Executive Summary
Following implementation of Russian Federation political and economic reforms, the Russian Far East (RFE) and its forests became a focal point of international attention. The Forest Industry Complex (FIC) can be considered as one of the most interesting sectors of the region due to its importance for business, international trade, tourism and the environment.
This study reviews the current state of the FIC in the RFE region, recent trends of development, and the outlook for the near future.
Economic Development in the Russian Far East

• The RFE is located in Northeast Asia in close proximity to the major wood-deficit countries of the Pacific Rim (Japan, South Korea and China). With the availability of marine transportation, conditions are potentially favorable for greatly expanded RFE timber production and international timber trade, primarily with the Pacific Rim.  However, remoteness and poor infrastructure continue to impede the development of markets and trade with the western part of Russia, the former republics of the USSR and Western Europe.
• A monsoon climate exists in the southern RFE, with a Siberian, or Continental, climate in the interior. Almost 75% of the RFE is permafrost, which results in a very low rate of growth on most RFE forests and to the slow recovery of disturbed areas.
• Four main vegetation zones are defined in the RFE (the first two zones have no commercial value for the FIC):

Arctic tundra grows as a thin belt in the far northern regions of Yakutia and Chukotka.
Tundra grows further south, forming a thin belt in Yakutia, covering most of Chukotka and northern Kamchatka, portions of Magadanskaya Oblast and northern Khabarovskiy Kray.
Taiga, the largest mass of boreal forest, forms the third zone that is the heart of the RFE. Further south, this forest gradually becomes more complex, although tundra can still be found along the mountain ranges. The forests of this zone provide a main base for the FIC.
Korean-pine-broad-leaved forests grow below the taiga zone in Primorskiy Kray and southern Khabarovskiy Kray. The conifer broad-leaved forests in these regions are called Ussuri taiga. This forest supports the majority of the RFE’s endangered species. Ussuri taiga also is a productive source of timber.

• The RFE is a group of nine territories (sub-regions), which have equal political stature under the jurisdiction of Russia (except for the Republic of Yakutia, which has greater autonomy).
• The RFE, with an average population of 1.25 inhabitants per km2, is one of the world’s least populated areas. Population within the RFE is also unevenly distributed among its territories. The most populated areas are Primorskiy Kray, Sakhalinskaya Oblast and other southern sub-regions which enjoy a more favorable climate. The least populated sub-regions are those of the northern portions of the RFE region and the interior sub-region of Yakutia.

• The RFE has long been a labor-deficit region, where about 10% of total demand for labor is usually unmet. The government of the Russian Federation has stopped subsidies to the RFE regional population, and population has begun to decline with the most substantial drop in the Northern sub-regions of the RFE.
• Non-ferrous metals, marine resources, and timber are the major components of the economy of the RFE region. Although the RFE is rich in natural resources, it is also considered to be one of the least - developed regions in Russia.
• Previously, the RFE enjoyed cheaper (subsidized) transportation for the extracted natural resources that were in demand within the highly populated Western regions of Russia that provided the primary processing industries. National policies were to transport the natural resources rather than to construct processing capacities within the undeveloped areas. The RFE was, in turn, supplied with food products and most consumer goods from the other parts of Russia.
• Industrial production is concentrated in the south of the RFE, which is relatively diversified and self- sufficient. The northern areas have only isolated pockets of industrial (mining) activity with large areas of undeveloped tundra and taiga
• Following the collapse of the USSR, the economy of the RFE has become more oriented towards international markets, especially the Pacific Rim countries which account for almost 90% of RFE exports. The RFE supplies primarily extracted raw materials.
• Industries in the RFE are seeking to develop the capacity to process raw materials internally. Until value- added industries develop, the region will continue to focus on the short-term gains of exporting unprocessed materials.

The Forest Industry Complex of the RFE

• Two of the major determinants affecting the FIC are the status of the forest resources of the RFE, and the level of forest management and related land use and environmental issues.
• The Forest Fund included about 498 million ha in 1993, or about 80% of the total land area of the RFE. The Forest Fund includes both forest lands and non-forest lands. Forest land is land within the Forest Fund on which it is technically possible to grow tree species, which has been set aside for that purpose, and which constitutes the main basis for activities of the FIC. Forest lands total about 351 million ha, comprising about 70.5% (1993) of the total Forest Fund of the RFE.
• Forest Lands within the Forest Fund can be either Forested or Non-forested depending upon the present status of the vegetative cover. Forested lands within the Forest Fund totaled almost 274 million ha in 1993, comprising about 44% of the total land area in the RFE, 54.9% of the total Forest Fund and almost 80% of the Forest Lands. The Non-Forested component of forest lands are technically allocated for growing tree species, but are not presently occupied by sufficient forest cover. These lands include both plantations and non-regenerated forest lands and constitute the potential basis for further expansion of the forested land category.
• Non-Forest Lands within the Forest Fund are just over 147 million ha in the RFE (1993). These lands are mainly swamps and mountain deserts, with little potential for conversion to forested lands or for future logging.
• Forests in Russia are classified by three categories of protection.

Group I are strictly protected forests (13.2% of Forest Fund). All forms of legally protected areas are allocated to this group. Commercial logging is forbidden in this category of forests, although sanitary felling may be permitted.
Group II includes forests in areas with a high density of population, a developed transport network, and both protective and limited-use functions (1 % of the Forest Fund). Principal cutting (commercial harvests) should be carried out in a way to preserve the nature-conservancy functions of these forests.
Group III forests (85.8% of Forest Fund) are forests allocated primarily for commercial exploitation. They are specified by legislation as developed and to-be-developed forests. The forest resource base which is potentially available for logging and for support of the FIC is mainly the group III forests.

• About 61% of forested lands in the RFE are located in the Northern sub-regions of the RFE (Yakutia, Chukotka, Magadan) with a harsh climate. Permafrost, which underlies about three-quarters of the forests, cold weather and low precipitation limit tree growth and regeneration. These forest areas are also of low productivity and have low stocking densities, which inhibit the development of the FIC in this part of the RFE.
• Almost all forests in the RFE (except Yakutia) are mountain forests. This factor increases costs of logging and in many cases makes forests economically inaccessible.
• Forests of the RFE are primarily conifer (71.9%) with larch dominating (60.9% of all forests). The share of conifer forested area increases from the south to the north. The most valuable forests for the timber industry complex are the mixed conifer-deciduous forests in the south of the RFE. Korean pine, oak, ash and birch are the primary components of this mixed forest.
• Almost half of all the forest inventory in the RFE is mature or over-mature and is considered available for principal felling. The distribution of these age classes is almost evenly distributed across the RFE. This age structure determines the value of the annual allowable cut (AAC).
• Under existing levels of technology and infrastructure the utilization of AAC is very low (14%). Southern sub-regions of the RFE have the highest percent of utilization of AAC, although it is at present much less than under socialist conditions. Forests in Sakhalin are all developed and this sub-region has the highest percent of utilization of AAC at 41 % (1994).
• Forest management systems (especially forest protection) suffer the lack of funding and a distorted monitoring system. Only 28% of total required area was actually reforested in 1994. Only 7.7% of the area which needed to be planted for plantations was actually planted.

