D. Lipman
David Lipman is President of the union of Timber Manufacturers of Russia.
An analysis of how the Russian Federation 's forest industries are coping with the transition from a centrally planned to a market economy.
The Russian Federation's forests cover 45 percent of its territory, with an estimated standing volume of 81600 million m3, 48000 million m3 of which are mature timber. Indeed, almost one-quarter of the planet's forest resources is concentrated in the Russian Federation. The unique richness of Russian forests has allowed the country to develop timber, pulp and paper and wood processing industries which play an important role, not only in the national economy and that of neighboring countries, but also in the European and global trade of wood products.
In the past, the timber industry was one of the leading sectors of the national economy. Until recent times, trade in timber and wood products, which dates back to the tenth century, ensured the country a position as a world-class exporter and provided a major source of foreign exchange.
This was the situation of the pre- 1917 Russian economy, again in the 1920s and 1930s when a policy of rapid industrial development prevailed, and also during the postwar reconstruction of the Russian economy. The rapid growth in the export volumes of energy resources (gas and crude oil), machinery and armaments was the only reason why wood and paper products came to represent a smaller share in the value of the country's external trade.
At present, the Russian Federation has about 3500 specialized harvesting and wood processing enterprises as well as nearly 33000 firms engaged in reforestation, harvesting and wood processing. Beyond these sector-based enterprises, practically all major economic sectors use wood, including the construction, engineering, mining and oil extraction, agricultural, transport, communications, trade and chemical production sectors.
Nevertheless, despite the significant potential of its forest industry, the Russian Federation's natural resources are underutilized. While timber resources have been increasing naturally at a yearly rate of 750 million to 800 million m3, removals did not exceed 400 million m3 in the 1980s and fell to below half this figure in the following years.
In 1992, the Russian Federation embarked on radical economic reforms. By that time, the possibility of evolutionary reform had been largely exhausted within the framework of an economy run along the lines of centralized state planning. Unfortunately, the transition to a market economy was complicated by the political upheavals that led to the disintegration of the USSR and the formation of newly independent states which imposed restrictions on the free transfer of goods and capital outside their boundaries.
The unified economic system came apart at the seams, destroying the economic ties that had been formed between enterprises that now found themselves in territories belonging to different states. It complicated accounting matters and in many ways made the creation of market relations more difficult and costly. For example, supplies to the Russian Federation of wood processing equipment made by Ukrainian machine manufacturers diminished, leading to a significant decrease in Russian sales of forest products to the former Soviet republics.
As a result of the financial difficulties and the complication of interstate accounting there was a sharp increase in defaults on payments for timber sold by Russian industrial enterprises. This ultimately led the Russian Federation to reduce sharply its sales to the former Soviet republics and worsened the suppliers' economic predicament.
Reforming the Russian economy, including the timber industry, is indeed a difficult task: inflation is slowing economic activity seriously; the prices of goods rose by 26 times in 1992, and by 14 times again in 1993; and centralized investment in industry is virtually at a standstill. All these negative factors have led to a significant reduction in the manufacture of basic products. The following indicators illustrate the country's manufacturing volumes of wood and paper products in recent years (see Table 1).
The "shock therapy" policy chosen for making the transition to a free economy a policy based on self-reliance and sweeping economic deregulation - has had an unhealthy and often disastrous impact on most enterprises. This policy did not take into account the peculiarities of the Russian economy, comprising a monopolistic state-run sector and a still embryonic private sector. The problem is aggravated by the lack of adequate regulations aimed at stimulating industrial development and protecting the interests of enterprises investing capital in expansion, new technologies and modernization.
For a considerable period before the country embarked on the transition to a market economy, investment in industry particularly in forest industry - was utterly inadequate. Under central planning, capital investment in the development of the timber, pulp and paper and wood processing industries was allocated year by year and always at the same basic level. Neither the soaring expenditure on nature conservation nor the increased cost of construction materials (resulting from the development of new logging activities in distant forests of northern Europe, Siberia and the most easterly regions) were taken into account.
This in turn led to a systematic decrease in new logging and wood processing facilities, and the industry as a whole became more and more technically back ward. Table 2 indicates the downtrend in new production facilities commissioned during the final period of centrally planned management.
Because of the inadequate volume of investment, the renewal of production facilities in the timber industry also suffered a considerable slow-down: by the beginning of 1991, 50 percent were in need of replacement. As a result, the Russian Federation's timber industry faced transition to the free market when it was least fit for it. The industry found itself in a critical situation, characterized by:
· dwindling domestic production of basic wood and paper product types the downward trend in production did not bottom out in 1993 and has not done so in early 1994;· a deteriorating financial situation for enterprises in the sector as defaults on payments increased - at the beginning of 1994, the indebtedness of wood and paper product purchasers for goods supplied to them had risen to 900000 million roubles, approximately 30 percent of annual volume in the sector.
