Abstract

The aim of this study is to identify and analyse the institutional arrangements that regulate the forest lease and related markets of industrial timber in Russia. A theoretical framework is derived from institutional economics. Institutions, their hierarchy and cohesion are surveyed at constitutional, collective-choice and operational levels. The organization of the long-term forest lease and its contribution to the sustainable forest management and development of forest industries are described and regional differences in the organization of forestry are tested. In addition, the expected impacts of the new federal Forest Code are analysed.

Introduction

Russian forests, comprising 20 per cent of the World's timber volume, possess considerable significance for the global ecology and carbon balance. The vast forest resources have not yet been transformed into sources of welfare and economic prosperity as anticipated. The forest sector contributes less than 3 per cent of the Russian gross domestic production. Development has been hindered by a slow development of institutions and a lack of investment incentives. The establishment of a market-based system in the forest sector is still work in process. In the 1990s, market structures were formally established in the Russian forest sector and leasing became the main approach to commercial forest use. Subsequent studies have nevertheless shown that institutional factors still impede the establishment of markets that regulate the access to forest resources, and in the absence of an open market, the official stumpage fees remain low (e.g. Jacobsen, 1999; Carlsson et al., 2000). Low economic efficiency has also negative effects on social and ecological sustainability.

The general politic and economic environment has been unable to provide a solid framework for the forest sector. Public administration, which has a pervasive role in the organization of the business environment in Russia, plays a key role as the enforcer of laws and programmes in the forest sector. However, the inertia of the structural reforms and the persistence of informal networks have reduced the efficiency of the administrative work (Jakobson, 2001).

The forest administration has undergone several reformations in Post-Soviet Russia. The Federal Forest Service was subordinated to the Ministry of Natural Resources (MNR) in 2000. In 2004, a Federal Forest Agency (Rosleskhoz) was established. The agency is the sovereign state body of forest management that enforces regulations, realizes state policies and administers state forests. At regional and local levels, the Agency is represented by regional agencies and local forest management units (leskhozy). Leskhozy execute forest management tasks, prepare forest tracts to lease and conclude the contract with the leaseholder. An annual cutting licence, prepared and approved by the forest administration, grants the actual harvesting right to leaseholder.

The Russian Nature Supervision (Rosprirodnadzor) controls and supervises the use of natural resources. Regional offices control the legality of the forest use. Environmental non-governmental organizations have questioned the ability of Nature Supervision to enforce credible control over forest use as part of the MNR, which has been largely interested in extraction of natural resources (Massa and Tynkkynen, 2001). Nature Supervision has also been weakened by a drastic reduction of staff and resources (Sologub, 2005).

Currently, institutional reform of Russian forest policy occurs via the adoption and implementation of a new federal Forest Code, i.e. the main document outlining the management and use of forests. The new Code, adopted on 1 January 2007, provides a general framework for forestry and forest use. A modernized system of long-term forest leases is assumed to provide the impulse needed for the realization of new private investments. Simultaneously, the forest administration is under a major reconstruction including the abolition of the centralized forest management system.

The institutional framework that has been identified reveals the complexity of the formal and underlying informal network of influences that affect the terms and content of the forest lease: operationally experienced as a forest lease contract (Figure 1).

Figure 1.

Institutions and organizations that influence the formation of forest lease terms in Russia as defined in the lease contract in accordance with the Forest Code in 2006 (solid line indicates formal and broken line informal influence).

Figure 1.

Institutions and organizations that influence the formation of forest lease terms in Russia as defined in the lease contract in accordance with the Forest Code in 2006 (solid line indicates formal and broken line informal influence).

The main goal of this study is to determine how these institutional and organizational frameworks facilitate the long-term access to forest resources and access to timber market in Russia, and therefore, contribute to the sustainable management and utilization of forests. The focus is on the analysis of the situation that preceded the adoption of the Forest Code of 2007. The elements of the new Code will be considered from the point of view of the long-term forest lease and sustainable forest management.

Theoretical approach, methodology and data

Theoretical framework

Within the institutional economics framework, three concepts have been chosen as instruments to illustrate the organization of forest use in Russia: formal and informal institutions, property rights and transaction costs.

Institutions increase the predictability of the decision-making situation by setting rules that govern the players, allowable actions and strategies, authorized results and linkages among decisions (Heywood, 2000). Institutions consist of formal rules and informal constrains. Helmke and Levitsky (2004) define their distinction as follows: ‘formal institutions are openly codified, in the sense that they are established and communicated through channels that are widely accepted as official … informal institutions are socially shared rules, usually unwritten, that are created, communicated, and enforced outside of officially sanctioned channels’. Informal institutions are equally known but not laid down in writing and they tend to be more persistent than formal rules (North, 1997). While a stable formal institutional framework is a pre-condition for sustainable forest management, informal institutions play a crucial role in the Russian forest sector (Nystén-Haarala, 2001).

Property rights are key institutions that determine the use of resources and influence the behaviour of resource users. Bromley (1991) defines property as a benefit stream, according to which to have property is to have control over that stream. Property rights can be seen as part of a broader set of factors determining access to forests (Ribot and Peluso, 2003). In the Russian forest sector, property rights are affected by the dichotomy on one hand the state forest ownership and on the other hand forest use carried out largely by private enterprises. Multi-level management of forests reinforced by the new Forest Code also affects the formulation of property rights.

