Mordashov, Finns to Build Timber Mills

The world's top magazine papermaker, UPM-Kymmene, agreed Wednesday to form a 50-50 joint venture with Sveza to invest more than 1 billion euros ($1.4 billion).

Russia has raised export duties on timber, leading Nordic forestry firms to invest in the country. Previously, UPM and other firms have imported a large share of raw lumber from Russia to process in their Finnish mills.

The main owner of Sveza, metals magnate Alexei Mordashov, said Wednesday that investments in the new facility in northwestern Russia could reach 1.15 billion euros.

"Russian forests have a huge potential that has not been explored in full yet," Mordashov said. The joint venture is "a first step in this direction."

Mordashov's venture with UPM will produce about 800,000 tons of pulp, 300,000 cubic meters of wood and 450,000 cubic meters of building panels per year. UPM will help Sveza sell pulp in Russia and the rest of Europe. The papermaker will also be Sveza's main client, buying half of its production, said Mordashov, who also controls steelmaker Severstal. The venture may expand production to produce paper and cardboard in the future, he said.

"As we participate in the venture on a 50-50 basis, our investments will be also equal," he said.

"We will definitely attract funds on capital markets, which will allow us to break even in five to six years." The venture plans to start construction work in 2009 and launch the facility in 2011.

The final investment decision will be made in early 2009. Mordashov said the venture also planned to attract several billion rubles from the state investment fund to finance infrastructure.

"Taking into account factors of the close location of resources and logistics, this enterprise should be one of the most efficient in the world," he said.

Mordashov said the venture was planning to sell products mainly in Russia and Europe. He also said the venture was considering diversification and paper production at a later stage.

The venture aims to get at least 5 million cubic meters of timber per year via a long lease. When fully operational, the new mills would employ about 650 people, UPM said.

UPM chief executive Jussi Pesonen also said there was no connection between the new project and a mill closure in Canada.

"UPM's strategy is to grow, and our focus is strongly on new emerging markets such is Russia, and our plan is to grow in these markets primarily through organic investments," said Heikki Malinen, UPM's executive vice president for strategy.

Russia has urged foreign companies to build sawmills and plants in the country before export tariffs for unprocessed timber jump to as much as 80 percent in 2009. Scandinavian companies have pledged investment there, while closing plants in Europe and North America.

The government has raised tariffs for unprocessed timber to support the country's wood-processing and manufacturing industries, as it tries to reduce the economy's dependence on oil and gas. The higher tariffs will double wood costs for Finnish companies. Finland buys about 20 percent of its wood from Russia.