The outlook for the Russian Federation's timber industry therefore remains extremely difficult and unstable. In the fledgling free market, enterprises are encountering great difficulties in adapting to the new conditions. Effective methods for state economic intervention to stimulate production growth and technological retooling have yet to be worked out. Nevertheless, these difficulties testify not to the failure of the reforms being carried out but to the complications and problems of the transition period. The adversities currently affecting enterprises in the timber industry - and the entire national economy derive for the most part from the unsatisfactory state of the industrial base or from the underplanned, premature break with existing economic and organizational structures.
If the crisis is to be overcome and economic reform successfully carried out, new business forms suitable for market relations must be created. The privatization of state-owned enterprises is the basic policy being implemented by the government to create new kinds of production units. The privatization of enterprises in turn implies creating economically independent business units that operate strictly within a clear and well-articulated legal framework.
Privatization allows the enterprises themselves to carry out an active market development strategy, to restructure their own manufacturing systems, taking market demands into account, and to implement a rational, competitive policy. No industrial policy objectives will be achieved unless there is a community of economically independent production centres, capable of flexible reactions to market signals and of working in a competitive environment.
Pursuant to the Act of 3 July 1992, entitled Privatization of State and Municipal Enterprises in the Russian Federation, work has been under way since 1992 for the denationalization of enterprises in the timber sector as well as in other sectors of the national economy. With privatization, both individual citizens and joint-stock companies may acquire (as private property from the state) land, enterprises, workshops, equipment, buildings and infrastructure, in addition to purchasing equity in joint-stock companies. The list of properties involved and the priorities for and restrictions on carrying out privatization are set out in the government's programme, to be implemented by the State Committee for the Management of Government Property (the Goskomimushchestvo). The Goskomimushchestvo directly manages and controls the privatization of all state property, with the exception of facilities located on property belonging to the Russian Federation's territories, regions and autonomous republics, where privatization is carried out by the regional committees.
TABLE 1. Processed wood and paper production
|
Product |
1988 |
1990 |
1992 |
19931 |
1993 as % of |
|
|
1988 |
1992 |
|||||
|
Timber (million m3) |
3450 |
304 |
238.0 |
180 |
52.2 |
73.1 |
|
Sawnwood (million m3) |
84.9 |
75 |
53.4 |
40 |
47.1 |
74.9 |
|
Plywood ('000m3) |
1727.0 |
1577 |
1268.0 |
1030 |
59.6 |
81.2 |
|
Particleboard ('000 m3) |
5490.0 |
5568 |
4522.0 |
3950 |
71.9 |
87.3 |
|
Fibreboard (million m3) |
501.0 |
483 |
427.0 |
370 |
73.8 |
86.6 |
|
Wood pulp ('000 tonnes) |
8349.0 |
7525 |
5670.0 |
4391 |
52.5 |
77.2 |
|
Paper ('000 tonnes) |
5334.0 |
5239 |
3603.0 |
2882 |
54.0 |
80.0 |
|
Paperboard ('000 tonnes) |
3249.0 |
3085 |
2147.0 |
1576 |
48.5 |
73.4 |
1 Preliminary data.
TABLE 2. New production capacity
|
Product |
1976-80 |
1981-85 |
1986-90 |
1986-90 as % of |
|
1976-80 |
||||
|
Timber (million m3) |
23.0 |
19.7 |
12.0 |
52.2 |
|
Sawnwood (million m3) |
5.0 |
2.3 |
1.3 |
26.0 |
|
Particleboard ('000 m3) |
2040.0 |
1265.0 |
753.0 |
36.9 |
|
Fibreboard (million m3) |
83.0 |
80.0 |
37.0 |
44.6 |
|
Wood pulp ('000 tonnes) |
952.0 |
754.0 |
58.0 |
6.1 |
|
Paper ('000 tonnes) |
852.0 |
561.0 |
401.0 |
47.1 |
|
Paperboard ('000 tonnes) |
382.0 |
94.0 |
66.0 |
17.3 |
According to statistical data as of 1 October 1993, 1144 timber, pulp and paper and wood processing enterprises, i.e. 33 percent of the overall total, were located outside state property. In addition, 652 other enterprises belonged to municipal corporations and were managed by the regions, territories, autonomous republics and other local government bodies. Therefore, at the end of 1993, there were 1796 enterprises owned by the federal government, that is more than half of all businesses in the timber sector, accounting for 60.5 percent of production.