Current Status of the Industries of the FIC and Future Development

• The FIC includes forestry, the logging industry, wood-processing, pulp and paper, microbiology, hydrolysis, and furniture sub-sectors, all based on the forest resources of the RFE. The logging, wood- processing and pulp and paper industries make the greatest contribution to the industrial production of the FIC in the RFE. The logging industry is the most developed and the timber economy is mainly oriented to extraction of raw materials.
• The role of the FIC in the economy of the region was more significant before the introduction of reforms. The traditional planned supply and demand systems collapsed after the reforms, while individual timber enterprises have become more independent.. The declines in production have continued due to constantly changing regulatory structure, lack of capital, and political and economic chaos.
• The reduction in lumber manufacturing has been dramatic. In 1994 lumber manufacturing volumes fell to only 54.5% of the 1950 level. It is essentially now more profitable for most logging enterprises to export unprocessed logs than to sell them to domestic sawmills. There has also been a striking drop in the production levels of pulp, paper and paperboard for the year 1994. Paper production has almost stopped.
• Productivity of the industries in the RFE is only 31.3% of the productivity of the Russian FIC as a whole. Among the main reasons of the worsening situation in FIC are:  1) completion of industrial development of the most accessible forests and uneconomic conditions for undeveloped forests under existing levels of technology and infrastructure; 2) frequent reorganizations in forest management and wood production; 3) rapid increase of all production costs (especially for transportation and energy) due to market adjustments and inflation, which has caused a decrease in competitiveness of regional forest products; 4) sharp decline of demand for wood products in the RFE;  5) loss of western Russian markets for wood products due to the sharp increase of railroad tariffs; 6) shrinking positions in international markets due to chaotic export policy regulations and low quality of wood products which did not meet international requirement; 7) sharp decline in regeneration of forest resources; and 8) increase of ecological, environmental and sustainable management restrictions.
• A main reason for the crisis in the FIC has been the rapid depreciation of main production assets. Modernization in a forest industry has not been a sector-wide process. Rather, upgrading facilities has

been carried out on a limited, enterprise basis and has largely depended upon funding by foreign capital investments.

• The geographical location of the enterprises (especially the distance from ports) has begun to play a large role under the new economic conditions. Enterprises of the FIC located in the lower reaches of the Amur River and enterprises near railroads and ports have concentrated on roundwood production for exports which have become more profitable than domestic processing. Enterprises which are farther away from railroads and which use long road hauling or river routes have encountered difficult economic conditions.
• Labor productivity remains at a low level. In 1994 it was 360 m3 per worker (roundwood equivalent), or about 1/2 to 1/3 of the level in competitor countries. Reductions of industrial harvest and low salaries also caused a reduction in employment in the industries of the FIC.

Transportation Infrastructure Affecting the FIC

• RFE transportation systems were developed to connect the western territories of Russia and the resource- rich areas of Central Siberia with the Pacific Rim countries. Transportation systems running from north- to-south were neglected. All different modes of transportation (sea, river, truck and rail) are utilized to transport timber to the consumers. International export is conducted mainly via sea routes.
• New ports have emerged in the last five years, and major ports including Vanino and Sovgavan’ have been expanded.  The road system is poorly developed and is concentrated in the southern part of the RFE region. Future construction will be required for the FIC to secure shorter routes to the RFE seaports and to access presently inaccessible forest resources.
• Main freight transport routes for transporting timber include:
  1. Trans-Siberian Railroad to the southern ports of Primorskiy Kray (Nakhodka, Vostochniy, Poset, Zarubino, Bol’shoy Kamen’, Slavyanka) and all ground transfers via China and Korea borders;
  2. Baikal-Amur Mainline (BAM) to the ports of Vanino and Sovetskaya Gavan’;
  3. Lower part of Amur River with its terminals;
  4. Areas around the seaports and terminals of Primorskiy and Khabarovskiy Kray (Svetlaya, Plastun, Preobrazhenie, Ol’ga, Amgu, Rudnaya Pristan’, De-Kastri, Mis Lazarev), Tiksi in Yakutia, Ust’- Kamchatsk in Kamchatka and terminals of Sakhalin;
  5. Domestic, locally-constrained freight transport routes of Yakutia, Kamchatka, Magadan and Sakhalin.
• The Trans-Siberian freight route accounted for the majority of timber transportation in the RFE (30.9%). The Baikal-Amur route was second in significance (26.7%) of all domestic closed freight routes and played a large role for producers of Northern territories and Sakhalin. About 8.3% was shipped via the lower part of the Amur River.

International and Domestic Trade Impacts on Forest Products Development In the RFE

• In the mid-1980s about 15-20% of wood products produced in the RFE were exported to other regions within the former USSR; 25% were exported to international markets (with Japan and China as major customers); and the balance was consumed within the RFE. Since 1994, shipments to the other regions of the former USSR have almost ceased. In 1995 approximately 50% of production was exported to international markets while 50% was consumed in the RFE region.
• Major wood products exports originating in the RFE are from Khabarovskiy Kray, Primorskiy Kray and Sakhalinskaya Oblast. The Khabarovskiy Kray and Primorskiy Kray sub-regions will continue to be major industrial roundwood exporters in the RFE region. Northern sub-regions exports of wood product are negligible.
• Exports of lumber were 110 thousand m3 in 1995. Primorskiy Kray is the leader in lumber export, accounting for 66.3% of the total lumber export of the RFE, and will likely remain as the single chip exporter (30 thousand tons in 1995) in the near term.
• The number of Russian timber exporters has increased since the cancellation of export timber licensing permits. This has resulted in price decreases for Russian timber on the international market. Large

intermediary firms and associations have tried to unite small exporters in order to maintain the previously prevailing price levels. About 20% of timber is exported directly by independent exporters, mainly exports of logs by truck and railroad to China.

• Chaotic timber export regulations and violations of contract terms undermine the trust of foreign partners and the position of Russian timber in major Pacific Rim markets. The main obstacle in receiving a satisfactory (profitable) price for exports is the perceived lower quality of delivered wood products.
• Hard currency regulations announced on July 4, 1994, and a broad range of exchange rates were introduced in order to help Russia’s national producers. However, this negatively affected the profitability of export trade in wood products and even caused bankruptcies of some FIC enterprises of the RFE region by reducing the net prices when converted to ruble accounts.
• Joint ventures (JVs) or those domestic enterprises with access to foreign capital have played a significant role in restructuring the FIC. Usually they have provided the necessary investments to support logging or other forest industry sub-sectors where they are involved.
• On September 1, 1995 108 JVs were registered in the RFE, related to timber industry. Almost 67% of JVs specialize in logging and production of industrial roundwood for export. The most prominent contributions to international trade were made by JVs of Primorskiy Kray, Khabarovskiy Kray and Sakhalinskaya Oblast sub-regions
• The economic efficiency of most JVs has declined over time. Economic instability in the region and frequent changes in investment legislation have had a negative impact on foreign investment decisions linked to further development of the FIC of the RFE.
• The Japanese market has always been the major foreign market for RFE wood products. Roundwood totally dominates the RFE export structure to Japan. Lumber and chips have recently comprised only about 13.7% of the total by volume. Export of plywood and pulp and paper products was negligible.
• Lumber exports from Russia have increased, due in part to Russian efforts to improve the overall export structure to increase the share of value-added. Russia has sought to insure this by including special terms related to value-added products in the new compensation agreement with Japan.

