Ripple Effects

Russia has the world’s largest reserves of natural biomass with about 25% of the world’s timber resources and about 45% of the world's peat reserves. The annual amount of organic waste from the agro-industrial complex is about 700 million tons, with a total gross energy content of about 90 million tons of fuel.

At the same time, the biomass sector is one of the youngest branches of the Russian timber complex, the actual development of which began a little over a decade ago. In 2013, the first federal program for the development of the domestic biofuel market was adopted—the "Action Plan for creating favorable conditions for the use of renewable wood sources for the production of heat and electricity."

As part of this plan, production and use of biofuels in the country were to significantly increase, but Russia’s attack on Ukraine and sanctions pressure from the West has put an end for implementation of these plans—at least in the foreseeable future—and has also significantly impact export markets, with subsequent ripple effects.

Densified Biomass Production
According to industry trade data, traditionally, 95% of wood pellets and about 60% of briquettes produced in Russia were exported to foreign markets, with more than 80% of its exports being sent into the EU market. The imposition of the fifth package of sanctions by the EU led to the suspension of such supplies, and revocation of Russian exporters' ENPlus certifications.

Prior to late February of last year, the annual volume of pellet production in Russia varied in the range of 2.6 million to 2.8 million metric tons (MT), according to Rosleskhoz, the Russian Federal Agency for Forestry. Of these, 2.4 million tons worth €504 million ($611 million) were sent for exports.  In 2021, Russia ranked fifth in the world in terms of annual pellet production. While the official results for 2022 have not yet been announced, most analysts expect Russia will lose its status as one of the world’s largest pellet and biofuel exporters, and some have predicted that the overall sales for Russian pellet producers in the domestic and foreign markets will have declined by 80% in 2022 compared to 2021, with sales ranging from 30,000 to 40,000 metric tons per month.

During the recent Russian International Forestry Forum—one of Russia’s most important annual events in the field of forestry and biomass—Yuri Vorobyov, deputy chairman of the Russian Federation Council, said Russian timber companies have been forced to significantly reduce output due to sanctions, with the biggest decline being observed in the case of wood pellets.

The domestic market has also seen decreases in demand. In general, according to Vorobyov, logging volumes in Russia have declined by more than 13% across the country as a whole, and by 30% in some densely forested cities of the country. So far, the industry has faced massive shutdowns of enterprises, while some companies are cutting staff or transferring them to part-time. Among the largest producers of wood pellets in Russia in 2021 were Segezha Group (part of AFK Sistema) at 360,000 annual metric tons (MT), Sawmill 25 (part of the group of companies Titanium) at 160,000 MT, and Ustyansky timber processing plant (ULK Group) at 300,000 MT.

While the companies were not available for comment, local analysts expect that most of them will revise 2023 production plans. In late December, Lesprom reported that ULK Group, the largest sawmiller in the northwest Russia, announced it would cease all wood pellet production due to lack of sales, and lay off 1,500 workers.

According to Rosleskhoz, before sanctions were imposed, Russia’s share of total wood pellets imported into the EU was an estimated 10%. The largest consumers were Denmark (958,000 MT) and Belgium (381,000 MT). Most of that volume was purchased by large energy companies including German RWE and Uniper, the British Drax, the French Engie and the Danish Orsted. A significant portion was also sent to Baltic countries, Scandinavia and South Korea.

A Mounting Problem
Ekaterina Mikhailova, executive director of the Russian Pellet Union, says the annual volume of sawdust, which is accumulating in Russia and used in the production of wood pellets, is estimated at 12 to 15 million cubic meters. As production has been cut, it is unclear how these volumes of sawdust will be utilized.  “If the production of pellets and biofuels stops, then there will be a mountain of sawdust three meters high in our forests, lying on an area of 2,000 hectares,” she says. In this case, according to Mikhailova, the risk of forest fires will significantly increase. In addition, sawmills are left with disposal problems and must seek alternative ways to use the material.

