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VESTNIK, THE JOURNAL OF RUSSIAN AND ASIAN STUDIES  / RUSSIA'S FOREST SECTOR AND INTERNATIONAL TRADE IN FOREST PRODUCTS
11.04.2013


John Simeone is pursuing a dual MA in Russian Studies and MS in Sustainable Forest Management from University of Washington, Seattle. He holds a BS in Natural Resources and Sociology of International Development (double-major) from Cornell University. During the summer of 2012, John spent two months in Vladivostok on a SRAS Research Grant and Summer US Dept. of Education FLAS Fellowship studying Russian and conducting research for this paper and for his graduate work. After graduate school, John hopes to pursue a career related to the international trade in forest products.

This paper was published as part of Vestnik: The Journal of Russian and Asian Studies.


Russia's Forest Sector and
International Trade in Forest Products:

Export Taxes on Roundwood, Priority Investment Projects, and WTO Accession
By John Simeone

Wood, well made into buildings and furniture and well cared for, can last hundreds of years, but it is now routinely manufactured into products that last us twenty-five years. We do not cherish the memory of shoddy and transitory objects…we do not invest in them the lasting respect and admiration that makes for satisfaction. The problem of our dissatisfaction… [is that] it is virtually impossible for us to know the economic history or the ecological cost of the products we buy; the origins of the products are typically too distant and too scattered and the processes of trade, manufacture, transportation, and marketing too complicated. There are, moreover, too many good reasons for the industrial suppliers of these products not to want their histories to be known.
     - from the ‘Whole Horse’ by Wendell Berry

Introduction

The territory of the Russian Federation is 6.5 million square miles and contains huge amounts of natural resources. Russia was the world’s largest exporter of natural resources in 2008, with exports of USD 341.2 billion, representing 9.1% of the world’s natural resources trade (WTO, 2010). A total of 23% of global forests are contained within the Russian Federation—more than the combined forest area of Canada and Brazil. Forested ecosystems constitute 46.6% of Russia’s total territory and are distributed evenly across its nine time zones (Figure 1). Despite the fact that Russia contains the largest area of natural forests in the world, its current share in the trade of world forest products is below 4 percent. The United Nations (UN) notes that “forests occupy over half of the land of the country, but the share of forest sector in the 2010 gross domestic product (GDP) was only 1.3 percent; in industrial production, 3.7 percent; in employment, 1 percent; and in export revenue, 2.4 percent” (UN FAO, 2012, p. vii). This paper addresses the emergence of Russian timber into the global spotlight since 2007. Recent events, such as changes in Russia’s export taxes and subsidies, World Trade Organization (WTO) accession, and new US and EU regulations have altered the Russian forest sector. Through discussion of the Russian government’s intentions for its domestic forest sector and its efficacy in achieving those goals over the last five years, this paper provides a historical backdrop to Russia’s recent WTO accession and explains why there has been renewed scrutiny of Russian timber sourcing. Section I introduces Russia’s 2007 policy goals for its domestic forest sector, while Section II evaluates their short-term effectiveness. Section III addresses Russia’s recent accession to the WTO and how WTO membership affects specific aspects of forest sector policies. Section IV describes Russia’s role as the world’s largest supplier of logs in light of the newly passed US Lacey Act and EU Timber Regulation. Lastly, Section V concludes.

Simone1  Figure 1: Distribution of Forests in the Russian Federation—all shaded areas are
considered forested, with each color designating a specific type of forest ecosystem.
Click for Source

 

I. Government Support for the Production and Export of Value-added Forest Products

Beginning with the collapse of the Soviet Union in 1991 through the mid-2000s, the Russian forestry sector languished. Under the centrally-planned Soviet Union, the production, consumption, and allocation of all goods “took place under a different social, political, and economic regime; [this is to say that]…in a market economy, prices and costs perform allocative roles as opposed to simple monitoring roles in a centrally planned economy” (Backman, 1998. p. 7). Intensive Soviet forestry practices led to high outputs and sustained production of timber for domestic and export markets alike through the late 1980s. Soviet forest sector production relied heavily upon the presumption that their forest resources were inexhaustible and thus forestry practices and levels of production were neither economically nor ecologically sustainable (Barr and Braden, 1988).

Following the collapse of the Soviet Union and the subsequent decline in economic activity, domestic production fell as much as 40% (Backman, 1998). Meanwhile, domestic consumption in Russia fell, but not nearly as significantly as the drastic decline in wood exports. This fall in wood exports was due to large increases in transportation costs as well as the failure to match buyers with sellers throughout the former USSR (Backman, 1998). During that time, the industry relied on aging infrastructure with limited new investments, and thus there existed a disparity in timber processing production trends across Russia’s regions (Table 1). With a low capacity to process timber domestically, Russia increasingly became an exporter of roundwood (see Appendix A for a brief introduction to forest products terminology).

If Russia could shift its reliance on roundwood exports to more value-added wood products, it could increase employment in timber processing. This shift also could help encourage the development of a more sustainable method of resource-use by decreasing the costs associated with less-valued wood pieces, like branches and woodchips, thereby making them more cost effective to use for end-use products like paper, pulp, and many wood-based panels. Furthermore, if Russia could domestically produce more value-added wood products, it could raise substantially higher revenues and thus contribute more to the country’s GDP. While the total export value of wood products increased from USD 2.4 billion in 2000 to USD 8.8 billion in 2007, the percent of this total that is attributable to forest products with at least basic processing showed slow growth. That is, the export value of non-roundwood forest products as a percentage of Russia’s total forest products exports rose from 37.0% in 2001 to 50.5% in 2007 (red dashed line in Figure 2). These low percentages of value-added exports contributed to Russia’s first-place rank in the world for the highest quantity of roundwood exports between 2003 and 2005 (Global Trade Atlas, 2012). While this ranking illustrates the prominence of Russian logs in international markets, this position was far from optimal from Russia’s perspective.