Implications and Near-Term Prospects for the FIC

• The significance of international trade with countries of the Pacific Rim and China has increased in the period since reforms were implemented, while the domestic trade within the Russian Federation and former USSR republics have lost position.
• For the future development of FIC of the RFE region it will be necessary to restore a balance with both domestic and international markets. The domestic market consumed about 20 million m3 of wood products (in roundwood equivalent) from the RFE in the years of maximum production (1980’s), while approximately 10 million m3 were exported. Logs dominated in the previous RFE export structure, while domestic markets consumed many kinds of different processed forest products.
• Major determinants of the near-term outlook for the FIC of the Far East region can be grouped into three broad categories:
  1. National and regional macro-economic factors;
  2. Factors related to land base, forest resources and environment;
  3. Factors related to forest industrial production and markets.
• Group I (macro-economic) factors are largely outside the direct control of the FIC. However, these factors form the economic environment framework and determine the major policies for industrial development under continuing reforms. This group of factors include the major decisions made at the national and regional levels which will shape economic development of the region: transportation infrastructure, tax policy, and foreign investments.
• Group II (status of land base and forest resources of the region) factors are presently more stable than either Group I or Group III factors. Neither the land base, nor the accessibility of forest resources has

changed in significant ways over the last three forest inventory periods. However, conditions for the economic utilization of the resources as well as introduction of sustainable forest management and environmental regulations will be critical to the future. This group of factors includes overall land use, classification of forest resources for non-timber and protective uses, conditions of forest resources and the economic accessibility, forest management (including reforestation), forest-linked environmental policies and requirements.

• Group III (forest industrial production and markets) factors largely depend upon achieving a stable economic and political environment (Group I) as well as upon the longer term status and allocation of the forest resources (Group II). This Group includes the following major determinants: international markets and trade, domestic markets and intra-Russia trade, new trade and forest policy and business regulations, technology, and transportation costs.
• The Group II factors form the primary basis for the near-term development of the FIC in the RFE. Land use and the resource base have been the most stable influences over recent years, although the economic parameters shaping feasibility of access and use have changed dramatically. These factors will continue to play a moderate role for the future development and restructuring of the FIC of the region in the near-term.
• Environmental values associated with the forests of the RFE are forecast to grow, perhaps significantly, in importance in the future. Where land use changes are involved, allocating lands to non-timber purposes will reduce the commercial forest land base (Group III forests) available for logging and support of the FIC. However, in the near-term these factors appear to be less significant. The forest resource base of the Southern sub-regions will largely remain accessible and economically attractive for logging companies. This part of the RFE can be expected to provide the base for the near-term future development of the regional FIC.
• Group III factors (industrial production and markets) have been changed dramatically during the period of economic and political reforms. International trade and transportation costs have become the major determinants of the development of the FIC of the RFE. The importance of access to new production techniques and modern technology has increased greatly, though progress has been seriously impeded greatly by the severe shortage of operating and investment funds. In the near-term, future production of roundwood for export will likely remain as the major trend in the development of the FIC in the RFE.
• It is possible that the economic level and composition of the RFE forest industrial complex may be below the prior socialist levels given the need to rationalize resource use and respond to the actual real costs of production. Exposure to the international markets may prove to be a significant advantage if comparative advantage can be established for more processed materials in lieu of growing exports of unprocessed logs. The loss of traditional domestic markets will place a stress on the FIC to adapt to changing domestic demands and the disadvantages of great distance from those markets.
• It will be necessary for the FIC in the Russian Far East to work out the elements of a strategic plan for the near term development of the entire region which is supportive of the unique conditions of this important sector. The integration of all the key determinants (factors) affecting the FIC into such a strategy will be critical. Timber resources alone will not be sufficient to assure an internationally-competitive forest industry capable of fully contributing to the recovery of the Russian Far East.

