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Timber Industry 1991-2000
As the total forested area in Russia amounts to 1.1 billion hectares, or 80 billion cubic meters of timber, a sizable timber industry developed in the country.
This is more than 24% of the world's forest reserves. In contrast to the rest of the world, the area under forest in Russia is slowly increasing rather than decreasing. Russia can produce up to 650 million cubic meters of timber per year without environmental damage. However, in reality, it produces and processes no more than 130 million cubic meters.
About 1.4 million people work in the industry. Its annual sales volumes exceed $4.5 billion, which is 2.9% of the gross domestic product (GDP) of the Russian Federation. Up to 85% of production is geared to export: round timber accounts for 33% of exports; lumber, for 19%; and the remainder is comprised of cardboard, pulp, and paper. The industry's foreign deliveries of more than $3.5 billion per year hold fifth place as a source of income after gas, oil, and ferrous and nonferrous metals. The industry accounts for about 5% of Russia' exports.
Timber industry production has decreased 54% compared to 1988, the peak year for the economy of the USSR. The average age of equipment in the industry is 25 years. No more than 10% of the capacity of pulp and paper mills in Russia conforms to world standards, and up to 40% of it needs to be replaced immediately. However, stable demand for Russian timber and pulp in Europe and Asia coupled with an unlimited inventory of raw materials makes business in the industry extremely promising.
HISTORY: 1991-2001
From the very start of capitalism in Russia, the forests in Siberia and the Archangelsk region, as well as in other parts of Russia, interested would-be capitalists no less than oil, gas, and aluminum. However, the timber industry's first decade passed surprisingly quietly: it very quickly became clear that the industry was too conservative to allow investors to make fast money. Trees grow slowly, and only entrepreneurs who are prepared to work without visible profits for at least five years succeed in the industry.
1991
The history of the timber industry began when the Russian Timber Exchange was established at the beginning of the year. Soon there also appeared the Timber Exchange and other specialized and unspecialized exchanges dealing in timber. None of them were successful and ended up trading export quotas for timber and lumber rather than timber itself, and after liberalization of exports, peacefully passed away.
The Russian Timber Merchants' Association, which advocated a market-oriented approach to development of the industry, vigorously developed its business. The Association had close ties with AO Eksportles, and its only real competitor was the Roslesprom company.
In 1991, fortunes were made in the illegal and quasi-legal export of timber and were immediately eaten up by inflation. Meanwhile, managers of large enterprises dreamed of Western credits that would allow them to buy Western equipment to carry out technical modernization of the industry. The majority of pulp and paper mills and timber processing combines had been technically upgraded in the 1970s, with the exception of the relatively new Vyborg Pulp and Paper Combine. However, the Vyborg mill has not become a flagship of the new economy either.
1992
The majority of the industry's large enterprises were established in 1992 as open join-stock companies (OAO) with state participation, for example, Segezhabumprom and the Arkhangelsk Pulp and Paper Mill.
In early 1992, ZAO (closed joint-stock company) Ilim Pulp Enterprise was established, initially as an export company. Within nine years, the company founded by entrepreneur Zakhar Smushkin and four of his colleagues became the largest company in the industry.
In mid-1992, a sharp increase in production (5-10% per month) was recorded in the logging industry, which lasted until the middle of 1993. At the same time, production volumes in the timber processing and wood chemistry industries started falling by 20% a year; the fall ended at the end of 1994.
In July, the Hermes concern, which had participated in the privatization of a number of small enterprises in Siberia, became one of the first private structures in the timber industry. However, in Tyumen region, the assets of the Tyumenlesprom company, which interested Hermes, were snapped up by the Russian Timber Merchants' Association with the assistance of the Forestry Committee of the Russian Federation; as a result, Tyumenlesprom was involved in litigation with them for more than two years.
In November, the EU imposed duties on imports of Russian wood products, namely, plywood and chipboard. In December, the State Customs Committee sharply decreased customs duties on timber exports. Eighty out of 132 existing special exporters received timber operation licenses. This decision led to the creation of a number of smaller enterprises in the logging sector. Most of these companies have survived to this day: in traditional forest regions, such as Karelia, the Komi Republic, and Arkhangelsk and Irkutsk regions, logging enterprises prevail among medium-sized business.
In December, the Timber Merchants' Union of Russia was founded; David Lipman, the chairman of the governing board of the Russian Timber Merchants' Association, was elected president of the union.
At the end of the year, a number of major timber industry players, such as the Eksportles foreign economic organization and the Russian Timber Merchants' concern, were transformed into joint-stock companies, with the state losing its shares in their capital. For example, in the process of creating AO Russian Timber Merchants on the basis of the existing concern and the Department of the Forest and Pulp and Paper Industries of the Ministry of Economics, the Ministry of Property got only 23% of the shares; the remainder went to the capital of 63 of the still-unprivatized forest-industry enterprises. Igor Sankin, the director of the Department, was elected president of the new company.
1993
At the end of 1993, the state corporation Roskontrakt, which had been established at the end of 1992, captured a large part of the state timber export contracts. At the same time, the Supreme Soviet implemented a forest regeneration tax of 20% of turnover. The Union of Russian Timber Merchants, with the support of the Russian Union of Industrialists and Entrepreneurs (RSPP), managed to get the parliament to lower the tax rate to 5%, but excessive taxation forced many logging companies into the shadows.
In April, privatization began of the first logging enterprises of the timber complex of the Far East, the largest of which was AO Nakhodkales. At this stage, privatization proceeded unobtrusively and formed a stratum of small owners in the timber industry who determined the market situation over a period of several years.
