4.2 FIBRE SUPPLY
4.3.2 Prognosis
An appreciation for long-term export opportunities cannot be made without considering the likely direction of domestic consumption.
Increasing domestic consumption brought on by a successful social contract among the various participants of the Russian house will place increasing pressure on .the resource to meet higher consumption lirked to rising living standards. With the present environment in Russia, it is unlikely that domestic consumption in Russia would be allowed to suffer through unrestricted export of wood fiber,
Backman (1995b) provides a window to the future through four scenarios for domestic consumption and exportable surplus. While the scenarios are based only on the fiber available in the short to medium term, the results help illustrate some of the policy areas which must be addressed by the international community, including that in Russia, if the wealth latent in the Russian forest resource is to be captured by both the Russian and international communities.
Presented in Figure 4.14, continuation of demand evident in 1993, with the vector of world costs and prices imposed on the Russian forest sector system, suggest that some 40 million cubic meters will be surplus, 21 million available for Pacific Rim markets and 19 million available for European markets. Development of the potential resource in the medium to long term can only add to the exportable surplus, though more to Pacific Rim and near abroad markets located on the southern periphery of Russia than to those existing in Europe.
The export surplus is very sensitive to both capital investment and to increasing domestic demand brought on by a successful transition away from the centrally planned economy. Shown in Figure 4.15, the absence of capital investment leads to a rapid constriction of in the exportable surplus within 10 years, forcing the forest industry to meet domestic demand through import of a wide range of products. While such a scenario is unlikely, it serves to underscore the importance which the international and Russian policy formation communities should place on issues which affect on the investment climate.
Conversely, shown in Figure 4.16, rising domestic demand, brought on by sustained 4 percent economic growth, and when coupled with accessible capital, effectively eliminates the export surplus within 15 years following the start of growth. In the absence of the flow of fiber supported by the resource available in the medium to long term, the exportable surplus declines first for the European and near abroad regions, and disappears by the start of the third five year period. Modest exports to the Pacific Rim region continue into the third period but are completely absent by the start of the fourth.
However, accounting for the higher prices available for unmanufactured forest products in the Japanese market has a large impact on the fiber surplus to domestic demand. Exports from Western Russia rise to 38 million cubic meters from 19 million and to 45 million cubic meters from the eastern region from 21 million cubic meters (Figure 4.17).
FIGURE 4.1: WORLD and REGIONS - Slocked forest land
Total Con~ferous
Source: B a c k ~ n (1994b)
FIGURE 4.2: WORLD and REGIONS - Growing stock
Total Coniferous Decidurus
World
4 Rurs~e Nonh Amencs
7
World
Russia Nonh America
FIGURE 4.3: RUSSIA - Stocked forest land
- I I I
Tolel Coniferous Decidlaus Mher
Baskman (1994b)
FIGURE 4.4: RUSSIA - Growing stock
Tolel Coniferow Mher
FIGURE 4.5: RUSSIA - Estimated annual growth of forest resources 1 , 2 0 0
1,000
8 0 0
6 0 0
4 0 0
2 0 0
0
Total L o r sne Reserve Trans 6 tech Currenl
Baskmn. Baskman 11994bl
FIGURE 4.6: RUSSIA - Estimated maxlmum annual accessible fiber
Sholc l a medium Medium to long
Source. Baskman (1S94b). C.A. Bscknvn
Total
Conilerous
.
