The Hindu Business Line : In Russia, opportunity grows on trees

EVEN as his wood processing business is growing , Mr Rajagopalan Ven does not think he had struck a gold mine when he set up his first sawmill in Siberia three years ago.

"Doing business in Russia is real tough, considering the climate, the poor infrastructure, the corruption and the lack of government support," the Indian businessman complains. "Why do you think all those American and European moneybags are not rushing to invest here?"

However, the 38-year-old will notgive up on Russia. "Opportunities here are enormous," says Mr Rajagopalan, who came to Russia nine years ago to work for a United Arab Emirate-based firm and later set up his own timber company.

Russia is the world's largest forest country which accounts for a quarter of global timber reserves, a mere 6-8 per cent of which has been developed so far. With global demand and prices for quality wood and bio-fuels growing, the Russian timber industry is an attractive destination for investment.

"We are constantly falling behind demand," says Mr Rajagopalan, whose Silverline Ventures Ltd., operates three sawmills in Krasnoyarsk, Krai region in Eastern Siberia. This territory is more than two-thirds the size of India and much of it is under forests, but with a population of just 3 million. Over 80 per cent of Siberian forests are valuable coniferous species.

According to Krasnoyarsk authorities, the region produces 9.5 million cu. m. of timber a year, while its potential is 55 million cu. m. Russia exports $5 billion worth of timber, whereas its potential is $100-120 billion, which makes timber a potential hard currency earner for this country over oil and gas. Beinga renewable resource it is also more valuable. Since its opening in 2002, Silverline's sawmills have shown an impressive growth from 10,000 cu m to 90,000 cu m of timber, all of which is exported to Japan and China as also Europe. "The business climate is improving, Corruption is coming down and mafia is not the problem it used to be in the 1990s," Mr Rajagopalan told Business Line.

International demand for Siberian larch and other hardwood is enormous. "In Europe they used to make garden furniture from spruce and pine, which had to be impregnated with chemicals to last longer.

Now the ecology-conscious Europeans want to have only water-proof larch, which does not need impregnation and lasts hundreds of years," he says. Much of Venice still stands on foundations made of Siberian larch that is 300-400 years old.

Silverline has not exported any wood to India as other markets, much closer, are available, but Mr Rajagopalan says there is a huge potential for the supply of high-quality wood products from Russia to India. "There is a shift in preferences for floor material in India from marble to parquet made of hardwood which is not available in New Zealand, the main source of softwood for India."

New Zealand cultivates fast-growing varieties of softwood pines that reach maturity within 20-30 years, whereas in Siberia the average tree age is 150-170 years. (The slower a tree grows, the harder its wood gets.)

Mr Rajagopalan is convinced that it makes good sense for Indian businesses to invest in the Russian forest industry with a view to exporting wood products to India. But he doubts if this can happen unless the fragmented Indian wood processing industry consolidates. Poor infrastructure is the biggest challenge for the growth of timber business in Russia.

Silverline could double its production if it did not have to haul the sawn timber some 190 km to the nearest railway station. Companies have to build roads at their own cost to reach their logging sites. Silverline has built two roads — one 40-km long and the other 60-km long — through taiga to reach its rented logging sites (forests in Russia are state property).

Krasnoyarsk authorities are aware of the problem and have drawn up plans to develop the infrastructure in the region.

The Russian President, Mr Vladimir Putin, signed a decree in April ordering the central government to help the Krasnoyarsk Region complete the construction of a giant hydropower station at Boguchany on the Angara river, build rail and paved roads and set up a regional transport hub at Krasnoyarsk. The main focus of the wood industry will be to promote in depth wood processing, the Krasnoyarsk authorities said. To encourage investment, the regional government has allocated funds to subsidise half the interest rate that companies pay on bank loans.

Silverline has its own development strategy to expand production of finished wood materials, such as plywood and window blocs, by setting up new plants (at Krasnoyarsk and the Syvtyvkar, Komi region), to process wood waste into fuel wood pellets. This technology, which involves drying sawdust and pressing it into pellets, will revolutionise the Russian wood production, Mr Rajagopalan says.

At present 50 per cent of wood in Russian sawmills goes waste, and results in large financial losses to producers and creates problems of disposal too. There is enormous demand in Europe for these wood pellets as an ecologically clean alternative to fossil fuels.

The wood pellet technology is relatively cheap and simple, and investors in Russia can take advantage of European programmes to switch power plants from hydrocarbons to "solid bio-fuels." Straw and wood pellets do not contain any chemicals and their calorific value is almost the same as that of coal, while prices for these two fuels are levelling out.

At a regional investment forum it was announced that Russia's biggest region would attract about $20 billion in private investment over the next 10 years. The forest industry has been identified as a priority area for investment, along with oil and gas and non-ferrous metallurgy.

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