Formal and informal institutions
and their hierarchy in the regulation
of the forest lease in Russia
TATU JUHANI TORNIAINEN* and OLLI JUHANI SAASTAMOINEN
Faculty of Forestry, University of Joensuu, PO Box 111, 80101 Joensuu, Finland
*Corresponding author. E-mail: [email protected].fi
Summary
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.,
© Institute of Chartered Foresters, 2007. All rights reserved.
For Permissions, please email: [email protected]
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
Forestry, Vol. 80, No. 5, 2007. doi:10.1093/forestry/cpm033
Advance Access publication date 13 September 2007
490
FORESTRY
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).
REGULATION OF THE FOREST LEASE IN RUSSIA
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 (NysténHaarala, 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
491
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:
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
492
FORESTRY
and constitutional rules. By joining collective
actions, actors at the operational level can influence the framework created at higher levels
(Kiser and Ostrom, 1982).
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).
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
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
Karelia
Novgorod
Total
27
27
24
78
7
16
3
26
0.253
0.581
0.112
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
REGULATION OF THE FOREST LEASE IN RUSSIA
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 northwestern 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
493
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
494
FORESTRY
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
REGULATION OF THE FOREST LEASE IN RUSSIA
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.
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
Figure 2. The leased forest area in Russia 1993–
2004 (sources: Vasin, 2003; Ministry of Natural
Resources, 2006).
495
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.
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.
Table 2: Regions in north-west and Central Federal Districts with more than 300 000 ha of leased forests as 31
December 2004
Whole Russia
North-west Federal District
Leningrad region
Republic of Karelia
Republic of Komi
Archangel region
Vologda region
Murmansk region
Novgorod region
Pskov region
Leased area
(1000 ha)
Forest fond
area (1000 ha)
Share of leased
forests (%)
Exploitable
forest area
(1000 ha)
Share of lease
in exploitable
forests (%)
91 993
38 109
3706
10 094
5119
12 982
4047
452
1348
346
1 172 322
116 360
5594
14 843
38 873
28 768
11 636
9832
4077
2436
7.8
32.8
66.3
68.0
13.2
45.1
34.8
4.6
33.1
14.2
329 789
56 902
2668
7844
18 489
15 556
6446
2104
2753
860
27.9
67.0
138.9
128.7
27.7
83.5
62.8
21.5
49.0
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).
496
FORESTRY
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.
Figure 4. Leaseholders’ contribution to silvicultural
operations in 2004 as a proportion of total work
area (ha) (source: Original data, 2005).
Table 3: Estimated variables and significances of
paired significance for tests for comparing two
proportions in three populations (regions in the northwest Russia)
Comparisons
Leningrad-Karelia
Leningrad-Novgorod
Karelia-Novgorod
Pooled
estimate p SEDp
0.417
0.187
0.360
Z
P
0.127 1.587 0.056
0.107 1.056 0.145
0.115 2.172 0.015
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.
REGULATION OF THE FOREST LEASE IN RUSSIA
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.
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
497
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.
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
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§).
498
FORESTRY
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
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 problemsolving 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 taxlike 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
REGULATION OF THE FOREST LEASE IN RUSSIA
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 collectivechoice 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 shortterm 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.
499
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
500
FORESTRY
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. and Vincent, J. 2000 Promoting better
logging practices in tropical forests. Land Econ. 1,
1–14.
Bromley, D. 1991 Environment and Ecology: Property
Rights and Public Policy. Blackwell, Cambridge, MA.
Carlsson, L., Lundgren, N-G and Olsson, M.-O 2000
Why Is the Russian Bear Still Asleep After Ten
Years of Transition. IIASA Interim Report IR-00019, Laxenburg, Austria, 35pp.
Coase, R. 1960 The problem of social cost. J. Law
Econ. 3, 1–44.
