Industry Department Director A. Sapelin Participates in the Fourth International Forum “Forest and Man”

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“Vnesheconombank’s role in Implementing the Strategy of the Russian Timber Complex Development. Principles and Criteria of Selecting Deep Timber Processing Investment Projects”

At the present time, State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’aims for the most part to secure the rapid development of Russian high-priority industries with private capital maximum participation in addressing problems associated with the country’s socio-economic development.

Woodworking industry is one of Vnesheconombank’s investment activity industrial priorities set forth by the Bank’s Memorandum on Financial Policies.

It’s quite clear why the condition in this industry has been rated by the state as unsatisfactory. Russia is the largest forest power. Russia’s total timber reserves amount to more than 80 billion cubic meters or about 28% of the world’s timber reserves. At the same time, Russia’s timber industry exports do not exceed 3% of the world’s market total volume and Russian most exports account for unprocessed round timber. Nevertheless, Russia has to increase the export of deeply processed timber products annually (certain grades of paper, paperboard, particle board, MDF).

In order to redress such a significant imbalance between the industry’s potentialities ant its real performance, the Government of the Russian Federation has taken comprehensive measures to encourage the development of deep timber processing and limit the export of unprocessed round timber, the legal export of which will become economically inexpedient from January 1, 2009.

The Government’s program resulted in the rapidly increased number of investment projects aimed at building timber- processing production facilities in various Russian regions, with some of them seeking to be given status of high-priority investment projects in forest development as well as to receive the state’s support for building assets of transport, social and engineering infrastructure from the funds of the Russian Investment Fund and federal target programs.

At the present time, of projects that received status of high-priority investment projects in forest development (28 projects have been registered with the Ministry of Industry and Trade), the two largest projects complying with the Memorandum’s requirements are under consideration in Vnesheconombank. The Bank is interested in considering the possibilities of financing other projects having status of high-priority projects. Upon making decisions on participating in implementing investment projects associated with deep timber processing, Vnesheconombank is guided by principles formulated by the Government of the Russian Federation and specified in the Memorandum on Vnesheconombank’s Financial Policies.

The project aimed at building a timber-processing complex in the Boguchan district of the Krasnoyarsk Territory was also given top-priority project status. Vneshecononbank finances this project, among other things, as an investor.

The project to build a timber-processing complex is a part of “the Lower Angara Area Comprehensive Development Investment Program “ carried out within PPP principles. In line with Russian Government instruction dated 30.11.20006 N 1708-r the program was included in the list of investment projects implemented with the support of the state through using monetary resources of the Investment Fund of the Russian Federation.

The project to build the Boguchan timber-processing complex in the Lower Angara Area is to include:

• construction of a major pulp-and-paper mill with a capacity of 850 thousand tons of coniferous kraft pulp per year,
• a factory to manufacture high-quality coniferous sawn timber (700 thousand cubic meters per year),
• a factory to manufacture kraft liner (500 thousand tons per year) and MDF plates (250 thousand cubic meters per year),
• establishing their own timber-logging facility (timber-logging volume is 5.5 million cubic meters a year), as well as building a worker’s housing area for 10 thousand people.

Nothing of the kind has been built in the country in more than 30 years. The priority nature of this project is evident. Russia’s timber complex development strategy for a period up to the year 2020 provides for outrunning development of deep timber processing facilities in Siberian and Far Eastern regions rich in timber resources.

Acting as a state financial institution, Vnesheconombank gives top priority to implementing the largest high-technology and thus capital-intensive projects whose payback periods make it impossible to fund them using commercial banks’ credits.

We shouldn’t forget that these projects’ locations and implementation scopes require to build significant engineering, social and transport infrastructure and this would increase periods and budgets needed to implement the projects.

An extremely important task is to build and expand a timber transport infrastructure because without it we wouldn’t be able to secure sustainable, long-term operation of timber-logging and timber-processing companies.

Long periods of designing and constructing timber-transport roads and the need to commission them prior to launching a timber processing complex and a pulp-and-paper mill require the Government to approve a procedure for financing this work on a top priority basis.

Based on our business experience in implementing the timber processing complex construction project in the Boguchan district (its preliminary value is 41 billion rubles) as well as on the Bank’s experience in reviewing a large number of projects aimed at deep timber processing, I would like to list certain factors, which in our opinion hamper the development of pulp-and-paper and timber-processing industries:

• shortage of modern equipment and machines for timber logging and absence of equipment for deep timber processing;
• low level of chemical and chemical-mechanical timber processing in the country;
• the need to move timber logging to districts where timber resources development is more complicated, given absence of roads and highly developed infrastructure;
• lack of proper companies’ certification in timber exploitation, among other things, for the purpose of making them to meet environmental requirements in line with international standards;
• absence of credible and  relevant information in a number of regions on a qualitative and quantitative composition of forests;
• shortage of highly qualified personnel, technical specialists and managers needed to implement new high technology projects;
• low investment and innovation activity by project initiators;
• shortage of investors’ own funds to meet commercial banks’ requirements for debt to equity ratio in financing large-scale projects;
• shortage of financial resources needed to implement major long-term investment projects both in terms of financing volumes and periods to provide these resources;
• improper project preparation by project initiators caused by the absence of engineering companies capable of providing project initiators with a full range of services and secure comprehensive (engineering, legal and marketing ) investment project monitoring at all implementation stages.

The above listed factors resulted in insufficient investment in the timber-processing sector.

In this respect, we believe that Vnesheconombank acting as a development institution plays a critically important role in fulfilling the task of developing the country’s timber complex. This task was set by Russia’s Government.

I would like to say that besides its financial activity, Vnesheconombank is actively cooperating with all interested federal executive authorities in addressing issues of developing the timber complex and it is also cooperating with regional executive authorities; the Bank makes its proposals within the framework of the Council for the Development of Russia’s Timber Industrial Complex under the Government of the Russian Federation.

I hope that in the course of this Forum its participants would be given a chance to discuss prospects and problems of timber sector development and maybe work out proposals for implementing specific measures to accelerate the timber sector development and learn to a greater extent Vnesheconombank’s experience and lines of its activity aimed at deep timber processing.

Thank you for your attention.