(a note from zemeunvalsts.lv) A question that, for reasons known only to those raising it, is repeated again and again was already assessed and explained a month ago by our colleagues at la.lv. With their kind permission, we offer a reminder.
The media have carried news of a mysterious informative report from the 19 December 2023 sitting of the Latvian Cabinet of Ministers, “On reducing the factors negatively affecting the competitiveness of Latvia's timber industry”, following which corresponding decisions were taken concerning the sale prices of sawlogs traded by the state joint-stock company “Latvijas valsts meži” (LVM). The government's decision is said to have torn a hole in the state budget and helped a few businesspeople onto easy street, and the chairman of the LVM board, Pēters Putniņš, has just resigned in horror at the decision taken back then — that is the impression one forms on reading through what has been said in the public arena, the “nra” portal reports.
Why has this enormous interest in government decisions that are two years old arisen precisely now? Why was this part of the government's work not dissected much earlier, immediately after the decision was taken? How could such a dissection rescue the state budget and boost LVM's income?
Or perhaps the resuscitation of this old decision has entirely different political aims — namely, in the pre-election atmosphere, to cast a shadow over Prime Minister Evika Siliņa, Minister of Agriculture Armands Krauze and the government of that time as a whole? Perhaps those now being punished are the very people who prevented many of Latvia's timber companies from being driven into ruin?
To gain clarity on why, in December 2023, shortly before Christmas, the government considered the question of the timber industry's competitiveness and the reduction of factors negatively affecting it, on the impact of this question on LVM's profit, and on the situation in the timber harvesting and processing industry, we questioned in detail Kristaps Klauss, board member of the Latvian Timber Producers and Traders Association and vice-president of the Latvian Forest Industry Federation, who also took part in the discussion of the above question in the Cabinet of Ministers.
War and the banks' anti-inflation measures
Explaining the government decision mentioned in the media, K. Klauss urged people to recall the situation on the timber market in 2021. At that time LVM concluded three-year contracts with companies that need sawlogs for processing and export. Those contracts followed a principle: shortly before the start of the contract period an auction is held at which companies bid the price at which they are prepared to buy sawlogs. During the contract period this price was indexed in line with a single price basket of six countries.
One of the auctions took place in 2021. It is important to mention this, because it happened shortly before everything in the world suddenly changed. Russia's invasion of Ukraine began, markets shrank, and the policy of the European Central Bank and other banks around the world changed rapidly. At the time of the auction, it could not have entered anyone's head that construction activity would be artificially driven down through an “anti-inflation plan”. Suspecting nothing of the brewing trouble, companies bid the starting price. The bidding turned out to be a long affair. To speed up the process, LVM even changed the bidding procedure during the auction. Up to that auction the bidding increment had been 15 cents. Bidders were allowed 40 minutes to consider a bid. Fifteen cents may sound like little and 40 minutes like a lot, but when the bidding is for 100,000 or 130,000 m³, those 15 cents are, to put it mildly, of enormous value. This is about annual delivery volumes, not three years combined. To speed up the process, LVM decided that in this auction the thinking time would be 20 minutes and the increment five euros. The bidding turned out to be rather chaotic. Be that as it may, the tender concluded and the winners became known. The prices bid were very high. In all likelihood, paying these prices to LVM, the companies would have been able to survive those three years had the horrors of 2022 not descended on the world, along with the actions of the European and other banks.
Cheaper in Sweden
As K. Klauss explained, the result was that the companies that had bid the high prices found themselves in an unenviable position. They were forced to buy sawlogs from LVM at prices that were already disproportionately high for the situation at the time. Breaking the contract would have cost more and would have meant saying goodbye to taking part in future auctions.
At that moment it would have been considerably cheaper for the companies to buy sawlogs in Sweden and haul them from there to Latvia for processing: “The trouble is that all this indexation works very well. The current three-year contract also has indexation on a very similar principle, and it works well. But indexation works well when markets are stable and comprehensible, not extreme, as they were at that time. Indexation created for peacetime did not work in a time of enormous change.