By spring, the situation on the timber market had worsened. Svetlaya company, a large Russian-Korean joint venture in the Primorye region, with the participation of Hyundai, was one of the first to suffer from the intensifying competitive struggle when unknown criminals started a fire at it. Within several months, the joint venture closed.
In July, Vice-Premier Oleg Lobov acted as one of the first industry lobbyists in the government. During a visit to Germany, he made an unexpected announcement: "In future, Russian forests must become a no less powerful generator of budget revenues than oil." He invited German manufacturers to set up joint timber-processing ventures in Russia. The outcome of this visit was the participation of a number of German firms, including the Conrad Jacobson Company, in the capital of a number of pulp and paper mills in Northwest Russia.
In the same month, the Presidium of the Supreme Soviet of the Russian Federation gave the state company Roslesprom a month to prepare a draft resolution on classifying logging enterprises and enterprises of the timber, pulp and paper, and woodworking industries as exclusively federal property. Thus, Roslesprom, headed by Miron Tatsyun, took the first step in the struggle for industry assets.
1994
In January, Roslesprom, with the support of Oleg Lobov, began a campaign to reorganize the entire management structure of the industry. By presidential decree, Roslesprom became the general distributor of export quotas for timber, the manager of a number of forest-industry holdings, and the coordinator of the distribution of state funds aimed at supporting the industry. Roslesprom's first target was Eksportles, which had close ties to Russian Timber Merchants and managed state property in joint forest-industry ventures with Western companies that had been set up in Soviet times.
In the middle of 1994, the holding company Ust-Ilim Timber Processing Combine (Ust-Ilim LPK) was created. Its charter capital was formed of state blocks of shares of the combine itself and of local logging enterprises.
On October 4, at an investment tender, the Herlitz concern acquired 20% of the shares of AO Volga (Balakhna Pulp and Paper Combine) at face value, with an offer of a three-year, $12.1-million investment program. Later, the concern increased its package to 48%, which cost it another $45 million. Boris Nemtsov, the reform-minded governor of Nizny Novgorod region, was said to have pushed for Volga's privatization; he had taken on the task of making the combine a "flagship of the market economy."
In summer and fall, Roslesprom tried to reinstate state, that is, its own, control over the timber industry. It used all possible means, including the authority of law enforcement agencies, to put pressure on all independent exporters. At the time, Miron Tatsyun told Kommersant that "in effect, we're talking about the almost complete return of timber exports to state regulation."
AO Kondopoga, the second-largest pulp and paper mill in Karelia, was privatized. This was the most peaceful privatization in the history of the industry: 80% of the shares went to the labor collective, and thanks to good relations with the Karelian government, Vitaly Federmesser, in spite of his reputation as a "red director", retained his control over the combine, and has remained the general director to this day, having become one of the region's most authoritative businessmen.
In mid-1994, there was an acute systemic crisis in the industry, this time unconnected with the export situation. The Arkhangelsk, Solombalsky, Kama, and Neman pulp and paper mills and AO Onega were on the verge of bankruptcy.
The Arkhangelsk Mill underwent restructuring, which resulted in the creation of 11 independent subsidiaries of the company.
In November, Roslesprom lobbied for a presidential decree under which state property (belonging to Eksportles) in foreign companies was transferred to Roslesprom. Eksportles' traders moved to Roseksportles, a subsidiary of Roslesprom. Miron Tatsyun became the number-one man in the industry.
In December, Sberbank announced that it considered two industries-food and timber processing-the priority industries for its investments in 1995. However, large-scale private capital, both Russian and Western, outstripped Sberbank's investments in these industries.
1995
At the beginning of 1995, Eksportles capitulated in the war with Roslesprom and signed an agreement on cooperation with Miron Tatsyun's company.
On January 11, the regional antimonopoly department gave Herlitz permission to acquire more than 35% of the shares of AO Volga. A controlling block of the pulp and paper mill's shares was transferred to foreign hands, and the mill was reoriented to newsprint exports outside Russia.
In February, the State Committee for the Management of State Property (Goskomimushchestvo, or GKI) made the decision to turn the Bratsk Timber Processing Combine (Bratsk LPK) into a holding that was supposed to include 17 forest-industry enterprise owners in Irkutsk region. The Russian-French joint trading venture Continental Invest, which owned 15% of the shares in the Bratsk combine, seized on this decision to acquire a leading role in the holding. However, its opponents, the Orimi concern of St. Petersburg and Western banks, which controlled more than 35% of the shares, won the fight and Continental Invest had to turn its attention to the nearby Ust-Ilim Timber Processing Combine. It gained control over the enterprise only in 1999.
In March, the state parcel of shares in the Vyborg Pulp and Paper Combine was put up for investment tender in March, but Roslesprom succeeded in blocking the tender for the shares. In response, Alliance Cellulose, which owned 9% of the Vyborg mill's shares, used a "loophole" in the legislation and bought a controlling block of shares at face value. Meanwhile, at the mill that GKI and Roslesprom were so fiercely dividing, production came to a halt. Thus began the scandal over the ownership of the Vyborg mill, which ended only in 1999.
In May, Roslesprom began a fight with Herlitz for the Balakhna Pulp and Paper Combine. Miron Tatsyun sent a letter to GKI and the Security Council stating that in 1991, when the company's charter capital was being formed, equipment worth $145 million had not been included in the property assessment. Roslesprom requested that the government increase Volga's capital stock and transfer the second issue to state control, i.e., to Roslesprom. GKI rejected this proposal.
In May, there was a boom on the Russian stock market. The price of shares of major timber processing enterprises, including the Syktyvkar and Bratsk timber processing combines and the Archangelsk Pulp and Paper Combine, increased by 300-700% and were actively bought up.
