7 December 2010
INVESTMENT CLIMATE IN RUSSIA FROM THE VIEWPOINT OF FOREST
According to companies operating in Russia, the following are the most serious
problems facing forest industry operators planning to invest in the country:
Foreign investors have noticed that investments originating from other countries are still
viewed with suspicion in Russia. Even in public statements given by top-ranking
politicians, foreign operators are occasionally characterized as violators of the country’s
laws, which cause more trouble than domestic operators. For example, the timber trade,
an important engine for growth in the Russian forest sector and a requirement for
expansion in the wood-processing sector, has been branded as a questionable activity
that is detrimental to Russian interests.
Uncertain raw material supply
Another factor creating uncertainty in the investment climate in Russia is the long drawn-
out process to get the country’s new forest act approved, and the ensuing changes in
such matters as raw timber pricing and the logging permit procedure. Widespread
corruption in matters such as the granting of forest leases is another major problem.
- The lack of long-term logging rights makes it difficult to plan and implement projects
involving the use of large quantities of timber.
- Russian laws and regulations pose a major obstacle to the introduction of
modern forestry methods that would allow intensive use of the resource. As a
result, profitability levels common elsewhere in Europe remain unattainable in Russia.
- In certain paper-processing segments, a raw material shortage is a potential threat,
affecting growth prospects.
- More use should be made of paper recycling so that recycling-based raw materials
could become a major raw-material source.
Finnish Forest Industries Snellmaninkatu 13 Telephone +358 9 132 61 email@example.com
P.O. Box 336, FI-00171 Helsinki 00170 Helsinki Fax +358 9 132 4445 www.forestindustries.fi
7 December 2010
Standardization situation and shortage of labour an obstacle to investment
- Implementing projects is made more difficult by Russian technical standards, which are
different from those applied in other European countries.
- There is a shortage of skilled employees meeting the operators’ requirements among
the local population. This creates additional costs and increases staff turnover.
Dealing with factors affecting Russia’s competitiveness when making investment
Import duties for machinery and equipment and a cumbersome capital contribution
- Cumbersome, complex and time-consuming customs procedures mean complicated
transport arrangements, keeping equipment in storage, and delays. For example,
operators have been forced to submit machinery imported as capital contribution to a
three-stage customs clearance, each stage involving up to twenty lorries. The company
making the investment may have to spend up to four months on preparing and
submitting tax-relief applications for the machinery needed.
- The instructions on import and export customs clearance issued by the Russian
customs are not sufficiently clear. The companies involved will have to shoulder the
blame for errors resulting from any misunderstandings.
- The cost of constructing external infrastructure is unreasonably high (connection to
electricity, water-distribution, sewer and gas networks).
- ‘Natural monopolies’ (local power companies, and gas, water and sewer utilities) are
fully independent and do not come under local government. This means that they can
charge unreasonably high prices for connections to public utilities.
- The process of getting project plans approved is protracted and the end result often
impossible to predict.
- The planning process for converting forest or agricultural land for industrial use can last
up to two years. If the site is owned by the local or regional government, planning is at
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the local level, while for prime forest or agricultural land, the regional government must
submit an application to the Russian ministry of natural resources in Moscow. In most
cases, the planning permit is granted but the long processing times are a major planning
- It is difficult to predict price trends in the energy and transport sector. This is a
problem because pricing in these areas is an important operational consideration for
- Guidelines, laws and regulations and the authorities issuing them provide few
incentives or little support for improving the infrastructure, such as forest roads.
- Problems in the Russian forest sector are a drain on resources for all those concerned.
Inaction by authorities often forces the operators making the investment to assume
responsibility for improvements.
Improvements needed in the way authorities operate
- There is virtually no cooperation or coordination between different authorities.
- The orders and requirements issued at different administrative levels are sometimes
contradictory. For example, the permit conditions laid down by environmental authorities
may be so strict that it is not even theoretically possible to meet them.
- Permit-processing in infrastructure matters is slow (gas, telecom, railways).
- Inflexibility in the way standards are applied (for example, fire protection must be in
accordance with Russian requirements even if other technical solutions would be
- In long-term undertakings, there is a risk that a project will run into problems at a later
stage because of official action. This is because it is impossible to check or plan
everything in advance (for example, changes in building plans, application of standards).
- It seems that the obligations and commitments made are only binding on the
builder/the investor but not on the authorities.
- Authorities rarely act against criminal elements. Operations in regions affected by
crime is practically impossible or at least prohibitively expensive.
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The problems in connection with the approval procedure can be illustrated with
In western countries, each municipality usually has a local government body responsible
for technical matters, which delegates the work on a project to different lower-level
authorities. No such arrangements exist in Russia, which means that operators are
themselves responsible for collecting all permits and other documents for their projects.
Thus, the operator must be able to rely on a team thoroughly familiar with the building
In Russia, a project must be approved by all building-supervision authorities. The most
important of these are the fire, health and environmental authorities, electricity, gas,
sewer, and water utilities, the local-government architect and building supervision, the
Russian emergency ministry, the Russian occupational health agency, the Russian
army, water authorities, and the independent government building-inspection agency. In
addition, the project must also be considered by all regional government committees
(such as committees for legal and financial matters and committees for natural
resources). Different committees also have departments that must give their approval for
Experience has shown that environmental authorities have the longest processing times.
The amount of work required of the company making the investment is amply illustrated
by the number of permits needed. For example, the builders of a sawmill in the Republic
of Karelia have been obliged to apply for 300 different permits and approvals during a
A one-stop principle would make life much easier for companies planning to invest in
Russia. In it, they would get all the necessary permits from a single authority.
Because of the above reasons, the total cost of projects in Russia is 1.2-1.3 times higher
than in other countries. This makes Russia a less attractive option for companies
considering investments abroad.