​Summary
Both China and Russia are and have gone through unprecedented change as both of their societies adjust away from the centrally planned approach and begin to adopt a mixed system incorporating facets characteristic of both private and public sectors.  However, while Russia’s economy has collapsed following the demise of the centrally planned system, GDP falling nearly 40 percent between 1990 and 1994 (25 percent between 1990 and 1993), China’s economy has grown with GDP rising by 55 percent (40 percent by 1993).  While the activity of the forest sector in Russia has fallen more steeply to a level of only 45 percent that existing in 1990 (63 percent 1993), being somewhat lower in Siberia and Russian Far East, China’s forest sector has expanded though it is facing constraints imposed by the forest resource (27 percent between 1990 and 1993).
Ongoing growth linked to evolution of the Chinese system will translate into higher demand for forest products than can be met in the short to medium term by domestic sources.  The looming shortages present emerging opportunities for regions rich in forest resources which must seek export opportunities abroad.  Nowhere does this opportunity beckon more than in the relatively less developed forests of Siberia and the Far East.
By the year 2025 under a low growth assumption, China could face a deficit in industrial wood of some 200 million cubic meters annually, equal to slightly more than two times the domestic production of industrial roundwood in 1992.  Outside of Siberia and the Russian Far East, very few regions have the ability to service this looming deficit.  Furthermore, even the Russian region will seemingly be able to meet only up one-half of the short fall and only under conditions which promote capital investment in the Russian forest sector and development of the forest resource which is available subject to development of the infrastructure.
While on the surface conditions seem to be emerging which will favor increased trade activity between Russia and China in forest products beyond current levels of nearly one million cubic meters annually, much uncertainty remains regarding the longer-term outcome of reform and restructuring in both countries.  Future China trade in forest products with Russia will depend on many factors on both sides – many of which are political in nature of speculative regarding future course of economic and market reforms.  There is no doubt that in the near term China will experience increasing demand for all forest products and that the domestic supply will be insufficient to satisfy consumption a prevailing prices.  Increased trade, including trade with Russia, is one of the several policy tools available to China to deal with this reality.  Whether this will be selected as a major or significant element of overall timber strategies remains to be seen.  Russia, the potential trading partner, will almost certainly seek nuw and expanded markets for timber from Eastern Russia (East Siberia and the Far East regions).  The future status of economic reform and transition to markets will dictate outcomes with respect to Russian forests and potential for trade.  International markets will grow in importance as traditional markets in European Russia and former Soviet Republics become increasingly economically inaccessible.
What is certain, however, that the People’s Republic of China will increasingly play a major role in Asia and the Pacific Rim forestry, both as a producer and consumer market.  Likewise, it is certain that Russia, particularly Siberia and the Far East, will impact the overall equation for Forest products trade in the Pacific region, with important linkages to China.  It is certain that China will need to compete with other Pacific Rim consumer countries in order to obtain timber.  It is unlikely that Russia will offer substantial concessions I order to sell to China.  Barter trade may persist (currently denominated in Swiss francs) but will be more difficult given competition from hard currency buyers for the available timber from Russia.  The willingness to pay international prices for specific species and quality of timber will largely determine the competitiveness of China.  Japan, as the major log importer in the Pacific Tim, is increasing seeking timber supplies worldwide, including from the Russian Far East, to offset declines from traditional sources including the West Coast of North America.
It is also certain that Russia will seek expanded international market outlets for timber and forest products.  The level and mix of timber for export will in turn depend critically on development strategies for the forests in East Siberia and the Far East.  The lack of capital for investment I new and modern capacity and technology will slow the development of competitive processing, largely indicating future trade will continue to emphasize unprocessed roundwood in the near term.  The near term outlook for unprocessed roundwood exports from Russia is not materially affected by the import tariff structure imposed by China, though there appear to be inconsistencies in how tariffs are applied to Russia.
China has historically had preferential tariff structures favoring the import of unprocessed timber with increasingly higher tariff rates for semi-processed and finished products, thus favoring domestic manufacture of the wood raw resource.  Although ‘special arrangements’ can often prevail for trade with Russia, importers of Russian timber in the Northeast of China complain that they  must pay full duties on wood imported uven under barter arrangements or from labor-export agreements.  Government officials indicated that this could be ‘resolved’ in the case of trade with Russia, although no clear policy appears to exist dealing with such issues.  China’s future policies with regard to timber substitution and regulations to enforce limitations on timber in many end uses (including construction) will be important with regard to meeting pressures for increased consumption as well as the future role of trade and import of timber from Russia or elsewhere.
The role of finance and credit arrangements will perhaps be most significant for China’s importers.  Russian enterprises have virtually no working capital and little possibility of credit.  In many cases, supplies must be paid for in advance, in  some cases including timber.  Production is impossible without adequate credit or advance payment from buyers of timber products.  Given the financial situation of many forest products enterprises with China, it is unlikely that advance payment for imported timber can be feasible any time soon.  Greater roles for banking institutions, including letters of credit and foreign exchange accounts will be required if timber trade with Russia is to expand.  Improved infrastructure, including rail, port and other transportation services for Russian trade remain critical, and although agreements in principle have been announced for cooperation on infrastructure development much remains to be accomplished.
From the perspective of China, timber from Russia has both advantages and disadvantages.  Advantages for trade with Russia include the possibility of ‘trade deals’ as both countries seek to minimize the use of scarce foreign exchange in trade.  Border trade, including barter trade, expanded between China and Russia from 1990-93 following some 20 years of closed borders.  Various agreements were negotiated for the import of goods from Russia by China, including timber.  In exchange China offered consumer goods, textiles, electronic goods, and a variety of other light industrial and agricultural products.  Border trade declined during 1993-95, due to many perceived problems on both sides.  The changing nature of policies and regulations in both countries contributed to charges of “difficulty” in reaching agreements that could be honored and enforced.  In 1993, China also tightened credit in its efforts to control inflation, resulting in a drop in demand for imported products including timber.  Tax regulations, trade policies including quotas and licenses, and foreign exchange restrictions also impacted trade.  The ‘political situation’ in Russia was frequently mentioned as causing many difficulties for Chinese importers.  This was noted particularly with regard to ‘labor contracts’ whereby China has sought to use Chinese labor to supplement Russian workers in exchange for both wages and timber which can be brought back to China.
Closeness to Russian timber is a considerable advantage for China importers.  Access by rail or water is relatively low cost considering alternative timber supply sources, including North America.  Trade with Russia also has the advantage of species familiarity.  The common forests of NE China and the Russian Far East reinforce the dominant role of China’s NE as a supplier of timber throughout China.  Enterprises and users of timber are generally quite familiar with the attributes and characteristics of the Russian timbers and can easily substitute supply sources.  Siberian larch, Korean (red) pine, spruce, and “white pines” (whitewoods) are all acceptable I the China market.  Larch, a relatively abundant species in Easter Russia, is commonly used for railroad ties, construction, vehicle floor boards, etc. and can substitute for Douglas-fir and hemlock in these and other lower-valued markets such as packaging.  Internal river ports and coastal shipping compliment rail connections directly linking China and Russian or passing through Mongolia.  Improved infrastructures in the Far East and in China ease the problems of transportation and distribution.  Although rail connections still require changing of rail car wheels, plans have been put forward to eliminate this difficulty in the near future.  Coastal shipments (up to 40 percent of Russian timber imports) are by comparatively small ships, handling about 5,000 cubic meters.  Most China buyers do not need (or cannot finance) larger shipload purchases, hence favor smaller and faster transport by smaller vessels.  Shipments to Shanghai, Jiangsu, and Shejiang have increased as wholesale markets have evolved, allowing brokerage of relatively small volumes to individual enterprises and other purchasers.
While having some advantages over competitors brought on by proximity and familiarity with species, China buyers and processing enterprises prefer North American timber to Russian timber.  While technical characteristics are noted (for example strength),  log size is the most common difference identified as leading to this preference.  Russian timber is generally smaller diameter, normally less than 25-30 cm, and often 12-16 cm.  China prefers larger timber, preferable over 30 cm diameter at a minimum.  China imports also complain that Russian timber is ‘old’, having spent considerable time in storage or transit following harvesting, resulting in considerable drying and cracking, thus degrading product yields.
China importers also feel that Russia trade is not ‘dependable’ in terms of quality per orders, timely delivery, and other details of trade agreements.  Contract disputes are difficult to resolve, as are questions of financing and credit.  Quality of timber had declined, according to China importers, and comparisons were made to radiata pine from New Zealand which was considered much better and quite suitable for pulping.
 

​Executive Summary
Forestry Developments in Russia

• Russia’s forestry sector has recently received increasing international attention. Previous analysis by CINTRAFOR and others have sought to better understand this sector under ongoing political and economic reforms. Russia’s international role in forestry, however, is increasingly determined by regional and local conditions, with substantial differences becoming evident between European Russia and the forests of Eastern Russia, including East Siberia and the Far East. This analysis reviews the recent trends in production and trade, and examines the emerging role of these two dominant Eastern Russian territories relative to the timber situation in the Pacific Rim.
• Policies to assist Russia during the transition to a market economy have drastically altered production, consumption and trade. The Eastern Region of Russia, including the Far East and East Siberia is largely characterized by extensive undeveloped forest resources, a relatively low population, a lack of infrastructure and transportation, and low levels of industrialization (capital investment and capacity) for the forestry sector.
• Political and economic change is the norm throughout Russia. While the decline in industrial output has recently slowed, the lack of performance measures for the forestry sector under the slowly emerging market conditions makes it difficult to forecast the future. It is obvious, however, that Eastern Russia’s forests will play a significant and increasing role in the Pacific Rim.

 
Recent Industry Performance

• The declines in Russia’s forest sector performance, first evident in 1990, continued largely unabated in 1995. The disruptions have affected both production and export trade. The sector has been plagued by high interest rates, lack of credit, shortage of capital for investment to replace obsolete equipment, lack of marketing knowledge (especially export markets), tax and license issues, and steeply rising rail and transportation costs.
• The forest sector of the Eastern Russia (East Siberia and Far East) has not escaped the difficulties of the sector at the national level. The trends of declining harvest and production and spiraling costs hold significance for the near-term outlook for Eastern Russia’s participation in the timber economy of the Pacific Rim.
• The Russian Far East (RFE) produced approximately 8 percent of the Russia’s timber industry output prior to the wave of economic and political change. RFE roundwood harvest was estimated at 42 million cubic meters in 1989, but had declined to 13.5 million cubic meters for 1994.
• Harvest from East Siberia has also fallen sharply, from an estimated 73.4 million cubic meters in 1988 to only 24.7 million cubic meters in 1994.
• Declining harvests have led to significant cutbacks in the domestic production of forest products throughout Russia as demand has shrunk. Export shipments have also declined, but by proportionately smaller increments as producers have sought to shift from disappearing domestic markets to hard currency foreign markets.