At the end of May, the Russian Fund for Federal Property (RFFI) put up for sale the first large block of share of a major wood chemistry plant at Ust-Ilim. Fifty-one percent of the shares were offered for sale, which were bought by MENATEP Bank.
On May 30, an agreement was signed in Berlin on providing foreign investments and credits of $150 million to AO Volga (the Balakhna Pulp and Paper Combine). This was the beginning of a three-year program for Volga conducted by international financial organizations under the patronage of Governor Boris Nemtsov. However, the program has not brought prosperity to Volga.
In July, a banking consortium proposed to put out shares of companies such the Bratsk Timber Processing Combine and the Archangelsk and Solombalsky pulp and paper mills for credit-for-loans auctions.
Aleksandr Smolensky, the head of The Capital City Savings Bank (SBS) decided to revive the nearly moribund Eksportles. In July, Eksportles signed an agreement with SBS on an exchange of capital shares for investments of approximately $1 billion. However, he was not able to revive Eksportles with bank funds.
On August 8, Lesprombank head Pavel Ratanin was murdered.
In September, a major privatization scandal broke out on the timber market. Yury Spiridonov, governor of the Komi Republic, cancelled an auction for 15% of the shares of the Syktyvkar Pulp and Paper Combine. MENATEP and Ilim Pulp had been favored to win (the governor called them "speculative investors"), in which case the company that managed the mill, a joint venture of the governments of the Komi Republic and Moscow called Kommos, would have lost control over the mill. Spiridonov deferred the auction for three years.
In October, the Archangelsk mill filed suit against GKI, which on December 7 put out a block of its shares for a credit-for-loans auction instead of selling it at an investment tender. The court ruled the credit-for-loans auction invalid. The Solombalsky and Bratsk mills later followed its example, and in December, three timber industry enterprises supported by Roslesprom managed to avoid being sold at credit-for loans auctions. None of the other 26 enterprises "pledged" to private owners against their credits to the government were able to repeat the success of the Archangelsk mill.
By winter, the stock market boom over shares of pulp and paper mills and timber processing combines had ended and has not been repeated since.
In December, there was a large-scale price slump on world pulp markets. Finnish timber merchants stopped buying Russian wood products. The industry entered a protracted crisis that ended only in 1999.
1996
In January, Roslesprom and Eximbank USA announced their readiness to sign an agreement to lend the Russian management monopolist $1 billion to rebuild timber industry enterprises in Russia. This was the peak moment in Roslesprom's history: if it had obtained the loans, the industry would have been monopolized. Roslesprom did not get the loans, and Miron Tatsyun left for a career in the government as head of the State Committee for the Timber industry.
At the beginning of the year, Alliance Cellulose shut down the Vyborg mill. The 87% of the shares belonging to the American investors were returned to the Ministry of Property of Leningrad region.
In February, GKI tried to start a new wave of privatization in the timber industry, further undermining the position of Roslesprom, which managed, but did not own, the country's largest logging enterprises. OAO Severoleseksport was put up for sale.
In early April, Roslesprom blocked the sale of Severoleseksport, which was under its control; instead of privatization, it proposed to create the Severoles financial and industrial group, which was supposed to include the Northern Cellulose holding, the Archangelsk Pulp and Paper Combine, the state companies Konoshales and Severoles, the Onega Lumber Combine, a number of lumber mills, Lesobank (Arkhangelsk), and the Timber Leasing company. Setting up financial and industrial groups became trendy in the industry, although not a single one of them was successful.
The Archangelsk Pulp and Paper Combine, which remained under the control of the labor collective, was on the verge of bankruptcy. A buy-up of Archangelsk stocks was in progress, which involved companies close to Vladimir Krupchak, the future head of the combine.
In summer, the crisis in the industry reached wood chemistry enterprises. Operations at the Ust-Ilim and Bratsk mills were shut down for several months. Speaking before the Duma in August, Miron Tatsyun said that the industry needed immediate state support. From then on, his career declined, as his two years of efforts to revive the timber industry with state support did not bring any benefits to the state.
The American company Stratton Group, which was first half-owned and since 1997 wholly owned by the Swedish concern AssiDoman, bought 57.3% of the shares of Segezhabumprom.
In the fall, the government discussed the possibility of turning Roslesprom into a corporation. At that time, the covert struggle over this state company reached its peak; within six months, compromising material about Miron Tatsyun and Valery Kazikaev, the head of Rosleseksport, was splashed all over the newspapers.
In December, the Bratsk combine announced the creation of the financial and industrial group Bratsk Wood Chemical Company with the participation of Roslesprom, the National Reserve Bank, the Kommunar Paperboard and Polygraphic Combine, the Baikal Pulp and Paper Combine, and a number of specialized enterprises. The project fell through; the Orimi concern ended strategic investments in timber processing.
At the end of 1996, the striking union at the Ust-Ilim mill brought production to a standstill. Ust-Ilim entered a depression, a situation that only changed in 1999.
1997
On January 28, the crisis reached the Volga Pulp and Paper Combine. Managers from Herlitz shut down production, arguing that prices for AO Volga's paper did not cover production costs. Herlitz advertised the sale of its share in the mill in Western media. The only companies to show an interest were the Norwegian company Norske Skog and Continental Invest. However, no deal was made; a real buyer for the factory was found only in 2001.
In March, the Prosecutor General's Office of the Russian Federation initiated a criminal case against the management of Roslesprom and Roseksportles on charges of embezzling budgetary funds. The case dragged on until 1999, but never made it to court. Nevertheless, it ended the efforts to consolidate the industry under the state flag. The career of businessman Valery Kazikaev was virtually finished, but Miron Tatsyun continued his in government departments. The next attempt to consolidate the industry was made only after four years, this time by private capital.