DeciduousFIGURE 4.7: RUSSIA - Estimated maximum annual accessible fiber by category
Short lo medium term Medium to long term
Saursa. Baskman (1004b). C.A. Baskman
FIGURE 4.8: RUSSIA - Estimated maximum annual accesslbla fiber and harvest
s
Maximum fibre 1 9 8 9 1 9 9 2 1 9 9 3
SOUCCW B~ckman (1004b). C.A. B a c h n
Commercial Fibre loss
Medium to bng term Short to medium term
FIGURE 4.9: RUSSIA - Estimated maximum annual accessible fiber, actual harvest, and estimated economic harvest
Maximum 1 8 8 8 1 8 8 2 1 8 8 3 Estimated
fibre economic
accessible
Source. Backman (1994b. 1995b). C.A Backman
FIGURE 4.10: RUSSIA - Estimated maximum annual accessible fiber, actual harvest, and eatimated economic harvest
Maximum 1 8 8 8 1 8 8 2 1983 Erlimated
fibre ecommic
sccesslble
sours.: B a s h a n (1994b. 1995b). C.A. B . c h a n
Medium to long term Shorl to medium term
Medium to bng term Shorl to medium term
FIGURE 4.11: RUSSIA - Estimated commercial roundwood supply, share consumed domastically, and shara axportad
1 9 8 9 1 9 9 2 1 9 9 3
source: B r k m a n 11995b)
FIGURE 4.12: RUSSIA - Estimated commercial roundwood export, share consumed domestically, end shera exportad according to destination
Producllon
I Consumption
I ~ o g expolls
Tolsl Near sbmad Fer abmad
FIGURE 4.13: RUSSIA - Estimated fibre supply, share consumed domestically, and share exported according to product In fibre equivalents
FIGURE 4.14: RUSSIA and REGIONS - BASE CASE - Actual and projected commercial harvest and export of fibre
Product~on D o r n e r t ~ mnsurnptlon
I ~ o g exports Pulp erponr Other exponr
Actual lolal exponr Adual wert exports Adual easl exports Projected total expons Projected wert expons Projected east exports Adual west produdion Adual east production Projected west production Projeded east produdion
1 9 8 9 1 9 9 2 1 9 9 3 Period 1 Period 2 Period 3 Period 4 Period 5 Source: Baskman (1BBSb)
FIGURE 4.15: RUSSIA and REGIONS - SCENARIO 2 - Actual and projected commercial
FIGURE 4.17: RUSSIA and REGIONS - SCENARIO 1 - Actual and projected commercial harvest and export of fibre
Actual to?aI expods Adual west expods AdUd 8861 BXpoflS Projecled lolal e x p o r t s Projected west e x w r Proleded east expods Actrral west pmdudion Actual east productmn Prolected west productton Projaded earl produduon
1 9 8 9 1 9 9 2 1 9 9 3 Peimd 1 Period 2 Period 3 Psnod 4 Period 5 source: Backman (1885b)
5.0 OPPORTUNITIES
The preceding chapter provided an appreciation of the opportunities presented by the forest sector while Chapter 3 emphasized some of the background environment which must be considered before embarking on a voyage to Russia. From these two chapters it can be seen that clearly opportunities exist.
To provide some structure within which to view opportunities, this chapter is divided into two major parts. The first part identifies opportunities which are generic to Russia and are not industry specific.
The second part focuses on the opportunities evident in the forest sector.7'
Many organizations see Russia as a potential market for their products and a base from which to export to world markets. However, that potential is kept in check by a number of factors which have conspired to raise the political risk which has been assigned to Russia. Russia, ranking only second to Iraq by The Economist, is viewed as a risky place to do business, increasing the thresh hold rate of return and decreasing the time period demanded before the initial capital invested must be repatriated.
Consequently, much can be accomplished if the perception of Russia a s a risky place can be decreased in the eyes of the investor, foreign and domestic alike. This can be accomplished through a government that develops clear and well thought out action plans to deal with problems.
The fundamentals of the market economy must be understood to avoid missteps and non-steps. Once policies have been determined by government, they must have a fair chance to be implemented. Therefore, government should have the ability to govern. Since democracy and the institutions and process supporting its operation are only recent arrivals
However, despite the existence of these opportunities, their realization will depend on arranging adequate financing. The nascent state of the recovery in Russia would suggest that financial resources would be available for those activities which can demonstrate a more immediate return. Those opportunities which have benefits further into the future may need to be financed through sources other than those existing in Russia.
to Russia, "democracy" consultants can act as facilitators as Russia and its institutions follow their path towards their own version of democracy.
As the reform process continues, there are increasing opportunities for both foreign and domestic organizations and people to participate in the political, economic, and social development of Russia. The absence of a common understanding of the process by which a market economy and a democracy function from the Russian side, and the failure to appreciate the degree to which Russia is a relationship society built upon trust and unwritten understanding increases the chances for miscommunication, misunderstanding, and out right fraud. The code of conduct which forms part of the background environment which many participants from the West take for granted, is not present in Russia. The absence of a transparent code with which they are familiar and the existence of a Russian non-transparent code of behaviour does not inspire any degree of confidence in a dispute resolution process when treating foreigners in a balanced fashion viz-a-viz Russians. Thus, there is a need for a well thought out legal code which is both implementable and acceptable to all participants. While there are opportunities for consultants with skills in drafting the appropriate legislation and accompanying regulations with a view towards transparency, the converse is also true. Cultural interpreters who can place behaviour in both contexts can help to facilitate cementing of relationships among organizations from different countries and cultures which have a commercial incentive to do so.