 
International Trade in Forest Products

• Trade in forest products from European (Western) Russia is primarily comprised of softwood lumber, plywood, and pulp and paper products. In contrast, trade from Eastern Russia is primarily unprocessed roundwood and smaller volumes of lumber and other processed material.
• Trade in industrial logs have been almost entirely to Pacific Rim markets (primarily Japan) and China. Lower grade logs (including pulpwood) are also important to Russia’s Pacific region trade. Trade from Eastern Russia is primarily conifer logs. Almost all of Russia’s exports destined for the Pacific Rim originate in the Far East, and to a much lesser extent, East Siberia. In 1994, total Russian industrial log exports were 14.85 million cubic meters, down from 18.7 million in 1989. Trade in conifer logs with Japan rebounded slightly in 1993, then reached 5.0 million cubic meters in 1995.
• Russia’s total softwood lumber exports dropped to almost 5.4 million cubic meters (1994), down from 7.7 million in 1989. In contrast with logs, Russia’s trade with Japan in softwood lumber has been small. Volume was below 200,000 cubic meters from 1983 through 1987, then reached 424,000 cubic meters in 1995.
• Pulp, paper and paperboard from the Far East region is largely utilized domestically.
• The majority of Russia’s Pacific Rim wood exports have been directed towards Japan, both North and South Korea, and to a lesser extent to China (pulpwood). Chip exports were reported to be entirely to Japan. South Korea has emerged recently as an importer of Russia Far East timber, also in the form of unprocessed conifer logs. China has been an important market, from both the Far East and East Siberian regions.

 
Forest Resources - Area and Volume

• The Russian Republic includes some 771 million hectares of forest, widely spread across the entire national landscape. Only 446 million ha. is considered as presently accessible, indicating current developed access or a likely potential for developing access within the next twenty years. For East Siberia, some 110 million ha. (47 percent) of the forest is inaccessible, while in the Far East 169 million ha (60 percent) is so considered.
• East Siberia and the Far East together account for approximately 438 million hectares of forest including 380 million hectares of conifer forests, comprising 72 percent of the Russia conifer forest total. The East Siberia and the Far East dominate most conifer species within Russia. Proportionately, these two regions account for the largest share of larch forests (271.6 million ha; 97.7 percent) and true fir (11.2 million ha; 71.3 percent). Pine, spruce, and cedar-pine forests are also nationally significant.
• While the forests of Russia contain an estimated 82 billion cubic meters of growing stock, only approximately 55 billion cubic meters are presently accessible (67 percent). For the Far East, just 12 billion board feet (57 percent) of the inventory is presently accessible, while in East Siberia 17 billion cubic meters are presently accessible - amounting to 59 percent.
• The forests of Eastern Russia account for some 47.4 billion cubic meters inventory, or over 64.6 percent of the total inventory for the Russian Federation.

 
Privatization

• A key strategy of Russian economic reform has been to privatize much of the state owned productive capacity, with unprofitable State enterprises as the primary target. Privatization has placed the responsibility for profits and losses squarely on local managers.
• Privatization has, however, not extended to the ownership of forest lands. Overall use and regulation of forests now falls under the Russian Federation “Fundamentals of Forestry Act” enacted in March 1993. Assignment of rights to utilize forests rests with the Russian Federation “Forest Authority” and “its subordinate units.” In practice, control of forest use (as allocated by the State) has been asserted at the Republic, Territorial, or District levels, resulting in considerable conflict and uncertainty as to actual legal authority and reliability of contracts.

 
Development Outlook for Eastern Russia’s Trade

• The bulk of direct harvest from forestry operations (”principal harvest”) is directly linked to the calculated “Annual Allowable Cut” (AAC) which is determined for both currently and "potentially" accessible forest lands (primarily Group III forests) as well as the total forest area including inaccessible and reserved forests. The total physical AAC for the Far East is reported at 188 million cubic meters, while the East Siberia AAC is 279 million cubic meters.
• For the Far East, the total “currently and potentially accessible” AAC is 105 million cubic meters, with 87 million cubic meters of conifer and 18 million cubic meters of deciduous timber. Of the total, about 57 million cubic meters are derived from currently accessible forests while 48 million cubic meters could only be made available from developing "potentially" accessible forests.
• East Siberia has an estimated “currently and potentially accessible” AAC of 179 million cubic meters, including 129 million cubic meters of conifer and 51 million cubic meters of deciduous timber. Some 109 million cubic meters of the AAC is from currently accessible forests, while 70 million cubic meters would be from “potentially” accessible forests.
• Even the “currently and potentially accessible” AAC can be misleading, particularly in the present economic and political climate of the Russian Republic. A part of the AAC is estimated here to be economically "not realistically" accessible under either the prevailing 1992 economic conditions nor is expected to become economically "realistic" before the year 2000.
• The estimated currently and potentially available AAC for the Far East of 105 million cubic meters based on currently accessible and "potentially" accessible forests falls to only 74 million cubic meters, excluding the near-term "unrealistic" component. This lower economic volume would be made up of 57 million cubic meters of conifer and 17 million cubic meters of deciduous timber. This is only 30 percent of the physical AAC of 188 million cubic meters which incorporates inaccessible and reserved forests as well. . For conifer species, the current economically accessible AAC is only 27 percent of the physical total. Total 1994 actual harvest for the RFE was reported at 13.6 million cubic meters, including 12.5 million cubic meters of conifer timber.
• For East Siberia, the “currently accessible” AAC of 109 million cubic meters contrasts with the gross physical AAC of 279 million cubic meters (39 percent). Including the “realistic” potential harvest brings the estimate to 166 million cubic meters, or to just 59 percent of the physical total. Actual harvest was 24.7 million cubic meters including 23 million cubic meters of conifers.

 
Economic Implications- Near Term Projections

• The reform of costs and prices in Russia and the liberalization of economic transactions and accountability highlight the importance of understanding economic accessibility as increasingly reflected by market-based costs and prices and the influences on harvesting and production decisions. A hypothetical ten percent increase in real prices, would, for example, increase the feasibility of accessing some larger portion of the present unrealistically available AAC. Such a real price increase could result in an potential economic AAC of 126 million cubic meters (vs. 117 million cubic meters at 1992 real prices) for Eastern Russia, a level well above the actual harvest of recent years which have been seriously impacted by market disruptions, lack of credit for operations, and the unavailability of investment capital required for industry restructuring and modernization.
• Near-term projections were formulated using the Russian Forest Sector Model which integrates information related to the forest and resource base, timber harvesting, timber processing and markets, reflecting constraints imposed by both resources and the performance of the Russian economy under continuing reforms. Domestic consumption was related to the trends in gross domestic product but constrained to meet minimum politically acceptable levels in the face of economic collapse.