In March, the Swedish state concern AssiDoman, the owner of 57% of the shares of AO Segezhabumprom, stopped production at the combine, citing as the main reason the "foot dragging" by the Karelian and Russian governments on granting Segezhabumprom reductions in debt payments to the Pension Fund and the budget. Without these reductions, the European Bank for Reconstruction and Development and the International Finance Corporation refused to provide Segezhabumprom with investment credits worth $150 million.
In April, the Archangelsk mill held talks on completing privatization and restructuring of the business. As a result, a large block of shares was concentrated in Vladimir Krupchak's Titan Group and a significant portion was in the hands of Western, mostly German, investors.
The same month, the crisis also reached the Bratsk combine, the largest Russian pulp producer. The company's management decided to lay off a third of the workers and shut down part of its production.
In April, the Rosprom Group controlled by MENATEP signed an agreement with the Continental Invest Group headed by Nikolai Makarov on managing the Ust-Ilim combine. At that point, there was no talk of Makarov getting a share in the ownership of Ust-Ilim. The company needed crisis management and an agreement with Ust-Ilim's union, which adhered to aggressively communist views on the combine's development.
On July 15, the Karelian government threatened AssiDoman with the introduction of outside management at Segezhabumprom. The factory, which had not operated since March, restarted production but not to full capacity. Meanwhile, it was discovered that AssiDoman's European divisions had taken over a significant part of Segezhabumprom's export deliveries.
In November, Nimonor Investments Ltd., organized by a group of private Western investors, including Nina Wang, a co-owner of a Hong Kong construction corporation, bought 87% of the shares of the Vyborg Pulp and Paper Combine for $32 million from the Leningrad Region State Property Management Committee.
In December, the management of AssiDoman finally ended operations at Segezhabumprom, shut down the production facilities, and quit the combine en masse. The Swedes later sold their block of shares in the mill to the Segezha Management Company created by 30 of Segezhabumprom's Russian managers.
1998
In January, Nimonor announced plans to cut staff at the Vyborg Pulp and Paper Combine by 1000 (about 40%). In response, the mill's union committee organized workers' brigades headed by Osip Kikibush, the combine's head of security. Starting on February 1, the brigades blocked access to the combine by Nimonor representatives. Nimonor claimed that instead of producing paper, the enterprise was involved in illegal vodka bottling. The labor collective demanded that Leningrad Region State Property Management Committee abrogate the agreement with Nimonor on the sale of the combine.
At the beginning of the year, Titan reorganized the organizational management structure at the Archangelsk Pulp and Paper Combine. Two open joint-stock companies were formed: Archangelsk Pulp and Paper Combine, which was responsible for production, and Archangelsk Paper Combine (Arkhbum), whose functions included supplying the mill with raw materials and selling the finished products.
In June, representatives of the Vyborg Pulp and Paper Company set up by Nimonor to manage the Vyborg Pulp and Paper Combine, made a rather non-traditional attempt to storm the blockaded mill. A helicopter rented by Nimonor carrying guards and company managers landed on the mill grounds. Vyborg's workers successfully beat off the attack and the Union declared the mill a "people's enterprise," registering it as such in the Registration Office.
In August, the Swedish company Tetra Laval sold a controlling block of shares of the Svetogorsk Pulp and Paper Combine for $300 million to the world's largest paper manufacturer, the American corporation International Paper. Tetra Laval kept 20% of the shares and production of wrapping paper at the mill for itself.
In September, the Court of Arbitration of Karelia brought in outside management to OAO Segezhabumprom; Vasily Preminin was appointed outside administrator.
In October, the owners of OAO Ust-Ilim Timber Processing Combine, MENATEP Bank and Mezhkombank, reregistered the combine for third time. This time, only 4 of the 20 remaining Ust-Ilim plants were included in the combine: the rest were unprofitable. Forty-nine percent of the shares in the newly founded AO Production Association Ust-Ilim Timber Processing Complex were handed over to creditors against debt repayment, and 51% were transferred to ZAO Industrial and Financial Alliance. Management of the new company was turned over to two management companies, Continental Invest and Mezhkominvest. Later, Mezhkominvest left the business, and Mezhkombank sold its shares to Continental Invest, thus giving Nikolai Makarov control of the combine.
1999
In early 1999, the production assets of Segezhabumprom were separated into OAO Segezha Pulp and Paper Combine which was put under the control of Segezhabumprom and Segezha Management Company. Vasily Preminin became its general director.
In April, Ilim Pulp Enterprise acquired the state share package (23.7% ) of Bratsk Complex Holding at an auction and soon increased its block of shares to 75%. The former owners, who included the Orimi concern, did not have faith in the depressed enterprise and sold their stocks with almost no bidding. Some of Bratsk Complex Holding's assets were transferred to OAO Pulp and Cardboard Combine.
In May, Nimonor resold its block of shares in the Vyborg Pulp and Paper Combine to the British company Alcem UK Ltd., one of whose co-owners was the prominent St. Petersburg entrepreneur Aleksandr Sabadash. Mill representatives lead by the "people's director," Aleksandr Vantorin, refused to allow the new investor onto combine property.
On July 9, Aleksandr Sabadash, accompanied by a bailiff, the police, and the guard service of ZAO AFB-2, which he controlled, tried to seize power at the Vyborg mill. Sabadash was beaten up by the workers, and the media began to talk about the "revolutionary actions" of the Vyborg mill workers, who thus threw into doubt the possibility of defending private property in Russia.
In July, MENATEP put its assets in the Ust-Ilim combine up for sale. Towards 2000, they were acquired by Continental Invest and Dmitry Bosov's company Energoprom.