Amidst the reduction in exports, prices for pellets in the domestic market are also declining, creating more problems for producers. According to experts of the Russian Ministry of Agriculture, demand for wood pellets in Russia is varied, in the range of 200,000 to 600,000 tons per year, or about 23% of domestic production. Due to inability of exports, producers and the government plan to take measures to switch a significant part of exported pellets to the domestic market. As part of these plans, the government is evaluating the possibility of converting approximately 30% of domestic boilers from coal and fuel oil to pellets, as well as the use of up to 5% of fuel pellets for combustion in coal-fired thermal power plants.

Despite the potentially positive implications, actual implementation of these plans may be quite difficult due to high costs. As experts of the Russian Ministry of Construction have recently warned, the costs of converting a coal-fired boiler to wood biofuel are comparable to those of building a new boiler. But the department believes that such projects can be important to replace outdated, small-capacity coal-fired boilers in remote areas of the country. In addition, biofuels can be used as additives in waste incinerators, and as the main fuel for new boiler houses in difficult-to-reach areas where it is impossible to provide gas, coal, fuel oil and diesel fuel at affordable prices.

Plans of more active use of biofuels in energy complexes have been recently announced by the heads of some regions of Russia. For example, authorities of the Krasnoyarsk Territory, Russia’s largest region in Siberia, are considering the sale of fuel pellets at a discount to municipal boiler houses, while officials of the Russian Arkhangelsk region have the same plans. However, according to experts of the Russian Pellets Union, switching boilers from coal to pellets could take months, while the receipt of all the necessary approvals could take years. In addition, a public campaign is needed to promote the use of pellets for heating private houses in Russia, which, to date, has been uncommon for the country.

A significant increase in the consumption of pellets and other biomass in Russia is nearly impossible due to the low popularity of the concept of “green economy” in Russia, and its cheap hydrocarbon reserves. According to data of the Russian Ministry of Agriculture, Russia annually consumes only 150,000 to 300,000 tons of pellets, or approximately 5% to 8% of the country’s total production volume, with small households being the major consumers. There were some plans to begin supplying wood pellets and other biofuels to some Russian cement and steel plants, but so far, the initiative has not been implemented.

Moving Markets
In order to compensate for losses associated with the exit from the EU market, leading Russian wood pellet and biofuel producers are considering increasing supplies to Asian markets. Currently, Asian markets remain available for Russian pellet and biofuel producers, although their consumption is significantly lower than the EU. While South Korea has made significant purchases of Russia’s biofuels, Japan has only explored such a possibility.

In case of South Korea, from January to November 2022, Russian companies managed to redirect about 20% of their wood pellets exports from the EU to the South Korean market, despite very high transport and logistics costs. While the government has promised to provide subsidies to cover at least part of these costs, most producers and analysts believe they will be insufficient to ensure profitability.

In the case of China, there is a currently a ban on the import of biofuels from other countries, with an exception of some border areas of the country. As Olga Rakitova, head of IAA INFOBIO, tells the Russian Lesnoy Region forestry paper, China produces about 8 million tons of pellets per year, almost 100% of which is consumed in the country. Therefore, the need to import foreign supplies is minimal.
In 2011, the Russian Vyborg Cellulose Company launched the world's largest wood pellet plant in Russia. The volume of its production is 1 million tons per year. Prior to the war, the company had the potential to meet about 30% of all European demand. Due to the current situation in Russia and its ever growing isolation, the company will have to find alternative sale markets for its products.

The situation is also complicated by the lack of equipment and machinery in the industry. Prior to sanctions, most equipment was supplied to Russia from abroad, particularly from EU states.

While the exodus of Russian pellets from the EU market provides an opportunity for foreign rivals to fill the vacant niche, at the same time, there are growing concerns of Russian pellets being recertified, repacked and illegally exported through other countries.


Author: Eugene Gerden
International Freelance Writer