Transaction costs, consisting of, e.g., the costs of information, bargaining, protecting rights and policing and enforcing agreements, reflect the efficiency of the political and economic institutional framework that regulates transacting (North, 1990). The lower the costs, the more efficient the prevailing institutions are (Coase, 1960). Klemperer (1996) defines the basic principles of market as follows: firms and consumers attempt to maximize their benefits, firms are price takers, for example, a single firm cannot affect the market price, firms have free entrance to market and there is a free mobility of labour and capital. In this paper, the functioning of markets is studied from the point of view of access to forest resources and the timber market.

Methodology and data

Kiser and Ostrom (1982) defined a theory of hierarchy and institutional approaches that consists of three levels of analysis. The framework illustrates the potential of institutional models to explain a broad range of situations, with institutional arrangements linking each level of decision making to the next level in the hierarchy. The framework is structured as follows:The data employed consists of official data, data from literature, original data and some unpublished data of the Federal Forest Agency. Original data have been collected from three regional forest agencies in north-west Russia (Table 1). Leaseholders’ contribution to silviculture was analysed by comparing the leaseholders’ share to the total amount of silvicultural work (in hectares) at the level of forest district, leskhozy. Regional data were compiled from the leskhozy level data. The statistical significances of differences between the regions were tested by using a paired comparison of two proportions of independent samples described in more detail by Moore and McCabe (2003).

  • 1 The highest level is the world of ‘constitutional decision making’ where political and legal arrangements are established.

  • 2 At the second level, in the world of ‘collective-choice’, decisions are made by officials to enforce or change actions authorized by the constitutional rules. Collective decisions are plans for future action that are also enforceable against non-conforming individuals: officials have the power to enforce a collective plan but also to impose sanctions against individuals who violate the official rules.

  • 3 At the ‘operational level’, the actor is an individual or an organizational unit, the behaviour of which is largely determined by the institutional framework, i.e. collective-choice and constitutional rules. By joining collective actions, actors at the operational level can influence the framework created at higher levels (Kiser and Ostrom, 1982).

Table 1:

Observed and measured variables for three populations (regions in the north-west Russia), where n = sample size (number of leskhozy observed), X = count of successes (silvicultural work carried out by leaseholders) and p = sample proportion

Population n X p 
Leningrad 27 0.253 
Karelia 27 16 0.581 
Novgorod 24 0.112 
Total 78 26  
Population n X p 
Leningrad 27 0.253 
Karelia 27 16 0.581 
Novgorod 24 0.112 
Total 78 26  

Legal analysis of the Forest Code of 1997 and the newly adopted Forest Code 2007 has been carried out. An extensive analysis of Russian and international scientific and professional literature has been undertaken.

Results

Constitutional rules – a chase for stability

The first years of Post-Soviet Russia were characterized by the breakdown of the foundations of society and the weakening of formal institutions (Hashim, 2005). The Constitution of the Russian Federation devolved political and economic powers to regional and local levels. The delineation of powers between the regions and the centre remained ambiguous while the executive power led by the president became the most important centre of actual power (Sakwa, 2002). Strengthening executive power has weakened the independence of legislative and judicial powers (Gel’man, 2004).

The legal base of forests is established by the Constitution, according to which the issues of ownership, use and disposal of natural resources and forest legislation are under a joint authority of the Russian Federation and the subjects of the Federation, i.e. the regions (Konstitutsiya Rossiyskoy Federatsii, 1993). The Forest Code specifies that the Federation as the owner of the Forest Fund (Lesnoy Fond) has an exclusive right of ownership, use and disposal of its property (Lesnoy Kodeks Rossiyskoy Federatsii, 1997). The Forest Fund denotes the area that according to the legislation should be covered by forests consisting of 99.5 per cent of the total forest area in Russia. The division of powers between the levels of authority has been a central issue of the development of forest policies (Moiseyev, 2002). The Forest Code of 1993 gave municipalities the authority to control the access to forests and to set timber prices, whereas federal authorities were responsible for forest management. The Forest Code of 1997 transferred access control and legislative authority to regional leaders and, in 2005, decision-making powers were recentralized to federal authorities (Petrov et al., 2004; Torniainen et al., 2006).

The re-establishment of stability in society has been central to Russian government policy during the presidency of Vladimir Putin (Ross, 2003; Ruutu, 2006). The harmonization of regional legislation with federal laws was viewed as a step in strengthening the rule of law and thereby creating equal rights across the federation (Hashim, 2005). On the other hand, centralization and the control over the regions, media and civil society have been viewed as attempts to establish a more authoritarian model of governance. The concentration of power creates conditions for the execution of more consistent and harmonized national policies.

The transformation towards a market-based system has not been stable or goal oriented. The formulation of policies has been characterized by short-term goal setting under the influence of various interest groups (Sutela, 2003). This has often resulted in unpredictable changes in the course of economic development. Government policies aim to shift economic structures from the heavy reliance on raw material exports to a more value-added production. There are mixed signals indicating, on one hand, a modernization of the formal institutional framework and the attraction of foreign investments, and on the other hand, a more pervasive state command over strategic areas of the economy (Volkov, 2004).

There are few market economies where economic and political powers are so intermingled as in contemporary Russia. These ties are even closer at regional level (Sutela, 2003). Political and economic elites, so closely integrated in the Soviet Union, were able to seize local power and property when the system collapsed (Tikhomirov, 2000). To maintain power, political leaders relied on close ties with business and the managers of important regional enterprises. In return for financial help in elections and prevention of social tension by providing jobs, business received state subsidies, cheap energy and natural resources, tax waivers, etc. (Gaddy and Ickes, 2002; Orttung, 2004). Despite moves towards centralization, governors still control land use, the granting of permits and the allocation of budgetary funds, electricity prices and the overall conditions, in which business operates (Volkov, 2004).

