Update on Russian Log Export Tax

Since the Russian government imposed a 25% (min. €15/m3) softwood log export tax on April 1, 2008, Russian log exports have decreased dramatically. reports International Wood Markets Group.

Russian log exports decreased from a peak of 51 million m3 in 2006 to about 20 million m3 in 2009 and 2010 (-59%).

Major Russian log importers such as Finland, the Baltics, Germany, South Korea and Japan have almost halted Russian log imports during the last four years (from about 30 million m3 in 2005 to only five to six million m3 in both 2009 and 2010).China is the only Russian log export market that has maintained a relatively large log import business with Russia. Chinese imports of Russian logs peaked in 2007 at 25.5 million m3 and have dropped to just over 14 million m3 in 2010 (-45%). Even with this large drop, Russian log exports to China made up 70% of Russia’s log exports in 2010 compared to only 46% of in 2006. With falling log exports, Russian log exporters have become more dependent on the Chinese market.

The Russian government’s surprise move in November 2010 to reduce current log export taxes as part of its requirement to be admitted into the World Trade Organization (WTO) caught many industry players and traders off guard. The tax had been one of the major hurdles faced by Russia to obtain membership agreement from the northern European WTO members. Russia has stated that no changes will be made to the current 25% (min. €15/m3) tax rate until it has joined the WTO.

Although there have been no official announcements by the Russian government about the new log export tax rates after accession to the WTO, Finnish government officials have stated that the new Russian export tax rate on softwood logs will be 50% lower than the current rates (to 12.5%), while the hardwood tax rate on pulpwood will decrease by about 65%.
If the softwood log export tax is reduced to 12.5%, it will have some positive impact for Russian log exporters. However, it should be noted that all of Russia’s former sawlog export customers have made significant supply arrangements to reduce or eliminate the need for Russian logs.

The unanswered question is whether a 12.5% reduction will entice former customers back to Russian logs. Obviously, China is the one country that would benefit from the lower tax given that the country is struggling to replace former Russian log exports with new softwood log and lumber suppliers. Russian log imports will become more affordable, but how well they compete with new softwood log and lumber suppliers (at any point in time) will likely depend on the comparative delivered price of Russian logs versus alternative softwood log and lumber supplies. These are topics the WOOD MARKETS consulting group is currently examining, as the implications for exporters in North America, New Zealand and other countries, and to global trade flows and prices, could be far-reaching.

It should be noted that Prime Minister Putin has made numerous speeches since the WTO announcement extolling the virtues of the log export tax on developing the log-processing industry in Russia. In December, he stated in a speech in the Russian Far East that in “seven to eight years” all of the timber harvested in the region would be processed in the country. These comments provide a degree of uncertainty about the final outcome of this twist in Russia’s plans for the tax after Russia’s admission to the WTO. In addition, we assume that Russia will negotiate a lower log export tax rate with China once it has reduced the tax to Europe - or implement the same reduction.

Source: International Wood Markets Group, www.woodmarkets.com