 

Table 1. Comparison of the actual harvest, available harvest and processing capacity in Russian regions (CIBC, 2007)

Region

Actual Harvest
(million cubic meters)

Economically Available Harvest*
(million cubic meters)

Ratio of Actual to Available Harvest (%)

Processing Capacity (%)**

Northwest

44

59

74.6%

38%

Center

10

19

52.6%

13%

South

.3

.5

60%

2%

Volga

20

36

57.2%

11%

Ural

10

37

27%

5%

Siberia

32

64

50%

25%

Far East

14

33

42.4%

2%

Total

130.3

248.5

52.4% (AVG)

14% (AVG)

*Quantity that is economically feasible to harvest in each region. Eastin and Turner (2009) note “the disparity between the actual harvest and the economically available harvest varies across regions in Russia and is correlated with the available processing capacity and the existing transportation infrastructure in each region” (p. 1).

**Percentage of regional harvest that can be processed within the regional wood processing sector.

These trends have not gone unnoticed by the Russian government and President Vladimir Putin. In 2006, at a meeting on forest sector development, Putin acknowledged the lack of domestic processing by noting that, “processing facilities are needed…we are desperately short of processing capacity…there are not enough companies performing even minimum processing…and [Russia is] doing little to develop our own wood products and timber processing industry” (Russian Federation, 2006, para. 8). In order to modernize the forestry sector and make the timber industry more competitive, Putin called for prioritizing three initiatives: (1) passing a new, more effective, Forest Code to establish a stronger legal foundation for forest sector development; (2) instituting structural change in the sector by helping small logging companies develop processing capacity; and (3) creating economic conditions to make processing industries attractive to investors. “These issues are all interlinked,” stated Putin, “and if we fail to deal with one of them, we will fail to resolve the problem as a whole” (Russian Federation, 2006, para. 31).

In 2007 and 2008, the Russian government adopted an initiative titled “Strategy for the Development of the Forest Complex to 2020” and began implementing a series of policies to accomplish Putin’s stated goals (MINPROMTORG, 2008). Two of the core policy initiatives were export taxes on roundwood and a domestic mechanism of subsidizing the development of timber processing facilities as a way to attract investments, known throughout Russia as "priority investment projects." With regard to the export tax, on February 5, 2007, the Russian government announced an ad valorem, or percentage-based, export tariff on roundwood, which would increase incrementally each year. By instituting an export tax on unprocessed wood, the Russian government intended to decrease exports of raw wood, thereby directing log sales into the domestic market.

As of January 1, 2007, the Russian Federation’s tax on roundwood was 6.5%; however, by July 1, 2007, the tax had increased to 20% and by April 1, 2008, the tax again had increased to 25% (CIBC, 2007). While the government’s goal initially was to raise the tax rate to 80% by January 2009, in early November 2008, Russian authorities announced that they would delay the increase to an 80% tax rate indefinitely. Citing the rapidly worsening global financial crisis, the government maintained that the tax rate would remain at 25% for both softwood and hardwood. With regard to subsidizing timber processing development, on June 30, 2007, Russia passed Federal Resolution No. 419 which instituted "priority investment projects" with the goal of encouraging the development and modernization of wood-processing infrastructure. Priority status would be given to projects that had an initial investment of no less than 300 million rubles (MINPROMTORG, 2008).

Additional perks would be given to projects that are selected for ‘priority investment project’ status, like permission to bypass public auctions to lease forest land (UN FAO, 2012) and a discount of 50 percent off standard federal forest leasing costs (ROSLESHOZ, 2011). Two additional resolutions have been passed—No. 53 on February 2, 2010 and No. 450 on June 8, 2011—which stipulate additional documentation that companies must submit as well as additional selection criteria (MINPROMTORG, 2012). Post-hoc additions include: (1) requirements for more thorough detail in project applications concerning project planning, financing, and specific forest resource management and harvesting, and (2) a requirement that the Federal Forest Agency (ROSLESHOZ) must give their full agreement prior to the approval of each investment project (ROSLESHOZ, 2011).

II. Short-term Effectiveness of Forest Sector Policies

Since the implementation of Putin’s priorities in 2007, Russia’s domestic forest sector has undergone significant short-term changes. While the discussion that follows is results-oriented and focuses the policies’ effectiveness, it should be noted that further analysis is needed to address the efficiency of the processes and mechanisms themselves. Beginning in 2008, the combined effects of the increase in the roundwood export tax to 25% and the global financial crisis contributed to a dramatic decline in export revenue from Russia’s forest sector (Figure 2). Predictably, roundwood exports witnessed the largest declines, from 49.3 million m3 exported in 2007 to 21.9 million m3 in 2011. As a result of the export tax, domestic log prices were lower than the prevailing export price and thus, the government hoped this would encourage an increase in domestic production of primary wood products, like sawnwood and wood-based panels, as well as secondary wood products, such as furniture. At the same time, the hope was that the reduction of log exports would encourage demand for Russian primary and secondary wood products in international markets. According to an UN ECE report (2012), “to some extent, the duties had the planned effect of increasing the country’s own capabilities and domestic production” (p.26). Additionally, the implementation of the federal government’s strategy brought a boost to the aging infrastructure that had held back the development of the forestry sector for the last 20 years (MINPROMTORG, 2012; UN ECE, 2012).

Simone2Figure 2: Total Export Revenue of Russian Forest Products—excluding Furniture
(Simeone and Eastin, 2012; data source: Global Trade Atlas, 2012)

There have been significant increases in both domestic and foreign direct investment in timber processing infrastructure. As of October 2012, there have been a total of 117 projects given priority investment status, with a total projected investment value of 379 billion rubles, or approximately USD 12.21 billion (Figure 3). Comparing the regional investments that are being made through priority investment projects to the percent of available regional processing from 2007 (Table 1), it is clear that these new projects will significantly increase cost-effective, regional processing in many areas of Russia. Of the 117 qualified projects, only 24 have begun operations, with a total investment of 70 billion rubles, or USD 2.25 billion. While the financing of some projects comes from domestic sources, a large percentage of them are foreign direct investments or joint-venture projects between foreign and Russian companies. “Finland alone invested over 1 billion euros in Russian forest-product industries…and China built sawmills inside the Russian Federation, but close to its own border to process logs into basic export products” (UN ECE, 2012, p. 26). In addition to Finland and China, investments in the Russian forest sector have come from many countries including the United States, Malaysia, Austria, South Korea, and Japan. The recent United Nations publication ‘Forest Products Annual Market Review for 2011-2012,’ (UN ECE, 2012) is one of only a few English-language sources that detail many of the current priority investment projects.

