Russia: Progress and Problems

14 July 2017


Russia is recovering and panel making there offers good openings for investors. But it can be a bumpy ride. Eugene Gerden investigates.

The Russian panels market is continuing its recovery from the financial crisis and its consequences. Beginning in 2015, demand for wood based panels slumped.

This followed on from a decline in the furniture and renovations sector, which of course are crucial heavy drivers for panel consumption.

Now, though, although accurate statistics are not available, both those sectors are climbing again and panel demand is anticipated to rise. As an indicator of progress to come, global majors are accelerating expansion in the country.

New investments are being launched, in anticipation of increasing sales within Russia Kronospan is one such investor. It has recently announced its readiness to start building a new plant for the production of MDF in Russia. The facility will be located in Kaluga in Central Russia, close to Moscow, and will supply products mainly to the domestic market.

Agreement for the building of a plant was initially signed between Anatoly Artamonov, the governor of the Kaluga region, and Kronospan at the end of last year during Artamonov’s visit to Germany; however implementation of the project was suspended until the end of March this year.

The new plant will be in the Lyudinovsky district of the Kaluga region and will have a projected capacity of 350,000m3 per year. Investment in the first stage of the project is estimated about 17.5 billion rubles (US$305m); further stages and investment may follow. The plant will create more than 200 jobs.

It is proposed that the plant should also produce HDF and lightweight MDF panels, coated with decorative laminate film.

Turkish Kastamonu is another possible investor – although its plans have not run smoothly. Last year the company selected Lyudinovo, capital of the Lyudinovsky region, as the site for a new MDF plant. In May 2016 the company even laid the first stone in the foundation of the new plant. Implementation of the project was suspended, however, after the deterioration of relations between Russia and Turkey.

The proposal was for a plant on a 70ha site, with a capacity of 1.8 million cubic metres annually, to include MDF, particleboard, OSB, and laminate flooring.

About 75% of its products were to be sold in Russia, with the remaining 25% destined for Asia and Europe.

According to Anatoly Artamonov, the Turkish company is currently considering resuming implementation of the project.

Artamonov has not ruled out the possibility of both projects going ahead within his territory. He has said that the optimal distance between the plants would be 200km, and that the Kaluga region is large enough, and forested enough, to allow both projects to flourish.

It is one of the most wooded regions of central Russia.

At the same time, in addition to its Kaluga project, Kronospan is considering the possibility of a second new plant in Russia, this one around Chernyakhovsk in the Kaliningrad region and specialising in particleboard.

According to Nikolai Tsukanov, the governor of the Kaliningrad region, such a plant is acutely needed, given the region’s status as a centre of furniture production. Some 30-35% of all furniture in Russia is produced within the territory.

“Currently our furniture enterprises are experiencing an acute need for domestic component materials, in particular of MDF and particleboard. It is planned that the demand for these components will be fully provided by the new plant of Kronospan,” he said.

The project will be implemented by the Austrian company in cooperation with the Development Corporation of the Kaliningrad Region, a structure affilated with the authorities of the Kaliningrad region, which focuses on attracting foreign investments into the region.

It is reported that Kaliningrad authorities have been able to meet key requirements of the investor. These include direct access of the plant to the railway network. In addition, the majority of communal, energy and other infrastructure on the site will be built by the regional authorities, who have also announced plans to provide a package of benefits to the investor, to include tax and customs preferences.

The new plant will have a planned capacity of up to 700,000m3 of fibreboard and particleboard per year, and will have its own coating line.

Raw materials for the new plant will mainly be supplied from other regions of the country and it will export more than 90% of its finished products to the countries of the European Union. A significant part of its future production will be distributed through Kronospan’s own networks.

However there, too, problems have arisen. They centre on issues of size and impact: the company would become the largest forest tenant in the region, which has sparked criticism from the Kaliningrad government.

Vladimir Zarudny, head of the Development Corporation of the Kaliningrad Region, comments: "As for Kronospan, among a number of requirements that were put to us by the company, one involved turning the company into the largest forest tenant in the Kaliningrad region, with the aim of ensuring stable raw material supplies for its needs. However we cannot accept such a proposal, given that tourism and an ecologically clean living environment currently remain one of the major features of the Kaliningrad region. We do not want a certain commercial structure to harvest all the forests simply because it needs chips and other raw materials for its projects”.

Still, Kronospan hopes that the sides will be able to reach an agreement in the coming weeks, and that implementation of the project will not encounter difficulties of the kind which occurred during the building and operation of the company’s plant at Ufa in the Bashkotorstan region.

There, Kronospan is involved in continuing legal battles with local environmental activists, who remain insistent on the need to close the plant due to what they claim are harmful emissions; and non-compliance of its waste treatment facilities with Russian ecological requirements.

The protesters have made numerous petitions and law suits to the Russian federal courts. One claim is that equipment at the Kronospan plant is that which was previously installed at the Sonae particleboard factory in Liverpool, England, which experienced a massive fire in 2011.

That fire resulted in the submitting of lawsuits from 18,000 local citizens claiming compensation for inhaling fumes from the fire. The suits were dismissed, but in 2012 the plant was closed and its equipment was purchased by Kronospan.

Kronospan has been operating in Russia since 2003, when it commissioned the first stage of its laminate flooring plant in the city of Yegoryevsk, in the region of Moscow. Since then the company has invested two billion US dollars in the development of its Russian business.

Overall, according Nikolai Tsukanov quoting Kronospan management sources, the company is planning to invest over €600m in the development of its Russian enterprises and assets this year.

Nor is Kronospan the only Austrian investor planning active expansion in the Russian MDF industry. In July 2016, leading board producer Egger officially launched a new line for the production of MDF at its factory in the city of Gagarin, in the Smolensk region. This has been the most important investment project for the company in its 10 year presence in Russia.

The capacity of the line is 350,000m3 in its first stage, with the possibility of near doubling that to a projected 600,000m3 capacity over the next few years. The project will create about 200 new jobs.

Site of the Turkish Kastamonu plant in Kaluga
Anatoly Artamonov
Protests against Kronospan's Ufa plant
Kronospan's plant in Egoryevsk