economy and the forest sector is no exception. In addition, the system of non-payments allows firms and the government to trade in non-cash instruments, which do not show up in official statistics. Given the downward bias of official statistics on profitability, the return to profitability in 1999 gives even more reason to believe that the sector is indeed recovering.

2.48 The fiscal contribution of the forest sector is not commensurate with the size of the forest resource (World Bank 1994). The potential tax revenues from the forestry sector were estimated at US$ 0.9-5.5 billion per year in 1996 depending on assumptions about wood production and the profitability of forest enterprises, i.e. 0.7-4.4% of consolidated revenues (World Bank 1996). In 1999, the forest sector still contributed only about US$ 0.55 billion, or 1.1% of consolidated revenues (including profit taxes, VAT, excises and stumpage fees).

# **Low Rent Capture**

2.49 The mediocre fiscal role of the forest sector is due to a complex set of interrelated issues, including low stumpage fees, illegal logging and exports, and poor collection rate of stumpage fees. The first two reasons are considered here. The third reason is common to most every natural resource and every tax in Russia and is discussed in more detailed later in the context of the non-payments problem.

# **_Low Stumpage_** _Fees_

2.50 Russian stumpage prices are less than 2-3% of the market price for timber, compared to 65% in Finland (Sokolova 2000). Russian stumpage fees are low for several reasons. As was explained above, federally mandated minimal stumpage fees do not reflect rent or market conditions. Other reasons include: (1) the cap imposed on actual stumpage fees; (2) high road building and transportation costs; (3) low value added; (4) political risks; and (5) distorted domestic and export timber market structures. When analyzing reasons 2 through<sup>5,</sup> it helps to place Russia in international context. Finland is a meaningful reference for Russia, as the forests are comparable, and Finland is the largest importer of timber from<sup>Russia,</sup> either for processing or re-exporting. Most of the Russian-Finnish wood trade is in round wood coming from European Russia, in particular the Russian North and Northwest. Whereas in Northwest Russia the actual average stumpage fee per cubic meter of round wood was RUB 14.5 in 1999, or about US$ 0.50 at the current exchange rate, in Finland<sup>the</sup> average rate hovered around US$ 18, i.e. about 30 times more (Petrov 2000b; Finnish Forest Research Institute 2000).

2.51 First, the Russian legislation limits the autonomy of regions to raise federally mandated minimal stumpage fees: regions are only allowed to double the minimum rates.

2.52 Second, Finnish importers invoke the high costs of road building. Russian all-purpose roads are few and of substandard quality, and the quality of forest roads is even worse. Harvesters thus spend considerable resources building roads or otherwise overcoming transportation difficulties. The higher the cost, the lower the residual<sup>stumpagevalue.</sup> Although this argument holds some truth, it should be qualified in the following<sup>way.Firstly,</sup> much timber is cut in the winter in Russia, at a time when roads are of less importance since 24