In summer, the Svetogorsk Pulp and Paper Combine began to produce office paper under the Xerox Office trademark. Xerox had been trying to set up production of its products in Russia at various mills since 1989.
In August, unknown persons kidnapped Evgeny Drachev, director of Russia's largest woodworking combine, Solombalsky LDK, who had previously worked as head of the Department of the Timber industry Complex in Archangelsk region and as vice-governor. The crime was not solved.
On October 13, bailiffs and the Typhoon division of the Ministry of the Interior, which specialized in suppressing prison riots, tried to take the Vyborg mill by storm. However, the "people's enterprise" put up resistance to them. Aleksandr Vantorin flew to Moscow for a meeting with Prime Minister Vladimir Putin (the meeting did not take place), and by order of Deputy Minister of Justice Eduard Renov, the process of returning the enterprise to its owners was halted.
2000
In early January, Aleksandr Sabadash, in true capitalist style, resolved the problem at Vyborg mill with money. Upon reaching an agreement with the leadership of the union that had seized the mill, he organized the Vyborg Cellulose Company, which hired the striking, and therefore unpaid, mill workers and paid them each a 1000-ruble advance. Money turned out to be more convincing than the procommunist propaganda of the organizers of the "people's enterprise."
On January 6, the government included OAO Baikal Pulp and Paper Combine on the list of corporations that were strategically valuable for the economy: by a Cabinet order, 48.99% of the combine's shares would remain unprivatized. Information once again appeared about a development project for modernizing the Baikal plant, which environmental organizations had been demanding since the end of the 1980s, as the plant was seriously polluting Lake Baikal. However, the modernization of Russia's most environmentally problematic pulp and paper mill has still not received final approval.
Since the beginning of 2000, all of the country's major pulp and paper and timber processing combines have started returning to the idea of creating holdings, which besides processing enterprises would include logging and forest utilization companies. When at the end of 1999 the situation in the export market and domestic packaging market improved, the combines received the resources to carry out substantial modernization.
In May, OAO Segezhabumprom and its creditors signed a settlement that was approved by the Court of Arbitration of Karelia. The outside management and bankruptcy proceedings were terminated.
At the end of 2000, the problem of timber utilization that was uncertified by international standards arose among Russian timber exporters. A number of exporters in Archangelsk region had been forced to deliver timber to Egypt instead of to Great Britain with a double loss of profit as British customers refused to buy uncertified timber. A little later, AO Volga's largest buyer of newsprint, the Axel Springer media concern, also demanded certified deliveries. As a result, operators in the Northwest were forced to begin expensive certification procedures that would allow them to remain on the world market; among them were LEMO Concern (St. Petersburg), AO Arkhbum, AO Volga, Vologdalesprom, and Ilim Pulp.
In 2000, general director Vitaly Federmesser ordered a modern organ to be purchased in Germany for AO Kondopoga's renovated Palace of Culture. Federmesser, who for a decade protected the mill from any attempt at a hostile takeover, without ever shutting it down whatever the economic conditions, was decorated with the country's highest state order: "For Service to the Fatherland" of the second degree (the first degree is reserved for heads of state).
2001
In spring 2002, the Papyrus association headed by Ilyaz Muslimov, which was already operating at the Kama Pulp and Paper Combine and owned AO Visherabumprom, tried to get control over the Perm Pulp and Paper Combine. The redistribution of property at the mill is still not finished.
On March 21, Herlitz announced that it was prepared to leave AO Volga (the Balakhna Pulp and Paper Combine). Alpha-Group and Ilim Pulp were contenders for control over the company. Alfa won.
In April, the Ilim Pulp group dismissed Georgy Trifonov from the management of AO Pulp and Cardboard Combine in Bratsk, although he remained general director of Bratsk Complex Holding. It was assumed that Trifonov would leave to become active in politics.
In June, OAO Krasnoyarsk Pulp and Paper Combine was declared bankrupt with the introduction of outside management for one year. The fight with the creditors for the mill muddled along to the end of 2001 when representatives of Alfa Group gained control over it. However, the process of redistribution of property rights at the combine is still not complete.
At the beginning of summer, the Continental Invest group began informal talks on the sale of shares of the Ust-Ilim combine to the Ilim Pulp group, which displeased Ust-Ilim's co-owners from the Energoprom group. During the dispute, Energoprom was banned from sales of Ust-Ilim's products.
On August 21, representatives of the Ministry of Industry and Science announced the opportunity to privatize the state shareholdings (49% of the shares) in AO Baikal Pulp and Paper Combine. According to Kommersant's information, the privatization was lobbied by structures close to the Sibal (Siberian Aluminum) investment and industrial group. The reason for such an interest remains unclear, as it has no forest-industry assets.
On August 27, on the initiative of the mayor of Ust-Ilimsk, Sergei Doroshek, a board of directors was set up at the Ust-Ilim combine, which removed Continental Invest subsidiary OOO Continental International from the control of the parent company and dismissed Nikolai Makarov from the combine's management. The general director of Energoprom, Maksim Avdeev, took his place. The takeover was accomplished with the help of Continental International's general director, Nikolai Ilyunin, who arrived in Ust-Ilimsk in a chartered plane with the Energoprom team.
On September 25, Continental Invest regained control over the Ust-Ilim combine with the help of a team from Sibal and began negotiations with three potential buyers of its shares: Sibal, Energoprom, and Ilim Pulp. As a result, Nikolai Makarov signed two contracts, with Sibal structures and Ilim Pulp, for the sale of his share in the Industrial and Financial Alliance company (the owner of 51% of Ust-Ilim's shares). However, management of the combine had already been taken over by a team led by Yakov Itskov, the former head of one of Sibal's divisions, Soyuzmetallresurs. Dmitry Bosov sold the Ust-Ilim combine shares belonging to Energoprom to structures close to Continental Invest and Sibal.