The importance of forests is reflected in regional policy making. In forest rich regions, such as in north-western Russia, forest sector companies have played a significant role at regional level in terms of economy and employment. In north-western Russia, the forest industries’ share of the industrial output was 11.5 per cent in 1999. The contribution to the regional production was highest in Archangel (44 per cent) and in Karelia (42 per cent) (Dudarev et al., 2002).

Collective-choice rules framing the terms of forest lease

Law enforcement, implementation and the interpretation of legislation and policies are integral institutions for the establishment of the rule of law in any sphere of state regulated actions. In Russia, some characteristics of the administration have a notable influence on the performance of these actions. Jakobson (2001) considers that administration and public management traditionally have demonstrated a gap between the official rules and the conditions of real life, the existence of networks of informal connections, a lack of accountability and the interlacing economic, political and administrative activities. The concentration of political and executive powers combined with the lack of strong administration and horizontal accountability strengthens the non-democratic method of administration and its inability to realize determined policies (Hashim, 2005).

Rent seeking may be viewed as a practice encouraged by the government itself in order to obtain specific benefits from the regulation of business and the creation of administrative barriers, such as licensing and registration, taxation, price control, restrictions on the mobility of goods and the granting of exclusive rights. Rent-seeking behaviour has been a direct consequence of insecure property rights together with strict formal rules and lack of commitment to property rights (Savulkin and Zaostrovtsev, 2001).

Forest administration largely not only shares the characteristics presented above but also contains specific features. In public forest management, the budget has not been able to secure sufficient finance for silvicultural activities as required by the forest law. Leskhozy have therefore largely concentrated on the acquisition of external income mainly through the execution of intermediate cuttings and timber sales. In 2002, leskhozy harvested 15.3 million m3 of timber, which accounted for 12.4 per cent of the total wood removals in Russia (Vasin, 2003). The structures and administrative processes in the 1800 leskhozy in Russia have remained largely intact. Their operating model resembles the planning economy with a mix of management, control and business (Petrov, 2003a). The role of leskhozy in the market differs from private enterprises since they are not liable to pay stumpage or sales tax. In 2004, the total financing of forest management was equal to 770 million € (according to the annual average rate of the European Central Bank), of which 38 per cent came from budget and 62 per cent came from external sources, primarily from timber sales (Ministry of Natural Resources, 2006). In the Leningrad region, external financing covered 89 per cent of the total forest management costs in 2003 (Petrov, 2004).

Lease is based on an agreement by which the owner allows another actor to use the resource for a specific time, usually in exchange for payment or other agreed-upon considerations (Grunebaum, 1987). In Russia, the parties to the forest lease are the state as owner of the forests and the leaseholder, which is a physical, or a legal person. The general content of the forest lease is defined in the Forest Code. Forest can be leased out for timber harvesting, for the collection of secondary timber products and non-wood forest products and for hunting (Lesnoy Kodeks Rossiyskoy Federatsii, 1997). A lease contract, signed by the leaseholder and leskhozy, determines the case-specific terms of a forest lease. However, the contract is primarily a reservation, an option to cut timber in the future. The actual harvesting right, which defines the harvesting volume and constrains of logging operations, is given in an annual cutting license which requires the leaseholder's compliance with the laws and normative, harvesting and silvicultural regulations controlled by leskhozy (Lehtinen, 2005).

In addition to rent, there are other requirements related to the forest lease. According to Lehtinen (2006), the leasing agreements commonly addressed additional requirements, services and payments to leaseholders in Karelia and the Leningrad region. Lease terms are formally announced in the tender documents. However, requirements not included in the official selection criteria form an important element of the selection process. These terms that may eventually play a decisive role in selection are defined in informal bargaining between the bidder and officials. Almost all the leaseholders do have additional responsibilities even though they are offered on voluntary basis (Sologub, 2005).

Direct tax-like payments were paid to the forest administration and/or to regional and local administrations or other authorities or communities. Payments varied from a fixed price to a relative share of the annual rent (Lehtinen, 2006). Services consisted of the delivery of firewood or timber for free or at a fixed price or the purchase and delivery of equipment and machinery to be used, e.g. in forest fire prevention. Measures against illegal logging were also included in the contracts (Sologub, 2005). Illegally harvested timber from the leased area is included in the leaseholder's harvesting quota, which reduces the legal harvesting potential (Lehtinen, 2006). This practice makes the leaseholder, even if that does not take part in illegal logging, financially liable for the economic losses in state forests.

Contractual terms also regulate and restrict the leaseholder's market access. According to the legislation, the harvested timber belongs to the leaseholder who is entitled to decide how to benefit from it (Petrov, 2003b). In reality, export and transportation of timber to other regions were occasionally limited when a certain amount was to be processed inside the region. In some cases, the pricing of harvested timber was also regulated. The leaseholder might be bound to sell timber below the market value (Lehtinen, 2006). These restrictions contradict the legislation on competition. Protectionist rules also work directly against new investments. The establishment of a modern wood procurement system, which constitutes a pre-condition for the development of forest industries, is extremely difficult if the inter-regional trade of timber is restricted.

The forest allocation system promotes income transfers that bypass the legal owner, the state. Local and regional authorities, while not having rights to forests, control the access to forest resources and therefore benefit from resources. The additional requirements, even though they are part of the formal lease documents, may contradict with the existing legal framework. The formal price of timber is low because, unlike informal payments and services, it is not always the primary target of bargaining.

