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Final Report: Analysis of the Russian-Asian Timber Market (2)

Analysis of the Russian-Asian Timber Market (2)

The Rise in Logging Companies, Exporters, and Export Points

Radical privatization and liberalization, for a variety of reasons, led to the explosion in the number of actors involved in the Russian timber sector. Industry consolidation still appears to be decades away. By 2000, in Khabarovsk region alone, more than 450 logging firms were registered [8]. The number of exporters has also mushroomed since the government dismantled the Soviet system of strictly limiting the number of exporters and export points. The government has since made efforts to limit the number of export points, but the expanding number of exporters shows no sign of abating. In 1998, approximately 700 entities were registered as exporters to China, by 2002 this had increased to more than 2300 (see fig. 5). Most of the field reports document the activities of illegal logging; see for example, BROC 11, BROC 12, and BROC 14).

Figure 5. Russian timber exporters to China by category and number
Source: Lankin, Status and Trends in Forest Product Exports from the Russian Far East and Siberia to China. 2004, Pacific Institute of Geography: Vladivostok. Reprinted with Permission.

The large number of actors has influenced the sector in a number of ways, most of them negative. The rise in the number of logging firms, coupled with the inability of the poorly-funded and often corrupt divisions of the Federal Forest Service to properly regulate these operations, is a major reason for the rise in illegal logging. (For specific examples of timber operations involving the Forest Service, see the following field reports: FSF-5, FSF-7, BROC-2 and BROC-12.) Geographer Alexei Lankin maintains that these many operators are flooding the market with timber and are therefore responsible for the steady decline in the price of timber, as shown in figure 6.

Figure 6. Prices trends in Russian timber export to China in 1995-2001
Source: Lankin, Status and Trends in Forest Product Exports from the Russian Far East and Siberia to China. 2004, Pacific Institute of Geography: Vladivostok. Reprinted with Permission.

Finally, effectively tracking the chain of custody from the logging site to the importer has proved extremely difficult due to the great number of players involved in timber harvest and export. Lankin provides us with a rough picture of these many actors (see figure 7), illustrating the many stages where the timber can be 'mixed up'. The thin arrows show timber flows where, due to poor transparency in Russian business practices, exact information of the volumes and money involved is difficult, if not impossible, to obtain. The dotted thin, broken arrows illustrate the numerous channels by which illegally logged timber enters the legal timber chain. The thick arrows represent the crossing of the Russian border by authorized exporters.

Figure 7. Chain of custody patterns
Source: Lankin, Status and Trends in Forest Product Exports from the Russian Far East and Siberia to China. 2004, Pacific Institute of Geography: Vladivostok. Reprinted with Permission.

There are two chain of custody models that typify most Russian timber export to Northeast Asia. In the first model, the large commercial timber harvesters, usually privatized state-owned Lespromkhozy, handle all phases of the chain from the harvest site to the signing the agreement with the importer. Usually these companies have their own sorting and processing facilities and are also registered as an exporter. However, these firms often purchase timber from third parties - including small firms that may or may not be logging illegally - either to fill a particular export order or because they can make a profit. The second model essentially introduces intermediaries. An intermediary may be a Russian exporter that purchases timber from a number of logging companies operating on short-term lease or from illegal loggers. But an intermediary may also purchase timber from large commercial timber harvesters who may not have the necessary export capacity. An intermediary may also simply act as a carrier for an exporter. There are literally dozens of possible scenarios that involve intermediaries at some point in the timber chain.

These complex arrangements have therefore made it virtually impossible in some cases, particularly in the second chain of custody model, to source the timber back to the original logging site as well as to distinguish between legally and illegally logged timber.

This reality is a major constraint for retailers such as the furniture giant IKEA in their efforts to require their Chinese suppliers to be able to source in which forests their timber is coming from, see Box 3.1 (see also BROC-5).