Simone3Figure 3: Investment Value of Priority Investment Projects by Region
(MINPROMTORG, 2012)

Short-term trends from 2007 to 2011 reveal that the production of wood products in Russia is on the rise. However, the distribution of this growth is somewhat skewed towards the production of low value-added goods. It should be noted that much of the increased production of manufactured wood products was consumed domestically in response to large increases in construction projects. In fact, “in 2010 the Russian domestic market consumed almost two-thirds (61%) of the national forest sector production…the remaining part (39%) was exported” (UN FAO, 2012, p. 9). However, in the last five years, production and exports of value-added products has increased but is still skewed toward lower-value primary and secondary wood products. The total export value of wood products declined from USD 8.8 billion in 2007 to USD 5.5 billion in 2009 largely due to a 49% drop in log exports and the impact of the global financial crisis (Figure 2). Between 2007 and 2011 the export revenue of all wood products decreased by 16.2%, while exports of value-added wood products increased by 16.8 % to USD 5 billion in 2011 (red dashed line in Figure 2). While Russia’s market share of global forest product exports decreased substantially over the last 5 years, Russia continues to be the world’s largest exporter of softwood logs (UN ECE, 2012).

Simone4
Figure 4: Quantity of Roundwood Logs Exported from Russia to Top International
Markets (Simeone, 2012; data source: Global Trade Atlas, 2012)

Simone5
Figure 5: Percent of Total Quantity of Roundwood Logs Exported from Russia to
Top International Markets (Simeone, 2012; data source: Global Trade Atlas, 2012)

Nevertheless, Russia’s log exports increasingly demonstrate a high degree of market segmentation (Figures 4 & 5). While the total quantity of un-processed roundwood log exports from Russia has decreased substantially from its 2006 peak of 51 million cubic meters to 21.9 million cubic meters in 2011, there is an increasing asymmetry to the proportion of exports destined for the Asian market in the east compared to the Scandinavian market in the west. The Asian market (78%) includes China (73%), South Korea (3.2%) and Japan (1.9%), which made up Russia’s first, third and fourth largest log export markets in 2011. The Scandinavian market (19%) includes Finland (17.1%) and Sweden (1.8%), which made up Russia’s second and fifth largest export markets in 2011. It is evident that the Chinese and Finnish markets are critical for Russian roundwood exports. With respect to softwood logs, Russia’s exports to China accounted for 85% of the 2011 total.

Since 2007, it appears that Russia has been making progress in fulfilling its goals for the domestic forest sector. As many of the priority investment projects that were established over the last five years are beginning their operations, and will progressively increase their capacity over the next couple of years, continued growth of domestic production is expected. While identifying the key policy for Russia’s apparent short-term successes is nearly impossible, it is important to recognize that several of the current policies have helped advance Russia’s forest sector. It appears that the “Russian Federation’s introduction of log export taxes may have encouraged increased domestic conversion, at least in the eastern part of the country” (UN ECE, 2012, p. 62). Despite the positive short-term evaluation of the role of the export taxes on Russia’s forest sector development, over the last five years there have been numerous debates regarding the justification and potential negative effects of roundwood export tariffs (see Simeone, 2012). Additionally, many industry personnel in the Russian Far East have begun to re-think their initial positive evaluation of the the roundwood export tax (Kommersant, 2013). Yet, these tariffs seem to be one of the federal policies, at least in the short-run between 2007 and 2011, which has helped Russia achieve the goals that MINPROMTORG envisioned in its "Strategy for the Development of the Forest Complex to 2020." However, the ability of Russia to increase its forest sector competitiveness in the medium- to long-term is also dependent upon many institutional, economic, and societal factors; Russia’s recent World Trade Organization (WTO) accession will influence all of these aspects in Russia’s domestic economy.

III. Russia’s WTO Accession and Changing Tariff Rates on Roundwood

After 18 years of negotiating its membership, on August 22, 2012, Russia officially became a member of the WTO. Now that Russia is a member, more than 97 percent of all world trade takes place among member countries (NY Times, Dec. 16, 2011). WTO countries agree to adhere to guidelines that not only restrict the imposition of future trade barriers, but also require that most existing import tariffs be lowered. Prospective member countries go through a series of negotiations with WTO member states that typically require the prospective member to lower not just import tariffs, but some export taxes upon entry. Tarr and Volchkova (2010) note “in many cases, Russia implemented changes prior to accession to adapt to post-WTO requirements; in other cases, commitments may be implemented only several years after accession due to a negotiated adjustment period” (p. 202). The schedule, which contains the entire list of tariff changes for implementation that Russia agreed to follow upon WTO accession, is available in a 1734-page document from the Federal Russian Duma (2012). In general, the “cumulative changes will move the [Russian] economy toward an open trade and investment model of economic development and away from an import-substitution industrialization economic model” (Tarr and Volchkova, 2010, p. 202). Rutherford and Tarr (2010) find that Russia will gain from WTO membership in three major ways: liberalizing barriers to foreign direct investment in services (like telecommunication, banking, insurance, and transportation); improved gains from trade due to tariff reduction which, in turn, improves domestic resource allocation; and the potential for improved access for select Russian products in markets of other WTO member states due to dispute settlement mechanisms inherent in WTO membership (like rights over anti-dumping and countervailing duty investigations). While there is much speculation on the actual short-, medium-, and long-term effects of Russia’s WTO membership, it is important to note that the competitiveness of Russia’s burgeoning timber-processing sector is particularly vulnerable and may see some short-run setbacks. That is, Russia’s accession to the WTO will affect the competitiveness of Russian timber in foreign markets, as well as change the incentive structure of the domestic timber industry and thereby alter the domestic market (Sheingauz and Antonova, 2008). [1]