On December 21, a team with close connections to Sibal and Continental seized power at the Bratsk Timber Processing Combine with the help of bailiffs. The official reason was the restoration of Georgy Trifonov's authority; he claimed that it was necessary to unite the pulp and cardboard mill and Bratsk Complex Holding and redirected the sale of Bratsk Combine's products to structures close to Continental Invest. It is assumed that Sibal thus began to form its own holding in the timber industry and that this holding would become one of the largest in Russia instead of Ilim Pulp holding, which is threatened by a hostile takeover.
At the end of 2001, Arkhbum and the Arkhangelsk Pulp and Paper Mill made a strategic decision to join Ilim Pulp in exchange for 25% of its shares and the formation of a single company that would have a power comparable with that of Roslesprom as it was in 1995. However, the future of Ilim Pulp remains unknown. It is said that after the takeover of the Bratsk combine, Sibal and Continental Invest would attack the Kotlas Pulp and Paper combine.
On December 28, during negotiations with Zakhar Smushkin, the head of Ilim Pulp, Oleg Deripaska, Sibal's president, offered to sell a controlling block of Ust-Ilim shares. Thus, the takeover of the Ust-Ilim and Bratsk combines, which was seen as preparation for combining all the profitable assets in the timber industry under Sibal's management, turned out to be merely the presale preparation of Ust-Ilim combine.
Ilim Pulp accepted the terms of the deal, which would make it one of the largest players in the world pulp and paper market.
by Dmitry Butrin
PRESENT
Due to the abundance of forests in Russia, there has always been a sizable production of paper, pulp, and cardboard, a large part of which has always been exported. Thus, Russian pulp and paper combines have not only survived the harsh transition period, but have also gradually started to grow.
Free Loggers
Unlike other industries, in the timber industry, there is no economic necessity of building long production chains, in this case from logging saws to paper sellers. Even the first stage of production, i.e., logging, yields a product that is in demand on both the domestic and foreign markets, namely, round timber. The next processing stage varies. The timber can go to a sawmill (in the same logging enterprise or a large woodworking combine) and be turned into various building materials from boards to chipboard sheets, which are in demand on both the foreign and domestic markets. However, the greatest profit comes from wood processed in the wood-chemical and pulp and paper industries, whose end product, cellulose (pulp), is the raw material for textiles, chemicals, paper, and cardboard.
It might seem that the main battle among potential contenders for control of the industry should be fought at the level of raw material production, that is, logging enterprises, since their owners can easily control the situation at the next step in the production chain. However, a typical logging operation is relatively small (annual turnover of no more than $300 000-400 000) and does not differ fundamentally from a collective farm with all its problems.
Although unification of logging enterprises into relatively large holdings is possible, the concentration is happening in the last production chain - in wood-chemical and pulp and paper production, which is also the most economically effective one. Regional authorities sometimes manage to hold onto large enterprises at the privatization stage (for example, Vologdalesprom, Karellesprom, and Sakhalinlesprom). Recently, against a background of mass bankruptcies of logging enterprises, holdings have succeeded in becoming private structures, for example, LEMO Concern and the Orimi Group in Leningrad region. Nevertheless, for the most part, exports and deliveries of "raw" timber are virtually unstructured. In addition, this sphere is heavily criminalized, especially in regions where there is cheap railway or sea transport to the border, as in the Northwest and the European part of Russia.
Things are somewhat better in light timber processing, i.e., at woodworking combines and lumber mills. There are hardly any large enterprises here. Woodworking and lumber enterprises are usually either associated with pulp and paper and timber processing combines, for example, the Ust-Ilim Lumber Mill and Production Association Ust-Ilim Timber Processing Combine, or they stay within the boundaries of their region or district. Until recently, large investors were not very interested in them, as their annual turnover rarely exceeds $6-7 million and uniting them into larger structures is inefficient. In addition, problems with crime in these enterprises are also commonplace.
Timber Oligarchs
There are hardly any independent pulp and paper and timber processing enterprises in the pulp and paper industry worldwide. They began to merge as early as the 1970s, and today world-scale companies like the American company International Paper, the Finnish companies M-Real and Stora Enso, and the Swedish company SCA set the fashion in the industry. In Russia, this process of creating large timber processing corporations has only begun.
The largest Russian holding of this type is the St. Petersburg group Ilim Pulp Enterprise (IPE). The company was registered in April 1992 and was initially involved in the trading operations of the country's major timber processing and pulp and paper combines. As is obvious from the name, IPE's managers were mainly interested in the Ust-Ilim combine. However, it took IPE eight years to buy Ust-Ilim (see "History"). The first large enterprise that IPE acquired was the Kotlas Pulp and Paper Combine in 1994, followed by Bratsk Complex Holding. With yearly sales volumes of more than $1 billion, the IPE holding these days includes the St. Petersburg Paperboard and Polygraphic Combine, the Kommunar Paper and Cardboard Factory, trading companies, and even a small offset-paper factory in the Czech Republic, Plzenska Papirna. At present, the holding, whose top managers own large blocks of shares (the major shareholder is chairman of IPE's board of directors Zakhar Smushkin), now ranks among the world's 20 largest pulp producers.
In the early 1990s, the IPE group competed with another well-known trader, the Continental Invest group (the former French-Russian joint venture Continental Invest). Until recently, Continental Invest controlled the Ust-Ilim combine, the third-largest such combine in the country; and in summer 2001, when Nikolai Makarov, the head of the group, concluded a cooperation agreement with Oleg Deripaska's Sibal Investment and Industrial Group, it was expected that a holding equal to IPE would be created on the basis of Continental Invest. However, the project fell through. According to Kommersant's information, Makarov no longer has control over the largest enterprises in the industry and Sibal only owns AO Siberian Pulp and Paper Combine, a structure created on the basis of the Krasnoyarsk Pulp and Paper Combine.