Dudarev, G., Boltramovich, S. and Efremov, D. 2002
From Russian Forests to World Markets. ETLA, B
195 Series. Taloustieto Oy, Helsinki.
Federal Forest Service 2003 Lesnoy Fond. VNIITSlesresurs, Moscow (in Russian).
Gaddy, C. and Ickes, B. 2002 Russia’s Virtual Economy. Brookings Institution Press, Washington, DC.
Gel’man, V. 2004 The unrule of law in the making. Eur
Asia Stud. 56, 1021–1040.
Giryayev, M. 2003 Lesopolzovanie v Rossii. VNIILM,
Moscow, 240 pp (in Russian).
Gray, J. 2003 Implementing forest concessions policies and revenue systems. In Institutional Changes in
Forest Management: Workshop Proceedings. L. Ivers
(ed.). World Bank, PROFOR, Moscow, pp. 51–64.
Grunebaum, J. 1987 Private Ownership. Routledge &
Kegan Paul Ltd, London.
Hashim, M. 2005 Putin’s Etatization project and limits
to democratic reforms in Russia. Communist Post
Communist Stud. 38, 25–48.
Helmke, G. and Levitsky, S. 2004 Informal institutions
and comparative politics: a research agenda. Perspect. Polit. 4, 725–740.
Heywood, A. 2000 Key Concepts in Politics. Palgrave
Macmillan, Basingstoke, England.
Ilyin, V. 1999 Some problems of the state of forestry
in Russia. In Problems of Forest Complex Economy
and Forest Policy of Russia in the Transition Period.
O. Saastamoinen, A. Chubinsky and T. Torniainen
(eds). Tacis PCP3/FIN-10-R, St Petersburg FTA,
Russia, pp. 55–57.
Jacobsen, B. 1999 Auctions without competition: the
case of timber sales in the Murmansk region. Working
Papers ir99072. IIASA, Laxenburg, Austria, 19 pp.
Jakobson, L. 2001 Public management in Russia:
changes in inertia. Int. Public Manage. J. 4, 27–48.
Karvinen, S., Välkky, E. and Torniainen, T. 2005 .
Luoteis-Venäjän Metsätalouden Taskutieto. Metsäntutkimuslaitos Joensuu, Finland, 118 pp. (in
Finnish).
Kiser, L. and Ostrom, E. 1982 In The three worlds
of action: a metatheoretical synthesis of institutional
approaches. In Strategies of Political Inquiry. E.
Ostrom (ed.). Sage Publications, Beverly Hills, CA,
pp. 179–222.
Klemperer, D. 1996 Forest Resource Economics and
Finance. McGraw-Hill, NY.
Konstitutsiya Rossiyskoy Federatsii. 1993 The Government of the Russian Federation. Izdatelstvo Yuridicheskaya Literatura. Moscow, 137 pp (in Russian).
Lehtinen, L. 2005 Puunhankintamahdollisuudet. In
Puuntuojan opas. Metsäntutkimuslaitos, Joensuu,
Finland, 76 pp. (in Finnish).
Lehtinen, L. 2006 Venäjän metsäoikeudesta. Lapin
yliopiston oikeustieteellisiä julkaisuja. Sarja C 45,
Rovaniemi (in Finnish).
Lesnoy Kodeks Rossiyskoy Federatsii. 1997 Prospekt.
Prospekt, Moscow, 64 pp. (in Russian).
REGULATION OF THE FOREST LEASE IN RUSSIA
Massa I. and Tynkkynen V-P, 2001 (eds) The Struggle
of Russian Environmental Policy Kikimora Publications, Series B17, Helsinki.
Ministry of Natural Resources 2006 Svedeniya o
dohodah lesnogo khozyaistva i ih raspredelenii po
polychatelyam. Unpublished. 5 pp (in Russian).
Moiseyev, N. 2002 Natsionalnaya Lesnaya Politika
Rossii. MGUL, Moscow. (in Russian).
Moore, D. and McCabe, G. 2003 Introduction to the
Practice of Statistics. 4th edn. W.H. Freeman and
Company, NY.