Operational level: competition in the forest lease in north-west Russia

In the Soviet Union, territorial expansion and extensive utilization were the prominent features of wood procurement: harvesting units moved in accordance with the availability of timber, while harvesting areas were largely left without ensuring the renewal of the forests (Giryayev, 2003). This was resource consuming and expensive due to construction of new infrastructure and growing transportation distances – on average 1800 km (Niskanen et al., 2003). In the 1990s, the leased forest area grew rapidly and at present over 90 million ha, or ∼8 per cent of the total Forest Fund, are leased out (Figure 2). This represents 68 per cent of the economically accessible forests given the existing infrastructure (World Bank, 2003). The majority of the accessible forests are already in use and access to more remote areas would require massive investments in infrastructure. On the other hand, only 23 per cent of the annual allowable cut in Russia is realized. In north-western Russia, forest use is the most intensive with a utilization rate of 40 per cent, being highest in Karelia, 66 per cent (Karvinen et al., 2005). There is potential to raise the intensity of the accessible forest area already in use.

Figure 2.

The leased forest area in Russia 1993–2004 (sources: Vasin, 2003; Ministry of Natural Resources, 2006).

Figure 2.

The leased forest area in Russia 1993–2004 (sources: Vasin, 2003; Ministry of Natural Resources, 2006).

The European-Urals, where 80 per cent of the population lives, contains ∼20 per cent of the forest resources (Ilyin, 1999). Leases account for 28 per cent of the exploitable forests of the Forest Fund as a whole but it is 67 per cnet in north-west Russia, being highest in Karelia and Leningrad region (Table 2). The forest sector is characterized by local forest industries and, because of the location close to western markets, exports of harvested timber. The most intensive harvesting has taken place in accessible forests close to railways, main roads and watercourses (Niskanen et al., 2003). Similarly, there are increased demands to start harvesting operations in ecologically valuable old-growth forests.

Table 2:

Regions in north-west and Central Federal Districts with more than 300 000 ha of leased forests as 31 December 2004

 Leased area (1000 ha) Forest fond area (1000 ha) Share of leased forests (%) Exploitable forest area (1000 ha) Share of lease in exploitable forests (%) 
Whole Russia 91 993 1 172 322 7.8 329 789 27.9 
North-west Federal District 38 109 116 360 32.8 56 902 67.0 
Leningrad region 3706 5594 66.3 2668 138.9 
Republic of Karelia 10 094 14 843 68.0 7844 128.7 
Republic of Komi 5119 38 873 13.2 18 489 27.7 
Archangel region 12 982 28 768 45.1 15 556 83.5 
Vologda region 4047 11 636 34.8 6446 62.8 
Murmansk region 452 9832 4.6 2104 21.5 
Novgorod region 1348 4077 33.1 2753 49.0 
Pskov region 346 2436 14.2 860 40.2 
 Leased area (1000 ha) Forest fond area (1000 ha) Share of leased forests (%) Exploitable forest area (1000 ha) Share of lease in exploitable forests (%) 
Whole Russia 91 993 1 172 322 7.8 329 789 27.9 
North-west Federal District 38 109 116 360 32.8 56 902 67.0 
Leningrad region 3706 5594 66.3 2668 138.9 
Republic of Karelia 10 094 14 843 68.0 7844 128.7 
Republic of Komi 5119 38 873 13.2 18 489 27.7 
Archangel region 12 982 28 768 45.1 15 556 83.5 
Vologda region 4047 11 636 34.8 6446 62.8 
Murmansk region 452 9832 4.6 2104 21.5 
Novgorod region 1348 4077 33.1 2753 49.0 
Pskov region 346 2436 14.2 860 40.2 

The exploitable, i.e. technically accessible, forests of the Forest Fund cover mature and over-mature forests in which final felling can take place. Preservation areas, protective zones, reserve forests and areas not covered by growing stock are excluded from exploitable forest area (sources: Federal Forest Service, 2003; Karvinen et al., 2005; Ministry of Natural Resources, 2006).

Timber removal from leased forests accounts for 66 per cent of all industrial harvesting in Russia. In Karelia and Vologda, timber removals from leased forests were highest accounting for over 70 per cent (Vasin, 2003). Rogov and Rodionov (2004) argue that local authorities tend to avoid competition in order to support local enterprises even at the expense of revenues. In 2004, 54 per cent of leases were concluded for 5 years or less. These short-term contracts could be granted by administrative decision without competition. As result, revenue to the state budget has decreased. The timber price acquired through direct administrative allocation was significantly less than lease rent and auction price (Figure 3). In comparison to competitive forest lease, the loss in state revenue because of the non-competitive forest allocation was ∼7.1 million € in 2005. This approximates to 37 per cent of the budget funding for forest management.

Figure 3.

The division of timber removal and revenue accumulation in Russia based on forest allocation method (source: Ministry of Natural Resources, 2006).

Figure 3.

The division of timber removal and revenue accumulation in Russia based on forest allocation method (source: Ministry of Natural Resources, 2006).

According to Gray (2003), it is often argued that longer lease periods would provide incentives for sustainable forest management. On the other hand, renewable tenures based on demonstrated performance provide strong incentives for sustainable management notwithstanding the length of the contract (Boscolo and Vincent, 2000). Petrov et al. (2004) argue that the existing structure, which emphasizes short leases, has substantially worked against sustainable forest management and investments in Russia. A closer look at three regions reveals significant changes in the load of silvicultural work carried out by the leaseholder (Figure 4). In Karelia, only 28 per cent of forests are leased out for 10 years or more, the respective figures being 66 and 61 per cent in Novgorod and Leningrad, respectively. Nevertheless, in Karelia leaseholders contribute more to silviculture than in other two regions. There was a significant difference in the leaseholders’ share of silvicultural work between Karelia and Novgorod at 95 per cent confidence interval (Table 3). Other differences were not statistically significant, although the difference between Karelia and Leningrad was almost statistically significant. As a rule, the number of successes should be five or more when comparing two portions (Moore and McCabe, 2003). This requirement was failed in Novgorod case (X = 3) that may decrease the efficiency of testing.

