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Final Report: Analysis of the Russian-Asian Timber Market (4)

Analysis of the Russian-Asian Timber Market (4)

Conclusions

Russian raw log export dependence bodes ill for the future of Russian industry, for the communities that depend on the industry, and for the health of Russian forests in general. Closely connected to this dependence is illegal logging. With an internationally competitive processing sector in place, many analysts believe that illegal logging would decline. More (and better paying) jobs would be created, reducing the need to poach timber to survive. The timber would be processed more closely to the source, which would make it easier to discern where it was harvested and reduce opportunity for the inflow of illegal timber in the supply chain. But the prospects for rejuvenating Russia's antiquated processing facilities look gloomy without large-scale reform on many different levels. Only a few can be mentioned here. First, many Russian entrepreneurs invest their final profits abroad - part of Russia's capital flight - rather than reinvesting in necessary items for the industry, such as wood-processing equipment. This is partially due to an outdated tax code, which makes it extremely difficult for honest companies to achieve profits, but it is also attributable to the continued corruption and illegality that pervade the Russian economy today. Corrupt officials who benefit greatly from current arrangements are resisting sectoral reform. Finally and perhaps most importantly, the Chinese government and private enterprise are investing aggressively, modernizing and expanding their own wood-processing capabilities. With lower labor costs, a more stable energy supply, superior road and rail infrastructure, and better access to international finished wood-product products, China will pose stiff competition to Russian wood-processing enterprises.

Russia does have its own advantages though. Most notably, the wood, for obvious reasons, can be processed much more closely to the harvest site, greatly reducing transport costs. These savings alone could be enough to offset the lower labor costs. The Russian government can also take measures to protect its processing industry, much as China does, through tariffs. China encourages the import of logs by requiring full import duties and value-added tax (VAT) on lumber, but zero import duties and only a reduced VAT on roundwood. When assessing prospects for Russian regulatory changes designed to reduce illegal logging and generally improve forest practices, change may come not through internal reforms, but rather from outside the country. The impossibly long and opaque chain of custody from harvest site through the multitude of transporters, exporters, importers, wholesalers, and other intermediaries and finally to the Chinese processors should be unsettling to the international retailers with environmental standards who purchase products from these suppliers. With the proposed pressure applied and necessary information supplied, these retailers may require their suppliers to take measures to ensure environmental performance, such as a transparent chain of custody and the assurance that the timber was harvested in accordance with Russian forestry regulations. Such demands could lead to significant changes in how forests are logged in Russia and could give forest certification efforts a much needed boost.

Chain Of Custody Issues - From the Russian Forest to the International Market-place

Much of the logging underway in Eastern Siberia and the Russian Far East is taking place in frontier or intact forests and much of it is illegally felled or exported. Suifenhe Trading is one of the largest of the Chinese trading companies who import Russian timber and, like the other traders, sells about half of its timber to domestic wholesalers at large timber exchanges situated at the major railway junctions just across the Russian border, including exchanges in Suifenhe, Heihe, Manzhouli, and Erlianhot. While it should be theoretically possible to purchase logs and lumber at these exchanges that has complete chain of custody information, Forests Monitor site visits to these exchanges indicate that the timber from harvesting sites from all over Russia are mixed together when the logs are sorted.

There is a bewildering array of chain of custody arrangements, complicated by the more than 2000 harvesters and 2500 traders and exporters involved in the Russian-Chinese timber trade. This makes it virtually impossible to trace the timber back to the original harvest site. A common scenario demonstrates this complexity: To fulfill a log order from a Chinese importer, a Russian timber exporter purchases pine logs from both small and large timber harvest companies as well as from a number of intermediary companies who may buy timber from a commercial logging operator, such as the forest service, and from an illegal logging operation. Small timber traders, many of whom do not have export licenses, can also sell their timber to this exporter, further complicating the mix. While Russian forestry regulations require that a Russian harvest license or ticket accompany the transferred timber, it is not uncommon for traders and exporters to create false documents, or use tickets from legitimate timber enterprises to legalize the illegally harvested timber.

According to a senior representative of Lianing Wanrong Trading Co. Ltd, the quasi-governmental company annually buys about 1 million cu. m. of pine and birch logs and lumber at the Suifenhe and Manzhouli exchanges. When pressed, the representative admitted he had no idea where exactly in Russia the timber was harvested. The wood is used to make picture frames in Lianing's factories in the cities of Dalian and Qingdao. Lianing produces about 15 million pictures frames yearly and sells most of them to IKEA. About one million frames are also sold to Intercraft Corporation, a subsidiary of Newell Rubermaid, which in turn supplies Walmart Corporation.

If international companies such as IKEA and Walmart were to insist that their Chinese suppliers cease buying logs and lumber at the timber exchanges, where legally logged timber is hopelessly mixed with illegally logged timber, and work directly with Russian timber companies, then it would be easier to implement effective chain of custody measures. IKEA now buys more products from suppliers in China than any other country and according to industry analysts this percentage will increase as IKEA relentlessly lowers costs. Chinese suppliers specialize in smaller items (e.g. picture frames, dish racks), with much of the birch, pine, and spruce used to make these products coming from the forests of Eastern Siberia and the Russian Far East. Cracking down on the purchasing practices of Chinese suppliers would have a ripple effect throughout the Russian timber sector, forcing both government and the industry to clearly identify where the timber is coming from and to accelerate forest certification efforts.