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- Alexei Chekunkov, Director General FEDF: “If we turn 1% of our timberland into investment forests, we’ll acquire an asset comparable to the oil industry”
The Far East Development Fund (FEDF) is working on an online service for the region’s timber industry. In the interview for Interfax, Director General FEDF Alexei Chekunkov told, how the service would operate, its objectives, investments in the timber industry and FEDF projects on the sidelines of the 5th Eastern Economic Forum (EEF).
- Alexei, this is already the Fifth Eastern Economic Forum. What are your expectations this year?
- The initial five years of human life are most important. During this time a person acquires 80% of all skills and capabilities that will be used throughout the lifetime. Five years ago, Russian President prioritised the development of Russia’s Far East and her Asian part for the entire 21st century. The past five years have laid a solid foundation for this endeavour.
It was Yuri Trutnev, who invited me to take this office in autumn 2013. We did not have any ASEZ back then, nothing like that. I remember inventing this name in a temporary office of the ministry, perusing various options. Eventually we opted for ASEZ, and then everything got settled, you know.
The first EEF was a bit chaotic, with its growth pains. I was then a board member at Alrosa, receiving representatives of the world’s leading diamond businesses. A diamond cutting and sale meeting was held in the big “Sopka” hall (at Far Eastern Federal University — note by Interfax) seating two hundred guests. Only 10 persons were present at the first forum in addition to probably three panellists – hilarious botch-ups indeed.
It is rewarding now to see all panel session halls are filled to their capacity with no place to seat or even enough room to enter. The forum has obviously been a success. We see things rolling, with 1,500 of our enterprises thriving in all new regimes. The increase in investments is significant indeed. At the fifth forum we are supposed to sign an agreement on the Nakhodka plant (Nakhodka mineral fertilizer plant — note by Interfax). This will probably be one out of five really competitive gas chemical enterprises in the world due to domestic gas resources available in Sakhalin as well as maritime logistics, close proximity to target markets and technologies. The plant may well fall within 2% of most efficient endeavours in global gas chemical industry. The facility to be built by 2023-24 will surely be more competitive than the one built in 1984.
As we review any industry’s profile, we evaluate the combined cost of all resources, logistics, and technologies used. A wise strategy would be waiting a little, letting others make their mistakes, and then starting the work in a precise and proper way.
- The bottom line is not waiting too long.
- We will definitely not spend any more time waiting. The Russian Far East’s huge potential is based on natural resources, high conversion, and it is this environment that is currently undergoing rapid change. The world’s energy mix is changing along with consumption, renewable energy and mobility patterns.
People earlier used to fuel their autos with diesel until a certain embroglio made it unpopular. But will anyone dare say that in 50 years from now all motor vehicles will still be driven by gasoline? I would rather bet that they will all go electric while ships will be using LNG as a cost-efficient and environmentally-friendly fuel. We already see some experiments with electric aircrafts.
Half of the national budget revenues come from oil and gas sale. This means that we should lose no time, developing and selling everything that is still valuable and priced at USD 60 per barrel or USD 200 per 1,000 cu m. The money thus earned should be invested in technologies and technology-intensive processing.
I think economics is right here: Michael Porter who invented the competitive advantages of nations was up to the point. This is the main idea behind economic exchange: there must be some concentration or focal areas which are our strengths. There are certain deep-seated patterns relative to the Russian Far East that suggest that there is nothing but timber and fish in abundance here. I think this type of cliches are important. They are like folk wisdom and sayings that have not come out of the blue — they bear the sagacity of the ages.
Investments in forestry are booming in the world now. Wealthy people, billionaires want to hold up to one percent of their assets in timberland. First, very naturally, they like the idea of having a forest of their own. Second, it’s a good hedge against inflation. But most interestingly, this is a physically growing asset. A gold deposit, for instance, is not growing at all. An oil deposit takes 100 mln years to grow. A good tree grows 100 years. This is why a hectare of good investment forest in Finland is valued at EUR 5,000-7,000 and in France — at EUR 10,000. Should we turn 1% of our timberland into investment forests, we’ll acquire an asset comparable to the oil industry in terms of its worth.
For instance, we can compare the Russian oil and forest sectors. Russia’s proven oil reserves amount to 106 bln barrels roughly worth USD 6 tln. Russia is ranked eighth globally in terms of oil reserves. Russia’s standing crop is estimated at 83 bln cu m. At the average market price of USD 70 per 1 cu m, we get virtually the same figure of USD 6 tln. However, as opposed to forest, oil is not growing. If we fine-tune and adjust the entire system properly, it will be very intriguing both from economic and environmental perspectives.
- The FEDF is developing an online service for the national timber industry. Please comment on this service and the ends it serves.
