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Interview of Vasily F. Preminin, Director General, Segezha Pulp and Paper Mill (Open Joint-Stock Company), to the PRIME-TASS North-West News Agency November 10, 2003

Mr. Preminin, the Segezha Pulp and Paper Mill has been acknowledged as the most dynamically developing company in the forest products industry in 2003. In this connection, please tell us how much is invested in the development of your company in 2003? What are these investments channeled into? What is the volume of the 2004 investment program, and what will these funds be channeled into?

I'd like to answer the last question first: what will these funds be channeled into? Into the refurbishment and modernization of production. Just as we use the funds that we raise and earn ourselves. All that we have earned since we eliminated the threat of the company's bankruptcy and began its recovery in 1998/99 we have channeled only into the mill refurbishment.

At present, the expression "a developing company" in our industry may also mean "a pursuing company": we are lagging behind our foreign competitors in technology, and this lag reaches dozens of years! But the market is not "swayed by tears"; the customer needs quality products at acceptable prices rather than tales about bygone sorrows. And we must catch up with the competitors-this is the only condition for the survival of the Russian industry.

Slight improvements are not enough for such a race. And the first thing we did was our corporate strategic development program for the nearest one and a half decades developed in cooperation with the world-famous Jaakko P?yry Consulting firm. The program provided for the lines of our specific activities and their sequence. Our financial partner, the Savings Bank of the Russian Federation (Sberbank), approved of the business plan and expressed the willingness to finance that unprecedented project.

First, there was an agreement-the agreement of intent to implement the investment program of the Segezha Pulp and Paper Mill reconstruction-the largest refurbishment project in the pulp and paper industry in Russia's contemporary history. The agreement providing for €410 mln. investments was signed by the Russian President, Chairman of the Board of Sberbank Andrey Kazmin, Head of the Republic of Karelia Sergey Katanandov, and me acting as Director General of the Segezha Pulp and Paper Mill on May 19, 2003. The fact that Valentina Matvienko, the Plenipotentiary Representative of the Russian President in the Northwestern Federal District, participated in the signing ceremony emphasized the all-Russian nature of the event.

Shortly after that, the financing of specific projects began. In July, the North-West Bank of Sberbank approved the decision to finance the $15.4 mln. continuous pulp cooking plant modernization project. In October, Sberbank made the decision to extend the Segezha Mill a €40.4 mln. loan with seven years' tenor.

The loan funds will be used for Paper-Making Machine (PMM) No. 10 refurbishment. The implementation of this project will allow the PMM No. 10 capacity to be doubled and the bag paper quality to be improved to reach the world standards for the quality of extensible paper. The contract with Metso Paper, Finland, for PMM No. 10 refurbishment was signed in early September.

The work is currently in full swing. The commissioning of these facilities-in fact, the rehabilitation of the entire process stream of PMM No. 10-is scheduled for the middle of 2004. I think you agree that it will be a good gift on the occasion of the 65th anniversary of the mill!

What can you say about cooperation between the Segezha Pulp and Paper Mill and Russian and foreign banks? What problems do you face, how do you think such problems can be resolved?

Our cooperation with banks raises no problems. We are perfectly satisfied with our relations with our financial partner, the North-West Bank of Sberbank. Before extending us a loan for, say, one more project within the framework of the company's refurbishment, the bank makes a very careful examination of the documents. This doesn't allow us to let things slide and, at the same time, provides us with an additional guarantee that the project is viable and developed enough.

The cost of borrowing is a different matter. Russian borrowings are expensive, especially long-term ones that are the only loan funds the pulp and paper industry is able to use. However, loans obtained from Western banks will not eventually turn out to be less expensive if we take account of all bank instruments meant for preventive protection from "Russian economy risks."

Of course, we would like the state, interested in recovery and modernization of the domestic economy, to lend us a helping hand by reducing interest on bank loans. But, according to the President, only economic revival in Russia rather than the state will decrease the cost of borrowing. We have to take it into account.

Could you please make a comment on the economic performance of the Group members and the Group in the aggregate for nine months of 2003 and, if possible, a forecast for entire 2003 and 2004.