Officially, the “focus of the WTO is on trade policy towards imports, not exports” (Ruta and Venables, 2012, p. 11). However, throughout the negotiation phases of WTO accession over the last few years, Russia’s high export tax on roundwood was one of only a few trade policies that caused WTO member states to obstruct Russia’s entry (Tarr and Volchkova, 2010; see NY Times, 2010 and NY Times, April 8, 2011). In particular, “Finland, which is the most heavily affected by [Russia’s] export tax measure, has strenuously opposed it; so has Sweden…[and] as bilateral talks with Russia failed, these two countries succeeded in getting the European Union to negotiate the matter as part of Russia’s WTO accession negotiation” (Tarr and Volchkova, 2010, p. 212). Finland and Sweden were able to leverage the European Union to negotiate specific roundwood export tax terms as part of Russia’s WTO accession package (ICTSD, 2013).

As a result, while an export tax for roundwood logs would remain, Russia agreed to allow the export tax rates to progressively fall over the next several years to single-digit final bound rates. A system of quotas was established for three specific softwood species—Norway spruce (Picea abies Karst.), silver fir (Abies alba Mill), and red pine (Pinus sylvestris L.)—whereby a given quantity, or quota, is allocated for export at a certain lower tax rate and any quantity exported above that level will receive a higher tax rate. Given Russia’s segmented market for roundwood exports, the quota system, specifically called tariff-rate quotas (TRQs), allocated not just an overall total quota level, but also specific threshold quantities that can be exported to countries in the European Union (EU) and to all other counties (Table 2).

Currently, Russia has instituted two sets of TRQs for specific tree species. Russian spruce and fir exports are lumped together into one quota with an in-quota tax rate of 13%, whereas red pine exports have an in-quota duty tax rate at 15%. Both quotas maintain an 80% out-of-quota tax rate (Rossiskaya Gazeta, 2012). While the new total quota volume levels have been set close to Russia’s record-setting 2006 log export, the Russian government has stated that the quotas will be revised each year (WTO RF, 2012). Export tax rates have been lowered substantially for certain hardwood species, like poplar logs (now 10%), birch logs (now 7%) and aspen logs (now 5%). The roundwood export tariff for most other species, including larch, will remain at 25%, at least for the near future.

Table 2: Russia’s Tariff Rate Quotas (TRQs) for 2013 (Federal Russian Duma, 2012, p. 871)

Aggregate of HS 4403 20 110 and 4403 20 190
Wood in the rough of spruce of the species "Picea abies Karst"
or silver fir "Abies alba Mill"
Global volume of TRO, cubic meters In-quota duty Out-of-quota duty
6,246,500
            including:
            European Union: 5,960,600
            Others: 285,900
13% To be established in
accordance with the tariff
applied by the Russian Federation
Aggregate of HS 4403 20 310 and 4403 20 390
Wood in the rough of the species "Pinus sylvestris L"
Global volume of TRO, cubic meters In-quota duty Out-of-quota duty
16,038,200
             including:
             European Union: 3,645,900
             Others: 12,392,300
15% To be established in
accordance with the tariff
applied by the Russian Federation

 

Yet, questions remain: how might Russia’s primary export markets respond to a lower tax rate? Since Russia must lower its tariffs due to WTO accession agreements, how might the disruption of one of the foundational policies designed to stimulate forest sector development alter the effectiveness of its national goals? Since there is much discussion within the Russian government about the need for oversight and periodic tweaking of the new tax rates and TRQs, it is hard to do more than offer conjectures about the effects of a lowered tax rate. Nevertheless, at least with regard to the quota levels set for 2013, some rudimentary conclusions can be made (Table 3). Using 2011 Russian log export quantities as a guide to better understand the 2013 TRQs, it can be seen that very little (10.3%) of the 13% TRQ for spruce and fir was used, with equally low quantities going to the EU or elsewhere. A significant portion (58.7%) of the 15% TRQ for red pine was used, with quantities to non-EU countries nearing its threshold (72.3% to non-EU countries used). As mentioned earlier, the importance of the Chinese, South Korean, and Japanese markets for Russian roundwood exports cannot be overstated. While the incidence of 13% TRQ on exports to China, Japan, and South Korea is negligible (less than 1%) due to the relatively low quantity of spruce and fir logs exported to these countries, the incidence of the 15% TRQ on exports to China, Japan, and South Korea is significant. Russian red pine exports constitute 52.8% of Russia’s total roundwood exports to China, 34.9% of exports to Japan, and 0.2% of exports to South Korea. Russian red pine represents a significant portion of total softwood imports by China (26.85%) and Japan (3.58%), and thus these countries, at least in the short-run, may experience positive effects due to the lower tax rate. Mid- to long-term effects may not be as positive and depend upon whether 2013 export quantities are similar to 2011 volumes, whether there are modifications to the quota levels, or whether the 80% out-of-duty tax rate is triggered due to large increases in imports of Russian red pine.

