Timber Briefing: U.S. Lumber Prices Could Be Affected By Sanctions On Russia

Danny C. Kelly-StallingsMarisa N. BocciChristopher J. VossMichael E. Ruck

*This article was originally published as a K&L Gates Client Alert and is being republished with the permission of K&L Gates.

The U.S. lumber market has seen unprecedented price rises in recent years. Prices could climb even higher as the world responds to the conflict between Russia and Ukraine. Russia is a major exporter of wood in the global market, particularly in China and the European Union. If these countries restrict wood products imports from Russia, or if Russia refuses to export to them, the strain on global supply could drive domestic prices to new heights as Russia-dependent markets look for new sources of wood. 

There is already significant upward pressure on domestic lumber prices. We are in an inflationary environment, demand for building materials is high, increased regulation and catastrophic wildfire have combined to depress supply, there are skilled labor shortages and wage demands for mill and forestry jobs, and carbon reserves and credits are increasingly taking trees out of regular harvest rotation.

In this context, the impact of Russian market disruption could have an outsized impact. Russia is a significant player in the world wood products market. In 2020, Russia exported over US$8 billion in wood products, making it the world’s fourth largest exporter.[1] In 2021, that number rose to US$12 billion.[2] 

Asia and Europe are Russia’s primary export markets. Roughly 40% of Russia’s exports go to China—over US$3 billion in 2020, with Finland (US$539 million), Uzbekistan (US$429 million), Egypt (US$386 million), and Japan (US$369 million) also being major importers of Russian wood.[3] Other significant importers include EU countries like Germany, Italy, Poland, and Estonia, as well as the United States, Kazakhstan, India, Azerbaijan, Korea, Ukraine, and Belarus.

Sanctions from these countries could limit or halt trade with Russia. Many countries have already restricted Russian trade, and others could follow suit. Russia has also deemed many countries “unfriendly” and will cease trade with them.[4] The following table shows the status of sanctions in Russia’s primary wood export markets:

CountrySanctions Overview as of 7/22/22Sanctions Specific to Wood ProductsFurther Sanctions Outlook
ChinaAs of April 1, 2022, China rejects Russian sanctions: China rejects sanctions as Ukraine war tops summit agenda | AP News

China generally abiding by Western sanctions: China’s Russia dealings irk US, but don’t breach sanctions | AP News Exports to Russia from China have plummeted: Peterson Institute study casts doubt on Chinese help for Russia – The Washington Post However, some China is still providing some aid and trading with Russia: Russian firms launch new sea routes to ensure trade with China, other countries – Global Times China aid to Russian military prompts sanctions on 5 companies – The Washington Post
While China has remained supportive/neutral regarding Russia, they may be indirectly affected by the Russian export ban on western countries: Russia risks damaging alliances in China as wood sanctions cripple international trade (packaginginsights.com)

China also impacted by Russia’s ban on exporting certain types of wood:
Forest wood: The appetite of the Chinese alarms the French oak industry (lafranceagricole.fr)

Russia stopping log exports to China and the situation in the EU and France (europa.eu)
Chinese tech companies may halt business operations in Russia: Chinese tech firms may follow DJI to cut Russia and Ukraine exposure to minimise political, sanctions risk, experts say | South China Morning Post (scmp.com)
JapanBroad range of economic and trade sanctions including restrictions on financing and banking transactions, investments in Russia, imports and exports of various goods, and energy reliance. Summary list available here: Japan Stands With Ukraine – Government of Japan   May 5: In a show of commitment to its western allies, Japan announced new sanctions on Russia including ban on exporting Quantum computers and other high-tech products: Kishida announces new sanctions on Russia | NHK WORLD-JAPAN News   May 11: New financial sanctions against Russia including freezing assets of Russian banks and prohibiting Japanese investments in Russia:   Japan freezes assets of Russia’s Sberbank, Alfa Bank over Ukraine (kyodonews.net)   June 26: Japan announces additional sanctions against Russia including a ban on imports of Russian gold and on providing accounting, trust, and other services to Russia: Kishida announces additional sanctions on Russia | NHK WORLD-JAPAN NewsProhibitions on imports of “some wood”

Japan is subject to Russian export ban: Members of the EU are subject to the Russian export ban including wood products: Russia’s Export Ban: Nigeria escapes “unfriendly list” – Voice of Nigeria (von.gov.ng)   The international ban on Russian timber, and Russia’s ban on exporting wood products, have caused timber prices to increase in Japan: Skyrocketing lumber prices push up costs of homes, furniture – The Japan News (yomiuri.co.jp)
Japan stepping up sanctions against Russia following removal of “most favored nation” designation: Japan formally revokes Russia’s ‘most favored nation’ status – ABC News (go.com)