Because of the war and the banks' sudden change of policy, indexation became unsuited to the situation, and our LVM delivery price differed from the prices of Swedish traders by 30-40%. That is, sawlogs cost less in Sweden. Everyone knew perfectly well that these prices did not match market conditions. It was known what prices prevailed in the private sector and in imports — they were considerably lower than LVM's.
Even LVM's short-term auctions had considerably lower prices than its longer-term ones. No one had any doubt that the prices in the long-term contract were not adequate. They bore no relation whatsoever to market conditions. Our call was to return to market prices. Let us pay what a log ought to cost. These discussions took place in 2023. In the end the Ministry of Agriculture began to analyse the problem and saw it through to the end.”
On the brink of ruin
According to K. Klauss, timber processing and export companies began to run into trouble. Had the Ministry of Agriculture not turned to solving the issue, many companies in the sector would have been rendered uncompetitive on world markets, which would have meant the loss of jobs for many thousands of people: “These companies are not just ‘a few' — they are the core of coniferous sawlog processing; together they account for roughly 70-80% of the coniferous sawlogs processed in Latvia.
The fundamental problem is the prices of coniferous sawlogs in LVM's longer-term sales programme. Chaos in the sales programme itself, where the rules of the game changed during the auction; unforeseeable anti-inflation programmes by central banks, which put the brakes on sales markets and drove prices down; and indexation methods unable to absorb sharp market swings — all of this pushed contract prices upwards from the second half of 2022 onwards.
They became inadequately high compared with real market prices. In 2023 we also proposed a solution whereby companies could terminate their contractual relations without contractual penalties or bans on entering new tenders, and the volumes could be put out to auction again, but the LVM management rejected this solution too, saying it was not within their competence.
As a result we turned to the owner, which assessed the situation and instructed that the pricing mechanism be changed for a year so that it matched market prices. Since 2025 there have been new tenders/contracts with an improved pricing mechanism, and as a result everything works. In essence, the reproach now being made is that the state did not use its power and twist its contractual partners' arms by continuing to charge inadequately high prices.
Companies, as usual, drag out a difficult financial situation to the very last. It is very easy to lay off workers, but hard to gather them back afterwards. As for why it was specifically the Ministry of Agriculture that went to the government — here I have to agree to some extent with the LVM management that this decision is not within their competence. This decision has to be taken by LVM's owner, the state — that is what the law provides. The decision can be taken by the owner — in this case, the Cabinet of Ministers.
As a result the indexation was changed, establishing that companies would pay the market price arising from the price at which LVM sells sawlogs under its other short-term programmes. At that time the short-term programmes characterised the market price very well. That is why one cannot for a moment claim that the companies were given the chance to buy something cheaply or below market price. That is absolutely untrue. Throughout 2022 and 2023 they paid considerably above the market price.
The public reproach now is that the government did not consider it necessary to strip its contractual partners bare. Of course, with these contracts at high prices the companies' arms had been twisted. The penalties for breaking a contract are enormous. For instance, if you break a contract, your right to take part in the next auctions is restricted, which is of course a decisive matter for sawmills. In effect the reproach is that the state did not go on allowing its company to earn excess profits.”
Attacked for not letting Latvian companies be destroyed
Asked whether it does not amount to the government now being reproached for having resisted the destruction of many Latvian companies, K. Klauss said: “Yes, that is the reproach! It is true that the state, in the person of LVM, could have used the force of the contract and of the market and demanded inadequately high prices in 2024 as well.
But then we as Latvia would have been the losers in the longer term — in 2023, when around 70 euros was being paid in Sweden for equivalent logs while LVM was charging its longer-term customers up to 130 euros, we saw investment being put on hold, production volumes falling and jobs under threat. The government did not instruct anyone to grant discounts to producers, nor did it set a price level politically — the instruction was to trade at the Latvian market prices of the time, which were higher than Sweden's in any case.
It is important to understand that this was not state aid; on the contrary — it ensured fair competition both among Latvian producers on the domestic market and between Latvian and foreign competitors on export markets. Quite possibly this decision should have been taken at LVM management level, but they insisted that it was for the owners to decide.
That is why it was decided at government level. As a result, LVM's financial results were nonetheless substantially better than it had itself forecast even before this decision. All the planned dividend amounts for the state were exceeded. And the sector continues to develop, to be competitive on export markets and to process sawlogs in Latvia, paying prices for them that are appropriate to the region.