 
Projected Domestic Consumption and Trade

• Total Russian annual wood supply was estimated at 227 million cubic meters for 1990-1995 with total domestic consumption of wood materials (which compete with exports) at an annual average of 207 million cubic meters. Wood exports were projected at an estimated 20 million cubic meters annually. Regional consumption projections for Eastern Russia were not estimated separately. Approximately 49 million cubic meters of the estimated Eastern Russia commercial wood supply (57 million cubic meters) would be delivered to domestic mills in Eastern Russia for further processing into manufactured products, while approximately 8 million cubic meters would be exported (6 million cubic meters) or shipped to other parts of Russia for processing (2 million cubic meters).
• For the five year period ending in 2000, the estimated harvest and the volumes potentially exported fluctuate widely under the three alternative future scenarios representing a range of possible economic conditions.
• For the baseline (or “middle”) scenario, the annual total Russian available wood supply was estimated at 225 million cubic meters, with 204 million consumed domestically, and about 20 million cubic meters available for export. Eastern Russia was estimated to produce about 63 million cubic meters, with 47 million cubic meters ‘consumed’ for processing within the region, 9 million cubic meters shipped to European Russia or the former Soviet Republics, and 7 million cubic meters shipped into the Pacific Rim.
• Under the pessimistic scenario, a total of 199 million cubic meters would be available annually within Russia, with 190 million consumed domestically and only 9 million cubic meters would likely be exported. Eastern Russia would produce about 64 million cubic meters, consuming about 50 million cubic meters within the region, and shipping 13 million cubic meters to European Russia or the former Soviet republics. Without political intervention, exports could drop to zero in favor of protecting domestic consumption at minimum levels.
• With the most optimistic scenario, total annual wood supply increases to 302 million cubic meters of which 256 million cubic meters would be domestically consumed. Wood potentially available for export could be as much as 46 million cubic meters annually. Eastern Russia would produce as much as 102 million cubic meters, consuming 56 million cubic meters within the region for domestic processing. Significantly larger volumes (34 million cubic meters would be consumed within European Russia (17 million cubic meters) or the former Soviet Republics (17 million cubic meters), while as much as 12 million cubic meters would be exported to the Pacific Rim.
• The baseline projection of Russian total roundwood and chip exports for 1996-2000 indicate that a static level would be achieved relative to pre-reform years. Under more pessimistic near-term conditions, exports could fall. The optimistic scenario indicates a substantial increase in hard currency exports, with the national volume growing to almost 30 million cubic meters. Possible trends in gross domestic product within Russia are the primary determinant of production and consumption decisions.
• Under optimistic conditions, Pacific Rim exports would increase, for both high grade and lower grade materials. Lower grade exports (pulpwood and chips) would increase to just over 5 million cubic meters for Pacific Rim markets. Sawlog exports would increase to about 8 million cubic meters, equaling pre-economic reform levels.
• For 1996-2000, baseline Russian lumber exports would be 3.2 million cubic meters, falling slightly over 1990-95 levels.
• Under pessimistic conditions, total Russian domestic use of lumber could drop sharply, and a total of 5.1 million cubic meters would be potentially exported, but primarily from European Russia. Eastern Russia exports would remain flat due to the lack of investment capital to improve processing quality for international markets.
• The optimistic scenario would see Russia’s lumber exports increase to a total of 5.7 million cubic meters, with 5.5 million cubic meters originating in European Russia since almost all near-term investment in modernization and equipment would first take place in western Russia.
• Eastern Russia lumber exports to the Pacific Rim would remain at only 200 thousand cubic meters under all scenarios due to the deteriorating productive capacity and quality limitations of the existing sawmill sector in East Siberia and the Far East.
• Estimated exports of wood-based panels (including plywood) are small with essentially all exports derived from the European regions of Russia and going to western European hard currency markets. Export of market pulp, processed paper, or paperboard products will also be very limited from East Siberia and the Far East to the Pacific Rim.
• Trade relations between Russia and its neighbors has been determined in part been by past political relationships as well as new economic realities, including the need to earn foreign exchange. Relations with Western Europe and the Pacific Rim (primarily Japan) have opened, where hard currency exports have provided considerable strength to the overall Russian Federation trade balances. The emergence of new trade partners include the Middle East, North Africa, South Korea, and potentially North America.
• Foreign participation in the forestry and forest products sector of the Russian Far East has been limited but is growing. The oldest bilateral linkages have been with North Korea and China. Japan has also had a long involvement with the forestry sector in Eastern Russia. South Korea has been actively involved since about 1990, although the level has declined significantly since 1995.
• As relations with the United States have improved in the post-reform period, there has been a very active interest in the Eastern Russia as a potential new source of timber. Imports of unprocessed logs into the Pacific Northwest have been prohibited due to regulations based on potential for pest and disease risks to US forests and the higher cost of treatment which would be required prior to importation. Interest in importing processed and dried lumber has grown, however, yet volumes imported to date have been small.

 
Conclusions

• The forestry sector in Eastern Russia, including East Siberia and the Far East, has substantial potential for future development. Timber resources are relatively abundant but utilization is presently limited by lack of access, high transport costs, shortages of investment capital, political uncertainty, and high comparative costs due to inappropriate and outdated technology.
• Substantial capital investment will be required to transform the existing industry to standards of technology and product quality required for the industry to become truly competitive in international markets of the Pacific Rim. Domestic sources are scarce and credit difficult, while international investors remain highly cautious of risks associated with political uncertainty and unstable economic conditions under ongoing reforms.
• Overall, large investments in infrastructure (access, transportation, housing, etc.) will also be required to make the harvesting and processing of timber economically viable under more market-oriented criteria of profit and loss. In Eastern Russia, territorial and local governments simply do not have the required funds required to undertake such infrastructure investments.
• The export of unprocessed timber and primary lumber products will, in the near term, remain as the most attractive export even as domestic prices continue to rise towards international levels. Eastern Russia has not yet become competitive for exporting a wider variety of manufactured wood products.
• Prospects for the period ending in 2000 will depend on the success of emerging policies to promote investment, and the re investment of a larger share of the hard currency earnings by the ownersmanagers of enterprises within the forest sector.

The longer term prospect for wood exports remains clouded. Economic realities, together with sustainability limits imposed on forest resource management may effectively limit future utilization to levels near or below the historic centrally-planned levels. The wood contribution from Eastern Russia to the Pacific Rim beyond the turn of the century will ultimately reflect the economic realities of the region’s comparative forest products competitiveness in both international and domestic markets in European Rus

​Executive Summary
While the Russian Republic represents one of the largest single holdings of forests and forest inventory, the potential of this resource is far from fully realized. In part, this is due to the huge size of the Republic, and the overall pressures that have taken priority over the development of the forestry and forest products sector historically.
 
In more recent years, the ongoing political and economic disruptions associated with political and economic reforms have resulted in actual declines in output and production in the face of breakdowns in the routine processes of economic activity generally. The findings of this analysis clearly indicate, however, that there remain a number of fundamental problems of a long-term nature that will inhibit and slow the realization of the potential for the forestry and forest products sector beyond the immediate short run chaos.
 
