There is much talk of the "feeble" sanctions against Russia and of the failure to influence the country into ending the war in Ukraine, yet the situation cannot be judged so simply. Russia is currently facing very considerable difficulties in the production sectors linked to its forest industry.
Dramatic changes lie ahead for Russia's timber production sector, whose turnover once reached 20 billion US dollars a year. The situation is being made sharply worse by falling demand in China, which is critically reducing the scope for further growth and development in Russian wood processing. Timber is one of Russia's most important export commodity sectors – before the war with Ukraine, Russia was one of the world's largest timber producers, exporting more than 30 billion US dollars' worth of timber and wood products to world markets each year.
Russia's largest timber companies may face the threat of having to shut down, as the industry is suffering under the anti-war sanctions. Falling demand on the Chinese market and a sharp rise in the rouble exchange rate prompted the Russian Association of Organisations and Enterprises of the Pulp and Paper Industry to write a letter to Russia's Minister of Industry and Trade, D. Manturov, calling on the government to allow businesses to set up an "operational headquarters" within the ministry in order to "normalise the industry's operations".
In the letter, published in the Russian outlet Kommersant , businesses in the Russian timber production sector warn that wood processing and the forest industry as a whole are "going through one of the most difficult periods in their history". Total timber harvesting volumes in Russia have fallen by 13% compared with 2021 (before the sanctions imposed over Ukraine), with the hardest hit being pulp production – down by 3%, sawn timber – down by 11%, and plywood production – down by 23%.
The Segezha Group concern, once the world's second largest producer of multi-ply paper, was forced last year to restructure its loans because of reduced production volumes, low prices and high costs. The situation was made worse by the rise in the rouble exchange rate – up 22% against the US dollar – and by the increase in corporate tax from 20% to 25%. Russian company directors point to falling demand on the domestic market and the resulting drop in prices, as well as to the difficulty of operating in China, where economic activity is declining because of the trade war with the United States and where construction remains stagnant. The slowdown in the Chinese economy is limiting Russian timber sales. The country is increasingly dependent on China as its largest trading partner in order to survive under the anti-war sanctions.
The chairman of the Arkhangelsk Legislative Assembly, A. Dyatlov, warned that the high base rate set by Russia's Central Bank has caused demand to fall across all types of product. As supply exceeds demand, prices continue to fall. For the same reason, demand for imported goods has fallen, which has caused a sharp rise in container freight tariffs for exports. The low dollar exchange rate, combined with expensive freight costs, is making Russian pulp and paper exports unprofitable, which in turn puts pressure on the domestic market.
"The situation is difficult," admits the chief executive of the ULK group, V. Butorin: "There is no way to sell pellets, pulpwood or wood chips." Representatives of the Segezha Group concern stress that the wood processing industry is being hit by a severe economic situation rooted in export difficulties, problems in the construction sector, falling demand, rising logistics tariffs and a decline in the operating efficiency of assets. The Russian Central Bank's high interest rate and the exchange rate affect a great many factors connected with production processes and with selling products. Only an easing of monetary policy could give companies in this sector the impetus to recover.
The rouble, which has strengthened by 22% against the US dollar, together with rising material costs, including for plywood, MDF and particleboard, is "putting at risk" Russia's wood processing industry.
Russian economic experts point out that while a strong rouble may be a sign of macroeconomic stability, it nonetheless undermines Russia's exporters. A strong rouble damages export prospects, making shipments less attractive and pushing up product prices on foreign markets. Experts note that rising imports into Russia are creating additional pressure on domestic producers, who are struggling to keep their businesses from going bankrupt.