Finnish Forest Research Institute  Metla

Press release 29.08.2006

Uncertainty impedes investments in Northwest Russian forestry

The Finnish Forest Research Institute (Metla) conducted a survey research concerning the key factors of the forest sector investment conditions in Northwest Russia. A foreign investor must be prepared to face several problems in Russia. The economic policy, including the future exchange rate of the rouble, is difficult to forecast. The Russian forest legislation is still under reconstruction, the physical business infrastructure is deficient and the operating culture based on personal relationships - these are all difficult for foreign investors to accept. They are counterbalanced by abundant roundwood resources, the low cost level, and growing domestic markets.

Compared with market economy countries, Russia’s special characteristics as an investment target have become fewer as the country slowly develops into a market economy. However, there are several issues in the Russian business infrastructure that must still be developed to improve the investment climate.

There are numerous problems in the forest sector of the Russian Federation counterbalancing the available immense forest resources. The forest industry, with processing capacity comprising many technically out-of-date factories and machinery, can only partly meet the domestic market demand. Insufficient infrastructure, especially in roundwood transportation, deteriorates the economics of Russian forest resource utilization. So far, the investments by companies of Finnish origin in the Northwest Russian forest sector have covered production plants in mechanical forest industry and forest harvesting companies. Getting involved with large capital-intensive investments in NW Russia, for example in pulp and paper industry, implies long-term continuance of wood raw material supply and setting up additional infrastructure. How these investment expenses and the financial responsibilities caused by forest regeneration are to be shared among private enterprises and the public sector, must still be clarified.

Russian macroeconomy has clearly stabilized in recent years s ince the mid-1990s and is now on a good growth track. The positive development is based mainly on the success of the oil and gas industries. However, the regional impacts from the economic growth on income and employment are unequally distributed. The majority of multiplier impacts are acquired by the metropolitan areas and oil industry areas. The under-developed financial markets and high interest rates have slowed down domestic investments outside the energy sector. The export income surplus through high oil export incomes tends to support the revaluation tendencies on the rouble challenging the competitiveness of exported Russian forest products.

The prolonged renewal of the forest legislation regulating forest ownership and use have slowed down foreign investments into the forest sector capacities. The outcomes of the political process related to the Forest Code reform regarding ownership, rights and responsibilities and the possibilities for foreigners to acquire forest properties or gain cutting rights can provide positive impacts on the forest investment climate in Northwest Russia. From the foreign investor’s perspective, Russia has remained as an area where administrative and political changes are rapid and difficult to predict. Repeated changes have been made to taxation, customs procedures and labour legislation that impede foreign investors’ operations. Political concern about the effects of foreign ownership on natural resources in Russia and public demands to set restrictions for foreign operators increase the uncertainty of long-term planning.

The strong position of the oil industry development in Russian macroeconomics has impeded the enhancement of forest sector investments in Russia. However, production units have slowly been updated and new ones have been built in Northwest Russia both with local as well as with foreign resources. These investments have had significant impacts to the economies of the Northwestern republics and regions through income and labour increases. The operating environment in the forest sector must become more transparent and easier to forecast to attract quality upgrades by foreign investors to replace the present low-technology units with units that consume massive amounts of timber. The fundamental reforms in society as well as in economic and operational business culture is an enormous process and in spite of improvements, most of the factors weakening the investment climate are still present.

Publication: Holopainen, Päivi, Ollonqvist, Pekka & Viitanen, Jari. 2006. Factors Affecting Investments in Northwest Russian Forest Sector and Industry. Metlan työraportteja 32.

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