As the assets of the Russian state are being distributed back to the Russian peoples and to foreign organizations, many questions arise concerning their valuation in a market economy. While much information exists concerning the performance of the organizations, this information often was derived under a completely different economic, social, and political paradigm.
Skills to establish their valuation under a market economy are not widely distributed among the Russian people. In order to broaden the appeal of Russia, mechanisms should be developed which can shed light on the degree to which accounting information generated by the former system can be employed to establish a realistic appraisal of the asset's value.
Linked to this item is the broader question of information and the degree
to which it can be independently verified. Thus, there are opportunities for consultants and organizations which can perform the valuation of assets in terms of a market paradigm and those which can provide sufficient due diligence to give credibility to the appraisals.
Opportunities to participate in a growing export trade are clearly evident from Chapter 4. Additionally, a rapidly rising domestic consumption level brought on by a successful contract among the difference participants in Russian society could lead to sharply higher prices on the domestic market. Constraints to supply exist which when encroach upon can translate into a price structure in the forest sector rising faster than in other parts of the economy. Consequently, prospects may not only be present for those firms willing to develop for the export market the forest resource and concomitant industrial capacity, but those companies prepared to invest with an eye to servicing the domestic market in the medium to long term.
While on a macro level the fundamentals seem to support investment in the forest sector, more micro oriented opportunities are presented below.
They are discussed in terms of five sections: (1) informational; (2) forest resource; (3) forest utilization; (4) forest products trade; and (5) forest equipment manufacture.
5.2.1 Informational
Consistent with many other industrial sectors, there is a general absence of descriptive information providing a realistic picture of the current situation of the sector and what the likely prospects will be over the next decade or so. It is this lack of background knowledge which can form an initial barrier to companies having an interest to participate in the Russian forest sector. Thus, there are opportunities for purveyors of knowledge to prepare the fundamental reports which give structure to the overall industry and help investors place their opportunities in perspective.
The purveyors of information can consist of two types. First, there is the macro level which helps to establish the overall fundamentals of the
forest sector. Second, at the micro level are those companies or organizations which can perform due diligence assessing the prospects and opportunities of individual companies. In this category would most likely fdl many of the foreign accounting firms and emerging Russian organizations with intimate familiarity of the sector.
5.2.2 Forest resource
There is a long-term need to establish a better framework for managing the forest resources of Russia in a more intensive manner. Included is a closer examination of the degree to which the ability of the forests to support a flow of fiber is realistically reflected in bo.th allowable annual harvest including intermediate harvests.
Not only is this important from a long term fiber flow view point, but it is also from the view point of export markets, particularly in Europe.
Growing concern over the appropriateness of forest management techniques is becoming a major concern of consumers of manufactured products. Failure to convince consumers of the responsible manner with which Russia approaches its stewardship of the land could have far reaching consequences, artificially diminishing export opportunities.
Accordingly, there are opportunities for consultants who can convey to the Russian forest sector establishment the ingredients of a forest management regime which will be positively viewed by foreign consumers, including the mechanisms to present it.
Linked with the marketing strategy to convince foreigners of the soundness of Russian stewardship of the forest resources is the substance underlying it. Russia has a long and rich history linked with the forests and forest management. The absence of financial resources and a long period of isolation from outside influences has created an opportunity for exchange between outside and inside of Russia.
Intensive forest management is probably more common outside of Russia, including the degree to which computers have been incorporated into management paradigms. Additionally, the need to accommodate the diversified interests served by the forest resource has meant that .the process of con~promise and consensus are more a part of the
background environment which organizations outside bring to the negotiation table. Accordingly, expertise in handling the large volume of data connected with resource management through a computerized information system can be expected to be well received. Furthermore, the process of consensus building and the art of compromise, while not unknown in Russia, can benefit from the more tolerant regime which has evolved in the West. Thus, administrative structures which promote and support conflict resolution and consensus building should find a receptive ear.