Table 3:

Estimated variables and significances of paired significance for tests for comparing two proportions in three populations (regions in the north-west Russia)

Comparisons Pooled estimate p SEDp Z P 
Leningrad-Karelia 0.417 0.127 1.587 0.056 
Leningrad-Novgorod 0.187 0.107 1.056 0.145 
Karelia-Novgorod 0.360 0.115 2.172 0.015 
Comparisons Pooled estimate p SEDp Z P 
Leningrad-Karelia 0.417 0.127 1.587 0.056 
Leningrad-Novgorod 0.187 0.107 1.056 0.145 
Karelia-Novgorod 0.360 0.115 2.172 0.015 
Figure 4.

Leaseholders’ contribution to silvicultural operations in 2004 as a proportion of total work area (ha) (source: Original data, 2005).

Figure 4.

Leaseholders’ contribution to silvicultural operations in 2004 as a proportion of total work area (ha) (source: Original data, 2005).

The administration, being a monopoly in the allocation of forests may dictate or least greatly influence the lease terms in a competitive situation with several potential bidders. In the reverse case, as reported by Jacobsen (1999) in Murmansk with only a few bidders, competition may collapse into informal bilateral bargaining between the seller and the most likely buyer.

The main principles of the new Forest Code with relation to forest lease

The new Forest Code will introduce significant changes to the organization of forest management. Federal forest ownership will prevail but forest management functions, including the arrangement of forest leases are to be delegated to regional governments. In forest management, it is intended that the leaseholder's role will be increased while the state will retain its regulatory functions and the supply of public services (Table 4). The existing lease contracts will also be adjusted to the requirements of the new Code.

Table 4:

The main features of the Forest Code of the Russian Federation of 2007 in relation to the forest lease

1 Federal authority is responsible, among other things, for normative regulation, drafting and implementation of forest-related policies, establishment of reserve prices for timber (81§). Federal authority is also responsible for the financing of forestry and monitoring and supervision of the execution of delegated powers by regional authorities (83§). 
2 Regional governments issue regional norms and regulations in relation to forests and organize forest administration, including their management, protection, conservation (82§) and use in their territory (83§). 
3 Leases are allocated through open auction (78§) but strategic investors may receive forests without competition (74§). Lease period is 10–49 years, after which a diligent leaseholder has a preferential right for a new period (72§). 
4 Leaseholder is to take care of silviculture and forest fire protection according to the forest development plan (12§). Harvesting plan paid by the leaseholder is designed by authorized planning organization. The forest authority is notified of the cutting by a forest declaration submitted by the leaseholder two weeks before harvesting takes place (26§). 
5 Lease contract is subject to subleasing, rights can be transferred and used as collateral according to the Federal Law on State Registration of Real Estate Rights and Transactions (93§). 
1 Federal authority is responsible, among other things, for normative regulation, drafting and implementation of forest-related policies, establishment of reserve prices for timber (81§). Federal authority is also responsible for the financing of forestry and monitoring and supervision of the execution of delegated powers by regional authorities (83§). 
2 Regional governments issue regional norms and regulations in relation to forests and organize forest administration, including their management, protection, conservation (82§) and use in their territory (83§). 
3 Leases are allocated through open auction (78§) but strategic investors may receive forests without competition (74§). Lease period is 10–49 years, after which a diligent leaseholder has a preferential right for a new period (72§). 
4 Leaseholder is to take care of silviculture and forest fire protection according to the forest development plan (12§). Harvesting plan paid by the leaseholder is designed by authorized planning organization. The forest authority is notified of the cutting by a forest declaration submitted by the leaseholder two weeks before harvesting takes place (26§). 
5 Lease contract is subject to subleasing, rights can be transferred and used as collateral according to the Federal Law on State Registration of Real Estate Rights and Transactions (93§). 

Within forest administration organization, supervision will be separated from management activities. Administrative bodies may no longer harvest forests for profit. This means that the forest administration will lose its main source of revenue. In 2008, leskhozy will be transformed from self-regulating state management units to state enterprises. These new state enterprises, contrary to public forest management units, will participate with private enterprises in auctions and competitive bidding for silvicultural contracts on equal basis.

The new Forest Code will strengthen the market orientation of the forest sector. Leasing rights will be obtained through open competition on a price basis, even though investment and management plans and the local processing capacity carry weight in the selection procedure. Lease forests are also treated as real estates, which increases leaseholder's financing options (see Table 4).

The Forest Code provides the general framework for forestry and forest use. The more detailed regulations will be established along the adoption of federal and further regional normative that regulate the management, protection and utilization of forests.

Discussion

Breaking down the institutional hierarchy

Institutions that create stability and predictability are the cornerstones of any well-functioning economy. A clear definition and credible protection of property rights occurs only when collective-choice rules and contractual terms conform to the legislation. At the constitutional and collective-choice levels, numerous institutional factors still hinder the development of the long-term forest lease towards a market-based system (Table 5). The joint management of the forests due to the unconsolidated federal and regional policies has made the formulation of policies unclear concerning both normative regulation and in practice (Torniainen et al., 2006). Moreover, the poorly defined and sometimes overlapping and contradictory division of authority undermines the public and leaseholder's property rights to forests.

