RUSSIAN PULP & PAPER: Industry is key to growth of entire forestry sector

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By NATALYA PINYAGINA / Special to The Russia Journal

THE RUSSIAN PULP AND PAPER industry, using cutting-edge technologies and focusing on exports, has a lot of potential and should become a locomotive to pull the whole forestry sector to a level that a great forest power deserves to have.

During its transition to a free-market and open economy, Russia had to deal with the issue of poor competitiveness of the vast majority of domestically produced goods and commodities. The influx of high-quality imported goods was one of the main reasons for the production slump that occurred in many of the country's industries during the 1990s.

This is 100 percent true in the case of wood and timber sector, where most enterprises cannot compete with their foreign counterparts.

The weak point of the domestic wood and timber sector is the lack of processing facilities for low-grade timber – pulp mills especially – in most of the country's timberlands.

Now is the time to develop the wood and timber industry in the regions with the most developed transportation systems, power-supply infrastructures and consumer markets, especially in the central region, the southern region and the Urals region.

Since massive woodcutting has been forbidden in most of the country's central and southern areas since the 1950s, a lot of mature and even overly mature forests have grown in these regions, and the Moscow Oblast is a typical example.

Development of the country's wood and timber sector as a whole is impossible without giving priority to its key element – the pulp and paper industry.

The pulp and paper industry is one of the most dynamically developing – as well as economically and socially important – industries in Russia.

While the country's overall industrial output grew 9 percent in 2000 compared to 1999, production of commercial pulp, paper and cardboard increased 14.2 percent, 12.5 percent and 21.3 percent, respectively.

The pulp and paper industry is oriented toward exports and is meeting steady demand from foreign consumers for pulp, newsprint and packaging cardboard. According to statistics from the Ministry of Industry, Science and Technologies, last year revenues generated from the export of these products totaled more than $1.5 billion, a 35 percent increase compared to 1999.

Nevertheless, Russia's share in the world output of pulp and paper is quite modest and does not correspond with the country's potential. During the last decade, Russia slid from fourth to 18th place on the list of the world's biggest paper producers. Simultaneously, domestic per capita consumption of paper shrunk by nearly half and currently equals 24 kilograms per year. At the same time, paper consumption in the world has increased 13 percent; the average per capita figure is 55 kg per year, while in the United States and Finland it exceeds 300 kilograms per person annually. According to forecasts, world paper consumption will increase 30 percent over the next decade.

In Russia, according to estimates, the demand for printed periodicals is satisfied by not more than 20 percent to 25 percent, and for notepads, wallpaper and sanitary-hygiene items – by 55 percent, 35 percent and 15 percent, respectively.

Currently, Russia is emerging from an unsettled period and entering a period of economic stability. A media boom should accompany the forecasted economic rise, allowing the domestic market for pulp and paper to outpace many other markets. There are reasons to expect considerable growth of domestic demand for pulp and paper next year, which, according to a Russian Ministry of Industry, Science and Technologies forecast, will rise by 23 percent. By 2010, domestic demand for commercial pulp and cardboard is forecast to increase by 43 percent and 65 percent, respectively.

In Europe, according to the United Nations' Economic Commission for Europe's Timber Committee, the consumption of paper and cardboard will increase 27.3 percent by 2010.

In southeastern Asian countris, according to the Food and Agriculture Organization (FAO), consumption of pulp and paper products will be growing faster than their production. The most dramatic growth – up to 60 percent – is expected in China. In the long run, the United States, Germany, Great Britain, France, Italy and African countries will become major importers of paper and cardboard, the FAO reported.

It must be noted that certain kinds of office and art-print paper are not produced in Russia at all, and other products, such as packaging paper, are produced in a very limited variety, and many are highly inferior in quality, specifically newsprint, offset print, book print, magazine print, etc.

The main factor plaguing the domestic pulp and paper industry is the catastrophically low technological level, which is 20-30 years behind modern, state of the art level. As things stand today, only 5 percent of the equipment matches modern standards, more than 50 percent needs modernization and 45 percent needs replacing.

Therefore, modernization of existing facilities and building new, up-to-date factories should be viewed as important means for developing the pulp and paper industry in Russia. To this end, the government is planning targeted programs, but an escape from the current plight is only possible if an ad hoc government program is elaborated for the industry. Government support in the form of budget subsidies and/or loan guarantees will stimulate private investments in the industry, while tax exemptions and protectionist measures will help implement modernization and equipment-replacement programs at a high tempo.

Last April, at a meeting organized by the Ministry of Industry, Science and Technologies and the Russian Union of Timber Producers and Exports, which was held in April 2001 and attended by a number of federal ministers, it was resolved to create a federal program for developing the pulp and paper industry until 2015. A working group comprising representatives of government agencies, specialists and scientists was formed.

In line with a decree issued by Prime Minister Mikhail Kasyanov on June 14, 2001, the program will include the construction of no less than five pulp and paper factories in Moscow Oblast and its neighboring Tver Oblast, Kostroma Oblast and others. Meanwhile, the working group has made cost estimates and determined the main sources of financing, including bank loans as well as domestic and foreign investments. Implementation of the program will considerably improve the efficiency of use of forest resources in Central Russia. It will also help make the forests healthier and improve their ecological balance, first of all in Moscow and Moscow Oblast.

In addition, the program will help to considerably reduce timber supplies to the central region from other regions – thus slashing transportation costs – to increase the proportion of deep-processed products in exports and to reduce import volumes of paper, cardboard and sanitary-hygiene items.

Now it is necessary to create mechanisms for attracting financial resources to the program, form corporations and consortia with potential investors and ensure government assistance.

(The author is head of the Timber and Forestry Investment and Development Center at the Russian Union of Timber Producers and Exporters.)