Japan looking to implement coal and energy sanctions: Where Russian Sanctions Stand | Paige Lambermont (independent.org)   Japan looking to slowly phase out Russian oil: Japan to slowly phase out Russian oil, keep interests in projects (kyodonews.net)   In July, US Treasury Secretary Janet Yellen met with Japanese Finance Minister Shunichi Suzuki to discuss further sanctions against Russia: Treasury’s Yellen, Japan’s Suzuki meet to discuss more Russia sanctions, weak yen | Financial Post
FinlandDecrease in Russian imports. Companies and industries making voluntary decisions to withdraw from Russia: Sanctions Hit Trade Harder Than Soviet Collapse, Finnish Customs Says | Investing News | US News

Finalnd appears to be supporting the EU sanctions, however, trade hasn’t halted completely due to grace periods/loopholes: Finnish ‘loopholes’ allow imports of Russian coal and oil to continue | Euronews   Russia cuts off natural gas exports to Finland in a symbolic move : NPR In line with EU sanctions, Finland seizes Russian freight cars: Finland impounds several Russian freight cars amid sanctions (railway-technology.com)
Finnish forestry groups UPM and Stora Enso have stopped buying Russian wood as international certifiers labelled it “conflict timber”: Sanctions Hit Trade Harder Than Soviet Collapse, Finnish Customs Says | Investing News | US News

Members of the EU are subject to the Russian export ban including wood products: Russia’s Export Ban: Nigeria escapes “unfriendly list” – Voice of Nigeria (von.gov.ng)
Import of Russian timber to be discontinued – Where to find an alternative source of wood raw material? (metsateollisuus.fi)
Prime Minister supports tougher sanctions on Russia – “including those covering energy”: PM: Finland supports tougher sanctions on Russia | News | Yle Uutiset   Also supports sanctions across the finance and transport sectors: Finnish PM says joining NATO will strengthen security – ABC News (go.com)   Finnish energy companies refusing to supply electricity to Russian search engine, Yandex:  Finnish energy companies refuse to supply ‘Russia’s Google’ – EURACTIV.com
GermanyRefused to accept sanctions against Russian oil and gas, under pressure by the EU to accept stronger sanctions against Russia and provide more support to Ukraine: Germany Faces Pressure to Bolster Response to Russian Aggression in Ukraine – WSJ   Canada grants exemption to Russian sanctions to allow delivery of equipment to repair the Nord Stream 1 pipeline to ease Germany’s gas supply strain: Canada waives Russia sanctions to ease Germany’s gas shortage | Financial Times (ft.com) Germany fears Russian gas flows could be about to stop for good (cnbc.com)   Germany seizes first Russian-owned property under sanctions | News | DW | 20.06.2022Members of the EU are subject to the Russian export ban including wood products: Russia’s Export Ban: Nigeria escapes “unfriendly list” – Voice of Nigeria (von.gov.ng)Germany is no longer in opposition to a ban on oil and gas: Germany Drops Opposition to Russian Oil Ban, Ministers Say | World News | US News

Germany Drops Opposition to Embargo on Russian Oil – WSJ   May 8: Germany agrees to additional sanctions against Russia: US, France, Germany, Italy, UK agree on additional sanctions against Russia (ukrinform.net)
EUBroad range of economic sanctions including prohibitions on trade and export/import of numerous goods, financial transactions and services, access to ports, and investments in various sectors as well as restrictions on media. A more complete list as of April 8, may be found here: Sanctions adopted following Russia’s military aggression against Ukraine | European Commission (europa.eu)   As of the latest sixth package of sanctions imposed on June 3, EU sanctions include freezes on individual assets, economic and media sanctions, and restrictions on the trade of goods and technologies. Other sectors affected include energy, transport, and finance: Handling the new EU and UK sanctions against Russia (cms.law) Recent EU, UK And USA Sanctions Against Russia And An Overview Of Russian Countersanctions And Further Measures Against So-Called “Unfriendly States” – Export Controls & Trade & Investment Sanctions – Worldwide (mondaq.com)“prohibition on imports of cement, rubber products, wood, spirits, liquor, high-end seafood” Sanctions adopted following Russia’s military aggression against Ukraine | European Commission (europa.eu)   July 11th marked the end of the transition period during which it was still possible to import/export certain Russian materials, including wood products: European Union tightens anti-Russian sanctions – Baltic News Network – News from Latvia, Lithuania, Estonia (bnn-news.com)EU proposing Russian oil ban: EU proposes ban on Russian oil imports, removes Sberbank from Swift – CNN   May 9: Sixth sanctions package is “close”: Sixth EU Sanctions Package Vs Russia Is Close, Germany Says | Investing News | US News   July 12 – the EU is working on a seventh package of sanctions: The EU Is Prepping Another Round Of Sanctions Against Russia | OilPrice.com
UzbekistanUzbekistan supports Ukraine, however, plans to maintain relationship with Russia for now: UZBEKISTAN – RUSSIA Attack on Ukraine: Tashkent distances itself from Moscow (asianews.it)
Uzbekistan will be indirectly affected by sanctions against Russia: Russia’s War in Ukraine Spells Disaster for Central Asia | Time   Uzbekistan is suffering effects of sanctions against Russia including the failure of the Russian purchase of a large Uzbek bank and secondary sanctions against a Uzbek company: bne IntelliNews – Russia sanctions complicate Uzbek energy sector overhaul Uzbekistan: Sanctions against Russia scotch bank buyout | Eurasianet
No sanctions against Russian wood tradeNuclear Deal: Uzbekistan: Nuclear deal with Russia still on the table despite sanctions | Eurasianet

