Halting the import of forestry products from Russia and Belarus will change the timber products market across Europe. Naturally, competition between different consumers of timber products will also intensify in Latvia. Unless consumption drops, prices for these industry products are likely to rise.

This potential future scenario is outlined by executives and entrepreneurs from the sectors that generate the largest export revenues for Latvia. It should be taken into account that in 2021, the volume of forest industry export revenues reached €3.65 billion, and imports also played a role in generating these revenues; furthermore, in terms of monetary volume, Belarus is the leader with €283.67 million, while Russia is in third place behind Lithuania with €171.56 million. The most significant item in terms of impact is coniferous sawn timber, 750.4 thousand m³ of which was imported from Belarus in 2021, compared to 613.1 thousand m³ in 2020, while 352.4 thousand m³ was brought in from Russia last year, compared to 228.4 thousand m³ in 2020. In total, both countries contributed more than 1 million m³, or just over 72%, of the total 1.49 million m³ of coniferous sawn timber imported. Last year, 57.9 thousand m³ of plywood was imported from Russia (nearly 53% of the total import volume of this product), which is less than in 2020, when volumes were even higher at 65.1 thousand m³. Another significant import product is wood chips, which are also used in heat production.

Several interviewed entrepreneurs pointed out that, for the time being, there are no official sanctions or bans on purchasing forest industry products from private timber producers in Russia and Belarus; rather, the question is whether business partners in Western countries want timber products that contain any wood sourced from Belarus or Russia. A rhetorical question was also raised: if sanctions are not being applied to Russian energy resources, including natural gas, why should they be applied to private timber producers operating in that country (including foreign investors who have built their own production facilities in Russia)? The best possible solution mentioned was the choice made by the entrepreneurs themselves regarding further cooperation with imported wood from eastern neighboring countries – those who are willing to risk working should continue, while those who do not want to, should not. In such a case, however, questions could arise about equal conditions for competitiveness. It must be noted that the situation is changing not by the day, but by the hour, so it is impossible to predict what will happen not tomorrow, but in a few hours today.

Still too early to calculate

“It is currently too early to assess the situation that will arise from excluding timber and other products of Russian and Belarusian origin from the market,” advises Kristaps Klauss, Executive Director of the Latvian Forest Industry Federation, suggesting we should not rush to conclusions. He points out that at present, emotions and solidarity with Ukraine are prevailing. “Forest industry companies have already donated huge sums to support Ukraine: one million euros by SIA “Gaujas koks”, 250 thousand euros by “Stiga RM”, and several other companies tens of thousands of euros; a/s “Latvijas Finieris” and RSEZ SIA “Verems” will donate 5 euros for every veneer log purchased in Latvia ³ and will support Ukraine in other ways as well,” K. Klauss stated.

He does not deny that the Latvian forest industry, and all consumers in Europe, will sooner or later feel the shortage of Russian and Belarusian forest industry products. “Entrepreneurs will have to look for other suppliers for that specific production that is not manufactured in Latvia, for example, coniferous plywood or MDF, while other wood products that are produced in Latvia will be available at market prices. The local buyer must have priority right now,” says K. Klauss in response to a question about what measures might be necessary. He points out that the war in Ukraine started by Russia and Belarus has changed everything, and one must currently adapt to new circumstances, many of which are not yet known, let alone understood. “It is not just the Latvian forest industry, but also other EU member states, such as Finland, Germany (and so on), that will have to live without Russian forest industry products,” says K. Klauss in response to a question about how wide a range the absence of eastern neighbors' forest industry products might affect. He particularly urges not to look at these problem issues in sectoral terms, as timber producers will also feel the shortage of chemical raw materials for glue production, the shortage of metal in construction, and the general logistics chaos both within Europe and in supplies from China. The same will be true in other sectors. “At the moment, the overall picture is not clear, and it is unknown when clarity will come,” says K. Klauss.

Starting gun for price hikes

“If forest industry products from Russia and Belarus are not ‘allowed in’ to the European Union (meaning they cannot be paid for), logically, total timber production and sales volumes will decrease, but with demand remaining at the current level, prices for all timber products will simply ‘go to the moon’,” predicts Armands Apfelbaums, Board Member of timber trading company SIA Aca Timber.

He justifies this by the fact that Latvia is not the only country in Europe that took advantage of the opportunities provided by Russian and Belarusian forest industry products to turn them into more expensive goods. “Finland was, it seems, one of the largest processors of Russian timber, and Germany did not shy away from them either, as did timber producers in other countries,” notes A. Apfelbaums. He adds that a shortage of certain wood raw materials is already being observed because, for example, board manufacturers in Poland are buying pulpwood at a fantastic price – even 100 euros/m³. “This means that the price per cubic metre of logs is at least 1.3 to 2 times higher, but the question arises whether the consumers of sawn products are prepared to pay significantly more for it,” says A. Apfelbaums. In his opinion, it is currently too early to try to understand the new reality.

Solutions needed

“The first task is to support Ukraine in its fight against the invaders; the second is to understand what the new situation is now that the European Union is closing (or being closed) to Russian and Belarusian forest industry products; the third is that an action plan is needed – what to do in Latvia and how,” explains Māris Liopa, Chairman of the Land Use Committee of the Latvian Chamber of Commerce and Industry and Chairman of the Forest Certification Council of Latvia. He emphasizes that these three tasks must be addressed simultaneously. “Even before the sanctions on Russia and Belarus, there was a deficit of timber products in Europe, which was covered by supplies from Asia and South America, where, incidentally, forest areas were shrinking, unlike in Europe. So the question is, with what resources and from which countries will this deficit of wood products in Europe be filled?” points out M. Liopa. In his view, the question is not rhetorical, especially if nature enthusiasts and bird lovers are writing and circulating calls not only to reduce logging volumes but even to stop them altogether.

