EBRD: Promoting sustainable forestry from Bratislava to Vladivostok

Our forests are a vital source of life to plants, animals and humans alike. Their trees do not merely provide a habitat for many species, but they also make the air clean and mitigate the effects of climate change by absorbing carbon dioxide. Ensuring that the forests stay alive is therefore vital to any life on earth.

At the same time, wood has become an important source for many industrial products and ensuring its long-term supply is crucial to keep the economy going. Thus forestry activities have to be sustainable in the long run – they have to protect the woods’ vital flora and fauna, while also providing socio-economic benefits to people depending on them.

“Environmental and economic issues are intertwined here: the forest industry is capital intensive and one of the key drivers for investments is the reliable long-term availability of wood,” explains Mikko Venermo, Lead Oversight Adviser in the EBRD’s Environment and Sustainability Deparment. “A continued wood supply, in turn, is at risk whenever there are unsustainable forestry practices or illegal logging. This can result in lower production, higher wood prices or transportation distances.”

Wide range of clients: from forest owners to furniture manufacturers

The EBRD is actively involved in a wide variety of projects, which involve wood or related forestry products, and therefore has an active interest in promoting the sector’s sustainability.

An investment in the Mondi Group, for example, contributed to more sustainable and efficient forestry activities in the company’s leased forest areas and to increase reforestation of their lands. With several loans to wood panel producer Kronospan, the EBRD supported a foreign investor that is active in several central and eastern European countries and uses wood from sustainable sources for its operations.

“Sawmills, pulp and paper mills, plywood factories and the furniture industry are some of the Bank’s clients in the forestry sector,” explains the Juhani Numminen, Senior Adviser for Pulp, Paper and Forest Products Industries at the EBRD. “A few of them are forest owners and logging operators, but in general most of our clients are buying wood rather than logging themselves.

The EBRD is also increasingly investing in biomass energy projects using forest resources for fuel supply, Mr Venermo adds. “Naturally our sustainable forest management principles and requirements apply to these projects as well.”

Ensuring the use of sustainable wood

No matter the exact nature of the activity, the EBRD requires its clients to adhere to rigorous standards to ensure that all wood used is of legal and sustainable origin. This includes, of course, that it does not originate from protected areas or forests with a high biodiversity value.

For companies directly involved in logging, this means that they have to ensure all forest areas are certified to internationally accepted standards of sustainable forest management and that their wood is harvested in a sustainable way.

Similarly stringent rules apply to clients who are relying on external suppliers. When procuring wood, they have to ensure that the material does not originate from protected forests, the origin of wood is monitored and their suppliers operate in accordance with the principles of sustainable forest management.

By implementing these requirements, the EBRD’s clients are spreading sustainable forest management practices to local harvesting companies and helping create a market for certified wood from Bratislava to Vladivostok. This is an important contribution to the EBRD’s transition impact in the forest industry and biomass energy projects.

“We are also promoting sustainable forestry very comprehensively in our policy dialogue with governments,” Mr Venermo explains. “We are raising awareness of unsustainable practices, such as illegal logging, and helping them develop legal, enforcement and governance systems towards sustainable forest management.”

If such systems do not exist, investors need to establish their own tracking and control systems to manage the business and reputational risks associated with illegal logging, Mr Venermo adds. “Needless to say that these measures come at a high cost to the companies and affect their competitiveness.”

Good investment potential

Several EBRD studies have analysed in-depth the investment potential and constraints in the forestry sector. “They have helped to identify sustainable ways in which the logging volumes could be increased from the current level, while at the same time ensuring that appropriate forest areas are protected,” Mr Numminen points out.

A recently published survey focused on how to attract forest industry investments to the three Russian regions of Vologda, Krasnoyarsk and Khabarovsk compared with competing investment destinations elsewhere on the planet. With approximately 800 million hectares of forest, Russia has access to nearly a quarter of the world’s forest resources yet produces only 3.5 per cent of the world’s forest products. Moreover, about 18 per cent of the country’s workforce lives in communities depending on economics associated with the Russian forests.

The EBRD survey explores the use of existing best practices from within Russia and practices developed in countries competing with Russia for forestry investors. The study found that the three Russian regions hold certain advantages, such as the low cost of wood, compared with forest operations elsewhere.

However, the emergence of efficient and fast-growing forest plantations in South America and China is a new challenge to Russia. Due to climatic differences and lack of forest management trees grow six to ten times slower in Russia than in a plantation in Uruguay. This is why a forest logging area needs to be very large in Russia to support, for example, a new pulp mill. This problem can be addressed by facilitating infrastructure investments and several other measures, the survey suggested.

