Russia resorts to export permits again.
market information

23 May 2014

Russia resorts to export permits again.

By Krista Kimmo.
Russia’s WTO membership has brought benefits and bureaucracy to Finnish forest industry. Russia now reinstates the list of companies allowed to export softwood.
The Russian Federation became a member in the World Trade Organization in August 2012, after 18 years of negotiations. The membership has not resulted in Russia following the WTO rules as such.
Before joining the trade organization, Russia used high import duties to defend its domestic production. By hoisting up round-wood export duties, foreign forest industries were encouraged to invest in Russia.
There still exist unresolved issues. They could be grouped under the heading ‘excess bureaucracy’.

List of approved exporters defies WTO.
Until October 2013, Russia maintained a list of companies which were entitled to export softwoods from Russia. A company could be included on the list only if it had no unpaid forest rent payments.
The list was contrary to WTO rules, as the companies could still sell softwood inside Russia.
“Now Russia is reinstating the list as of June 2014,” says Mr. Jukka Halonen, Manager for Russian Affairs and Trade Policy at the Finnish Forest Industries Federation. This time, the list is temporary and will be enforced until summer 2015.
Halonen says that reinstating the list will start to have effect towards the end of 2014, as companies start to apply for export licences for 2015. Russian officials also need to decide which companies should be on the list. The list of approved exporters will create new bureaucracy, but it will not stop round-wood exports from Russia to Finland. ”It was the Russian forest industries who wanted to reinstate the list”, Halonen explains.

Russia supports domestic industries.
Timber exports from Russia have increased and roundwood prices in EUR have decreased as the rouble has weakened. The Russian forest industries lobbed for the export list to be reinstated to safeguard their roundwood procurement. This will mean that many Russian logging companies used by Finns will fail. Nearly all Russian logging companies have unpaid forest rent payments. The financial difficulties are caused by the fact that logging as business is not really profitable in Russia. The profits are generated from the further processing of timber. The majority of the trees in Russian forests are cheaper pulpwood, the sales of which do not really cover logging costs. The companies get their revenue from selling timber, and there is less of that available. The situation is the opposite in Finland, where thinnings are carried out in forests and the trees have room to grow stout.

Advantages of WTO membership outweigh problems.
“All in all, so far the advantages of Russia’s WTO membership are greater for the Finnish forest industry than the remaining problems,” says Halonen.
The Russian WTO membership meant that the export duties for round-wood decreased significantly. This has brought annual savings of tens of millions of Euros for the Finnish forest industries.
Another positive outcome is that there is a negotiation mechanism. “Before, when Russia increased its duties, you just wondered what to do. Now we have the trade organization’s negotiation protocol to solve whatever issues,” Halonen says.
Export licences bothersome to get.
Another issue is the bureaucracy needed in obtaining export licences. When a company wants to export softwood from Russia, it needs an export license from Russia and an import licence from the EU. Russia and the EU have agreed on the information that the licences should include.
Take the hypothetical case that the EU grants a licence to import 50,000 cubic metres of Scots pine. You are allowed to import both pulpwood and logs, as long as the combined amount does not exceed 50,000 cubic metres. Russia requires you to define exactly how much pulpwood and timber you plan to export. Each grade needs a separate licence, which must be applied for, translated and stamped by a notary.
“The bureaucracy is bothersome but we have learned to live with it,” Halonen says.

Paper and board duties fluctuate.
Yet another issue concerns Russian import duties. According to Halonen, the treatment of fine paper and folding boxboard is still contrary to the WTO agreement. During its WTO membership, Russia has changed the import duties of these grades from five to 15 percent and back again.
The current five-percent duty is effective until the end of next August. How much the duty will be after that is open. A high duty would protect Russian production.
The share of paper and boards sold from Finland to Russia is 4.5 percent of the value of all the imports of Finnish forest industries. Halonen says the significance of the trade to Russia is greater than its value.

Russians buy expensive paper products.
”Russia is a growing market for paper products. Russians also buy the most expensive fine paper grades and folding boxboard,” says Halonen. If duties increase, the price of these products would go up. Then they would be replaced by other materials, such as plastic. Russian paper production cannot meet the increasing demand and there is no folding boxboard production in Russia, Halonen says.
If the duty treatment of fine paper and folding boxboard changes after August, the forest industries hope the EU will take the issue up at the WTO. Whether this will happen is by no means sure.
The EU and Russia have issues in other product categories, too, such as the garment and automotive industries. The order in which the EU starts discussions in WTO depends on the financial value of the product to the EU.
However, Halonen is satisfied by the EU’s activity in dealing with the paper duties. On the EU scale, it is a small business. He is surprised that so far the crisis in Ukraine has not affected the forest industry trade with Russia. In situations like this, the upsurge of Russian patriotism may translate to boycotting imported products.
For further information please contact Mr Hannes Mäntyranta:

FINNISH FOREST Industries Federation
Snellmaninkatu 13
FI-00171 HELSINKI / Finland
Tel +358 (0) 9 132 6600