- Two years ago, Yuri Trutnev instructed us to create an online service for aquaculture investors. As we worked together with the Government, we could alter the processes used by the executive authorities. Ultimately, we created a website where any interested individual or entity may file a request for an aquaculture zone, with software automatically generating the relevant regulatory documents. In a similar vein, an open auction is held automatically: the one bidding a higher price gets the zone. This arrangement virtually excludes the human factor. This resulted in an Internet shop of aquaculture, so to say.
During the two years of the system’s operation three times as many zones for aquaculture were allocated in the Russian Far East as in the previous 20 years. When we started, we had just 20,000 of these while now we have 60,000. This means significant amounts. Development of 1 ha costs around RUB 1.5 mln; 60,000 ha translate into RUB 90 bln of investment in aquaculture. We view this project as a success.
Now we’ve tackled the forestry. The first problem we encountered is the total mess in terms of information. Nobody in the country knows how much forest we have, its quality or age, what wood species are available. The basic source of information is the forester’s paper-based mapboard — a technology dating back to the 19th century. The foresters enter and change data in this mapboard with colour pencils. This is the primary tool used to in forest surveying and map preparation. Government officials then study these maps to make economic decisions. Over the last 10 years a meagre 3% of timberland in the Russian Far East has been subjected to this procedure, 80% of this forest being older than 20 years of age. During this time, the stock might have been destroyed by fire, or felled, new trees might have grown there, etc.
Investors enter the industry comprising multiple aspects that are managed by 13 federal executive bodies and by regional authorities. Every region has its own system. They do not cross each other’s paths. In the end, we have the state forestry register specifying timberlands and their location. To obtain a felling quota, the investor has to deal with the forestry department that has access to this register. The register contains certain data. There is also a state register of immovable property, the cadastre specifying the coordinates of any area covered with standing crop, i.e. forest land. The mismatch between the two reaches 257 mln ha which is comparable to the territory of Kazakhstan. Give or take a Kazakhstan-full of timberland — such is the reliability of information that we are talking about.
As a result, our pricing is in total disarray: for some reason, oak in the Primorye Territory costs USD 450 per 1 cu m, while 10 km away in China — as much as USD 1,000-1,200. Something is wrong from both the fiscal and customs viewpoints, etc. However, objectively, it was impossible to cope with an industry of that scope (1 bln ha) 20 years ago.
- And yet, technology is making rapid advances and it can be used in the industry.
- Today, the resolution of an image produced by a space satellite is 70 cm per pixel; software estimating the forest and where it grows has been around for quite a while, being quite affordable. They show the species composition of the timberland, infrastructure, nearest warehouses, and fire hazard levels. But to date, we’ve been dealing with discrepant data on the maps of EMERCOM and state forestry register, the latter being classified at that.
This is why the first thing we need to do is to pull out these data into the open, shooting everything from a satellite in order to create a reliable information base, a foundation for making government decisions. As it processes images taken on a weekly basis, the software shows where the felling was legal and where the investor exceeded the quota. The satellite can see it. Our idea is to make this information open to public in order to enable robust civil control. In addition, we are planning to draw up the disapproval ratings of districts, regions, and governors based on illegal felling data.
This interactive map for all stakeholders involved is the first component of the system, the second one being the online auction of plots. The investor will be able to see any vacant plot with all relevant data and file a request for this plot with the government authorities. We view the auction as the only proper method of plot allocation: whoever pays more gets it. In aquaculture, the average price of 1 ha is now three times as high as in the past, which means that the budget revenues have increased dramatically.
Another aspect is distribution strictly via the online exchange. The economy will not get on the right track unless the prices are transparent. In Russia, the trading range for various wood species may reach three or four times. It is important to have a certain exchange price indicator. If we move all commodities to the exchange, we will get a transparent system that is amenable to easy accounting and control by fiscal and customs authorities, financing institutions, and market participants. Ultimately, we will have timber futures and forwards here, that is a civilised market will emerge.
This will be a comprehensive system that will attract bona fide providers of diverse services: felling, taxation, planting, and transportation services for small and medium-sized businesses. We will get a kind of “timber Uber” after transforming the timber market in the same way Uber and Yandex have transformed the taxicab market.
The last crucial component of the system is the tree electronic certificate. The satellite sees every tree at the time when a plot is created in the system. Every tree will get a unique digital certificate at its first entry in the system. Thereafter, we will see where it grew up, who got the plot on lease, when it was cut, who bought it, etc.
The state provides the opportunity to buy and sell wood directly, but we need to report the information. The entire industry will de facto go digital with nothing left outside the system. Anything happening beyond the platform would be illegal. Illegal felling would be a tall order, since everything will be reflected in the system and finding the perpetrator would be a technical matter.