Eric Rasmussen, the EBRD’s Director for Industry, Commerce and Agriculture in Russia, added that top players in the forest industry agree that Russia has good potential, but the risk and reward must have a better balance to realise investment. Among other investment-hungry countries, Brazil has established a very competent force, which is maintaining a dialogue with the top 10 forest industry players. The taskforce is determined to attract investors and empowered to discuss reforms and support needed for investment projects – an example which Russia may want to follow in the future.

EBRD study on forestry: How to attract forest industry investments to Russia

Bank suggests action plan to help Russia compete with South America and China

An EBRD-commissioned study on the international forest industry recommends a step-by-step action plan that would enable the Russian government to attract the substantial foreign investment needed to exploit the country’s vast untapped forest resources.

Russia’s 800 million hectares of forest represent nearly a quarter of the world’s forest resources yet Russia accounts for only 3.5 percent of the market in forest products.

In the last three decades there has been no investment in major green-field pulp and paper projects in Russia. Instead, international industry players prefer South America and China as locations for new pulp and paper mills needed to feed the world packaging industry and meet the global demand for paper.

It is true that over this period global giants have invested in Russia to modernize and expand existing Russian pulp and paper mills, including with EBRD co-financing.

However, the cost of building green-field pulp mill in any country is significantly higher than brown-field ones and investors, always keen on a predictable environment, want to be much more certain of the future before deciding on such a major outlay.

This is why the Russian government needs to ensure investments in this sector of the economy become attractive for the major international players. These are today the only ones with the resources and know-how needed to build high quality mills incorporating state-of-the-art environmental protection measures such as recycling waste and water and using equipment compliant with emission standards.

The survey details the benefits Russia stands to gain. Working with respected industry players would give comfort to the Russian authorities that a new mill would comply with high standards of financial transparency, social responsibility and forestry management. In addition a new mill would

• increase Russia’s self-sufficiency in chemical pulp and support the growth of the Russian domestic paper, tissue and board industry
• improve employment and welfare in local forest communities
• generate economic growth and tax revenues
• have a knock-on effect on other industries such as those producing solid wood products and packaging for the domestic and export markets, thus contributing to the diversification of the Russian economy away from dependence on raw material exports

The survey, carried out by Pöyry Management Consulting, a leading forest industry consulting firm, compares what is on offer in three Russian regions with extensive forest resources -- Vologda in the West of Russia, Krasnoyarsk in Siberia and Khabarovsk in the Russian Far East -- with conditions in Australia, Brazil, China, Mozambique and Uruguay.

The three Russian regions covered by the survey do hold out certain advantages compared to their foreign competitors. The low cost of wood, for instance, makes Russia a competitive location for producing pulp for the Asian market, especially in the Russian Far East, which borders China.

But given the much slower growth of trees in the north of Russia, as opposed to that of eucalyptus plantations in more southern countries now attracting international investments, the size of the forest area needed to support a world class pulp mill in Russia is many times larger.

This multiplies the infrastructure requirements and transport costs. And this is precisely when a government’s ability to compensate for such disadvantages comes into play. Russia has the option to redress the balance in its favour by drawing on the best practises of countries with a very new but already flourishing forestry industry.
 

• Under the three-step action plan recommended by the EBRD, the Russian authorities first need to focus on how additional funding can be made available to develop infrastructure outside the mill perimeter, including forest roads, utilities, logistics, housing and municipal infrastructure. These costs play a huge role in investment decisions.
   
• Other first steps in this phase should include the piloting of modern and tested sustainable forest management practises for wood supply. These need to comply with standards set either by the Forestry Stewardship Council or by the Programme for Endorsement of Forest Certification Systems. Both are independent bodies set up to promote responsible forest management.
   
• Because of the very large size of the forest area a pulp mill requires in Russia, Priority Investor Status should be granted to mill owners to cover the entire wood supply area, including where it crosses regional boundaries. 
   
• This should be followed up by a second package of reforms focusing on reducing implementation risks. These should include ensuring that an adequate amount of forest leases is set aside in the logical wood supply zone – with the investor having a priority right to taking control of expiring leases.
   
• In addition, a pilot scheme should be introduced in the mill zone for adapting international standards on health, safety and the environment to Russian requirements. A “one-stop-shop” for filing and obtaining all legal documents and permits should also be launched as a pilot project. 
   
• Finally, a third package of reforms should focus on developing tax and financing incentives to increase the attractiveness of Russia as an investment destination for the major players in the world forest industry.

Last updated 29 March 2012

Richard Wallis
Moscow - Tel: +7495 787 1111