Timber Industry 2000-2004
Russia's timber processing industry was fairly healthy during Vladimir Putin's first presidential term, and in 1999-2001 analysts were even talking about an actual forestry boom. The industry's positive development trend in 1999-2002 was accompanied by a worldwide cutback of 15% per year in forest industry investments. The only region where forest industry production has increased sharply in the last ten years is Southeast Asia, mainly China, where paper and cardboard production has increased 2200% since 1992. Russian production trends are much closer to those of European and American producers: world physical output of paper and cardboard has increased an average of 40%, compared to 49% in Russia. Most of this increase occurred in the first years after the crisis of 1998.
However, by the end of 2002 it was clear that industry's growth was primarily the result of a favorable market situation and the effect of devaluation. In 2003, average growth in the industry was only 1.5% vs. 7% in the economy as a whole. For a long time, the timber processing industry has relied on mobilizing reserves of processing equipment purchased abroad 25-30 years ago. Therefore, according to analysts' pessimistic forecasts, in 2015, Russia, which possesses the world's largest timber reserves, could turn into the largest importer of both pulp and paper products and timber products as a whole.
But this applies only to pessimistic forecasts. If the plans of the industry's main players are implemented, the forest industry will not lose its place in the Russian economy for at least the next five to ten years. And the industry's strategic objective in this period is to maintain its place on the world market and promote increased demand at home. In any case, this objective was more or less achieved in the first four years of Vladimir Putin's presidency. And apparently it will be achieved to the greatest possible extent until 2008.
Russia's forest industry was in a unique situation in the first four years of Vladimir Putin's presidency. The government was so enthusiastic about forestry reforms that the industry developed without state intervention. At the same time, the use of the state apparatus as a weapon in the “forest wars” was the main obstacle to the development of timber processing in Russia.
The History of the Forest Wars
People in the forest industry have an extreme dislike of the phrase “interbranch flow of capital”. In the last four years, this term as applied to the forest industry has probably been the key one for the Russian government. The foot-dragging on reforms was largely connected with the fact that since 2000, the government and the new president had been anticipating that oil and aluminum magnates would see related objects for investment in the forest industry and invest hundreds of millions of dollars in it. An improved situation on the main forest product markets, especially pulp and paper, as well improvements in the macroeconomic situation and a surplus of spare cash in the resource industries, produced the desired effect. By the beginning of 2001, forests had become a trendy object for investment. However, the result was not a flourishing business, but forest wars – the main industry topic from 2000 to 2004.
The wars did not start as a result of multimillion-dollar investments, but from a banal dispute between one of the oldest players in the pulp and paper business, Continental Invest, which operated at the Ust-Ilimsk Forest Industry Complex (UILPK), and its partner Energoprom, whose director, Dmitry Bosov, had once represented the interests of the TWG metallurgical holding in Russia. The partners started a small corporate war at UILPK, a common occurrence in those days. But the outcome was unexpectedly far-reaching. In many respects, it determined the development scenario of the entire industry for four years.
Russia's largest pulp producer, Ilim Pulp Enterprise (IP) of St. Petersburg, wanted to buy UILPK from Nikolai Makarov, the head of Continental Invest. Makarov set up a joint venture with Oleg Deripaska's Siberian Aluminum Group (Sibal) and simultaneously sold UILPK to Ilim Pulp. Thus, UILPK ended up with two owners. However, simultaneously, Deripaska's agents forcibly seized another of Ilim Pulp's enterprises – Bratsk Forest Industry Complex (Bratsky LPK).
It was later learned that Oleg Deripaska and his partners in the holding – Vladimir Kogan from St. Petersburg Banking House (bankirsky dom Sankt-Peterburg) and Russian Aluminum (Rusal) shareholders (i.e., governor of Chukotka Roman Abramovich) – decided to move $800 million of capital from the aluminum, oil, and banking sectors to the forest industry. The plan apparently made provision for a hostile takeover of nearly all of Ilim Pulp's Russian assets, as well as Archangelsk Pulp and Paper Mill (ATsBK), for this exact amount.
During the first truce, Ilim Pulp bought UILPK from the owners for $230 million and vacated the Bratsk Forest Industry Complex. However, from then on, almost to this very day, the partners united in the company Continental Management (KM) never gave up their attempts to gain control over a large part of Russia's pulp industry. Strange as it may seem, ammunition from the state arsenal was put to use, e.g., arbitration courts, bailiffs, and pressure from both “power” and “non-power” state structures.