Table 3: Projection of the Proportion of In-quota Duty That Will be Used in 2013, Assuming 2011 Export Levels for the 2013 TRQs (Simeone and Eastin, 2012; data source: Global Trade Atlas, 2012)

Lumped 13% TRQ for Spruce (Picea abies Karst.)
and Silver Fir (Abies alba Mill.)
 

cubic meters alloted for 2013
% of Total TRQ Percent of quota used (according to 2011 Russian Export Data)
Total lumped quota 6,246,500 100.0 10.3
To EU 5,960,600 95.4 10.7
To Others 285,900 4.6 3.7
15% TRQ for Red Pine (Pinus sylvestris L.) 

cubic meters alloted for 2013
% of Total TRQ Percent of quota used (according to 2011 Russian Export Data)
Total lumped quota 16,038,200
100.0 58.7
To EU 3,645,900 22.7 12.4
To Others 12,392,300 77.3 72.3

 

Finally, it is important to follow-up on the second question stated above and ask how Russia might reconcile its national interest in supporting its burgeoning forestry sector with WTO accession. The liberalization of export and import tariffs—known collectively as "tariff barriers"—means that Russian industries increasingly will feel the pressure of global competition. Will the Russian forestry sector be able to compete globally with companies that already have well-established production and manufacturing? Or, can the Russian forest sector be characterized as an "infant industry?" The "infant industry" argument is put forth by countries to justify the institution of tariffs in order to temporarily provide support for under-developed domestic industries so that they can grow stronger and eventually become internationally competitive. Economists concede that there are specific instances that can justify the imposition of trade barriers. For example, in certain cases the infant industry argument may be justifiable if, and only if, the country imposing the export restraint has the ability to raise world prices, that is, be considered a ‘large’ country or ‘price maker’ on the world economy. Even then, economic theory indicates that an export tax “evokes both positive and negative effects: there is a positive terms-of-trade effect and a negative efficiency effect” (Piermartini, 2004, p. 4). The total net effect on a country’s welfare can depend upon the size of the terms-of-trade and the efficiency effects. Additionally, history indicates that there can be crippling effects to using high barriers to trade beyond the short-term, such as sustained government subsidies that just barely maintain an inefficient wood processing sector’s international competitiveness (Eastin and Turner, 2009).

In addition to direct trade, or tariff, barriers, of which export taxes are a classic example, many countries, including members of the WTO, try to institute "non-tariff barriers" (NTBs) as a means to protect domestic industries from international competition. There exist many types of policies that qualify as NTBs that countries use “to manipulate trade flows and prices in order to meet domestic objectives” (WTO ERSD, 2012, p. 20). Despite the fact that the WTO has tried to limit the use of NTBs since the late 1980s, they are still prevalent (WTO, 2001). In fact, tariff-rate quotas, like the ones Russia instituted for Norway spruce, silver fir, and red pine exports, qualify as a specific and commonly-used type of NTB called "quantitative restrictions," which are constraints on trade through the use of quotas, licenses, or other administrative measures. Another category of NTBs is referred to as "administrative restrictions," which can take the form of “complex import licensing procedures, customs procedures and financial transactions” (Sun et al., 2010, p. 51). Many countries, including Russia, impose various types of administrative restrictions in both domestic and foreign policies. The WTO tracks these policies for their potential to violate membership terms by severely restricting trade flows (Brack, 2009).

IV. Trade of Russian Timber Now in the Public Eye

Russia is widely known for its problems with illegal logging and corruption in its forestry sector (e.g. see BBC, 2009). Despite the fact that the WTO understands the worldwide importance of combatting illegal logging, it actively follows any administrative regulation NTBs that could indirectly put excessive restrictions on trade. Thus, all types of regulations, including those to prevent illegal logging, are scrutinized for their ability to qualify as NTBs and whether they conflict with WTO policy (Brack, 2009). Two recent administrative restriction NTB regulations originating from the US and the EU are causing companies globally to pay attention to the supply chain of wood products (Brack, 2009). In May 2008, the USA amended the Lacey Act from 1900, which originally forbade any handling or trade of fish or wildlife that was sourced illegally in foreign countries, to now include the handling or trade of plants and plant products, inclusive of wood and timber products. As of yet, there has been only one case of illegal timber sourcing prosecuted under the 2008 Lacey Act amendment, the high-profile investigation of Gibson Guitar (NY Times, 2009).

In 2003, the European Union developed a FLEGT (Forest Law Enforcement, Governance, and Trade) Action Plan, which stipulated several initiatives to limit illegal timber from EU markets. The most recent element, a piece of 2010 legislation called the EU Timber Regulation, took effect on March 3, 2013, and fully prohibits the “placing of illegally produced wood products on the EU market” (EU FLEGT, 2012, par. 1). It is important to note that, at face value, the eradication of illegal logging from our society is an issue that few would suggest we should not strive to achieve. From an economic perspective, the shift to lessen illegal logging and the trade of illegally-sourced forest products is expected to cause a decline in the global wood supply and thus drive up the price of inputs for many of the agents involved—from processors to consumers (Turner et al., 2008). While this price increase may be good for some, for example, processors of (legal) wood products, it would not increase economic welfare for others, like end-use customers of wood products. Turner et al. (2008) point out that the “extent to which producers and consumers of wood in different countries are actually better or worse off depends on how supply, demand, trade, and prices of wood and its derived products (sawnwood, wood panels, pulp, and paper, and paperboard) respond to changes due to the reduction in wood supply” (p. 76). Meanwhile, importantly, the shift to better forest management practices as a result of less illegal logging does represent a very positive aspect of initiatives to stymie illegal logging.

While the amendment to the US Lacey Act and the EU Timber Regulation are distinct approaches to combating the trade of illegal logs and forest products made from illegally harvested logs, future research would contribute to a better understanding of how these initiatives and regulations may affect Russia and the trade of Russian timber into EU and US markets. In addition to publications by the US and EU on their respective initiatives, reports and articles from Kishor and Lescuyer (2012), Turner et al. (2008), Contreras-Hermosilla et al. (2007), Rhodes et al. (2006), and Seneca Creek (2004) offer some insight into the effects of the legislation designed to limit the international trade of illegal logs and products made from illegally harvested logs. While this paper does not provide for a thorough analysis of these issues, the final section of this paper briefly addresses the importance of Russia’s role as a raw-material supplier for forest products in US and EU markets.