Table 5:

Institutional inconsistencies that hinder the establishment of open market in the long-term forest use in Russia

Constitutional level 
    Prevalence of unpredictable and short-sighted goal-setting of economic policies 
    Discrepancies between federal and regional policies that regulate the economic development and forest use 
    Ambiguous delineation of powers between administrative levels 
    Lack of credible commitment to property rights by the administration 
Collective-choice level 
    Contractual terms of lease conflict with the existing legal framework 
    The current system of forest allocation lacks transparency 
    Administrative barriers in the organization of forest use limit leaseholder's access to market 
    Leskhozy have a dual role in the forest sector as forest administrator and market actor 
Operational level 
    Investments in informal relations and social capital at the expense of technological improvement 
    Weak commitment to the implementation of sustainable forestry 
    Low level of new private investments 
Constitutional level 
    Prevalence of unpredictable and short-sighted goal-setting of economic policies 
    Discrepancies between federal and regional policies that regulate the economic development and forest use 
    Ambiguous delineation of powers between administrative levels 
    Lack of credible commitment to property rights by the administration 
Collective-choice level 
    Contractual terms of lease conflict with the existing legal framework 
    The current system of forest allocation lacks transparency 
    Administrative barriers in the organization of forest use limit leaseholder's access to market 
    Leskhozy have a dual role in the forest sector as forest administrator and market actor 
Operational level 
    Investments in informal relations and social capital at the expense of technological improvement 
    Weak commitment to the implementation of sustainable forestry 
    Low level of new private investments 

Strengthened government control over the regions and related institutional reforms support the harmonization of federal and regional policies. The delegation of powers to the regional governments could provide a synergy between forest-use planning and the development of the local and regional businesses. The institutional setting that determines the division of decision making and the distribution of benefits should encourage the responsible management of forests. As a counterbalance to liabilities, sufficient economic and social incentives concerning forest resources should be provided for all competent decision makers.

Besides the uncertainties of the general political and economic environment, notable contradictions occur between the formal and informal institutions that regulate the access to forest resources and the timber market. An informal bargaining procedure has meant that informal rules have been introduced to the formal lease contracts. Consequently, the outcome may contradict the legal framework. The situation is problematic particularly for the leaseholder, who should follow both the laws and the lease terms. Compliance with informal rules undermines the leaseholders’ legal protection of property rights by exposing them to administrative arbitrariness while non-compliance may result in exclusion from the forest resources.

According to Helmke and Levitsky (2004), informal institutions may play either a problem-solving role or a problem-creating role depending on the effectiveness of formal rules and the degree of compatibility between actors’ goals. In the case of effective formal institutions, informal institutions act as complementary or accommodating formal rules: they substitute or compete with ineffective formal institutions. In the forest lease, informal institutions compete with formal rules by changing the distribution of revenue between the central government and locals. According to legislation, forest revenue is allocated to central and regional budgets. At local level, informal payments therefore substitute for the lack of tax revenue. Determination of property right institutions is a political process. It would be however beneficial to contemplate the possibility to reallocate a part of the forest revenue, e.g. by changing taxation, to municipalities. This would also provide a strong economic incentive to promote sustainable management of forests at the local level.

The forest lease system contains features that are unfavourable for both the owner and the leaseholder. Additional requirements act as a tax-like burden on the leaseholder and obscure the formation of real production costs among market actors. These obligations also reduce the transparency and conformity of the forest lease rules and so increase the transaction costs of the leaseholder. Forest users may be treated unequally since access to the forests is not only a result of economic competitiveness but it is also dependent upon relative bargaining power in relation to authorities.

Services required from the leaseholder, such as delivery of firewood to schools or hospitals, could be of great importance and therefore justified from local communities’ point of view. On the other hand, these additional obligations represent an increased production cost of timber for the leaseholder. At least the mechanisms applied should allocate responsibilities in more equal and transparent way, e.g. in official tendering terms. This would also reduce the leaseholders’ transaction cost.

The maximization of an asset's value depends on the ownership structure. As a generalization, ‘the more easily others can affect the income flow of someone's assets without bearing the full costs of their action, the lower is the value of that asset’ (North, 1990). An alternative path for the current multi-layered organization of policy making, management and control could be a gradual change from pure state ownership to more diverse structures, including regional, communal and private ownership.

Public forest management because of the leskhozy acting simultaneously as forest administrator and market operator mixes collective-choice and operational level operations. This dual role constitutes a source of uncertainty in the timber market. Separation of the administrative and business tasks and making the leaseholder liable for the whole chain of timber production should improve the economic efficiency. High transaction costs due to bargaining and acquisition of information indicate inefficiencies in the formal institutional setting and the prevalence of competing informal rules. Uncertainty prevailing in the operational environment encourages short-term profit making at the expense of long-term development. Investments in political and informal relations may be more profitable for some actors than improvements of productivity and exposure to open competition (Carlsson et al., 2000; Gaddy and Ickes, 2002). These issues are tackled in the new Forest Code.

The impacts of the new Forest Code on management and use of forests

As already noted, Russian forest policy is at cross roads. There is a development towards a more intensive forest management regime. This is economically but also ecologically beneficial, as it should help to save the remaining uncut forests in more remote areas. Nevertheless, the adoption of a new forest management model requires massive investments from private industries in both silviculture and infrastructure. This is unlikely to occur without functioning markets.

