2.78 Several conclusions and caveats are in order before closing this section. First, the picture emerging is that a significant timber rent exists in Russia, though it varies considerably across regions. Second, the variance in the data indicates that more refined methods of rent estimation must be deployed in order to arrive at a more reliable picture of the reality. Third, the local economy dissipates a large share of the rent. Fourth, the total rent on round wood was derived from the price of round wood. This method underestimates the rent since part of the round wood is in fact transformed into processed products, which fetch higher market prices and profit margin, and thus also generate higher rents. Fifth, the total forest rent is more than the rent on timber or processed wood, as it also includes the rent of land bare of forests.

# **Enhancing Timber Rent Capture**

2.79 Forest rent can be captured by a variety of instruments. In the particular case of Russia, profit taxation is problematic, due to lax accounting and auditing rules. Another option is to rely on export duties for capturing the rent on profitable export transactions. The problem is that export duties distort resource allocation between export and domestic sales at the expense of exports. Moreover, unless substantial rents are known to exist across the board, export duties penalize marginal operations, since export duties are usually _ad quantum_ instruments. An improved system of stumpage fees should therefore be privileged as a rent capture instrument. Enhancing timber rent capture requires more than an improvement in stumpage fee system, however. It calls for the following more fundamental reforms: (1) a more accurate definition of forestry costs; (2) improved knowledge of forest resources; (3) better use of forest resources; (4) increased competition in the timber sector; (5) higher investments in branches with higher value added; and (6) forest management certification.

2.80 A better definition of costs could imiprove forest revenues and public revenues in general. At the moment, accounting rules allow firms to include in their production costs items that have little to do with forestry, which artificially depresses reported profits and residual stumpage values, and thus also stumpage fees. Normative production costs can be reconstructed without too much difficulty for each type of technology and location, and help forest authorities decide which costs and profit margins are acceptable.

2.81 Second, the knowledge of forest resources can be improved, for example through a forest cadaster (quantitative and qualitative register) and improved inventories, in accordance with the 1997 Forest Code (Lebedev 1998). This would help the authorities better estimate the value of the resources they sell, at least until such a time when forest auctions become reliable price-setting instruments.

2.82 Third, the use of forest resources can improve through better allocation of forest parcels, based upon more rational forest planning. This, too, will raise stumpage values.

2.83 Fourth, more effective competition in the timber sector would raise stumpage fees. Possible measures, based on the above discussion, include: (1) more transparent timber auctions; (2) regulation of monopolies and monopsonies; (3) limiting _leskhozy_ to forest 33