Unfortunately, the reported statistical data cannot be considered complete. During the privatization process, many wood processing facilities and lumber yards, which had previously been part of larger concerns and were even considered as belonging to other sectors (building materials, engineering, defence, etc.), became independent economic units. These were sold off and converted into joint-stock companies; they were not included in the reported indicators. Therefore, although the data show that privatization of the timber industry is being carried out on a fairly wide scale, they are inadequate. Both large and small state enterprises are being privatized, particularly in the furniture manufacturing and wood processing sectors.
Privatization, as it has been carried out, has involved serious drawbacks which have adversely affected business performance. Above all, the process has taken no account of the industry's special need to preserve the integration of production and technology from harvesting through to final processing. One striking instance of this lack of forethought is the way in which one of the Russian Federation's largest enterprises, the Ust'-Ilimski timber industry complex, was privatized. Built in eastern Siberia in the 1970s, this large complex was planned as a single enterprise with an integrated technological cycle. Its finished products included wood pulp, wood-based chemical products, high-quality sawntimber and fibreboard. The complex ran smoothly and fully exploited both timber and its by-products.
Privatization split this complex into 34 economically independent joint-stock companies, including a lumber dispatch centre, a sawmill and wood processing factory, a wallboard plant, a pulp mill, a hydrolysis yeast plant, a motorized transport enterprise, a machine repair and maintenance workshop and a service centre for machinery. The administrative apparatus was expanded and production costs rose at the same time. Each of the joint-stock companies launched its own financial and technical policy, completely out of step with the others. When sawmills began to sell timber to outside purchasers, the tempo of supplies to the wood processing plant was disrupted, causing great losses in production.
The disintegration of the USSR in 1991 and the cessation of the activities of its government structures led to the abolition of the Ministry of Forestry, which had provided leadership for the enterprises and organizations of the timber, pulp and paper and wood processing industries. As a result, there was no state coordinating centre responsible for defending the interests of the Russian timber industry on the federal level. The numerous commercial organizations, such as the Rossijskije Lesopromyshlenniki joint-stock companies, the Forest Trade Centre, the Exportles timber outlet, the wood commodities exchange, the Les trading house and the associations and individual enterprises, that have appeared during the process of economic reform cannot alone coordinate the sector's activities.
The need to coordinate the different sectors of the timber industry to protect their interests led to the meeting held in December 1992 to found the Union of Timber Manufacturers of Russia, an industrial union that has brought together more than 800 major enterprises, joint-stock companies, associations, firms and entrepreneurs in the timber industry. It represents timber industry interests before the various federal bodies. The Union is a member of the Obshchestvennaja Palata, chaired by the President of the Russian Federation and of the Russian Trilateral Commission for Social and Labour Relations. It participates in the decision-making process regarding forest sector issues in federal legislative and executive institutions.
In January 1993, the Russian timber company Roslesprom was founded with the aim of performing a number of individual government functions. The complex problems the timber industry has had to face during the period of transition to a market economy have meant that the main task of the Union of Timber Manufacturers of Russia and Roslesprom has been to lead the enterprises safely through a situation of crisis.
The federal programme for the development of the timber industry was prepared with this aim in mind. This programme envisages a series of measures to guarantee stability and subsequent development of production. The programme is at present awaiting government approval but a number of measures outlined in it are already being implemented.
One of the programme's priorities is the creation of a sectoral structure to coordinate and regulate the activities of the various enterprises during the transition to a market economy. The programme recommends the creation of holding companies in the timber industry. These holding companies would be formed as an offshoot of scientific and research organizations or of enterprises in the final production cycle, including enterprises technologically connected with them. The holding companies would be made trustees for equity that should not exceed 20 percent of the timber companies proper.
Enterprises that have suffered under transition economics have come to realize that, without joint action, it will be very difficult to survive in the free market. They therefore see the holding company approach as an opportunity to establish mutually advantageous collaborative relationships, to implement a concerted scientific, technical and investment policy and to maximize export potential. Company capital, to be formed through the sale of shares and through profits, will be directed towards retooling and development. As a result of the efforts being made by trade associations and local government bodies, more than 70 territorial holding companies are to be organized. The intention is for these holding companies to deal on a contractual basis with Roslesprom and the Union of Timber Manufacturers of Russia who will represent their interests before state federal bodies.