As has been mentioned, Russia’s largest quantity (and hence, value) of unprocessed wood exports are destined for China, whose role as a "middle-man processor" in the global supply chain of forest products has been increasing rapidly. First-world markets like the US and EU have become the final destination for Chinese-manufactured, value-added wood products (Ganguly and Eastin, 2011). As global policies are refined and strengthened to pursue the goal of eradicating illegal wood from first-world markets, timber supply chains will be increasingly scrutinized. What follows is a brief discussion highlighting the value of 2011 Russian wood exports to China as well as Chinese forest product exports to the US and EU in the same year. The discussion will be driven by the subsequent three figures and two tables, which detail the value of Russian and Chinese exports from 2011 (Figures 6, 7, and 8) and quantity of Chinese exports (Tables 4 and 5). Each figure is set up in a similar format: each bar represents a different forest product category with the total export value of each category listed on the right. Categories are ordered from the highest value (top bar) to least (bottom). The breakdown of each bar into colors indicates the percent of the total USD export value (in millions) to specific regions. Figure 6 specifies Russian wood exports, while Figure 7 details Chinese wood exports, and Figure 8 identifies Chinese wooden furniture exports. Tables 4 and 5 indicate the specific export quantities of these products bound for EU and US markets. See Appendix A for the international harmonized systems (HS) code for each of the categories used in this paper.

In 2011, the value of Russian wood and forest product exports (excluding furniture) was USD 7.4 billion. Figure 6 shows a breakdown of the top six categories, by value, of Russia’s wood exports, which account for USD 7.1 billion, or 95.8% of Russia’s total wood exports. Even though Finland is Russia’s third largest export market by value, exports to Asia appear to dominate the market.  Overall, of the total value that Russia exports to Asia (USD 3.29 billion), 78.2% of that is bound for China (USD 2.58 billion), which represents 34.8% of Russia’s total export value globally. By product category, China’s share of the Asian total was 67.7% for sawnwood, 91.9% for roundwood, and 51.2% for plywood, while only constituting 12.6% for veneer. China’s imports of Russian wood are heavily skewed to low value-added products: 99.1% of the total Russian export value to China is either roundwood logs or sawnwood lumber—totaling USD 2.58 billion. It should be noted, however, that the total value of Russia’s 2011 exports of sawnwood increased by 12.4% between 2007 and 2011. Additionally, while the 2011 total export values of other value-added products do not look significant, exports increased for plywood (+20.1%) and veneer (+429.4%) between 2007 and 2011 (Global Trade Atlas, 2012).

Figure6_b
Figure 6: Value of Russian Forest Products Exports in 2011 to Trading Regions by Top Harmonized System (HS) 44 Codes— Percent of Total Value and Millions of USD (Global Trade Atlas, 2012)

Using official customs trade statistics, the proportion of Russian exports destined for China is large; however, it may very well be larger. The Russian-Chinese timber trade is known to have a high instance of illegal logging, which includes both illegal harvesting of Russian logs as well as illegal trade into China. “According to Rosleshoz [The Russian Federal Forest Agency] official figures, illegal logging in 2010 totaled 1.3 million cubic metres… this volume represents less than 1 percent of the total wood harvest in the country and meets the best international standards in the forest sector…[yet,] according to Worldwide Fund for Nature Russia (WWF) and World Bank estimates, up to 20% of logging in Russia (about 25 million cubic metres) is of illegal origin. The total amount of budget loss as a result of this illegal activity may reach 13-30 billion rubles annually” (UN FAO, 2012, p. 78). Although the Russian government says it complies with best international standards with regards to illegal logging, publications from organizations like WWF (2013, 2011a, 2011b, 2004), Forest Trends (2009, 2007a, 2007b, 2006, 2005a, 2005b), Greenpeace (2006, 2002), and Environmental Investigation Agency (2012, 2007) as well as academic literature, like Robbins and Perez-Garcia (2012), and Krkoska and Korniyenko (2008), suggest that the movement of illegal logs between Russia and China is a major concern. There are many points along the supply chain of logs (harvesting, scaling, transportation, processing, etc.) at which logs themselves, their paper sourcing documentation, or their reported quantity or value can be altered in order to obfuscate reality. Deriving estimates of illegal log flows is very difficult, and depending on what point or flow of the supply chain is scrutinized, the scale of the problem can vary widely.

Figure7_b
Figure 7: Value of Chinese Forest Products Exports in 2011 to Trading Regions by Top HS 44 Codes—Percent of Total Value & Millions of USD (Global Trade Atlas, 2012)

 

Table 4: Quantity of Chinese Wood Exports in 2011 to the USA and specific EU countries (Global Trade Atlas, 2012)  *All Numbers in Thousands *(m3 = cubic meters, T = metric tons)

2011 Chinese Exports
by country of destination

 

Total Chinese Exports

United States

United Kingdom

Germany

Nether-
lands

Italy

France

Belgium

Spain

Plywood
(m3)

9,593

1,357

590

231

78

76

101

253

32

Fiberboard
(T)

2,501

353

12

.6

2

4

3

2

7

Wood
NESOI (T)

665

155

43

51

35

15

23

12

16

Panels & Parquet (T)

554

136

16

7

7

6

7

5

479

Sawnwood
(m3)

539

30

1

20

2

8

3

1

.9

Shaped
Wood (T)

399

122

38

5

7

3

15

8

3

Wood
Marquetry
(T)

139

57

10

10

6

2

5

2

3

 

Once in China, Russian timber mixes with wood sourced from many other countries, which is then processed into a variety of value-added products. With regard to the illegal log flows, for instance, Robbins (2011) attempts to better understand China’s reliance on log imports:

Using officially reported product statistics, combined with reasonable input-output coefficients for production [in China], it is estimated here that actual timber consumption [in China] exceeded officially reported consumption by approximately 45% in 2007. Total consumption of coniferous and non-coniferous logs, if calculated using official statistics, was between 91-102 million [cubic meters] in 2007. However, using the [CINTRAFOR Global Trade Model], consumption is calculated to have been more than 132 million [cubic meters]. While lumber and sawnwood production grew over the past decade by an average 21% and 19% per year, respectively, log consumption reportedly grew only by 6% per year. This seems doubtful. This discrepancy is likely a result of underreporting in both domestic log production and import volumes (p. 130).

