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The Canadians are Coming!

“Russia has had a vibrant forest sector for many centuries,” notes Carl Marcotte, head of Export Development Canada’s Resource Sector. “The prominence of the sector within the Russian economy has traditionally been underpinned by an abundance of forestry resources and low labour costs. However, in recent times, chronic underinvestment, sub-optimal allocation of capital and labour has led to the loss of some of the industry’s luster globally. Recent efforts by Russian authorities to modernize the sector, and to allow foreign investment have created significant opportunities for Canadian pulp and paper, and machinery and equipment exporters.”

It was with recognition of the tremendous potential inherent in a partnering of Canada’s forest sector with that of Russia, that the Canada Eurasia Russia Business Association (CERBA) sent a delegation to PaperWeek International for the second year in a row. With a mandate to expand Canadian business activity in Eurasia, to provide Canadian companies with competitive access to Eurasian markets, and to facilitate the successful operation of Canadian companies in Eurasian markets, CERBA hosted the Canada-Russia Forest Products Conference: Energy and Certification, which was organized in conjunction with Foreign Affairs and International Trade Canada and the Ministre du Dveloppement conomique de l’innovation et de L’exportation du Qubec.

“Given the high potential for cooperation but limited knowledge, Gilles Couturier (Trade Commissioner with Foreign Affairs and International Trade Canada) approached CERBA in June 2005 and suggested that we join our efforts to raise mutual awareness and develop contacts by bringing a Russian delegation to PaperWeek 2006,” said Brendan Scully, Regional Director of CERBA’s Montreal office. Although Canada has been comparably slower to make direct headway into the Russian industry, North American-based companies, such as International Paper’s recent joint venture with Ilim Pulp, are indeed crossing international borders to establish themselves within the former USSR republic.

“The international expansion of Canadian paper producers into Russia is still in its early stages,” Scully acknowledges. “Others, such as Mondi and International Paper have already made significant investments in Russian pulp and paper assets. The challenge for Canadian companies interested in Russia is to pursue their position in the large, but stable North American market, while seeking out a niche in a rapidly-evolving Russia which will help provide them with some much-needed growth.”

A venture into the Russian market will not be an investment without obstacles, however. As Carl Marcotte cautions, there are several, fundamental weaknesses within the market that will indisputably serve as stumbling blocks. “The industry remains highly fragmented with few large scale players,” he notes. “The legislative base is still being developed and forestry road infrastructure remains poor. Substantial investments are required to assess forestry resources.” Currently, only 20-50% of total wood resources can be assessed with the amount of infrastructure available. “Many grades of papers are not produced in Russia and the demand for high quality papers is filled by imports, and illegal harvesting remains a significant problem. [Further], most companies do not have sufficient financial capacity to modernize and expand.” Other challenges imposed by linguistic and cultural barriers could also impede smooth operation.

That said, there are arguably an equal amount of positive attributes associated with the Russian market that offset these challenges. The country boasts forest resources with over 20% of global reserves, and a significant 50% of coniferous wood resources. It has low labour costs coupled with low energy costs, and is enjoying growing domestic demand. Further, it is conveniently situated close to the large European market, as well as the ever-expanding Chinese market.

There are also reasons why a Canadian company would choose to invest in Russia as opposed to a Latin American country. As Carl Marcotte notes, ” Russia and Latin America are two different value propositions to Canadian investors. The Latin American forestry industry is much more mature, with large local and international players already dominating the markets. Investment opportunities in Latin America would generally be limited to very substantial investments. It remains possible for Canadian companies to consider a gradual commitment approach with relatively small initial investment. Also, because the growing conditions and type of resource available are very similar to those of Canada, there is a more natural fit.”

Brendan Scully of CERBA agrees. “The Canadian competitive advantage stems from its familiarity with the range of conditions and species present in Russia, which Canadian suppliers and service providers…have capitalized on.”

That Canada’s pulp and paper sector needs to seek out new markets and diversify its product offerings remains uncontested. Pressures are mounting on all sides. Venturing, albeit cautiously, into a largely untapped Russian market might provide answers to some of the stark challenges our industry is facing. As Carl Marcotte says, “Canadian companies investing in Russia would gain from diversification of operation into a fast growing market as opposed to remaining in a mature North American market only.”