Vlast has more than once reported in detail about the upheavals of the forest wars. Their outcome is as follows. During the war, Continental Management succeeded in forming a pulp and forest industry holding out of small pulp mills and logging companies throughout Russia [including the Siberian (formerly Yenisei) and Baikal pulp and paper mills, a cardboard factory in Omsk, and logging companies in Irkutsk, Karelia, Krasnoyarsk Territory, and Central Russia]. Ilim Pulp learned how to survive under the harshest conditions, and in the three years of the forest wars, transformed itself into a world-class company. However, it was unable to find a strategic partner (according to the “interbranch flow” concept, it should have been YUKOS, but the deal fell through) or carry out an initial share placement. Archangelsk Pulp and Paper Mill managed to consolidate a controlling interest, as well as finally formalize relations with Western partners and significantly enlarge its holdings. Overall, the wars probably gave the pulp industry a more powerful kick during Vladimir Putin's first term than any government reform could have done.
However, there is another side to the forest wars. During the wars, the state's authority to regulate relations in the industry (from judicial authority to government authority) was finally discredited, especially as it concerned privatization. The investment attractiveness of companies and assets in an industry in which deprivatization actions were not a theoretical threat but a fact of life was obviously not very high. With few exceptions (Severstal and Sibneft shareholders), interbranch flows of capital did not make the forest business any more attractive for investors, and the owners of fixed assets in the industry held on to their property.
At the same time, there were many economic processes going on in the industry that were not connected with the forest wars and which led to fundamental changes in it.
The Last of the Forest Outlaws
The most important events in the Russian forest and pulp and paper industries in the last four years were the changes in corporate governance of companies, the start of the formation of vertically integrated, specialized holdings, and the search by investors for forest industry niches that were unoccupied for historical reasons.
The changes in corporate governance in the forest industry during Putin's presidency are not only the consequence of the forest wars, but also of the fact that the large players increased their planning horizon. Prior to 2000, the majority of Russian forest industry companies were more oriented towards the principle of “live for today, not for tomorrow”. And although the forest industry is a long way from the principles of corporate governance that oil companies, for example, have adopted, transparency, strict corporate accountability, and division of management powers are regarded as targets for most management teams. Nevertheless, despite the fact that most forest industry companies are corporations, this can be considered a formality, since managers are often indistinguishable from owners.
The development of long-range plans at Ilim Pulp, Archangelsk Pulp and Paper Mill, Continental Management, and Segezhabumprom called for the formation of holdings uniting timber-processing companies and raw material producers. The process generally came down to the major players actively buying the regional logging companies that supplied them with raw materials. In the case of Segezhabumprom of Karelia, the company set up a holding with a large timber exporter, Karellesprom, with the participation of local authorities. However, as a whole, major exporters did not become timber processors. They generally limited themselves to securing 40-70% of their own raw materials and buying the rest on the market as before.
Finally, in the period from 2000 to 2004, many investors, both Russian and foreign, began a fairly active search for unoccupied niches in the Russian timber-processing market with considerable success. Thus, the Sveza Group, with the participation of Severstal, and an association of two regional plywood and chipboard producers under the common name of United Panel Group caused a real revolution on the wood panel market. Swedish investors from the Krona Group simultaneously initiated an investment program in the area of plywood production valued at more than $400 million. We note that exports of these materials from Russia had been negligible since the early 1990s.
Russian companies also actively expanded cardboard packaging production. For example, a partner of ATsBK, the Titan Group, set up a packaging holding, built a new factory outside of Moscow, and began a project to increase waste paper recycling in Moscow Region. There are already hundreds of smaller projects worth $1-15 million in the forest industry. In spite of all the wars, private investments in local timber-processing projects have become commonplace, and the investment revival has led to a revival of nearly all the paper, pulp, and woodworking companies that have existed since Soviet times.
Finally, certain improvements have also been observed in logging and timber exporting, which are considered the most troubled sectors of the forest industry. Despite the fact that most Russian timber exporters are still in the shadows, this is not preventing them from moving into the light in small, very cautious steps. For example, one of the largest logging companies in the Far East, the Indonesian company Rimbunan Hijau, began negotiations in Irkutsk Region in 2003 to start operating in the region; prior to this, the Indonesians had been logging only in Khabarovsk Territory. This same organization is gradually buying up assets in the region controlled by the American holding Pioneer Group. Russian timber exporters such as Zapkarellesprom, Vologda Timber Merchants (Vologodskie lesopromyshlenniki), Ros DV, and Primorsklesprom, are gradually becoming more public. In any case, the share of round timber, especially the share of contraband timber, in total actual Russian forest industry exports has slowly but steadily fallen.
