VAT return cancellation, wood commodity exchange and state co-financing: proposals of regional governors to Putin at the State Council

President Vladimir Putin held a meeting of the State Council in Ulan-Ude (Buryatia Republic, Siberia) dedicated to the problems of the forest industry. The participants of the meeting discussed a lot of issues of the industry and proposed a couple of novelties. However, according to experts, they didn’t manage to conduct deep and professional analysis of these problems.

“The participants didn’t mention that the recent reforms affected forest management most of all. (…) Almost nobody told about the critical level of forest depletion which makes many enterprises uncompetitive with the current state of the global wood market”, as said in a message of Greenpeace Russia’s Forest Forum.

“It seems that top officials of the Federal Forestry Agency and governors of several regions will be accused of short-sighted financial, manpower and managerial decisions. However, the major source of most problems is the Forest Code signed in 2006 by Putin and the following administrative changes”, replies Vedomosti business paper in an editorial article.

However, heads of several Russian regions proposed a couple of novelties that could solve some industrial problems in case of rapid implementation.

Novgorod region governor Sergei Mitin proposed changes to the technical regulations, mainly to the building code, and development of regional housing construction programs that could encourage growth of mass individual wooden house-building.

Oleg Kozhemyako, head of Amur region, expressed an idea not to return certain part of the VAT to enterprises that export unprocessed or roughly processed timber from the Russia’s Far East. Foreign companies operating in the Far East, especially Chinese ones, often export roughly processed wood under the guise of lumber, and reclaim the VAT. The governor also proposed to review the practice of auction sales, in order to give forestland to those companies that are really dealing in deep processing of timber. Kozhemyako also said that it is essential to introduce regulation of rail tariffs for the Far Eastern companies so that they can supply products to the European part of Russia.

The head of Vologda region Oleg Kuvshinnikov told the president about the project of Sveza Group which entails construction of a pulpmill in the region and proposed to create special economic zones with public-private partnerships for such projects to ensure that the state co-finances the infrastructure. In his opinion, it is also necessary to amend federal law in order to authorize transfer of protective forests into industrial lands in cases when special industrial zones are created. Later at the meeting, the head of WWF Russia Igor Chestin said that 118,000 Russians signed up for the return of appropriate conservation status to the protective forests: “The situation now is that commercial logging is allowed in protective forests”.

Having listened governor’s report on the pulpmill project in Vologda, Vladimir Putin replied that it is better “to look at the market” first in order to understand sales possibilities. Sveza’s Chief Executive Andrei Kashubsky assured the president that selling the product will not be much of a problem: “There is downturn of capacities in Scandinavia, and the competition is not as heavy. It is not too hard to supply one million tons of pulp to the market of 30-40 million tons”.

Governor of Arkhangelsk region Igor Orlov reported on the depletion of forest resources in the region. Artificial reforestation of softwoods using obsolete technologies can not completely ensure forest renewal, and soft deciduous species are gradually replacing high-quality softwoods. “In 1951, the softwoods accounted for 81%, while now – only for 52% of the area. Share of hardwoods increased from 11% to 23%”, governor said. “The solution to the problem of low-grade timber use is in state measures of demand stimulation. (…) On the basis of these facts, I want to propose development of a program or a priority project in the field of logging, processing and use of low-grade soft deciduous species and the following restoration of the most valuable, softwood forests”, Orlov concluded.

After a long discussion, Arkhangelsk governor also assured the President that the government’s decision to provide federal subventions for top priority investment projects is not supported with funds and developed schemes, which makes investors very cautious. The President ordered “to fix the matter” and allocate federal subsidies for the entire period of investment project implementation. Arkhangelsk governor also drew attention to the blurring of functions of Federal Forestry Agency and offered to transfer not only forestry, but the whole forest industry under its responsibilities.

Head of Irkutsk region Sergei Yeroshenko proposed to create a commodity exchange for timber trading, which could civilize the market and fight illegal logging with economic methods. Russia’s accession to the WTO leads to the growth of illegal logging again, as reduction of duties fosters it, he said. Irkutsk region has already signed an agreement of intent to open a specialized wood trade section at the St. Petersburg International Commodity Exchange, but the support of other bodies is needed, Yeroshenko concluded.

Vladimir Putin accepted most of the proposals and ordered to prepare regulations as quickly as possible: “The list of instructions following today’s discussion should be not in the subjunctive, but in the indicative mode: this and that is to be implemented. And not by February 01, 2014, as it is written here, but immediately. Amendments should be made in order to pass the law, probably not in the spring session, but at least in the autumn session”. Concluding the meeting, Putin blamed again Forestry Agency for discrepancies in data on forest fires with scientists and noted that “officials who are responsible for the development of the forestry sector can’t cope with their tasks”.

“Generally, the minutes of the meeting published at the president’s website and the comments of some of the meeting participants show that the country’s top officials are beginning to realize the depth of problems of the forest industry, but has not yet decided on a deep and professional analysis of the situation. (…) We should not count on systematic and effective solutions without deep professional analysis of forest industry condition, reasons of problems and development trends. So, probably one should not expect large and rapid changes in the forest sector following this meeting. It will be possible to estimate it more specifically once the list of instructions following the meeting is published”, as noted in a message of Greenpeace Russia’s Forest Forum.

“It is necessary to shift gradually to intensive forest management based primarily on the renewal of forest resources. But development of this model, as well as general restoration of order in the forests, requires urgent rewriting of the Forest Code and the entire legal framework for forest management. Perhaps, these decisions will be made, if all this wasn’t just a PR show, similar to those that have already been held with officials responsible for the housing and communal services”, Vedomosti paper concluded.

The first result of the meeting of the State Council, as expected after the president’s words on “personnel decisions”, was that head of Forestry Agency Viktor Maslyakov lost his position after the governmental regulation on April 15. He was replaced with his deputy Vladimir Lebedev, who will now combine the post of the head of the agency with the position of deputy minister of natural resources and the environment.