Uzbekistan distancing itself from Russia: Ukraine war: Is Central Asia loosening ties with Russia? | Russia-Ukraine war News | Al Jazeera   While Uzbekistan has not joined western sanctions, they will comply with them: Russia’s southern neighbors take a stand | The Hill
EgyptEgypt has rejected sanctions against Russia:  Russia’s War on Ukraine: Egypt’s Limited Room for Maneuver (arabcenterdc.org)

Egypt seeks middle ground between US, Russia as Ukraine fighting rages – Al-Monitor: The Pulse of the Middle East
Egypt impacted by price hikes of raw materials due to sanctions and the Russia-Ukraine conflict: Russian-Ukrainian war to take a toll on Egypt’s real estate sector: Stakeholders – Daily News Egypt   Egypt and Russia continue to trade, switching to local currencies to overcome Western sanctions: Egypt plans to use ruble in trade with Russia – Al-Monitor: Independent, trusted coverage of the Middle EastEgypt looking to maintain relationship with Russia, although deals have slowed down: Amid fears sanctions will impact Egyptian-Russian cooperation, Sisi, Putin vow to find ‘solution’ | MadaMasr

After UN Ukraine war vote, Egypt strives to protect vital interests with Russia (thenationalnews.com)
IndiaIndia looking to continue trade despite western sanctions against Russia: Russia and India will find ways to trade despite sanctions, says Lavrov | India | The Guardian

Import/Export of goods between India and Russia: India plans $2 bn more of exports to sanctions-hit Russia: Report | Business Standard News (business-standard.com)

U.S. Tells India There Will Be ‘Consequences’ for Dodging Russia Sanctions (newsweek.com)
India may be indirectly affected by trade sanctions: Russia risks damaging alliances in China as wood sanctions cripple international trade (packaginginsights.com)India increasing imports of Russian oil and continuing trade despite sanctions: Russian Oil: India increasing imports despite sanctions – CGTN In Russia’s War on Ukraine, China and India Emerge as Financiers – The New York Times (nytimes.com) India-Russia trade will continue despite Western sanctions: Envoy | Business Standard News (business-standard.com)

Even where countries do not take official action, individual companies may stop buying Russian wood to mitigate reputational risk. The removal of Russian banks from the SWIFT international payment transaction system will also complicate payments for exported Russian products, as well as for Russian timber harvesters, sawmills, plywood mills, and pulp mills, as they attempt to import machinery and supplies.

Other actions short of sanctions may have an impact as well. For example, in the United Kingdom, guidance published by the UK government last year to clarify the Timber and Timber Products (Placing on the Market) Regulations 2013 stated that due diligence by purchasers must include “consideration of the prevalence of armed conflict.” In early March, the Timber Trade Federation, a UK timber association, urged its members (who represent 85% of the £10 billion UK timber industry) to enforce their own trade ban on Russian timber.

Countries that restrict wood trade with Russia will be forced to look elsewhere for timber. Although they might not look first to the U.S. market, the market reverberations will eventually reach our shores and drive up demand. The market will seek out and find wood wherever it is available until eventually supply, demand, and prices adjust to meet the new geopolitical norm. If Russian wood supply exits the global marketplace, there will be a supply deficit that is likely to be filled either by increased production or price hikes.

Given this, U.S.-based timber companies would be well advised to monitor sanctions on Russian wood products as they seek to forecast market prices in the medium term. China, in particular, is worth monitoring closely. China is the world’s largest importer of wood products, and Russia is China’s most important supplier.[5] 

In addition, companies that export timber products may wish to identify export targets that might be of particular interest as the marketplace responds to Russian military action. For those looking to forecast specific market segments, the most common production species in Russia are pine, spruce, fir, larch, Siberian pine, oak, beech, birch, aspen, ash, elm, and linden.[6] 

[1] Observatory of Econ. Complexity, Russian Wood Products, https://oec.world/en/profile/bilateral-product/wood-products/reporter/rus?redirect=true.

[2] Wood Res. Int’l LLC, Russia’s invasion of Ukraine will likely reduce forest products export, CANADIAN FOREST INDUS. (Feb. 28, 2022), https://www.woodbusiness.ca/russias-invasion-of-ukraine-will-likely-halt-planned-forest-industry-investments/.

[3] Supra note 1.

[4] Nicholas Gordon, Russia banned the export of over 200 goods. But is Putin retaliating against sanctions, or stockpiling supplies?, FORTUNE (Mar. 11, 2022), https://fortune.com/2022/03/11/russia-export-ban-timber-cars-sanctions-ukraine-invasion-putin/

[5] Timber Trade Portal, Russia, https://www.timbertradeportal.com/en/russia/103/timber-sector#:~:text=According%20to%20FEDSTAT%20data%2C%20the,world%27s%20largest%20exporters%20of%20softwood.

[6] Id.

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