The development of processing industries, of course, needs to be based on a stable supply of raw materials. For this reason, it is planned to create such a basis by intensifying forestry activities and reorganizing forest utilization in European Russia, where logging and wood processing installations and pulp and paper enterprises are concentrated and where conditions are more favourable for supplying forestry products for export.
The development strategy for the timber industry in European Russia was worked out with the assistance of Finnish specialists who prepared the master plan for the regions and republics in the area. The plan proposes the widespread introduction of more effective forest utilization and reforestation based on modern technologies and environmentally friendly harvesting methods, with the goal of rapid growth in timber production, and particularly in wood pulp production.
To achieve these goals, technological renovation of existing enterprises will be necessary and the state-of-the-art technology of the engineering facilities of the military industrial complex now being converted to civilian use will have to be attracted. The implementation of these measures has already started. In this work, the Russian timber industry also relies on creative cooperation with firms in Finland, Sweden and other countries with highly developed forestry industries. A successful example of this collaboration is Ledenso, a joint venture with Finnish firms which is operating in Karelia. The programme envisages extending the application of similar forestry schemes to the Komi Autonomous Republic, the Arkhangelsk, Vologod and Kostrom and other regions.
At the same time, consideration is being given to the possibility of developing the untapped forests in the east, where there are sizeable timber reserves. This would, however, entail large-scale investment in view of the need to build new roads. Contacts are at present being established with a number of foreign firms and with business circles in the Russian Federation with a view to organizing joint venture harvesting and wood processing operations. In particular, the Primorie region has seen the creation of an enterprise called Svetlaja, a collective enterprise with producers from the Republic of Korea, yielding 1 million m3 of timber per year.
As far as timber production and wood processing are concerned, not only must output be increased but the range and quality of the lumber must be improved to meet the demands of Western customers. It is also necessary to convert to the production of new types of plywood and board (large-panel plywoods; medium - density water-and big-resistant boards with various types of finish). It is planned to refurbish factories and install modern automated equipment. During the transition to a market economy, a network of small-scale enterprises and industries is being created for processing softwood and hardwood for the production of parquet and sawnwood for cabinet making and for general utility merchandise. The sector has also seen the creation of a special fund to help finance small and medium-sized entrepreneurial ventures.
The problems facing the pulp and paper industry are even more complex. Nearly half the existing installations are old, worn-out and obsolete, and practically no up-to-date machinery for paper and pulp mills is manufactured by the domestic engineering industry. This is why it is planned that this subsector should, on a mutually beneficial basis, expand its cooperation with foreign businesses for the modernization and retooling of the existing facilities. At the same time, efforts are being made to attract investment from large-scale domestic printing houses that are interested in increasing their supplies of paper and paper products.
A birch stand near Moscow, the Russian Federation
In the coming years, insofar as it is possible, it will be necessary to switch over to environmentally friendly methods of pulp manufacturing and to diversify the types of paper and board produced, the need for which was previously satisfied by enterprises located in the former Soviet republics.
An increase in the output of wood and paper products to the extent planned should satisfy demand from the domestic market and create the conditions for increasing export potential. Exchange revenue from exports is expected to double by the end of the century, and processed wood products are expected to account for 80 to 85 percent of the overall trade volume for the timber industry.
It goes without saying that, to achieve the development parameters planned for the timber industry, substantial investment is necessary. To meet this need, investment by enterprises and organizations in the sector will be encouraged in every way. Government funding is also planned in support of the proposed programme It includes granting loans on special terms, the introduction of tax breaks for enterprises that are expanding and modernizing production, incentives for purchasing equipment and materials through the import market and other measures. The appropriate recommendations and estimates have already been submitted to federal government bodies.
The attraction of foreign investment funds at mutually beneficial terms is crucial for the realization of projects aimed at expanding production and retooling the enterprises. In order to carry out the various projects, joint industrial financial ventures will be formed.. These will include domestic and foreign investors who are directly interested in implementing the projects of business organizations as well as those of banks and credit institutions.
The legal framework for creating these groups is laid down by the government. The first priority is the presentation of state guarantees regarding the concession of foreign and commercial credits instrumental to an effective restructuring and development of the industry.
The Union of Timber Manufacturers of Russia is actively engaged in carrying out projects and attracting investors. It possesses a data bank of forestry resources and profiles of individual logging, pulp and paper and wood processing enterprises. The Union has information on existing projects for expanding and modernizing production and renewing facilities and it cooperates with foreign and domestic enterprises in selecting the most promising projects and establishing business contacts with domestic timber producers. Business cooperation that is advantageous to all parties will create the most favourable conditions for an effective utilization of the Russian Federation's forestry potential.
