Regional News - Russia and Finland at Loggerheads Over Timber Taxation

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Finland is counting on the European Commission to use Russia’s WTO accession negotiations to avoid an impending timber export tax hike of potentially disastrous consequences to its forestry industry, but chances of success appear slim.

At issue is an export tax levied by Russia on non-processed logs, due to rise to at least –50 per cubic metre by 1 January 2009. This would represent an 80 percent increase since July 2007, when Russia raised its –4/m3 export tax to –10. The duty now stands at –15/m3.

Russia Hopes to Develop Domestic Processing Industry

The timber tax is aimed at enticing foreign, as well as domestic, companies to invest in Russia’s processing industry, thus helping the country capture more value from its vast forest resources. Russia currently lacks the capacity to expand its processed forestry exports despite a strong international market. For instance, the average value of Russian wood pulp exports – half of which went to China – increased by 78 percent between 2002 and 2007 (in US$), but the volume of those exports grew just over 1 percent. Analysts do not expect significant improvement in Russian processing capacity before 2010.

Log Importers Fear Dire Consequences

Finland is the trading partner most affected by Russia’s rising export duties as nearly 80 percent of the country’s timber imports are sourced in its Eastern neighbour. If the tax increase is carried out as envisioned, imports from Russia are likely to dry up completely in 2009. This could lead to a 20-percent decrease in the forestry industry’s production capacity, putting at risk an estimated 25,000 jobs, many in areas that offer few other sources of employment. Other economic sectors are also likely to suffer, including the state-owned railways, which rely on Russian timber for a fifth of their freight traffic. In Sweden, some 6,000 jobs are at stake.

No Legal Constraints at Present

No international agreement prevents Russia from pursuing its timber sector development strategy. The country’s bilateral co-operation treaty with the European Union has expired, and it is not a Member of the WTO. Even if it were, the timber duty would not be a problem. Unlike export subsidies, which can give a country an unfair competitive advantage in the international market, export taxes are not covered by existing WTO rules since their effect is to restrain, rather than encourage, exports. The EU has, however, proposed to discipline export taxes in the Doha Round negotiations on non-agricultural market access (TN/MA/W/11/Add.6). Under the proposal, all WTO Members would be required to include export taxes in their schedules of commitments. With the exception of least-developed countries, and some flexibility for small and vulnerable economies, they would also be obliged to bind the duties, which would prevent increases in the future. However, the only part of the proposal likely to garner significant support is the requirement that Members notify the introduction and any modifications of export taxes to the WTO .

WTO Accession Negotiations Offer Little Leverage

After bilateral efforts failed to solve the timber conflict, Finland and Sweden pinned their hopes on Russia’s ongoing WTO accession talks. The Nordic neighbours argued that the EU should insist on Russia cancelling the projected tax hike on the grounds that it had pledged not to raise export taxes earlier in the accession process. That leverage, limited in the first place, diminished further with Prime Minister Putin’s 25 August announcement that his country would withdraw some of its earlier concessions, which “currently conflict with the interests of the Russian Federation.” Mr Putin added that Russia did not “feel or see any advantages from membership, if they exist at all. But we are carrying the burden. We need to make this clear to our partners.” See page 12 for more on Russia’s WTO accession.

Finland Plans Retaliation

While waiting for the game to the play out at the WTO (or bilaterally between the EU and Russia), Finland has embarked on a series of countermeasures to protect its pulp and paper industry. In order to induce local forest owners to sell more logs to domestic processors, the sales tax on timber has been halved until end-2009. After that, the tax relief will be brought to 25 percent. To recoup the cost of the tax incentive, the government plans to make heavy transport vehicles pay for their use of Finland’s road network. Since domestic haulers will be compensated through an equivalent decrease of the general vehicle tax, the measure will mainly affect lorries carrying cars from Germany to Russia. In 2007, about 680,000 cars were transported by road through Finland, up from 240,000 in 2004. Although the precise amount of the road fee has not yet been decided, the amounts under consideration are significant, reaching possibly –11 for a one-day permit and up to –2200 for an annual ‘vignette’. While the Finnish government expects that it will take a couple of years before the fee enters into force, serious doubts persist on the EU-compatibility of a measure that – at least on the face of it – discriminates against all foreign heavy transporters.

Environmental Fallout Possible

Experts warn that local resources are insufficient to make up for the shortfall caused by the Russian export tax in the long term. A number of companies have already started to import logs from much further a field, including fast-growing eucalyptus from Brazil. In some regions, such sourcing practices could lead to a reduction of old- growth forests, which act as carbon sinks and thus help slow the pace of climate change. In July, economic affairs minister Mauri Pekkarinen also warned that Finland would not be able to reach its EU-mandated renewable energy target – 38 percent of final energy consumption by 2020 – if Russia were to implement the –50/m3 timber export tax. Since Finland relies on the forestry industry for up to 70 percent of its renewable energy supply, the national target would need to revised downwards through a force majeur clause, Mr Pekkarinen said.

One response to “Regional News - Russia and Finland at Loggerheads Over Timber Taxation”

Mark Seed 5th November 2008 at 16:13
Does Export tax only apply to non processed logs or wood residues or sawmill/processed residues?