Timber Resources
The economic availability of timber resources, in contrast to the physical presence of forests, brings into question the real potential for near term development. Primary harvest, from designated (Category III) forests under the administration of the forest administrative authorities, has been stated as approaching 833 million cubic meters annually as a sustainable yield (Annual Allowable cut). However, only a fraction of that potential is considered by the Russian authorities as either currently available or potentially available over the next twenty years through significant investments in infrastructure for accessibility. In the present analysis, it is suggested that of the 545 million cubic meters of current and potentially accessible AAC, that the near-term harvest will be restricted to the currently accessible forests. These forests have an AAC "realistic" AAC of only 426 million cubic meters, or about 51 percent of the aggregate physical total. Of the currently accessible AAC, some 248 million cubic meters are from conifer forests, and 178 million cubic meters from deciduous forests. Further, this analysis finds that some 88 million cubic meters of the "currently accessible" AAC is in fact not realistically accessible due to access, reservation for alternative uses, environmental restrictions etc.
 
Timber supplies from other sources include intermediate harvests (primarily from silvicultural operations), harvests from "other" forests not administered• by forestry organizations, and secondary resources from waste and recycling. While important, these sources do not constitute more than 125 million cubic meters in the aggregate, and at present is mainly derived from secondary sources (primarily sawmill waste).
 
Economic Reforms and Forestry
The future outlook for the forestry and forest products sector is highly uncertain in today's political climate. As Russia struggles to install "market economy" mechanisms, it finds itself trapped in many economic and political issues of transition. Reforms are far from complete, particularly as it relates to the former administered cost/price system and the physical nature of decision-making for the forestry sector. Further, the overall decline in economic performance throughout the Russian economy has led to declines in almost all indicators for the sector relative to the previous "normal" levels as of 1989.
 
It is expected that in the near term that domestic prices and costs will continue to be distorted, and hence of limited value in guiding normal economic decision-making about the allocation of resources. Further, the forestry sector is compelled to approach reforms from the vantage point of the existing industry structure and resource conditions. This will mean that structural adjustments will come slowly. This is only part political. The lack of capital investment to modernize and restructure the sector will be a major constraint. The reinvestment of present hard currency earnings within the sector for restructuring are meager, as these earnings are diverted to other purposes. Foreign investment is likewise discouraged by the economic and political uncertainties, as well as the unknown parameters of future policies.
 
It can be expected that the imperfect corrections to the price/cost structure will have an immediate impact on the forestry sector, since the freedom from central control also means that enterprises must become "profitable" - measured by the covering of primary operating costs (variable costs) from their own sources of income. In the short term, the installed industrial capacity (including logging) can be further depreciated, with the appearance of avoiding the significant capital (fixed) costs of operations. Although beyond the period of analysis incorporated in this analysis, the deferral of capital investment will have serious consequences for the sector after the turn of the century. It is also clear that Russia will be torn between two conflicting policies with respect to domestic use of. available forest resources. On the one hand, the large standing inventories of timber represent a "bank account" that can be liquidated as needed to generate desperately needed hard currency. The potential for exploiting the significantly higher valued export markets is a great temptation under the pressing needs of the country at present. However, this factor is offset by the rapidly declining levels of domestic consumption since 1990, and the potentially growing need for forest products to aid in the eventual economic recovery process and future economic development. This means restricting the export of timber in lieu of meeting current and anticipated future domestic requirements.
 
Future Timber Harvests
In terms of harvest, the need to recover variable costs by forest enterprises means that not all "currently accessible" timber can be economically harvested under prevailing (and distorted) prices and costs. The relatively low domestic price for timber means that the ability to cover rising domestic costs is difficult, imposing a constraint on harvest.
 
The scenarios developed in this analysis attempt to mirror the "most likely" conditions through the end of the century, and bracket the most significant potential uncertainties. For the baseline conditions, the economic harvest rate declines to a delivered volume of industrial timber of approximately 250 million cubic meters for Period 1 (1990-1995), in contrast to a 1989 level of some 338 million cubic meters. Due to the presence of existing infrastructure for accessing the forest and the installed production capacity, the share of delivered timber increases for the European-west Siberian region, from 68 percent of the 1989 total to over 76 percent of the projected Period One timber supply. In Period 2 (1996-2000), the delivered supply is projected to decline further, to approximately 244 million cubic meters, with 178 million cubic meters (73 percent) derived from the European-West Siberia region. This slight decline in regional share is due to the continuing depletion of mature timber inventory in the Russian west. Under the Pessimistic scenario, the delivered supply would decline to only 214 million cubic meters, while the most Optimistic forecast for Period 2 would lead to a supply of 338 million cubic meters, just restoring the previous levels of 1989.
 
If firewood is excluded from the delivered commercial supply, but secondary sources (waste, chips and recycled fiber) are included, the total available wood/fiber supply projected from Period 1 is 230 million cubic meters, which includes 185 million cubic meters of roundwood. By region, this supply includes 175 million cubic meters from the European-west Siberian region (76 percent roundwood) and 56 million cubic meters from the Asian-Pacific region (86 percent roundwood). For Period 2, the total wood/fiber supply is 229 million cubic meters under the baseline scenario. with the decline in capital investment, the pessimistic outlook for Period 2 is for a supply of only 203 million cubic meters. Under the optimistic case, Period 2 supply would increase to 341 million cubic meters. The gain over the baseline case represents an increase of 112 million cubic meters, which includes 65 million cubic meters of roundwood, with 40 million cubic meters of this derived from the Asian Pacific region as the inventories in the European-west Siberian region continue to decline. The most important gain under the Optimistic case would be for greater waste paper recovery in the European region, with the equivalent of 37 million cubic meters of waste fiber recovered.
 
The analysis also sought to approximate the likely supply response to long term price/cost reforms based on 1992 international levels. Although higher international prices are an incentive, the reform of domestic costs would clearly discourage production. The results were perhaps surprising, indicating that full price/cost reforms to international levels for Period 2 would result in <an economic timber/fiber supply of only 216 million cubic meters, very close to the Pessimistic case outlook. However, supply would shift slightly to the Asian-Pacific region, where the more abundant timber would offset the higher costs, while the European-west Siberian region would continue to face declining competitiveness due to aging capital structure. If sufficient investment was made in infrastructure to access the "potentially accessible" forest (a factor not assured) the overall supply would increase to 265 million cubic meters, well below the 338 million cubic meters attained in the "pre-reform" period (1989).
 
As an illustrative example, it was further assumed that world real prices would increase by 10 percent in response to growing global timber scarcity. This assumption, with constant (1992) world real costs, lead to an estimate of Russian supply of only 350 million cubic meters, close to the realized volume of 338 million cubic meters for 1989. Conifer supply would approximate 248 million cubic meters, with deciduous supply would be 102 million cubic meters.
 
Full economic reform (to global competitive levels) thus does not significantly improve the comparative advantage of Russia in the absence of increased prices, and only then with substantial capital investment. Russia will continue to struggle to recover to the harvest levels and delivered wood/fiber supply of the centrally planned system (338 million cubic meters) during this century.
 
