Can Russian Timber Exports Survive the Double Hit of Sanctions and Costs?

Two Years of Sanctions: Russia's Timber Industry Between a Rock and a Hard Place

It has been two years since the introduction of anti-Russian sanctions, and their effects are now visible in all sectors of the economy. But, as always, not only large industrial giants or oil corporations are taking the hit. The timber industry, long regarded as the backbone of the northern economy and a source of inexhaustible natural wealth, is facing challenges that no one was prepared for. Export restrictions, skyrocketing transportation costs, and continuous changes in supply chains have turned the work of timber producers into a tightrope walk.

One would assume that under sanction pressure, the domestic market could become a saving grace for Russia's timber industry. However, the problem lies in the fact that the capacity of the domestic market is not unlimited. Sooner or later, domestic demand will be saturated, and if new solutions are not found for entering foreign markets, the entire sector risks plunging into stagnation. The export of wood, pellets, sawn timber, and other forest products is not just an option for development—it is a vital necessity for the industry.

While Western markets are becoming increasingly inaccessible, Asia, and particularly China, remains one of the few regions where Russia can not only hold its ground but also grow. But even here, the situation is far from simple. Expensive logistics, opaque procedures for obtaining state subsidies, and a critical shortage of investments put even these prospects at risk. This is the reality faced by timber producers today.

Timber Exports: How Transportation Costs Are Crippling Russian Industry

The situation in the timber industry of the Northwestern Federal District (NWFD) has come under close scrutiny. Transportation costs have suddenly become one of the key factors determining the profitability of exporting timber. At regional enterprises, the transport share of product costs for exports has exceeded 40%. Strangely, the price of timber itself remains stable, but logistics is literally “eating away” the margin.

Export or Stagnation: The Internal Drama of the Timber Sector

The 30% drop in exports in 2023 has become a serious challenge for the entire timber industry. The modest 1% increase in production in the forestry sector during the same period is hardly enough to compensate for the decline in external markets. Most of this growth was driven by an increase in domestic demand. This is a temporary safety cushion, but how long can it sustain the industry?

"We cannot rely solely on domestic markets. They will eventually reach saturation," said Oleg Bocharov, Deputy Minister of Industry and Trade. By 2024-2025, the approach to exports will need to be fundamentally revised if we are to remain relevant in the global economy.

Logistical Traps: Pellets Held Hostage by High Costs

One of the most affected categories of exported products has been pellets—wood granules. Under current conditions, their transportation has become almost unprofitable. For example, delivering Arkhangelsk pellets to South Korea costs $120 per ton, while the price of the pellets themselves is only $110. This means producers are operating at a loss, literally losing money on every contract.

What's next? Timber producers are calling for the preservation of transport subsidies, at least to offset logistics expenses.

“We are ready to work at cost price, but without support, we simply won’t survive,” says Vladimir Butorin, head of a large holding company in Arkhangelsk region.

High Rates and the 'Survival Race'

The issue of subsidizing transportation costs intensified in 2023. Obtaining government aid became reminiscent of a video game competition—whoever pressed the button first won. This year, within 65 seconds of the program launch, all funds had been distributed, leaving many market participants without the much-needed assistance.

“This is humiliating for business,” say representatives of the timber industry, recounting how their specialists worked through the night to prepare documents in time for the program’s opening. The system failed under the load, and many companies were unable to secure subsidies due to technical failures.

In response, the government promised that by the third quarter of 2024, the subsidy allocation process will be made fairer, based on applications and export plans rather than the “first come, first served” principle.

The China Factor: Eastern Horizons for Export

One of the few positive pieces of news is China’s growing interest in Russian timber. It is no coincidence that China selected Arkhangelsk as a key point for transporting goods via the Northern Sea Route and deeper into Russia. Chinese partners are ready to offer significant discounts on return shipments to avoid empty backhaul and transport Russian timber.

However, the problem remains that on the trading scales of “China–Pomorye,” the heavier weights still sit on the side of imports. Russia must work more actively on developing return shipments in order not to lose this crucial market.

Oh, That Utilization Fee: Even in Timber, It's a Headache!

In addition to transportation problems, timber producers are calling for the temporary cancellation of the utilization fee on logging equipment. This would allow companies to update their production capacities, avoiding excessive costs on imported equipment. Otherwise, the shortage of machinery could lead to further supply disruptions and lower profitability across the entire value chain.

State support remains a key factor in the survival of the timber sector in these new economic conditions. Without subsidies and a rethinking of the export strategy, the industry risks losing its competitiveness on the global stage.

Without Timber, Without a Future: Europe on the Brink of Shortages

After two years of sanction pressure, it’s safe to say that the global market, particularly Europe, is finding it increasingly difficult to operate without Russian timber. In their rush to reject all things Russian, many Western countries overplayed their hand with self-imposed restrictions, and now the consequences of those decisions are becoming more apparent. As European companies scramble to find alternatives to Russian pellets and sawn timber, timber market prices continue to climb as if conspiring to show that sanctions not only failed to solve the problem—they made it nearly insoluble.

It’s almost ironic that the very countries that imposed sanctions with confidence in their energy independence are now grappling with rising heating costs and raw material shortages. European analysts are nervously calculating potential losses, while Russian timber producers are slowly but surely redirecting logistics to eastern markets. Pellets are heading to China, timber to Asia, and Europe, with its usual pride, continues to avoid admitting that without Russian timber, its markets face serious problems.

Of course, there is an alternative for Europeans—expensive timber imports from Canada, the US, or South America. But their delivery and costs, against the backdrop of rising transport expenses, are merely a “sweet bonus” to an already existing energy crisis. One can only wonder when Brussels’ policies will finally collide with economic reality.

Meanwhile, Russia, with one of the largest timber reserves in the world, remains a key player in this market. Europe may continue to ignore this fact as much as it likes, but the choice between “principles” and economic benefit is becoming increasingly obvious. And who knows—maybe in a few years we’ll see EU countries enthusiastically discussing the resumption of Russian timber imports, no longer loudly proclaiming their independence.