The timber industry employs the same number of people and controls the same amount of natural resources as the oil industry. However, its actual contribution to Russia’s economic development does not live up to its potential.

There has long been talk that the Russian timber industry will join the ranks of oil to become one of the main forces promoting economic development in Russia. And there is good reason for such talk. The industry’s natural resources are comparable to those of the oil industry. In the majority of forest resource indicators, Russia is one of the world leaders. The number of people employed in the timber and oil industries is almost the same as well, around a million people. The two industry’s financial results, however, are beyond comparison. The timber industry’s contribution to industrial production is four times less than the oil industry’s, and labor productivity and profitability are two and a half times lower. According to data from the Ministry of Natural Resources, timber companies are using less than 21% of the harvestable forest, and this figure has fallen by 1% for the fourth year in a row. The level of economic potential put into exploitation according to various estimates ranges from 7% to 10%.
The ease of access of some parts of the industry’s natural resource base has played a cruel joke on the industry. While the natural gas business requires serious investment to organize production and set up a transportation infrastructure, the expenses related to harvesting timber are substantially lower. They are especially low if a company does most of its cutting near major roads and pays little heed to the state of forest it leaves behind.
As a consequence, from the very start, companies that had serious financial and human resources invested in oil. Almost ten years of experience rating Russia’s largest companies has demonstrated that oil companies are the most efficient in deferring their interests and attracting the most qualified management. In the timber industry, especially in logging, numerous small companies tried to sell off entire tracts of forests abroad at bargain-basement prices. Even organizations charged with protecting forests were guilty of this, as their economic interests were in direct conflict with their responsibilities. As a result, easily accessible forests have to a great extent been clear cut and access to new forests requires a large amount of money.
Companies operating nationwide formed primarily on the basis of cellulose and paper manufacturing. With time, financial-industrial groups turned their attention to the great potential of the industry, and a battle to redistribute resources began against the already existing lumber companies. As a result, the consolidation process and creation of vertically integrated structures which began after the 1998 crisis involved extensive scandals and only came to a close in late 2001.
For several years, the same cellulose and paper manufacturers, or the holdings that formed around them, have appeared in the Expert 200 (Table 25). The changes in their ranking are not only connected with changes in production figures, but also with the structure of timber corporations. Compared to last year, the number of timber industry companies fell to eight, as the industry’s largest holding, Ilim Pulp Enterprise (27th) acquired a controlling stake in Ust’-Ilim Lumber Company (106th last year). This year, the Titan Group joined the rating, which owns the Arkhangelsk Pulp and Paper Plant ranked 89th last year.

In terms of production figures, the total sales at major timber companies increased by 10.9%, though with a slight decrease in profitability (Diagram 41) due to an increase in costs and lower market prices. The timber industry leaders lag behind other companies in the Expert 200 in every way, including production growth, profitability, and labor productivity. Nonetheless, the major lumber companies still performed better than their smaller colleagues in terms of profitability and labor productivity, though not in terms of growth rates.
A clear lack of investment is holding the industry back. In the last three years, fixed capital investments remained at 16-17 billion rubles a year, while equipment was an average of around 25 years old and the majority of equipment was 80% depreciated. The load on capacity to produce products that generate the most income from export is extremely high. In the cellulose segment, for example, it is approaching 100%.
It should be noted that many leading timber companies are planning some sufficiently large-scale projects. Ilim Pulp hopes in the next three to four years to invest at least $0.4 billion in the Ust-Ilim and Bratsk Timber Companies. As much as $0.3 billion may be invested in the Arkhangelsk Pulp Plant.
In the meantime, however, lumber companies, even the most successful representatives of the industry, are no competition for oil and gas companies and they lag behind them in both quantity and in efficiency (Diagram 42).

Read also:
Russia`s Biggest and Brightest: The Expert 200 for 2003
The Expert 200. Financial markets
The Expert 200: Oil and Natural Gas; Energy and Electricity
The Expert 200: The Machine Building Industry
The Expert 200: The Metal Industry in Russia
The Expert 200: The Chemical Industry
The Expert 200: The Food and Tobacco Industry
The Expert 200: Precious Metals and Diamonds

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