Weakened Ruble Strengthens National Timber

ST. PETERSBURG — Until a few years ago, the small town of Sokol in the northwest region of Vologda was largely idle. Now, thanks to a timber plant that was nearly bankrupt, Sokol is coming to life again. Logs are brought in constantly by rail. Large tractors haul loads of wood. Even more important, employees are paid real money for real work — a not-so-common arrangement in Russia's economy.

After a decade of decline, the forest-products industry is bouncing back, revived by a weak ruble and rising domestic demand.

The industry is finding the sale of processed wood especially lucrative. In 1999, the country produced 110 million cubic meters of processed wood, up 25 percent from 1998. At the same time, timber companies are investing hundreds of millions of dollars in new processing plants.

The Moscow-based Sputnik Group and ZAO Ilim Pulp Enterprises of St. Petersburg are leading the resurgence. Ilim Pulp, which accounts for nearly 35 percent of Russia's pulp and board volume, and exports 70 percent of its output, says it will invest $140 million over several years to modernize its processing centers in the northwest and in Siberia.

The weakness of the ruble, which was devalued in August 1998, has bolstered the industry by pricing foreign goods out of the local market and making wood more competitive abroad. The weak currency has also prompted mergers within the industry.

Ilim Pulp, in fact, owes much of its current size to the 1998 devaluation. Founded in 1992 as a trader of pulp and paper products, the company slowly began to buy pulp and paper manufacturers in 1996. After the currency crisis that strategy accelerated.

"These companies became cheap to buy, especially for us, because our company was, and is, earning hard currency from exports," said Svyatoslav Bytchkov, Ilim Pulp's communications director.

Since then, sales have soared. They doubled from 1996 to 1999, when they reached $800 million. While the acquisition of timber companies caused some of the sales increase, the industry's revival explains a big chunk of it, Ilim Pulp executives said. They said plans include taking the company public and selling American Depositary Receipts on the New York Stock Exchange.

Sputnik, an investment company controlled by Boris Jordan, an American financier, has spent $30 million over the last two years to build up its National Timber Co. The company is centered in the Vologda region — it owns the plant that has revived Sokol's economy — and it sells logs and sawed timber to domestic and European markets. Sputnik says it will invest at least $50 million in the venture over the next three to five years.

"Our main goal is to create a vertically integrated timber company made of units that are located in various regions of Russia," Jordan said. "We plan to acquire more timber companies, to implement modern production technology and attract more investment to this sector."

The company is riding a surge of orders for sawed wood as furniture makers and construction companies respond to growing consumer demand. Sputnik estimated that National Timber's sales would reach $70 million in 2000 to 2001, up from $25 million in 1999 to 2000.

Foreign companies, including International Paper of the United States, Ikea of Sweden and Stora Enso, a Finnish-Swedish concern, are also investing in northwest Russia. Last year, International Paper opened a $35 million paper plant in Svetogorsk, 145 kilometers north of St. Petersburg.

More recently, Sweden's Sved Wood, a subsidiary of Ikea, said it would begin processing wood outside of St. Petersburg. Stora Enso, one of the largest wood-processing and paper companies in Europe, said it would invest $40 million in a packaging plant in the Nizhny Novgorod region on the Volga River.

But there are risks, he cautioned. Besides the chance that the ruble will become stronger, Savulkin said, "the growth of the Russian timber sector will depend on the situation on world markets — whether or not demand will remain high." After the collapse of the Soviet Union in 1991, Russia's wood-processing industry was devastated as domestic orders dried up and financial institutions stopped providing credit and investment. In 1989, the country produced 375 million cubic meters of processed wood. By 1998, that figure had dropped to 88 million.

Although Russia has the world's largest timber reserves, with 760 million hectares of forest, or 22 percent of the world's total, the country accounts for only 2.3 percent of world output, according to the Economics Ministry.

The Vologda region is one of Russia's timber centers. Private timber companies have invested about $200 million in production there since 1996, said Viktor Gratchev, head of the regional government's forestry department.

Nearly 75 percent of Russia's timber reserves are in Siberia, but a lack of road and rail connections there keeps most of these resources out of reach. Vologda, however, has rail links to the port in St. Petersburg and the markets in Moscow.

Most important, business executives say, they can do business with Vologda's leaders — a rare situation in the provinces, where many leaders are suspicious of outside investors.

"The government of the Vologda region is trying to improve the investment climate in the region and is ready to work with investors," Jordan said. His company, he added, cultivates close relations with the government and contributes to local social-service projects.

Alexander Zubkov, a former forestry official in Karelia in the northwest and now a timber businessman, suggested that such an approach was prudent. He said, "The government gives out licenses for cutting timber and can control organs such as the Tax Inspectorate, which can cause a lot of problems for those doing business."