Higher Russian Timber Tax Set To Squeeze Global Timber Trade

by Tatiana Smolenskaya, Tax-News.com, Moscow

20 October 2008

Russia’s scheduled 80% Log Export Tax will reduce log exports, disrupt global forest product trade flows and create a supply shortage in China, an industry analysis has warned.

Russia’s Log Export Tax is set to increase from 25% to 80% on January 1, 2009, making Russian logs expensive and creating a supply shortage for Russia’s key customers in Finland, Japan, China, South Korea and the Baltic States, the Canadian-based International Wood Markets Group concluded in a report on the implications of the Russian tax increase.

Since the mid 1990s, Russian exports have soared from fewer than one million cubic meters in the mid-1990s to 50 million cubic metres of timber in 2006 and 2007.

"China’s voracious appetite for wood has caused it to become Russia’s largest log export customer (consuming 50% of Russia’s total log exports), and much of China’s wood products growth in the last ten years has been a direct result of growing access to Russian logs," the analysis observed.

“The looming downside,” added company president Russell Taylor, “is that China is facing a huge log supply 'gap' starting in 2009 when the tax rises to 80%. The country’s sawmills will find themselves unable to buy expensive Russian logs and still produce competitively priced manufactured wood products in global markets. Our analysis makes it clear that China will suffer a massive supply ‘gap,’ and that many segments of its wood industry will be in chaos in 2009 due to these dramatic shortages and soaring raw material prices.”

However, while the impending supply shortage looks bad for the industry as a whole, for some timber exporting nations, the situation could up opportunities for higher export prices to China. "The resulting volume potential could be huge in some products!" the report predicts.

“It appears that most companies have not fully considered the implications of the 80% tax for their businesses,” commented Van Leeuwen. “Some of the greatest opportunities will be for softwood exporters from North America and the Southern Hemisphere as well as Russia itself (and to a lesser extent Europe), and at this point they don’t seem to recognize the potential magnitude of the supply shock.”

As a result of the pending tax, major wood product companies in Finland and the Baltics have already announced permanent capacity closures in pulp and paper as well as sawmills and plywood mills, the report noted.

Earlier in the year, representatives from several areas of the EU met with the Russian government to try and persuade them to consider revising the tax so that it taxes 80% of the overall log value, as opposed to each individual export. The proposal was rejected by Russia.

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