Russia in the Context of Global Trade in Wood-Based Products and Illegal Timber

1. Russia in the Context of Global Trade in Wood-Based Products and Illegal Timber Presented by James Hewitt Taiga Rescue Network Annual Conference (2008)

2. Summary •Russia’s timber exports in steep decline since 2007 (recession√, prices√, tariffs?) •Russia’s export potential are << than some vested interests claim (location, quality) •Wood-based products are a small % of all exports •The EU accounts for only a quarter of Russia’s wood, pulp and paper exports •China is increasingly dominant in eastern Russia, logging frontier moving west •Indirect exports are significant; chain of custody / certification to assure market access • Russia is a High Risk country concerning the supply of Illegal Timber – but there are regional differences (Northwest ▼, East ▲, South ?) and some FSC •Internationally, progress against trade in Illegal Timber is slow; sustainability is more important

3. •Wood-based products: almost insignificant (3%), increasing rapidly (10%pa) •Very vulnerable to world fuel market

4. Strong(?) negotiating position of EU given the balance of trade Increased exports & GDP but increased revenue & spending on society & environment?

5. Production & consumption of wood-based products (Source: OECD) • “High Risk” = supplies from countries whose exports (of some products) should be screened for Illegal Timber • Most of Russia’s High Risk production enters end-use in Russia

6. Trade in wood-based products from High Risk countries (Source: OECD) •SE Asia, China and Russia supply most trade in High Risk wood-based products •China, Japan, EU and USA are destinations for most of those supplies •Particular need to assess legality along the supply chain back to forest stump – breaks in supply chain through China imply illegality

7. •Pulp & paper: exports = imports •EU: the main supplier; destination for only 20% (P&P) and 30% (T); declining share for P&P exports, trade balance = nil •China: large and increasingly negative(?) trade balance; #1 destination (T and P&P) •EE/WA: large and increasing trade; might “follow” EU & China(!) concerning certification

8. •China: predominantly logs - little (but increasing) interest in adding value within Russia •Japan: declining direct imports; increasing imports, via China, but no chain of custody •Exports to the EU: logs declining, plywood increasing •Exports of sawn wood to Egypt, Ukraine and Turkic Republics increasing rapidly, the share of the latter is likely to rise (oil rich, so immune from recession)

9. Production + Imports - Exports ≠ End-use Sources: Production (UNECE) Imports & Exports (based on Eurostat, UN Comtrade & others) •End-usage in Russia’s timber sector probably >> implied by these statistics •If declared Production + Imports – Exports > End-use, is the excess illegal? Probably not. •Different sources and scope of official data; inaccurate RWE conversion factors; uncertain quantity of waste from timber mills used in other wood-based products

10. •China’s imports during last two years: 50% increase in sawn wood; small decline in logs •Decrease in Japan’s imports during year to 31/07/2008: 60% (logs) 40% sawn wood)

11. •Decline in imports mainly by Estonia, Germany, Latvia, Sweden & UK

12. FSC certification Area certified in Russia Area certified worldwide •Strong, sustained increase in area certified – but no data on volumes produced or traded •Mainly for Russian pulp mills; most of China’s imports of Russian pulp are FSC-certified •A few companies account for much of Russia’s logging – Ilim Group 7.5 million m3/year (some certified) •Promote FSC-certified Russian birch plywood – a discrete segment of the market; plywood accounts for 85% of USA’s imports of Russian timber (Lacey Act) •IFC support for mills not conditional on legality or sustainability - Kronostar

13. Illegal Timber (i) •ENA FLEG, led by the World Bank, seems to have failed (lack of interest?) •World Bank seems to have abandoned its forest strategy – which seeks to reduce by half before 2011(?) the US$5bi plus US$10 bi (?US$15 bi) annual losses which it estimates (without indicating how or where) are attributable to Illegal Timber •Estimates endorsed by the World Bank, its consultants and one major NGO ignore change, choice, variation between products and regions, and the numerous factors which determine legality – thereby tending to mislead and thereby delay remedies. •EU – industry wants to prohibit Illegal imports, but ambiguous new policy merely requires improved “due diligence”; FLEGT - good initial progress; little interest in minimising Illegal Timber production within EU •USA – has overtaken EU by amending its Lacey Act (illegal to trade Illegal Timber) •Japan’s procurement policy requires importers to trust their suppliers’ documentation •China only recognises a consignment of timber as being illegal if the government of the country from which it has been supplied specifically requests China to do so •China’s (excellent) code of conduct for Chinese enterprises overseas only applies to the plantation sector not to forests (and is probably not being implemented)