5.2.3 Forest utilization
Connected with management practices of the forest resource a r e environmentally neutral manufacturing practices which do not contribute to degradation of the environment. Not only do consumers of forest products, particularly in Europe, have a growing sense of the importance of environmentally sound forest management practices, but the concern extends to the manufacturing process. Thus, the discharge of waste products generated during the manufacturing are an important consideration if Russia wishes to substitute increasingly manufactured products for the solid roundwood which now dominates the export of Russian forest products.
An historical preference for coniferous species and the general absence of a well defined manufacturing industry which could successfully utilize the deciduous resource has resulted in their under harvest. Increasing capacity to utilize the lower grade material could very well translate into larger opportunities for the sale and manufacture of equipment to produce wood chip material from the lower grade wood now left unutilized or consumed as firewood for heating purposes. These opportunities are amply evident in the Russian Far East where currently a shortage of wood material has dramatically increased the price of by- product chips. Furthermore, increasing utilization of the waste material left either at the setting in the forest or at the lower landing cannot help but improve the perception that Russian is managing its resource in an efficient and responsible manner.
5.2.4 Forest products trade
While a system of grading standards has emerged inside Russia to help in the allocation of the forest resource and manufactured products among the different end uses and consumers, the system has not necessarily conformed to those standards which have emerged in the international community. Furthermore, the degree to which standards employed in Russia reflect what is actually delivered also is an important consideration from the view point of consumer satisfaction.
Thus there are opportunities for development of the appropriate paradigm to translate the internal Russian grading system into a standard recognized in the international community as well as developing training programs and equipment which can permit the Russian manufacturer to extract the highest value product with consistent quality.
Under the former regime, trade was the responsibility of specialized trading organizations. The manufacturing and harvesting enterprises d d not contain the necessary experience to market their products to either the domestic or the international market place. With the devolution of the centrally planned system, opportunities for the individual enterprises to deal more closely with actual consumers of their products have grown.
The absence of marketing skills provides a window of opportunity for international organizations which can provide marketing services to enterprises inside Russia and opportunities to link into the international market place.
5.2.5 Forest equipment manufacture
Connected with the environmentally responsible manufacturing methods discussed earlier is the ability to produce products of quality lying above the minimum thresh hold value acceptable in the West. While trade in manufactured products accounted for a significant portion of the trade in products under the Soviet regime, much of the products exchanged with former members of the CMEA were of substandard quality which would not have met the expectations of consumers long accustomed to a higher quality standard. With much of ,the capital employed in the forest sector
of a standard not capable of meeting a world level, opportunities exist for participation in the re-equipping of the industry.
Thus, opportunities for fabricators of manufacturing equipment in all sectors of industry plus those manufacturers of pollution abatement equipment exist. Furthermore, producers of harvesting equipment that poses less of a hazard to the forest can find a receptive chord both in terins of increasing productivity on accessible forest sites and bringing into accessibility forest which hitherto has been inaccessible due to limitations of terrain. The introduction of more appropriate technology, in addition to bringing to accessibility a resource not considered available currently, will also contribute to building the perception that the Russian forests are being managed in a manner consistent with sustainable development principals.
While markets seem to exist for manufacturers of equipment outside of Russia to compete in the domestic market, there may also be significant opportunities for equipment manufacturers to invest in the manufacturing sector of Russia, particularly in the transformation of the defense industry of Russia. Providing engineering and product design, the foreign investor may be able to take advantage of the familiarity of the domestic market and a significantly lower cost base either to manufacture for the re- capitalization of the existing industry or as a base from which to market forest equipment to a global market place.
Selected References
Abusow, Kathy, Fertile ground for investment in Russia's vast forests,
m,
January 1995, pp. 48-5 1Apsey, Mike and Reed, Les, World timber resources outlook - Current perceptions, A discussion paper, Vancouver: Council of Forest Industries (COFI), 1994, 160 pp.
Asland, Anders, 1989, Gorbachev's struggle for economic reform, Ithaca, USA: Cornell University Press, 1989,219 pp.
Backman, Charles A. and Waggener, Thomas R, Soviet forests at the crossroads: Emerging trends at a time of economic and political reform, WP #28, Seattle: Center for International Trade in Forest Products
Backman, Charles A. and Waggener, Thomas R, Soviet forests at the crossroads: Emerging trends at a time of economic and political reform, WP #28, Seattle: Center for International Trade in Forest Products