The competition-based system of forest allocation should make the access to forest resources more transparent. On the other hand, selection based solely on economic criteria may work against ecological sustainability. The highest paying bidder may not always be the most reliable forest user, especially if the economic incentives for reliable forest management are missing. The transfer of silvicultural duties to leaseholders clarifies the roles of private and public actors in the forest sector. It also makes the beneficiary, the leaseholder, responsible for the whole chain of production.

In principle, cost efficiency should improve by introducing market principles to forest management. In reality, the transition may turn out to be a difficult one. A key issue is how leaseholders respond to the new liabilities. Private companies have little if any experience in forest management. They may lack the resources, the capital, personnel, equipment or knowledge required to carry out forest management operations. The companies’ limitations may threaten the ecological sustainability of forest use. In the long-term, the quality of silvicultural work largely depends on the existence of economic incentives. Boscolo and Vincent (2000) argue that renewal conditions that depend on compliance with the rules and the quality of the performance provide a powerful incentive for sustainable management even under short-term lease agreements. The new Forest Code stipulates that after the termination of the lease agreement a priority for follow-up will be given to a responsible leaseholder. However, it is questionable if a possible extension alone will be a sufficient incentive given the uncertain business environment that discourages long-term planning.

The new law may have far-reaching effects on the business environment. The silvicultural liabilities and the potential strengthening of the market orientation in forest allocation will increase the production costs of timber. This may discourage new investments. On the positive side, the new lease terms, the introduction of subleasing and mortgage in particular, will give more possibilities to acquire capital for investments. On the other hand, increased restrictions on round wood exports and an increase in custom duties reduce the leaseholder's available market options.

The new law places a strict set of formal requirements on the forest lease. For the small- and medium-sized logging enterprises that already struggle with increasing costs, the new liabilities may be insurmountable. Meanwhile, large integrated companies, because of their financial resources, are in a more favourable position and so, the Code may speed up the consolidation of the Russian forest industries.

Conclusions

The forest allocation system that preceded the new Forest Code was a mixed bag, lacking the transparency and coherence required for open marked-based system. The new Forest Code provides the opportunity for a major step towards functioning markets, in terms of both access to the forest lease and the timber market. The enforcement of the new law will play a key role in the establishment of the new forest management regime. The regional governments may take over the forests, but the Federation as the owner of forests must ensure that, while the regional characteristics are acknowledged, the same basic rules are applied throughout the country.

Conflict of Interest Statement

None declared.

References

Boscolo
M
Vincent
J
Promoting better logging practices in tropical forests
Land Econ.
 , 
2000
, vol. 
1
 (pg. 
1
-
14
)
Bromley
D
Environment and Ecology: Property Rights and Public Policy
 , 
1991
Cambridge, MA
Blackwell
Carlsson
L
Lundgren
N-G
Olsson
M-O
Why Is the Russian Bear Still Asleep After Ten Years of Transition
 , 
2000
Laxenburg, Austria
IIASA Interim Report IR-00-019
pg. 
35
 
Coase
R
The problem of social cost
J. Law Econ.
 , 
1960
, vol. 
3
 (pg. 
1
-
44
)
Dudarev
G
Boltramovich
S
Efremov
D
From Russian Forests to World Markets
 
Helsinki
ETLA, B 195 Series. Taloustieto Oy
Federal Forest Service
Lesnoy Fond
 , 
2003
Moscow
VNIITSlesresurs
 
(in Russian)
Gaddy
C
Ickes
B
Russia's Virtual Economy
 , 
2002
Washington, DC
Brookings Institution Press
Gel’man
V
The unrule of law in the making
Eur Asia Stud.
 , 
2004
, vol. 
56
 (pg. 
1021
-
1040
)
Giryayev
M
Lesopolzovanie v Rossii
 , 
2003
Moscow
VNIILM
pg. 
240
  
(in Russian)
Gray
J
Ivers
L
Implementing forest concessions policies and revenue systems
Institutional Changes in Forest Management: Workshop Proceedings
 , 
2003
(pg. 
51
-
64
)
Grunebaum
J
Private Ownership
 , 
1987
London
Routledge & Kegan Paul Ltd
Hashim
M
Putin's Etatization project and limits to democratic reforms in Russia
Communist Post Communist Stud.
 , 
2005
, vol. 
38
 (pg. 
25
-
48
)
Helmke
G
Levitsky
S
Informal institutions and comparative politics: a research agenda
Perspect. Polit.
 , 
2004
, vol. 
4
 (pg. 
725
-
740
)
Heywood
A
Key Concepts in Politics
 , 
2000
Basingstoke, England
Palgrave Macmillan
Ilyin
V
Saastamoinen
O
Chubinsky
A
Torniainen
T
Some problems of the state of forestry in Russia
Problems of Forest Complex Economy and Forest Policy of Russia in the Transition Period
 , 
1999
Russia
Tacis PCP3/FIN-10-R, St Petersburg FTA
(pg. 
55
-
57
)
Jacobsen
B
Auctions without competition: the case of timber sales in the Murmansk region
Working Papers ir99072
 , 
1999
pg. 
19
 
Jakobson
L
Public management in Russia: changes in inertia
Int. Public Manage. J.
 , 
2001
, vol. 
4
 (pg. 
27
-
48
)
Karvinen
S
Välkky
E
Torniainen
T
Luoteis-Venäjän Metsätalouden Taskutieto
 , 
2005
Finland
Metsäntutkimuslaitos Joensuu
pg. 
118
  