A third large holding is OAO Archangelsk Pulp and Paper Combine, Russia's second-largest. The company has a rather complex structure. More than 40% of Archangelsk combine's shares belong to the Titan production group headed by Vladimir Krupchak; the remaining shares are controlled by portfolio investors and the combine's German engineering partners. Nevertheless, Krupchak has complete control of the situation at Archangelsk combine. Titan is the main owner of AO Arkhbum, which is the exclusive supplier of raw materials to the Arkhangel combine and the exclusive trader of its products. Titan was even able to include a number of packaging enterprises in Russia and the CIS and to build a modern Corrugated Container Factory in Podolsk near Moscow. However, in late 2001, Krupchak's team made decided to merge with IPE in the hopes of receiving at least 25% of IPE's shares.
Other attempts to form large timber processing companies in Russia have been on a smaller scale. Through the companies Alcem UK and Shanton International, the St. Petersburg group of Aleksei Shmargunenko and Aleksandr Sabadash (they control Volkhov Aluminum, the Glinozem Production Association, the Volgograd Aluminum Smelter, the AFB-2 distillery, and a number of other enterprises) is undertaking efforts to create a paper holding that already includes the Vyborg and Syas pulp and paper combines. The Papyrus association headed by Ilyas Muslimov, which is the major trader of the Ural Pulp and Paper Combine, created another holding that includes Visherabumprom and the Perm and Kama pulp and paper combines. However, the Kama combine, which is a supplier of raw materials to Goznak's Krasnokama Paper Factory, has already been put up for sale.
The company Alfa-Eco also intends to build a holding. So far, it has only managed to get control over the Balakhna Pulp and Paper Combine (OAO Volga, a major exporter of high-quality newsprint to Europe). However, Alfa-Eco is considering all proposals for buying new assets, particularly the Kama combine. Finally, the North-Western Timber Company has carried out a merger between the Neman Pulp and Paper Combine and the Kamennogorsk Offset-Paper Factory.
With the exception of IPE, no one else has succeeded in uniting the relatively modern superlarge pulp and paper combines. Contrary to worldwide practice, in Russia they exist independently and in the last two years have even been building their own miniholdings, which include producers of raw materials, i.e., logging enterprises. This has turned out to be an extraordinarily profitable pursuit. For example, the Balakhna combine, which only started buying up and restructuring logging enterprises at the end of 1999, was able to supply itself with about 55% of its raw materials by the middle of 2001.
Paper Capitalists
Privatization of the majority of large pulp and paper combines in the country occurred in 1993-1994, when the industry was experiencing hard times. At the time, the adverse situation on the world market made them uninteresting to both foreign timber concerns and frontline Russian investors. Therefore, in most cases labor collectives and management became the first owners of the combines.
Heads of combines who knew how to hold on to power still own them and often manage them just as well as foreign investors. Vitaly Federmesser, the general director of OAO Kondopoga, is classic example of a "red director". It is said that some time ago he personally ordered the free distribution of the newspaper Pionerskaya Pravda (Pioneer Truth), printed on superb Kondopoga paper, in the city of Kondopoga. At the same time, Kondopoga is one of the industry's most successful enterprises. Federmesser devised an original way to defend the combine against a possible takeover. He formed three companies owning a controlling block from the labor collective's shares: OOO Bumazhnik, Avangard, and Omega. Workers at the combine had the right of first refusal of the shares in these companies. In addition, 19.95% of the shares were sold to the German company Conrad Jacobson GmbH (which also owns a large block of shares in the Archangelsk combine) and 10% of the capital remained the property of the Karelian government. With all this, Kondopoga is still able to keep social amenities on its balance sheet, as well as invest a fair amount of money in them.
Thanks to successful work, the managers of Solikamskbumprom, the Tsepruss (Prussian Cellulose) Pulp and Paper Combine of Kaliningrad, and the Solombalsky and Baikal pulp and paper combines also retained control over their enterprises.
In 1995-1996, foreign investors were also interested in Russian pulp and paper combines, but there was no substantial influx of world timber giants into the Russian industry. Today, OAO Svetogorsk (Svetogorsk Pulp and Paper Combine) is the only large combine belonging to a foreign investor. Tetra Laval bought it in 1994 to produce packaging, then sold it in 1998 to the American company International Paper, keeping only 20% of the shares and wrapping paper production for itself. The Svetogorsk combine is right next door to export markets: the edge of the combine's plant management building on the Karelian Isthmus is right on the Russian-Finnish border, and some of the telephones in the building have Finnish numbers.
The Swedish company AssiDoman, another major player on the European market, was unable to hold on in Russia. After they bought 57% of the shares of OAO Segezhabumprom, the Swedes started to demand tax exemptions from the Karelian government; shut the combine down twice; brought it to a state of bankruptcy; and were finally forced to sell the shares to the Segezha Management Company, which was set up by 30 of the combine's Russian managers. As a result, the management company moved Segezhabumprom's assets to the newly created AO Segezha Pulp and Paper Combine and lifted the threat of bankruptcy by restructuring the combine's debts. Today, the combine is controlled by the managers led by Vasily Preminin, who was once Segezhabumprom's outside administrator.