“If wood harvesting is reduced, or worse, stopped, one must ask from what heat will be produced. We are not just talking about Latvia or Finland and Sweden, but also Germany and the Netherlands, which are some of the largest consumers of wood pellets produced in Latvia,” explains M. Liopa. He is surprised by the EU sanctions, which have not affected the supply of Russian energy resources – natural gas and fuel. “The question is, does the EU really want to reduce its dependence on natural gas, even more so specifically from Russia, which has invaded Ukraine?” asks M. Liopa. He acknowledges that politicians have also expressed concern in this regard. “Euroobserver quotes Spanish Energy Minister Teresa Ribera, who explained that reliance on Russia has created a huge fragility in Europe's energy system, which requires a rapid transition to cleaner and therefore non-Russian sources; time will tell whether the outcome will be ‘real and tangible’,” emphasizes M. Liopa. In his opinion, the volume of natural gas used in heat supply in Latvia could be reduced as early as the next heating season, if work begins in this direction now. “Forgive me, but if some public organizations are still saying in the current situation that the burning of wood (which cannot be used otherwise) contradicts EU climate and nature protection goals, one must ask if they should not be called something else,” answers M. Liopa to a question about whether the use of wood in energy is not contrary to EU climate guidelines. He believes that the preamble ‘Energy cannot be subjected to primary wood’ cannot be kept in the draft of the forthcoming EU renewable energy directive. “It is absurd – we have the resource ourselves, but we will not be able to use it, is it better to live in the cold (especially if it is minus 10–15 °C in winter) or what?” says an indignant M. Liopa. In his view, Latvian statesmen must block the inclusion of such a preamble or condition – they must use their veto power.

Aspects of impact

“The ‘disappearance’ of more than one million m³ of sawn timber, more than 60,000 m³ of plywood, and several hundred thousand m³ of wood chip imports from Russia and Belarus cannot be without consequences, not only for the forest industry, especially furniture manufacturers, but also for heat producers. Specific action from the Latvian state is needed,” emphasizes M. Liopa. He notes that before making decisions, it is essential for Latvia to look at what the governments of Finland, as well as Lithuania and Estonia, are planning to do in such a situation. “For example, it must be remembered that in the neighboring country, Lithuania, near the border with Latvia, in Akmenė, the 146 million euro VMG particleboard factory has been built, where it is intended to produce about 600,000 m³ of product annually, for which the raw material has so far been sourced mainly from Belarus. Now, under the new circumstances, it seems that the source of wood raw material for this plant will be Latvia, thus demand will increase and prices will not stand still either. That is one example, but there will certainly be many more,” points out M. Liopa. In his view, Latvia should prepare several scenarios for potential action.

“Latvia alone cannot and will not be able to cover the shortage of Russian and Belarusian forest industry products in the European market, but the state can at least slightly cushion the price increase of these products to protect Latvian manufacturers and heat consumers from a significant tariff increase,” answers M. Liopa to a question about whether Latvia is able to cushion the scale of the import shortfall. In his opinion, one must reckon with the fact that Lithuanians and Finns will try to compensate for the lack of Russian and Belarusian resources with additional purchases in forest-rich Latvia.

Directions for action

“If the annual wood growth in Latvia is about 26 million m³, but only 12-13 million m³ is harvested, logically, the volume of wood harvesting can be increased by one, two, or even three million m³ without causing harm to nature,” answers M. Liopa to the question of what to do. He sees a positive solution for both the industry and those employed in it, as well as for tax revenues, in allocating additional wood harvesting volumes in forests owned by the Latvian state.

“If back in 2009–2010 the then-Latvian government could decide on 2+2 million m³ of additional harvesting in state forests and thereby stabilize the situation, why could that not be done under the current circumstances?” M. Liopa explains the potential solution. The government could even stipulate in its decision: the state forest management company may only sell firewood chips to boiler houses operating in Latvia, and roundwood only to companies operating and processing in Latvia. “Temporarily abandon the creation of new restrictions and protected areas, which could remove tens and even hundreds of thousands of hectares of mature forest from economic activity,” M. Liopa points to a second solution. In his opinion, another solution would be to introduce changes to the felling diameter, linking it to the mandatory planting of new trees (purchased from nurseries), which was ‘put on pause’ back in 2018. “One can also talk about solutions in other directions here,” emphasizes M. Liopa.

Great uncertainty for now

“When the dust settles, then it will be possible to understand something more,” answers Andris Jansons, Chairman of the Board of furniture manufacturing and trading company SIA Daiļrade koks, to a question about the current situation. He admits that the exposure to Russian and Belarusian wood products as a source of supply for the production of processed goods is significant not only for Latvia but also for manufacturers operating in other European countries. “Logs can no longer be imported from these countries, but sawn timber and various panel materials (plywood, OSB, MDF particleboards) are an essential raw material for the production of various wood products, and, moreover, there is currently nothing real to replace them with, as Russia is one of the most forest-rich regions,” explains A. Jansons. He hopes that the mist and dust will clear and the situation will be resolved as quickly as possible.
Article first published in the 8 March 2022 issue of the magazine Dienas Bizness.
Photographs by Jesse, zemeunvalsts.lv used