro-scale.
Globally, it is often the case that the bulk of
resources is in one place (e.g. New Zealand, Brazil,
128072121
Source: Transparency International
Siberia and the Russian Far East) while the largest
market is in another (e.g. Europe, China, India). Not
many countries/places on the planet can offer a
large forest-products market together with large
available forest resources. Russia and Brazil may
be regarded as rare examples - with medium sized
but growing markets and vast forest resources.
Each of the two countries possesses some 22-25
per cent of global forest growing stock. With that
in mind, Russia was the largest global exporter
of round wood in 2013, the second largest global
exporter of sawn timber (after Canada) and only
the tenth largest exporter of wood based panels
(after China, Canada, Germany, Malaysia, Thailand,
Indonesia, France, Romania, and Austria).
So, is the abundance of wood resources crucially
important? Yes and no. "Yes" because it is quite
easy to imagine a situation when production of
wood based panels in Russia would boom by
RUSSIAN #6 (2015) 33
FORESTRYView entire presentation