14. Illegal Timber (ii) Source of both charts: http//www.globaltimber.org.uk/IllegalTimber.htm •Value of trade in Illegal Timber 2007 >> 2004 due to increased exports (of increasingly illegal?) milled products from China

15. Illegal Timber (iii) •Allocation of logging rights – major financial flows •Implementation of credible forest management plan - an indicator of sustainability •In 2001, “Operation Forest” (the Federal Service of the Russian Fiscal Police) found that about 21 million m3 (i.e. 50%) of Russia’s exports of logs (value US$ 1 billion) were illegal due to (export) tax evasion – but >>50% in eastern Russia and <<50% in NW Russia? •China’s imports from Russia: rapid increase (initially to offset NFPP) probably dependent on increased illegality;illegality likely to increase - export tariffs and recession – until China’s export markets demand legal timber (but only 20% exported – 2004) •Most of China’s exports of flooring made with Russian hardwood are probably illegal •Enterprises from Fujian distribute most of the timber which China imports from Russia and (overland) Burma, also Rimbunan Hijau and Asia Pulp and Paper •If the intent of export tariffs is to increase the investment in milling, this might backfire -new mills might put old ones out of business (if there is a level playing field); new, capital intensive pulp mills are risky investments, so, little impact on export of pulp logs •CITES: start with a “flagship” species – Korean Pine

16. China •The government has little idea how much industrial roundwood is produced in China, for pulp, panels, or solid wood •Initial increase in imports from Russia offset the NFPP (logging ban) – not exports. •Exports >Imports – China does not need more, it has excess capacity & seeks profit •Imports from Russia - unit import values rising rapidly (particularly logs) Source: http//www.globaltimber.org.uk/china.htm Source: http//www.globaltimber.org.uk/ChinaIllegalImpExp.htm

17. Indirect Imports

18. •Primarily logs for the Timber Sector and sawn wood •Timber Sector: rapid increase 2002-2006, steep decline during 2008

19. Production + Imports - Exports ≠ End-use Sources: Production (UNECE) Imports & Exports (based on Eurostat,) •Imports from Russia account for much of the RWE volume used in Estonia’s mills •Which exports are from FSC-certified state forest in Estonia? •Which exports are from Russia with no chain of custody?

20. •Decline in imports of logs (other than pulp logs) continued during H1 2008 •Impact of increased export tariffs? Increased effort to minimise Illegal Timber? Importance of maximising utilisation of pulp mill capacity

21. The apparent excess of exports over log production and imports in the Paper Sector is irrelevant to this assessment (and might be partly attributable to the use of timber mill waste and the adoption of inappropriate factors when estimating RWE volume from weight ) Production + Imports - Exports ≠ End-use Sources: Production (UNECE) Imports & Exports (based on Eurostat,) •Imports from Russia account for about 15% of RWE volume used in mills (on average) •Exports “contaminated” by Illegal Timber from Russia? Some export-oriented mills do not use Russian wood as raw material; some which do, take much greater care to avoid Illegal Timber than others (?for 100% of their output)

22. NB 12 mi m3 of waste from timber mills was used in 2006 to make pulp (and panels) Production + Imports - Exports ≠ End-use Sources: Production (UNECE) Imports & Exports (based on Eurostat,) •Russia directly accounts for a small proportion of the wood used in Sweden’s mills •Imports from the Baltic States (almost all pulpwood) = 10% of Production + Imports, but from where? Russia?, FSC certified?, both?, neither? Answer: mainly Latvia.

23. •Timber sector exports used to be at risk – rapid decline in imports from Russia since late 2007

24. Two pies before lunch? •Several countries depend heavily on Russia for much, if not most of their timber imports •Egypt is probably supplied mainly via the Baltic and Barents seas, Kazakhstan is probably supplied overland Thank you for interest