The Syktyvkar Timber Processing Combine is still another example of foreign ownership of a major enterprise. Its story is the exact opposite of Segezhbumprom's. MENATEP and IPE were interested in it, but the governor of the Komi Republic wanted to transfer it to the control of Kommos, a joint venture of the Komi and Moscow governments. Its management was so unsuccessful, that the combine was sold to a number of little-known Austrian companies. Today, the firm Frantschach Aktiengesellschaft, owned by private Austrian citizens, is the largest shareholder of the Syktyvkar combine, which is run by a mixed Russian-Western management team.
Although all of the large pulp and paper combines are generally self-sufficient, each of them could potentially build its own holding. Besides the successful combines, there are many smaller pulp, paper, and cardboard plants in Russia that are nearly ruined. By gathering logging enterprises into one holding, the owners of pulp and paper combines will sooner or later start redistributing property in the areas of woodworking, log and lumber exports, and consumer goods production (from furniture to viscose fiber). New combines might be established. Russia possesses one-fifth of the world's timber reserves, and increased world demand for paper will lead to growth in both domestic and foreign investments in Russia's timber industry.
by Dmitry Butrin
TRENDS
In the near future, trends in the timber industry will be set by the formation of a forest-industry megaholding around Ilim Pulp Enterprise, which is likely to become one of the world's ten largest holdings.
A few months before its tenth anniversary, Ilim Pulp Enterprise (IPE) went from losing almost all the assets it had acquired to becoming a virtual monopolist in the pulp industry.
The story began in summer 2001, when Continental Invest (KI), headed by Nikolai Makarov, started negotiations on the sale of a controlling block of shares of Ust-Ilim Timber Processing Combine (Ust Ilim LPK). IPE was one of the contenders. In fact, IPE already had a preliminary agreement with the company ESN under which ESN would receive up to 25% of IPE's shares in exchange for including the corresponding assets in IPE. ESN's owner, Grigory Berezkin, decided that paying for IPE shares with Ust-Ilim shares would be a good deal.
However, KI's partner in Ust-Ilim LPK was Energoprom, headed by Dmitry Bosov, a former manager at the legendary Trans World Group (trader in Russian metals) and a rather determined man. He was outraged when he realized that if KI sold its shares in Ust-Ilim LPK, he would become a minority shareholder in the combine rather than a co-owner. The deal with IPE fell apart, and Makarov and Bosov became enemies instead of partners.
KI then began talks with Yakov Itskov, the ex-general director of Soyuzmetallresurs, founded in 1999 by Vladimir Lisin and Oleg Deripaska and now part of the Sibal investment and industrial group. Bosov understood that in this situation he would be left without Ust-Ilim LPK and without money. At the end of September, Bosov occupied Ust-Ilim LPK, refusing admittance to Makarov's team; he then began negotiations with KI to buy out its shares in Ust-Ilim LPK. Makarov called for help from Itskov's team, which easily returned control of the combine to KI.
Later, KI began to behave strangely. It started talks with Itskov on the sale of shares and also offered them to IPE. As a result, Nikolai Markarov contrived to sign two agreements, one for the sale of all its shares to IPE and the other on creating a joint business with structures represented by Itskov. Energoprom simply sold shares to Sibal. Since Sibal ex-managers were already at Ust-Ilim LPK, the agreement with Itskov was considered valid.
The same summer, AO Siberian Pulp and Paper Combine, which was closely associated with Sibal, was set up on the basis of the Krasnoyarsk Pulp and Paper Combine. It was expected that after buying Ust-Ilim LPK, Yakov Itskov would head a timber holding of structures friendly to Oleg Deripaska.
IPE decided not to stand in Itskov's way, especially since Vladimir Krupchak's Titan Group, which owned the Archangelsk Pulp and Paper Combine and AO Arkhbum, had agreed to a merger with IPE. Thus, it turned out that the industry entered 2002 with two big ambitious players IPE and Yakov Itskov's Russian Cellulose holding.
Everything changed on December 21, when Itskov's team seized control of the Bratsk Timber Processing Combine (Bratsk LPK), which was part of IPE. In addition, Itskov and Sibal were said to have contemplated wrecking the deal between IPE and Titan and appeal the privatization at another large IPE enterprise, the Kotlas Pulp and Paper Combine. With the powerful resources available to Oleg Deripaska, Itskov's holding could well have become the largest producer in the Russian pulp and paper industry.
However, on December 28, the situation changed once again. Oleg Deripaska made IPE an offer: to buy Ust-Ilim LPK from him for a good price of $250-300 million. No one knows what drove Sibal to make such an offer, but IPE agreed. In January, Itskov's team returned IPE to power at Bratsk LPK.
In the end, IPE has consolidated control over a large number of assets. First, almost all timber processing plants in Irkutsk region, one of the four largest timber industry regions in the country. Second, the Archangelsk combine and Arkhbum did not reverse their decision to merge with IPE. Third, after Ust-Ilim LPK, Itskov's team will probably sell the Siberian Pulp and Paper Combine. Fourth, according to Kommersant's information, in fall 2001, Oleg Deripaska managed to convince the government to sell the state shareholdings in the Baikal Pulp and Paper Combine, and IPE will be the main candidate for buying it. Finally, according to Kommersant's information, IPE is already getting offers to buy new enterprises in the Northwest. There is someone to pay for them: the ESN group continues to work with IPE in attracting Western capital.
Thus, instead of getting into a long and very dangerous fight with Sibal, IPE received as a New Year's present the rare chance to become a central player in the Russian pulp and paper industry with an annual turnover of $2-2.5 billion and to join the ranks of the world's largest pulp producers.
This is still only a chance. However, the state of business in the country's timber industry allows the formation of world-scale companies. Five years ago, no one either in the West or even in Russia itself believed this.
Dmitry Butrin
All the Article in Russian as of Jan. 29, 2002
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