We believe this system will immediately push illegal participants out the industry, making it transparent and attractive for major bona fide actors and raising the industry capitalisation. Our vision is for the Russian forest to becomes comparable to oil in terms of economic and generational significance.
- Let’s get back to projects financed by the FEDF. What principles guide you in picking up worthy projects?
- For us, this is the balance of risks and benefits. Our benefits come down to the multiplier effect for the economy. On the face of it, we have multiple heavy “barriers” to securing the financing. The project has to be approved by the Board of Directors, our shareholder (VEB.RF) that has a rather tough risk control system, and the government. There is a government commission for the development of the Russian Far East, chaired by Dmitry Medvedev, that comprises Yuri Trutnev’s sub-commission actually reviewing investment projects. The sub-commission does not look at the financials of a project, but rather at its multiplier effect. It is this sub-commission that decides whether this is a top-priority project for the economy or not.
I’ll dwell on our top 3 projects to illustrate my point. The Khabarovsk Airport. Obviously, this is an infrastructure project. We invested a lot of time therein, making three expert reviews. We signed up for it in 2015 and the funds were provided in 2017. Ultimately, the airport was built within two years (ahead of schedule) and in compliance with the budget.
Another project is housing for employees of the Zvezda Shipyard in the Primorye Territory. It appears that we are financing a fringe project here, but despite the shipyard scale, its workers have no place to live. We resolve such bottlenecks.
The Inaglinsky Mining and Processing Plant (MPP) in Yakutia built from the ground up in the Arctic within four years. Today this is a state-of-the-art MPP producing 2 mln tonnes of dressed ore and having 3,000 employees on its payroll. The enterprise has already launched full-scale operations, tugging the entire region along. That is, our activities contribute to the aggregate effect in terms of taxes, gross regional product, jobs. In the meantime, our overdue debt is extremely low, standing at 0.1% of our portfolio.
Talking about the size of the fund, we can see real change. At the time of the first EEF, we had a capital of RUB 15 bln, while today we have RUB 60 bln.
- Are there any plans to increase the fund’s capital?
- This issue has been subject to continuous discussions and here are the changes: RUB 60 bln is already a significant amount. However, the pace of financing is faster than the pace of the fund refilling. Today, three-fourths of our resources fall to the share of subsidies from the federal budget, obtained through VEB, the remaining one-fourth being a long-term loan provided by the regional Development Corporation. This is de facto the budgetary money of the Sakhalin Region coming from the surplus profit of the Sakhalin-1 and Sakhalin-2 projects. We secured this soft financing for the term of 10 years back in 2017.
We are currently financing projects in the amount of about RUB 15 bln a year. But we are gathering pace. Just on the sidelines of the current EEF, we will sign agreements for RUB 46 bln of investments to be spread over the next two years or so. Moreover, our agreements are not crude but pretty elaborate. I will not be surprised if we end up investing the entire amount and all the projects reaching the financing stage. The two largest projects proposed at this forum are worth RUB 14 bln. They include the Nakhodka Mineral Fertilizer Plant supposed to receive RUB 7 bln from the fund. Yet another RUB 7 bln is to be invested in the project proposed by the Russian Copper Company — development of the Malmyzh deposit in the Khabarovsk Territory that is in the world’s TOP-10 largest deposits. All of the said RUB 14 bln must be released to the projects till the year’s end.
Nevertheless, we are maintaining an ongoing dialogue with the Ministry of Finance concerning the increase of the fund’s capital, preservation of our resources, their volumes, and value.
- When will the soft mortgage lending mechanism for the residents of the Russian Far East be put into effect?
- We want this mechanism to be launched as soon as possible. Currently, the primary discussion platform is probably the Ministry of Finance. The Ministry for Development of the Russian Far East and the Ministry of Finance are discussing how to calibrate this mechanism properly in order not to hang an extra loan debt burden on people. We’d like to make sure there is some down payment, but the cost of the mortgage loan is as low as possible and the loan term is long enough. For instance, the down payment for young families residing in the Russian Far East is 10% and the cost of mortgage loans is 2%. According to the Ministry for Development of the Russian Far East, the number of such families in the Russian Far East accounts for about 8,000. However, this may prove an effective product in those regions of the Russian Far East where well-performing mortgage agencies are available. The Fund acts as a single operator in this process. We are more of a corporate investor, while social projects are supposed to be implemented by the ministry.
- Does the Fund contemplate taking part in ship building and repair projects in the future?- This is a subject of interest to us. I think that if we stick to “you build where you fish” principle, then the Far Eastern shipyards will secure orders worth billions. This will whip up demand and boost shipyards– a very interesting proposition for us, although we need support in the form of state regulation in this area. The government should act in a soft but resolute manner to drive investors’ pivot to the Russian Far East.