Allocation of Available Timber/Fiber Supply
The allocation of the available wood/fiber supply will reflect the dual objectives of assuring an "adequate" domestic consumption consistent with overall economic performance (GOP) and internal price/cost reforms and the opposing need for critical foreign hard currency earnings. Assuring domestic consumption (relative to the declining GOP) results in a domestic use of timber of 207 million cubic meters in Period 1, leaving some 22 million cubic meters available as "surplus" for export. In Period 2, domestic consumption (baseline) is estimated as declining to 204 million cubic meters, leaving a slight increase available for export (25 million cubic meters).
 
Under pessimistic assumptions for Period 2, domestic consumption would absorb the entire supply of 203 million cubic meters. However, the analysis suggests that Russian central authorities would sacrifice domestic consumption in order to maintain exports at near present levels of 13 million cubic meters, resulting in a decline in domestic consumption to 190 million cubic meters.
 
Optimistic conditions would lead to a Period 2 domestic consumption of 256 million cubic meters, reflecting recovery of GOP. This growth, together with increased capital investment would allow for total supply to reach 341 million cubic meters, giving an export potential of almost 85 million cubic meters.
 
Domestic Use of Timber/Fiber
Domestic processing of wood/fiber is primarily related to conifer lumber. In 1989, output was 83 million cubic meters, with two-thirds of this in the European region. Projections for Period 1 indicate a significant decline, to approximately 54 million cubic meters of lumber, with conifer lumber accounting for 44 million (mainly non-larch species or 37 million cubic meters). Under optimistic assumptions, lumber production would increase over the baseline, but only to about 68 million cubic meters, still below the 1989 level of 83 million cubic meters.
 
Wood panel production in 1989 was approximately 12 million cubic meters. This is estimated to drop to only 6 million cubic meters in Period 1, and to a maximum of 7.7 million cubic meters in Period 2 under the optimistic case. Pulp and paper production was some 11.4 million metric tons in 1989, with 8.6 million metric tons produced in the European region. Baseline estimates are for a decline to 5.9 million metric tons in Period 1, with 3.5 million metric tons in the European region. For Period 2, production is estimated to range from 3.8 million metric tons (pessimistic) to 7.8 million metric tons (optimistic), with the majority being produced in European region.
 
Export of Roundwood and Wood Products
Export trade by Russia as typically involved the export of unprocessed logs to both the former soviet Republics and China (soft trade), the Pacific Rim (Japan) and Europe for hard currency. While the Pacific Rim trade has been primarily higher quality sawlogs, the hard currency trade with Europe has been primarily lower grade sawlogs and pulpwood.
 
Export trade with the former Soviet Republics was approximately 20 million cubic meters in 1989. Due to economic declines in the Republics (as with Russia), domestic consumption has fallen and hence the need to import conifer logs. Period 1 estimates are that unprocessed exports will decline to 8 million cubic meters, reflecting the Russian desire to maintain the traditional trade relationship with these Republics that are the source of critically needed Russian imports of other goods. In Period 2, exports to the former Republics are estimated to range from 8 million cubic meters to an optimistic level of 17 million cubic meters, a level still below that of 1989.
 
Exports to hard currency markets in Europe and the Pacific Rim were about 16 million cubic meters in 1989. Period 1 estimates are for exports of 13 million cubic meters, with 7 million going to European markets and 6 million to the Pacific Rim. While only 30 percent of European exports are sawlog quality, it is expected that over two-thirds of Pacific Rim exports will be higher grade sawlogs.
 
In Period 2, hard currency exports are estimated to range from a low of 7 million cubic meters (pessimistic) to a high of 29 million cubic meters. The baseline projection for Period 2 is for exports of 13 million cubic meters, representing the Central Government concern for maintaining hard currency sales in spite of the implied shortfall for domestic consumption. European exports would range from 2 to 17 million cubic meters, while Pacific Rim exports range from 5 to 12 million cubic meters.
 
Exports of manufactured wood products are anticipated to remain modest in contrast to unprocessed timber exports. Lumber exports are almost entirely to Europe, with the total estimated at 4.5 million cubic meters total for Period 1 (4.1 million cubic meters to Europe), and ranging from 3.3 to 5.8 million cubic meters for Period 2. Panel exports are likewise modest, estimated at only 0.4 million cubic meters in Period 1 and ranging from 0.3 to 1.9 million cubic meters in Period 2. The majority of panel exports will be to the Former Asian Republics of the Soviet Union rather than to hard currency markets.
 
Future Outlook
Although Russia seeks to utilize the forestry and forest products sector to promote regional economic development and desires to encourage value added production (both for domestic consumption and exports), the current state of industry capacity and the near term problems of gaining hard currency for capital investments will continue to constrain the achievement of these objectives. If (and when) incentives emerge for the reinvestment. of hard currency export earnings and/or a favorable climate for foreign investment is created, it can be expected that the more optimistic outlook described here will be more realistic. However, it remains that even the optimistic outlook barely allows Russia to reach the levels of harvest, production and trade achieved under non-economic central planning in the last half of the 1980 IS. Further development will require Substantial capital investments beyond the levels assumed in the optimistic scenarios in order to develop a competitive sector with an international comparative advantage.
 
Trade of forest products with hard currency trading regions can be expected to continue at levels evident 1n the late 1980's and early 1990's through 1995 (subject to short term cyclic variations).
 
The prospects for wood fiber exports between 1995 and 2000 depend on levels of invested capital, alacrity with which domestic costs and prices rise to world levels, and levels of domestic demand. Exports during 1995 and 2000 will fluctuate between 17 million cubic meters to European markets and 12 million cubic meters to Pacific Asian markets, and 2 million cubic meters to European markets and 5 million cubic meters to Pacific Rim markets. Higher exports are potentially possible should the ties binding Russia to other republics of the former Soviet Union not be as strong as those existing before the break-up of the USSR.
 
Employing the Russian Forest Sector Model, the reasonable bounds for this important sector of the Russian economy have been estimated. The implications are that restructuring and reform have had significant negative impacts to date, but that modest recovery can be anticipated during the balance of this century. However, no major expansions of the sector, or external trade, can be anticipated in the near to medium term. In fact, recovery to the pre-reform levels of the late 1989 will be a substantial challenge as Russia struggles to put reforms in place, and to substitute more market-like resource allocation decision-making for the previous noneconomic central planning approaches.
 
The longer-term outlook for the volume of wood raw material exports to trading regions not belonging to the former Soviet Union is clouded in uncertainty. Rising domestic consumption levels interacting with the physical limits imposed by the forest resource may effectively limit the contribution which Russia could be expected to make to consumption in regions outside of Russia. Longer-term outlook for the volume of wood raw material exports to trading regions not belonging to the former Soviet Union is clouded in uncertainty. Rising domestic consumption levels interacting with the physical limits imposed by the forest resource may effectively limit the contribution which Russia could be expected to make to consumption in regions outside of Russia.

​Summary
Political, social, and economic changes occurring in the Soviet Union under policies of perestroika and glasnost are creating unprecedented interest, opportunities, and risk for the Soviet forest products industry, foreign investors, and competitive suppliers in other countries.  The outcome of the changes is far from clear, not only for the forest products industry itself, but also for the country as a whole.  As the USSR grapples for clear direction along the twin paths towards political pluralism and decentralized market driven economy, these changes will continue to create uncertainty as well as opportunity.