However, both the state and investors expected more from the forest industry than just free development.
The New Masters of the Russian Forest
The theoretical calculations used in forest industry development plans in the past five years have looked at three sources as the basis for future “explosive growth”. The first is the interbranch flow of capital already mentioned. The second is large-scale investments by Western professional investors, mainly Finnish and Swedish, in Russian assets. The third is state investment in the construction of new logging and timber-processing facilities.
Things haven't turned out quite that way in practice. The largest foreign investments in Russia's showcase pulp subdivision took place when the managers of Syktyvkar Forest Industry Complex (Syktyvkarsky LPK) sold their shares in the company to Neusiedler Corporation (a division of the Anglo-American international concern). However, despite all expectations, Neusiedler was mainly interested in Russia as a huge unfilled market for paper. So far, M-Real, SCA, UPM-Kymmene, Stora Enso, and International Paper, which already owns AO Svetogorsk, have not expressed any interest in building large new pulp and paper mills in Russia. These companies appear to be more interested in smaller but still important subdivisions for the Russian market, such as paper, healthcare products, cardboard, and corrugated packaging, but not in large-scale pulp production in the volumes reached at Soviet-style facilities in the Priangara, Ust-Ilimsk, and Bratsk pulp and paper mills.
As has already been mentioned, investments by Severstal and Alfa Group made a relatively peaceful entry into the forest industry in the context of interbranch flows of capital. However, Alfa-Eko, which got into the forestry business in 2001 after buying a controlling block of shares in the large newsprint manufacturer Balakhinsk Pulp and Paper Mill (AO Volga) from the Nizhny Newsprint alliance of investors, had no plans to strengthen its position in the industry. After buying a complementary set of assets in Perm Region, Alfa-Eko suddenly began selling off its forest business at a profit. As a result, Volga passed to Ost-West Group, which had close ties with the combine's management.
Finally, despite a lot of talk in the government about possible multibillion-dollar investments in the forest industry, it did not lead to any real budget flows in Vladimir Putin's first presidential term. Various Russian government officials periodically talk about how a large pulp and paper complex in Tyumen (a giant paper production complex in Kostroma Region, a forest industry complex in Krasnoyarsk, a pulp and paper mill on Sakhalin) will still be built and how the state is prepared to invest its own forest industry assets in it, grant it tax concessions, and even allocate cash. But since these plans are directly linked with the government's Napoleonic plans to reform the forest industry, and reform is a slow process, for most or all of Vladimir Putin's second term, the current players will obviously have to develop the industry through their own efforts.
People Who Have Left the Scene
Mikhail Magii, the head of Syktyvkar Forest Industry Complex (SLPK), was forced to arrange the urgent sale of his company to the Austrian group Neusiedler, a division of the Anglo-American concern. Becoming a victim of the forest wars was a real possibility for him: there were rumors that structures belonging to Continental Management were already preparing for a corporate attack on SLPK. Magii initially offered to remain at the company as a hired manager, but he was apparently unable to agree with the new foreign team on a development strategy for SLPK. Therefore, he left big business and devoted himself to implementing his own smaller projects, which were also related to timber processing. It is not inconceivable that at a certain point, Mikhail Magii's name will appear on a list of the industry's influential people.
Nikolai Makarov, the head and founder of the Continental Invest group and one of the most authoritative figures in the Russian forest industry, has not actually left the business but has even received a “promotion” to head of Continental Management, a more modern and progressive structure. However, there is little doubt that after losing control over the Ust-Ilimsk Forest Industry Complex (UILPK) during a local conflict and then acquiring powerful partners in the person of Oleg Deripaska, Roman Abramovich, and Vladimir Kogan, Makarov is no longer a big businessman. However, as the founder of one of the oldest trading companies on the Russian market, he still has a chance of returning to the business as an independent owner. If Continental Management's projects are not implemented, Makarov could become one of the main contenders for the company.
