Update on the Russian log export tax

By Bob Flynn, Director, International Timber, RISI

SEATTLE, WA, May 22, 2008 (RISI) - On April 1, 2008, Russia implemented another increase in its tariff on unprocessed logs, increasing the tax from 20% of value to 25%, with the minimum tax increasing from 10 Euros per cubic meter to 15 Euros. The next stage in this process is a jump in the export tariff to 80% of value, or a minimum of 50 Euros per cubic meter, scheduled for implementation on January 1, 2009. While there is speculation that Russia may delay implementation of this tax, and/or provide exemptions for companies investing in processing projects in Russia, some changes in the global forest product markets are already apparent.

On the European side, Russian log exports to Europe fell by 24% in 2007, a drop of more than 4.4 million cubic meters. The majority of this decline occurred in Finland, where pulp and paper companies are all operating as if they assume the 2009 tariff increase will be fully implemented (despite maintaining some hope for a "reprieve"). The major Nordic pulp producers have developed plans to replace Russian timber and/or to reduce demand, including closing some production facilities and importing woodchips from as far away as Chile. (For more on the changes in wood sourcing for European pulp mills, see the RISI study The International Pulpwood Trade Review.)

A glance at Russia's pulp export data helps explain the Russian government's impatience with foreign pulp producers who have imported Russian pulpwood for the past 20 years or more without investing in pulp facilities in that country. Despite a strong global market for wood pulp in recent years, which has seen the average value of Russia's pulp exports increase by 78% between 2002 and 2007 (in US$), the volume of Russia's pulp exports have only increased by an anemic 105,000 tonnes over this period. This is an average annual increase of just 1.1% over the five year period, a surprisingly bad performance given that nearly half of Russia's pulp exports are to China, which has been rapidly expanding its pulp imports during this time. And although there has been a flurry of announcements of new/expanded pulp mills in Russia, we know of no significant new capacity which will actually be up and running before 2010.

The big question at this point is really not "Will Russia implement the next big tariff increase?", but "Will the increase still occur on January 1, 2009, or perhaps be delayed somewhat?" or "What exemptions to the log export duty might be granted to companies investing in processing facilities in Russia?" Regional authorities in eastern Russia, in particular, have been dangling this carrot of tax exemptions, although final regulations on this have apparently still not been decided in Russia. Assuming that some of this does occur, and assuming the normal leakage around regulations in eastern Russia, we believe it is likely that the decline in log imports from Russia may not be quite as abrupt as the increase to a 50-Euro tax might imply.

This is an excerpt from a full story that is available in RISI's Wood & Timber News Service.

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