However, “many of China’s wood product exports are manufactured from raw wood materials such as logs, timber, and pulp that have been harvested in countries such as Russia, Papua New Guinea, Indonesia, Gabon, and the Solomon Islands…where illegal harvesting and other violations covered by the Lacey Act are well-documented” (EIA, 2008, p. 68). In 2011, the value of Chinese wood exports was USD 11.3 billion. Figure 7 shows a breakdown of the top seven categories, by value, of China’s wood exports, which account for USD 10 billion, or 88.6% of China’s total wood exports. Of the total value of Chinese exports destined for North America (USD 2.8 billion), exports to the United States constituted USD 2.4 billion (85%). By product category, the United States’ share of the North American total was 88.9% for plywood, 91.5% for wood NESOI (which stands for "Not Either Specified or Included," and includes products like clothes hangers, etc.), 86.9% for panels and parquet, 93.5% for wood marquetry, and 97.2% for sawnwood, while only constituting 72.7% for fiberboard and 72.2% for shaped wood. The US and EU markets for Chinese wood exports is significant, with export value proportions of 32.9% for plywood (equal to 2.7 million m3), 48.2% for wood NESOI (equal to 350,671 tons), 21.8% for fiberboard (equal to 384,123 tons), 35% for panels and parquet (equal to 186,149 tons), 49.9% for shaped wood (equal to 200,242 tons), and 61.3 percent for wood marquetry (equal to 95,457 metric tons) (Figure 7 and Table 4).

In 2011, the value of Chinese wooden furniture exports was USD 12.8 billion. Figure 8 enumerates all of the categories that fall under this classification, by value. Of the total value of Chinese wooden furniture exports destined for North America ($3.7 billion), exports to the United States made up $3.4 billion (90.3%). The United States’ share of the North American total was approximately 90% for all product categories except for prefabricated buildings (60.9%). Chinese furniture exports to the United States and EU are significant, with combined export value proportions of 73.3% for kitchen furniture, 44.2% for office furniture, 40% for both bedroom furniture and furniture NESOI, and 16% for prefabricated buildings. Table 5 indicates Chinese export quantities to the USA and specific EU countries in order to highlight the importance of these markets for Chinese wooden furniture exports.

Figure8_b
Figure 8: Value of Chinese Wooden Furniture Exports, Excluding Seats, in 2011 by
HS Codes - Percent of Total Value &
Millions of USD (Global Trade Atlas, 2012)

 

Table 5: Quantity of Chinese Wooden Furniture exports in 2011 to USA and specific EU countries (Global Trade Atlas, 2012) *Numbers in thousands *(NO = number, T= metric ton)

2011 Chinese Exports
by country of destination

 

 

Global Export

United States

United Kingdom

Germany

Nether-
lands

Italy

France

Belgium

Spain

Sweden

Office Furniture
(NO)

16,322

5,473

402

295

79

120

233

108

91

33

Kitchen Furniture
(NO)

17,503

10,582

552

917

104

179

304

88

124

110

Bedroom Furniture
(NO)

30,604

7,273

1,836

1,229

388

150

742

306

244

111

Furniture NESOI
(NO)

137,486

40,445

7,216

6,829

3,639

2,119

5,135

1,926

1,825

1,662

Prefab. Buildings
(T)

680

13

15

14

7

10

23

5

9

4

 

V. Conclusion

While the Russian Federation contains more forests than any other country, since 1991 it has struggled to manage and develop them in a way that is both economically and ecologically sustainable. Throughout the last 20 years, global demand for wood and timber products has increased dramatically. Due to the turmoil and lawlessness that was characteristic of the 1990s in Russia, filling some of this demand with Russian timber, particularly softwood, became an easy source for illicit profit. The amount of money that could be made trading in illegal Russian logs provided incentives to engage in the shadow, or illegal, economy. These perverse incentives helped undermine any hope of developing an economically and ecologically sustainable forest sector throughout much of the 1990s and 2000s.

Thus, in 2007, the Russian government’s institution of policies to spur investment, modernization, and innovation in its forestry sector represented a large step forward. Since 2007, with the help of roundwood export taxes, subsidies for new investments, and several other changes in policy, Russia has made successful short-term progress in developing value-added wood processing industries. Yet, it is important to keep in mind that all policies change the incentives that people and businesses face, and as a result, some groups do better than others. The forestry sector is no exception. For example, while the export tax seems to have created incentives to decrease the amount of roundwood log exports from Russia, it also may have increased the incentives for people to side step these taxes, and thus it may have contributed to increasing the trade of illegal logs. MINPROMTORG’s 2008 ‘Strategy for the Development of the Forestry Sector to 2020’ contains a section devoted to the ‘Fight against Illegal Timber Trade’ (Section 6.4.5), in which stricter, better enforced policies are proposed (MINPROMTORG, 2008). Recently, on February, 25 2013, the director of WWF Russia, Igor Chestin, and Rosleshoz department head, Alexander Mariev, held a press conference together in Moscow on illegal logging in the Russian Far East and Russia’s trade with China. [2] While the 2007 policies may have resulted in Russia achieving some of its short-term goals, how well Russia progresses towards its medium- and long-term goals will increasingly depend on the efficiency of policies and the ability of regulators to foresee changes to incentives that these policies directly or indirectly create.

Despite the Russian government’s efforts, MINPROMTORG’s goals may not be able to be fully realized through the exclusive use of the 2007 policies. In the short-term, investments in value-added wood manufacturing will continue, but whether they prove fully able to compete with well-performing, highly efficient manufacturers abroad is dubious. While the decreased export tax rate on roundwood may contribute to increased log export revenue, it may not be enough to compensate for the government’s loss in tax revenue. Yet, since the Russian government maintains that it has the right to adjust quota level volumes each year, there is still much uncertainty. Additionally, from an economic efficiency perspective, developing efficient financial markets, improving the tax administration system, developing better institutions with well-defined and enforced property rights, and building a functioning legal system are the logical first-best options for policy-makers. However, Russia, like many developing countries, has historically struggled to bring about such reforms and thus, in the absence of domestic capabilities, has exerted influence at the border where commodities are more easily tracked and, hence, taxed. Such export taxes are often considered a second-best option for policy-makers. Nevertheless, if there are significant improvements to institutional arrangements in Russia’s domestic economy as a result of Russia’s WTO accession, then Russia may be able to move away from its reliance on export taxes and institute efficient domestic policies that will support a productive domestic forest sector in the long-term.