No one really knew what oligarch Mikhail Fridman and divisions of his Alfa Group were looking for in the unpopular forest industry back in 2001. There was talk of Alfa's strategic interest in the industry and how it would bring Finnish and Swedish investments to the forest industry complex. Things turned out to be much simpler. The forest industry complex was another industry where Alfa was seen as a successful “broker”, that is, a specialist in preparing industrial facilities for investors with a professional interest in these assets. No one knows for certain how much money Fridman and his colleagues earned in the forest. But at Alfa-Eko, which is more involved in the forestry business than other members of the group, they are saying that in principle they would not mind doing more in the industry – in the same elegant style
The general manager of the Baikal Pulp and Paper Mill (Baikalsky TsKB) left the forestry business quite accidentally. The Yugoslavian holding Delta Group, which owned 49% of the company's shares, used the resources of the pulp and paper mill as it could, without making much progress or allowing serious failures. Baikal's reputation had been ruined for good during the environmental hysteria of the mid-1980s. Despite the fact that the pulp and paper mill was only rather indirectly related to the pollution of Lake Baikal, its image as the “poisoner of the largest freshwater reservoir on earth” stuck fast to it. Viktor Shteinberg, who had kept his job at the mill all this time, left the company as Continental Management was collecting all available pulp and paper assets. It is expected that the new owners, with the help of the World Bank, will solve all of the Baikal mill's problems – both real and invented. But this will happen without Shteinberg.
People Who Have Arrived on the Scene
The LEMO concern has been in existence since the mid-1990s; and all this time, Andrei Benin, who was first general manager and then chairman of the board of directors, has managed the business without a break. LEMO imperceptibly became one of the country's largest forest industry companies, and the 44-year-old graduate of the Kaluga Teacher's College and former secretary of the Oktyabrsky District Komsomol Committee in Leningrad advanced to the ranks of the forest industry elite. Today, Andrei Benine is a United Russia (Edinaya Rossiya) deputy and an honorary doctor of the St. Petersburg Academy of Forestry Engineering. And LEMO continues to grow and apparently has no intentions of stopping.
Prior to 2001, the only people in Russia who knew of the existence of the Zheshart Plywood Plant (Zheshartsky fanerny kombinat) in the Komi Republic were its partners. Igor Bekker, who used it as the basis for the United Panel Group (UPG), one of the largest players of the Russian wood panel market, went through a lot before that – from an alliance with Yury Goncharov, a business partner from the Perm Plywood Plant (Permsky fanerny kombinat), to a dispute with him – and survived an attempt on his life. Nevertheless, UPG is gradually turning into one of the most important participants on Russia's timber market. The end has probably been worth the means.
It is unlikely that anyone will ever know just what moved Oleg Deripaska, the owner and head of Base Element (Bazovy element), to expand into the forest industry. Base Element has not had great success in developing its own forest business. Nevertheless, an ever-increasing number of lumbermen apprehensive about Base Element's persistence and cavalier manner are saying that if Oleg Deripaska had not taken it into his head to set up the counterpart of Russian Aluminum (Rusal) in the forest industry, events would have developed much less dynamically and ultimately more favorably. Moreover, the experience of the oligarch's three-year presence in the business has shown that Deripaska will get out of the industry only when he no longer sees any prospects in it. Which means it is highly likely that Base Element will continue its attempts to expand into the forest.
Few would have believed back in 1999 that the present general manager of the Segezha Pulp and Paper Mill (Segezhsky TsBK), Vasily Preminin, would remain in big business and even strengthen his position in it. At that time, he was the receiver of the predecessor to AO Segezhabumprom and many people were skeptical of his plans for turning the company around. A long drawn-out dispute with the largest shareholder – the Swedish company AssiDoman – had been going on at Segezha since the mid-1990s. The plant was nearly ruined and inoperative. After five years of work, Preminin and his management team restarted the Segezha mill, paid its debts, and redeemed the company from its creditors. He will probably remain in the circle of industry leaders in future. At the very least he has earned his present place in it 100%.
Zakhar Smushkin, currently chairman of the board of directors of Ilim Pulp Enterprise, is indebted to the forest wars for his entry into the forest industry complex as one of the most influential people in the business – those who are determining its development. As one of several partners and co-owners of Ilim Pulp, he had to coordinate the operations of the largest Russian forest industry holding under near-frontline conditions. And Zakhar Smushkhin won in a big way. Effectively defending the corporation from an attack by the country's most influential people and simultaneously expanding its business at rates far above the industry average is a task that only a handful of managers in Russia are capable of.
Heinz Zinner is usually known as Doctor Zinner in Russia. The managing director of the Austrian company Winfried Heinzel entered the Russian forest industry elite during the forest wars. Doctor Zinner was the main support in the struggle of ex-head of Archangelsk Pulp and Paper Mill and now State Duma deputy Vladimir Krupchak with corporate aggressors in the forest wars, and the package of ATsBK shares he controlled was the main obstacle to the attackers. With Zinner's approval, the controlling block was consolidated in the company Pulp Mill Holdings. As chairman of ATsBK's board of directors, Doctor Zinner is often in Russia these days: the Austrian businessman is in increasing demand in Russia's forest industry complex.
All the Article in Russian as of July 05, 2004