Global Timber Trade

The Impact of the Russia-Ukraine War on Global Timber Trade

By Sharanya & Vishal, March 23,2022

The war between Russia and Ukraine is likely to impact global trade, especially the timber market, to a large extent in the coming months. The increased number of sanctions against Russian trading and the challenging financial transactions will possibly re-direct and interrupt forest products’ shipments globally. Trade with Russia, as a result, will likely decline, jeopardizing the long-established international trade flows of forest products to and from the region.

The Current Sanctions on Russia

Stora Enso, a company that holds 3 corrugated packaging plants and 2 wood product sawmills in Russia with a total annual sawn timber production capacity of these plants at 340,000 m³ and employment of 1,100 people has decided to cease all production and sales in Russia till any further notice is given due to the situation in Ukraine. Stora Enso’s sales in Russia is 3% of total group revenues, and they will also terminate all export and import to and from Russia.

IKEA is one of the largest consumers of timber for furniture production in the whole world. Inter IKEA Group has halted all exports and imports into and out of Belarus and Russia. This will have a direct impact on IKEA’s 15000 co-workers. In addition, IKEA has halted all production and sales operations in Russia except for the sale of daily essential products.

Russia will most likely become a state cut off from regular economic dealings, investments, and global flows that build productivity, incomes, company profitability, and living standards. The fact that this has interrupted Russia’s access to SWIFT, the international payment system is worrisome. This would problematize payments and prevent payment of bond coupons, thereby starting technical bankruptcy for Russia.

The European Union has recently also approved new sanctions against Belarus because of its role in the war between Russia and Ukraine, thereby banning around 70% of all imports from the country. These economic sanctions have hit Belarus’ exports to the European Union and the EU machinery exports to Belarus.

Trade sanctions against Russia are set to impact global forestry shipments. The increased sanctions against trading and challenges with financial dealings will interrupt and redirect shipments of forest products throughout the world, and also affect long-established international trade flows of forest products.

The UK has targeted the Central Bank of the Russian Federation (CBR) and imposed more economic sanctions. Under the plans, British people and businesses are banned from transacting with the Russian Central Bank, its finance ministry, and its money fund.

The restrictions against Russian financial institutions include the prevention of Russian companies from issuing money market instruments and transferable securities in the UK. The UK Treasury department with the European Union (EU) and the US plans to stop the CBR from deploying its foreign reserves undermining the impact of west imposed sanctions, and undercut its ability to engage in transactions (foreign exchange) to sustain the Rouble (Russian currency).

Russian Steps to Save the Economy

Russia took steps to save the economy as sanctions hit banks. The central bank doubled its key interest rate to 20%, the highest in almost two decades, and imposed some controls on the flow of capital. Policymakers prohibited brokers from trading securities held by foreigners because of the risk of a bank run, quick sell-off in assets and the most abrupt depreciation in the ruble that occurred since 1998.

The U.S. and the European Union’s agreement to block access to $640 billion in the country’s central bank has built up as a buffer to protect the economy. The U.S. and Europe are trying to save the world economy from a greater shock and remain hesitant for now to sanction Russian energy. Germany stated that the purchase of Russian gas remains possible using SWIFT even after the latest curbs.

The Russian banks, however, can still settle cross-border payments using alternative communication and payment systems such as CIPS or China’s Cross-Border Interbank Payment System.

The Impact of These Sanctions on the Timber Market

Russia’s ban on softwood log exports came into effect at the beginning of 2022. This directly leads us to infer that the invasion’s impact on worldwide Roundwood markets may be minimal. Russia and Ukraine are not significant importers of softwood lumber. However, Russia ranks amongst the top exporters of timber around the world. With the sanctions in place, there are going to be far-reaching effects on the supply side of the forestry industry.

Softwood lumber traders are scrambling to ascertain the extent to which Russia’s invasion of Ukraine will impact markets, especially throughout Europe. North American traders are already noticing impacts a few days since the invasion began. The surging fuel costs resulting from the economic reaction to the war have prompted trucking companies to raise rates that were already high by historical standards.

A recent study by Fastmarkets estimates that Russia’s share of the global softwood lumber trade stands at roughly 22%. As per statistics from Global Trade Atlas, Russian softwood lumber exports had reached 27.8 million cubic meters last year, a 6% drop from 29.5 million cubic meters in 2020. The exports from Russia to Europe increased by 16% in the last year to 5.2 million cubic meters. Several observers also anticipate Russian exports to shift away from Europe and other NATO countries and curve toward alternative markets that remain open to trade with Russia, such as China, India, and North Africa.

With China being the largest importer of Russian Timber (about 68% in 2020), it will be affected the most due to sanctions on Russia. China heavily depends on the import of forest products such as lumber, paper, pulp, logs, and wood chips from Latin America, Europe, Oceania, and North America for domestic use. China has been a shrinking market for Russian lumber in recent years with shipments declining by 14% in 2021 as compared to 2020. Having said that, the 14.6 million m3 shipped to China from Russia last year still represented 52% of total Russian exports.

Within Europe, places like Estonia (20%), Finland (17%), Germany (17%), and the UK (12%) are going to be most affected since they import the most timber, respectively.

Within Europe, Russian Pellets are also in high demand with Finland being the country which imports the most (62%) followed by Denmark (19%) and so, they will be impacted the most.

In other products, Russian Plywood is also in high demand in the Netherlands (25%), the UK (19%), and Estonia (16%) which has the potential to create supply-side issues.

We should also note that since Belarus has also joined the fighting by siding with Russia, any exports from Belarus are also going to be impacted as the same sanctions and difficulties will be levied on Belarus as well. Belarus’s biggest markets within Europe for timber are Lithuania (32%), Latvia (22%) and Germany (15%), and they have a very high likelihood of facing a supply issue of timber shortly.

European importers are likely to switch to Scandinavian from Russian. As of today, countries like India, Pakistan, and China have still not announced where they stand in the sanctions. South Africa, Mexico, and Brazil have, however, refused to sanction Russia. This means that Russian can still sell to these countries.

On the other side of the spectrum, Ukraine, facing the brunt of the Russian attack, is facing economic problems despite global support. Ukraine exports about 47% of pellets to Poland and 32% of Pellets to Germany. Ukraine also has a big market in Germany and Poland having 38% and 22% of the timber export market respectively. Ukraine is known to have an abundance of natural timber products like Oak, Spruce, and Pine. However, as per recent news, services to Ukraine have been suspended, and the cargos are to be released in the Black Sea and the Eastern Mediterranean terminals, two essential transit points for dry bulk exports. The Russian and Ukrainian waters of the Black Sea and the Sea of Azov were, on 15th February, set as listed areas by the insurance industry’s War Risk Council, marking them for higher war risk insurance premiums. This might further worsen the congestion problems already persistent in the terminals.