Niskanen, A., Petrov, A. and Filiouchkina, G. 2003
Modelling and assessment of economic accessibility
of forests in the Novgorod region, Russia. In Economic Accessibility of Forest Resources in NorthWest Russia. EFI Proceedings 48 A. Niskanen, G.
Filiouchkina and K. Saramäki (eds). Gummerus
Printing, Saarijärvi, pp. 45–52.
North, D. 1990 Institutions, Institutional Change and
Economic Performance. Cambridge University Press,
NY.
North, D. 1997 The Contribution of the New Institutional Economics to an Understanding of the
Transition Problem. WIDER Annual Lecture 1.
UNU World Institute for Development Economics
Research, Helsinki, pp. 1–19.
Nystén-Haarala, S. 2001 The Russian Property Rights
in Transition. Interim Report IR-01–006. International Institute for Applied Systems Analysis,
Laxenburg, Austria.
Orttung, R. 2004 Business and politics in the Russian
regions. Probl Post Commun. 2, 48–60.
Petrov, A. 2003a In Topical goals in reforming the
Russian forest administration and management system. In Institutional Changes in Forest Management:
Workshop Proceedings. L. Ivers (ed.). World Bank,
PROFOR, pp. 1–5.
Petrov, A., Filyushkina, G., Kulikova, E. and
Teplyakov, V. 2004 Gosudarstvennoe Upravlenie
Lesnym Khozyaistvom. VNIILM, Moscow, 264 pp
(in Russian).
501
Petrov, V. 2003b Chastnaya Cobstvennost na Lesa v
Rossii. Lesnoe Khozyaistvo. 1, 14–16. (in Russian).
Petrov, V. 2004 Lesnoy Peredel. Lesnaya Gazeta. 90,
2–3. (in Russian).
Ribot, J. and Peluso, N.L. 2003 A theory of access.
Rural Sociol. 2, 153–181.
Rogov, A. and Rodionov, A. 2004 Lesnye Auktsioni
i Konkursy: Otsenka Ychastnikov. Lesopolzovanie
i Ohrana Prirodnyh Resursov Rossii. 2, 67–70.
(in Russian).
Ross, C. 2003 Putin’s federal reforms and the consolidation of federalism in Russia: one step forward, two steps
back!. Communist Post Communist Stud. 36, 29–47.
Ruutu, H. 2006 Venäjän Politiikka ja Perustuslaki. Kikimora Publications, Series A 14 Helsinki (in Finnish).
Sakwa, R. 2002 Russian Politics and Society. 3rd edn.
Routledge, London.
Savulkin, L. and Zaostrovtsev, A. 2001 Rent-seeking in
regions: bureaucracies and administrative barriers. In
Explaining Post-Soviet Patchworks. K. Segbers (ed).
Ashgate, Aldershot, vol. 3, 332 pp.
Sologub, A. 2005 . Les, Doroga, Brakoner. www.
rosbalt.ru/2005/11/29/236317.html (in Russian).
Sutela, P. 2003 The Russian Market Economy.
Kikimora Publications, Series B 31, Helsinki.
Tikhomirov, V. 2000 The Political Economy of PostSoviet Russia. St. Martin’s Press Inc., NY.
Torniainen, T., Saastamoinen, O. and Petrov, A. 2006
Russian forest policy in the turmoil of the changing
balance of power. For. Policy Econ. 4, 403–416.
Vasin, I. 2003 Ezyo Raz ob Arende Lesov v Rossii.
Lesnoe Khozyaistvo. 4, 10–13. (in Russian).
Volkov, V. 2004 Hostile enterprise takeovers: Russia’s
economy in 1998–2002. Rev. Cent. East Eur. Law.
4, 527–548.
World Bank. 2003 Issues in Forest Policy Reform in
the Russian Federation. World Bank Discussion
Note, March 30, 2003, World Bank, Washington,
DC, 20 pp.
Received 29 May 2006