As first-world markets strive to regulate the amount of illegal wood that enters their borders through policies like the EU Timber Regulation and the amendment to the US Lacey Act, the investigation of wood sourcing will undoubtedly lead to the world’s most forested country: Russia. Through these types of regulations, governments and citizens of the US and EU might lower the demand for illegal wood, and increase their appreciation of forest products through the renewed visibility of the supply chain. Only then will consumers learn about the economic history and the ecological cost of the wooden products they buy.

Acknowledgements

I thank the anonymous reviewers, Josh Wilson, Igor Novoselov, Brian Milakovsky, Alicia Robbins, and Erika Knight for their helpful comments and ideas. Additionally, I thank Judith Thornton, Ivan Eastin, Sergey Rabotyagov, and John Perez-Garcia and all my colleagues in CINTRAFOR and REECAS at the University of Washington.

 

Appendix A: Introduction to forest products terminology
(Adapted from: UN FAO, 2010)

Coniferous (C): commonly referred to as "softwood." All woods derived from trees classified botanically as Gymnospermae, e.g. fir (Abies), pine (Pinus), larch (Larix), spruce (Picea).

Non-coniferous (NC): commonly referred to as "hardwood." All woods derived from trees classified botanically as Angiospermae, e.g. maple (Acer), birch (Betula), oak (Quercus), poplar (Populus).

Roundwood: commonly known as logs. All roundwood felled or otherwise harvested and removed. It comprises all wood obtained from removals, i.e. the quantities removed from forests and from trees outside the forest, including wood recovered from natural, felling, and logging losses during the period, calendar year or forest year. It includes: all wood removed with or without bark, including wood removed in its round form, or split, roughly squared. It is commonly reported in cubic meters. Four-digit Harmonized System (HS) Code: 4403

Sawnwood: commonly known as lumber. Wood that has been produced from both domestic and imported roundwood, either by sawing lengthways, or by a profile-chipping process, and that, with a few exceptions, exceeds 5mm in thickness. It includes: planks, beams, joists, boards, rafters, and "lumber," etc. in the following forms: unplaned, planed, grooved, tongued, finger-jointed, chamfered, etc. but excludes wooden flooring. It is most commonly reported in cubic meters and board feet (in North America) but is also sometimes reported in square meters or metric tons (T). Four-digit HS Code: 4407

Wood-based panels: an aggregate category that in production and trade statistics represents the sum of:

Plywood: a panel consisting of an assembly of veneer sheets bonded together with the direction of the grain in alternate plies generally at right angles. The veneer sheets are usually placed on both sides of a central ply or core, which may itself be made from a veneer sheet or another material. It excludes: laminated construction materials (e.g. glulam), where the grain of the veneer sheets generally runs in the same direction. It is most commonly reported in cubic meters. Four-digit HS Code: 4412

Particle Board: A panel manufactured from small pieces of wood or other ligno-cellulosic materials (e.g. chips, flakes, splinters, strands, shreds, etc.) bonded together by the use of an organic binder together with the following agents: heat, pressure, humidity, a catalyst, etc. It includes waferboard, oriented strandboard (OSB) and flaxboard. It is commonly reported in cubic meters. Four-digit HS Code: 4410

Fiberboard: A panel manufactured from fibers of wood or other ligno-cellulosic materials with the primary bond deriving from the felting of fibers and their inherent adhesive properties (although bonding materials and/or additives may be added in the manufacturing process). It includes: hardboard, medium density fiberboard (MDF) and insulating board. It is commonly reported in cubic meters but is also sometimes reported in square meters or metric tons (T). Four-digit HS Code: 4411

Veneer: Thin sheets of wood of uniform thickness, rotary cut (i.e. peeled), sliced or sawn. It includes wood used for the manufacture of plywood, laminated construction material, furniture, veneer containers, etc. It excludes: wood used for plywood production with in the same country. It is most commonly reported in cubic meters but is also sometimes reported in square meters or metric tons (T). Four-digit HS Code: 4408

Roundwood (logs) are the least processed forest product, while sawnwood represents various levels of minimal to moderate levels of processing. Wood-based panels require the most processing. For the purposes of this research, "value-added" refers to the conversion of solid wood logs, or roundwood (and similar classifications, like fuel wood) to a manufactured product, including lumber or wood-based panels. That is, all forest products other than roundwood are considered "value-added."

Primary wood products are produced directly from trees and include all products described above, except logs.

Secondary wood products use ‘primary wood products’ as inputs, and include many value-added products, like furniture, musical instruments, etc.

Additional HS codes that are also used in this paper are: wood marquetry (4420), shaped wood (4409), wood NESOI (4421), panels & parquet (4418), wooden office furniture (940330), wooden kitchen furniture (940340), prefabricated buildings (940600), wooden bedroom furniture (940350), and furniture NESOI (940360).

 

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Endnotes

[1] The scope of this paper does not include a discussion of the myriad ways in which Russia’s WTO accession will impact the competitiveness of Russian industries as they increasingly compete with foreign firms in Russia’s domestic market. While this paper does not address these issues comprehensively, it is important to mention that the United States’ repeal of the Jackson-Vanik amendment restored permanent normal trade relation (PNTR) status with Russia and thus allows US companies to do business in Russia at lower costs. This allows US manufacturers—for example, manufacturers of forestry machinery equipment—to enter the Russian market cost-effectively

[2] http://pressria.ru/media/20130225/601426352.html

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