When Russian tanks rolled into Ukraine on February 24th, an uneasy quasi-war instantly become an all-out shooting conflict, triggering a cavalcade of unforeseen consequences not only for the warring parties, but the entire world.
Among the “unforeseen” economic consequences of the Russo-Ukrainian War was an uprooting of the global forest products trade. Besides the direct combatants, the Ukraine and the Russian Federation, the conflagration includes Belarus (and non-combatant ally of Russia) in the trade fallout.
And from the lumber and forest product perspective both the Forest Stewardship Council (FSC) and Programme for the Endorsement of Forest Certification (PEFC) have labeled all timber from Russia and Belarus as “conflict timber,” chopping interest from global buyers interested in purchasing lumber from either country [see below].
The Great Unfriending
Nearly immediately after the invasion of Ukraine, economic sanctions spurred by the United States began being levied at Russia, and on March 11th the G-7 and EU (European Union) announced joint actions. These culminated in the application of a broad range of economic sanctions designed to “strangle” the Russian economy.
In March Moscow began its own retaliatory “unfriending” by introducing tariffs and bans of its own. High on the list of exports banned for sale to the “unfriendly” West was wood and forest products. Russia has paired these export bans with import tariffs (reportedly as high as 60% for Western countries, as opposed to 10% for friendly nations) on imported wood products (see below).
Russia’s reaction is somewhat a non sequitur, as buying Western imports is crippled both by actual bans and financial transaction restrictions – SWIFT system lockout – imposed by Western financial institutions. Equally, Western nations have banned the purchase of Russian products in an effort to choke off funding for Moscow’s war effort.
Also lost in all the geo-political fallout was the notable fact that Russia applied the anticipated log export ban beginning in January of 2022. The log ban had its biggest impact on neighboring China which according to Wood Resource Quarterly (WRQ) saw log exports drop “from 800,000 m3 in the 4Q/21 to only 80,000 m3 in the 1Q/22” with customs data showing no imports at all for March and April 2022.
But Moscow’s moves inadvertently illustrate just how crazily convoluted the global trade in forest products is.
For example, take Russia. It is no surprise, that Russia with vast expanses of forest land, is a major lumber exporter. According to Observatory of Economic Complexity (OEC) in 2020 Russia’s forest product exports hit $8.44 billion and ranked 4th in the world [but ranked first in lumber exports], while it imported $697 million in forest products and ranked 221st. More specifically, Russia is also ranked as the top exporter of softwood lumber, which is used in the construction industries. The OEC reports that the principal export markets for Russian lumber are China ($3.08 billion), Finland ($593 million), Uzbekistan ($429 million), Egypt ($386 million) and Japan ($369 million). On the other hand, most of the forest product imports came from Belarus ($244 million), China ($127 million), Germany ($58.8 million), Poland ($46.1 million) and Portugal ($35.2 million).
And it looks like Russia’s forest product exports grew substantially since the OEC numbers came out. WRQ in their 2021 estimates pegged Russia at over $12 billion in 2021, with imports of around $2 billion.
So, why is a major forest exporter like Russia importing close to $700 million worth of forest products in the first place? Simply put, Russia doesn’t manufacture a great deal of forest product for export. On the other hand, countries like China, Finland and Germany do manufacture a plethora of forest products ranging from paper and pulp to furniture, plywood, and flooring which are exported globally… and even to Russia.
Which was part of the motivation behind the Association of Furniture and Woodworking Enterprises of Russia request to the Russian government to establish tariffs up to 60% on imported furniture and other wood products from “unfriendly” countries while subjecting pro-Russian countries to a 10% duty. In a recent story, FurnitureToday attributed Russia-based wood analyst Lesprom as the source of the market information. Lesprom said this move would enable Russian manufacturers to compete with foreign manufacturers in the domestic market – earning an additional $813 million in revenue on a 10%-12% growth in revenue.
Of course, the irony is that China is among the “pro-Russian importers”. And while European nations like Germany, Finland and Poland have had some market penetration into Russia before the advent of hostilities, Beijing’s geo-political position vis-a-vis the Ukraine War, as Moscow’s most necessary friend, opens the door for a potential increase in imports, such as manufactured wood products and items like furniture from the factory-nation. The drop in housing construction in China and a slowing GDP reducing domestic demand, historically has triggered an increase in Chinese exports to bolster the economy. However, given China’s problems with the US (and the West in general), resource laden but monetarily challenged, Russia becomes an easier, albeit much smaller, export alternative.
Shortly after the invasion Western paper producers and wood manufacturers largely halted operations with Russia. This step came with the dropping of certification by the FSC and PEFC, on March 2nd which labeled Russian and Belarus (a major processor of Russian lumber) as “conflict timber”. The labeling is critical to the sale of lumber and lumber products to overseas markets. The removal means that the timber cannot be used in manufacturing of “certified” products such as lumber, plywood, pulp, and paper for sale in the global marketplace.
Under the de-certification rules lumber that was headed from forest to sawmill and for which certification had already been applied could be placed on the market while lumber in storage “even outside the two countries [Belarus and Russia]” for which no certification had been applied is considered “conflict lumber.”
This has an enormous impact on how the global wood and wood product markets will function going forward – or at least until Russia is welcomed back into the global trading community. The removal of Russia and Belarus from global markets will clearly have a domino effect on wood product sourcing.
For example, Europe imported around 8.5 million cu/m of softwood from Belarus, Russia, and Ukraine in 2021, roughly 10% of total demand, according to WRI figures. So, the question becomes how will European lumber manufacturers “replace” the 8.5 million cu/m of wood? Certainly, some of the deficit will be sourced to Scandinavia, which already has an existing supply chain to Europe. But will this bump out Scandinavian exports to other markets like the U.S? North American exports might also contribute to Europe but again what other markets will be bumped in the process and at what cost?
For example, Vietnam is rapidly developing a robust wood products sector, will it become a bigger player with Russia on the sidelines?
Perhaps of bigger concern is China. With so much of the imported wood being used in the manufacturing of export products such as furniture, flooring, paper and paper products and plywood, how will China replace Russian sourcing? No doubt, China will look to known suppliers like Canada, New Zealand and Latin American and African sourcing. And for purely domestic use, Chinese processors might simply ignore the sanctions and labeling issues and use alternative payment systems.
But a larger issue looming is how will Western custom officials handle the enforcement of potentially Russian or Belarussian sourced lumber used in manufactured wood products by third or fourth parties? The use of Russian birch in flooring and other specialty products will force global manufacturers to find alternatives to keep up with demand. And there’s little doubt the “conflict lumber” issue is going to complicate the outlook for global lumber trade for years to come