If we look at the figures, in 2023 a situation arose in which this whole chain together earned around 380 million euros. Of that sum, 221 million was LVM's profit. It is obvious here how skewed the financial results in the sector are. Looking through the 2023 balance sheets of the companies whose indexation or pricing mechanism was changed, and deducting income not earned from core operations, those companies made losses of roughly 38 million euros over the year.
State Revenue Service data on the 2023 results
For comparison, State Revenue Service data for 2024 show that the sector as a chain earned 366 million, but this time the profit was distributed more evenly; profit/loss in 2024, in millions of euros: LVM 150; other forest owners — commercial operators 9; forest harvesting services 39; sawmills 51; veneer/plywood industry 67; the rest of the timber industry 50.
The reproach now is that 2024 did not continue the situation in which LVM could earn millions while its customers, Latvian companies, sustained losses of tens of millions.”
“Latvijas valsts meži” sustained no losses
On the question of whether LVM suffered because of the government's response, K. Klauss noted: “It is publicly visible what the expectations were for how much LVM was to earn in 2024 — it is even written into the budget plan. LVM met all these expectations and more. It is not the case that they performed very badly in 2024. In 2024 LVM's profit is around 150 million euros.
If we look at earlier periods, leaving aside the extreme ones, 2022 and 2023 — in the years before Russia's invasion of Ukraine, LVM's profit in good years only slightly exceeded 100 million. In 2021 it was 112 million, in 2019 — 105 million, and so on.
In fact LVM performed very well in 2024 all the same. They received good market prices for their products. I do not believe the state had a duty to destroy its own economy. I think the government's decision was correct and considered. In no way were discounts or very low prices handed out in it. The government did not even set prices. The government set a pricing mechanism, and prices were then set by the market.
Politicians did not intrude into competences they do not have. In effect, we regained our competitiveness in 2024. These baffling and difficult years, in which it is clear that matters can be resolved yet for some reason are not, undermine investor confidence.
I will not say there is a direct correlation, because I have no grounds to assert that, but I do see Latvian-capital companies losing faith. More companies have been put up for sale than before. Investment plans have also been halted that would have brought greater income to the Latvian economy and, indirectly, to LVM in the future. These matters should not be viewed in the short term. There was more than one extremely bad year in which companies were effectively subsidising all deliveries from LVM — I am talking about that particular sales programme. But the right decision was taken, and I do not understand why this question has landed on the agenda again.”
The decision was correct
Asked whether the reason an old government decision is being dragged into the light and publicly shaken out might not be the Swedish lobby in Latvia, K. Klauss replied: “No, I do not think that is the case. Strategies like that do not add up.”
On whether Pēters Putniņš really resigned as chairman of the LVM board because of this old government decision, K. Klauss noted: “First of all, he was not the one who took this decision. Secondly, the decision was correct. I do not know why he resigned. Nor has anything been heard of scandals at the company. In any case there is no reason to think that he was a bad manager or that LVM had got itself into any great trouble.”
It is true that the state, in the person of LVM, could have used the force of the contract and of the market and demanded inadequately high prices in 2024 as well. But then we as Latvia would have been the losers in the longer term — in 2023, when around 70 euros was being paid in Sweden for equivalent logs while LVM was charging its longer-term customers up to 130 euros, we saw investment being put on hold, production volumes falling and jobs under threat.
The government did not instruct anyone to grant discounts to producers, nor did it set a price level politically — the instruction was to trade at the Latvian market prices of the time, which were higher than Sweden's in any case. It is important to understand that this was not state aid; on the contrary — it ensured fair competition both among Latvian producers on the domestic market and between Latvian and foreign competitors on export markets. Quite possibly this decision should already have been made at LVM management level, but they insisted that it was for the owners to decide.
That is why it was decided at government level. As a result, LVM's financial results were nonetheless substantially better than it had itself forecast even before this decision. All the planned dividend amounts for the state were exceeded. And the sector continues to develop, to be competitive on export markets and to process sawlogs in Latvia, paying prices for them that are appropriate to the region.
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