(in Finnish)
Kiser
L
Ostrom
E
Ostrom
E
The three worlds of action: a metatheoretical synthesis of institutional approaches
Strategies of Political Inquiry
 , 
1982
(pg. 
179
-
222
)
Klemperer
D
Forest Resource Economics and Finance
 , 
1996
NY
McGraw-Hill
Konstitutsiya Rossiyskoy Federatsii
The Government of the Russian Federation. Izdatelstvo Yuridicheskaya Literatura
 , 
1993
Moscow
pg. 
137
  
(in Russian)
Lehtinen
L
Puunhankintamahdollisuudet
Puuntuojan opas
 , 
2005
pg. 
76
  
(in Finnish)
Lehtinen
L
Venäjän metsäoikeudesta
Lapin yliopiston oikeustieteellisiä julkaisuja
 , 
2006
 
Sarja C 45, Rovaniemi (in Finnish)
Lesnoy Kodeks Rossiyskoy Federatsii.
Prospekt. Prospekt, Moscow
 , 
1997
pg. 
64
  
(in Russian)
Massa
I
Tynkkynen
V-P
The Struggle of Russian Environmental Policy Kikimora Publications
 , 
2001
Series B17, Helsinki
Ministry of Natural Resources
Svedeniya o dohodah lesnogo khozyaistva i ih raspredelenii po polychatelyam
 , 
2006
 
Unpublished. 5 (in Russian)
Moiseyev
N
Natsionalnaya Lesnaya Politika Rossii
 , 
2002
Moscow
MGUL
 
(in Russian)
Moore
D
McCabe
G
Introduction to the Practice of Statistics
 , 
2003
4th edn
NY
W.H. Freeman and Company
Niskanen
A
Petrov
A
Filiouchkina
G
Niskanen
A
Filiouchkina
G
Saramäki
K
Modelling and assessment of economic accessibility of forests in the Novgorod region, Russia
Economic Accessibility of Forest Resources in North-West Russia. EFI Proceedings 48.
 , 
2003
Saarijärvi
Gummerus Printing
(pg. 
45
-
52
)
North
D
Institutions, Institutional Change and Economic Performance
 , 
1990
NY
Cambridge University Press
North
D
The Contribution of the New Institutional Economics to an Understanding of the Transition Problem
 , 
1997
Helsinki
WIDER Annual Lecture 1.UNU World Institute for Development Economics Research
(pg. 
1
-
19
)
Nystén-Haarala
S
The Russian Property Rights in Transition. Interim Report IR-01–006
 , 
2001
Laxenburg, Austria
International Institute for Applied Systems Analysis
Orttung
R
Business and politics in the Russian regions
Probl Post Commun
 , 
2004
, vol. 
2
 (pg. 
48
-
60
)
Petrov
A
Ivers
L
Topical goals in reforming the Russian forest administration and management system
In Institutional Changes in Forest Management: Workshop Proceedings
 , 
2003
(pg. 
1
-
5
)
Petrov
A
Filyushkina
G
Kulikova
E
Teplyakov
V
Gosudarstvennoe Upravlenie Lesnym Khozyaistvom
 , 
2004
Moscow
VNIILM
pg. 
264
  
(in Russian)
Petrov
V
Chastnaya Cobstvennost na Lesa v Rossii
Lesnoe Khozyaistvo
 , 
2003
, vol. 
1
 (pg. 
14
-
16
(in Russian)
Petrov
V
Lesnoy Peredel
Lesnaya Gazeta
 , 
2004
, vol. 
90
 (pg. 
2
-
3
(in Russian)
Ribot
J
Peluso
NL
A theory of access
Rural Sociol.
 , 
2003
, vol. 
2
 (pg. 
153
-
181
)
Rogov
A
Rodionov
A
Lesnye Auktsioni i Konkursy: Otsenka Ychastnikov
Lesopolzovanie i Ohrana Prirodnyh Resursov Rossii
 , 
2004
, vol. 
2
 (pg. 
67
-
70
(in Russian)
Ross
C
Putin's federal reforms and the consolidation of federalism in Russia: one step forward, two steps back!
Communist Post Communist Stud
 , 
2003
, vol. 
36
 (pg. 
29
-
47
)
Ruutu
H
Venäjän Politiikka ja Perustuslaki
 , 
2006
Kikimora Publications, Series A 14 Helsinki
 
(in Finnish)
Sakwa
R
Russian Politics and Society
 , 
2002
3rd edn
London
Routledge
Savulkin
L
Zaostrovtsev
A
Segbers
K
Rent-seeking in regions: bureaucracies and administrative barriers
Explaining Post-Soviet Patchworks
 , 
2001
, vol. 
vol. 3
 pg. 
332
 
Sologub
A
Les, Doroga, Brakoner
 , 
2005
 
Sutela
P
The Russian Market Economy
 , 
2003
Helsinki
Kikimora Publications, Series B 31
pg. 
31
 
Tikhomirov
V
The Political Economy of Post-Soviet Russia
 , 
2000
NY
St. Martin's Press Inc.
Torniainen
T
Saastamoinen
O
Petrov
A
Russian forest policy in the turmoil of the changing balance of power
For. Policy Econ.
 , 
2006
, vol. 
4
 (pg. 
403
-
416
)
Vasin
I
Ezyo Raz ob Arende Lesov v Rossii
Lesnoe Khozyaistvo
 , 
2003
, vol. 
4
 (pg. 
10
-
13
(in Russian)
Volkov
V
Hostile enterprise takeovers: Russia's economy in 1998–2002
Rev. Cent. East Eur. Law
 , 
2004
, vol. 
4
 (pg. 
527
-
548
)
World Bank
Issues in Forest Policy Reform in the Russian Federation
 , 
2003
Washington, DC
World Bank Discussion Note, March 30, 2003, World Bank
pg. 
20