If compared on a traditional year-on-year basis, the performance indicators for nine months are quite good: a 4 percent increase in paper production; a 15 percent increase in bag production; a far more considerable increase in wood-chemical production- for some products, a 50 percent increase. But if comparing the indicators in terms of money rather than in terms of pieces and tonnes, we find that, in the aggregate, the Group sustains small losses. Investments, the use of funds for refurbishment and modernization are undoubtedly among the reasons for such financial results; however, the main reason is a rise in expenditures for raw materials and energy products.

And the forecast for next year is "conservatively pessimistic." The year 2004 will not be better than the year 2003. The bag paper market is undergoing stagnation. We foresaw the situation, because such crises in the industry are cyclical. However, whereas foreign pulp and paper companies are sometimes simply closed, we just don't have this "opportunity." And we intend to spend the next year for active modernization and refurbishment to be able to offer the customer both new quality of our products and new service when the market begin to recover again. Besides, modernized production means another level of labor efficiency, reduced expenses, and improved competitiveness, irrespective of a rise in prices of raw materials and energy products.

In July 2003, Kondopoga Joint-Stock Company, the Segezha Pulp and Paper Mill, and Karellesprom signed a memorandum on establishment a new industrial group in Karelia. What is the current status of this project?

My answer will be brief: the work is under way, but we are currently at the stage of mutual consultations.

Does the Segezha Pulp and Paper Mill plans to enter the stock market or issue any bonded loans? If so, please tell us about it.

This answer will be brief too: we have some thoughts about it, but we haven't converted them into a real action program yet.

What problems is the Karelia forest products industry currently facing; is there any prospect of settling these problems?

The main problem is the low-efficiency use of forest areas. More simply, in spite of a formally large growing stock, in actual fact we can make use only of a small part of this wealth.

Cognition comes through comparison. An example is neighboring Finland, whose forest products industry has a worldwide high-efficiency reputation.

In similar weather conditions, the efficiency of the neighbors' use of forest resources is four times as high as that in Karelia and 13 times as high as Russia's average efficiency. Meanwhile, reforestation is more than twice as much as in Russia: the annual stand growth in Finland is 3.5 cu.m per 1 ha of the forest area; in Karelia, 1.5; and in Russia on the average, 1.25. In other words, the Finnish forest grows faster than harvested. We must eventually achieve the same results, simultaneously resolving an environmental problem unknown to Finland: the old-growth timber whose deterioration results in the reverse process-oxygen consumption accompanied by carbon dioxide liberation.

A relevant issue for Karelia is regional wood harvesting rules. At present, these rules are the same in regions with insufficient water sources, which means that forest protection is required, and in Karelia with one water body per ten inhabitants. Our forest operators are discontented with the situation: in spite of such water sources, unlike their grandfathers and great-grandfathers, they are not allowed to profitably harvest mature wood without any environmental abuse!

Another very important thing. Even the richest forest areas are not economically viable if inaccessible. Once we add the word "accessible" to the term "forest resources," we will have any optimistic statistical figures reduced to be half as much or even less! According to our calculations, to make the attractive Karelia forest resources accessible, it is necessary to invest around $400 mln. in the construction of the road network. In our opinion, the road system-and, correspondingly, such multimillion investments-is the area of responsibility of the forest owner. At present, the owner is the state.

By the way, Finland, which I mentioned as an example, did this very thing: it developed the program of forest road construction, drew up the business plan, obtained a loan from the European Bank, and repaid the loan several years later by using the funds received from those engaged in the development of the forest areas.

In addition to such large-scale problems requiring more than a year for settlement, the forest products industry has burning, current problems. If charges for standing wood are increased as announced in this situation, any and all forest operators will become loss-making enterprises or will simply go bankrupt.

What does the Segezha Pulp and Paper Mill do to improve the efficiency of the use of forest resources?

Let me divide the answer into two parts. On the one hand, the efficiency of the use of raw materials received by the company; on the other, the efficiency with respect to standing forest.

About raw materials, we developed the system a long time ago: pulpchips are used for pulp production; the rest, for steam and power generation instead of fuel oil. As early as 2001, we launched the project called the "Fluid Bed Boiler." Without going into technological details, this boiler plant to be commissioned in late 2003 can be used for incineration of all waste. Or, for instance, for burning peat-the actual reserves of peat near Segezha will last for many years.

The other direction of work is the maximum and, which is very important, sustainable use of resources in the forest areas that we lease.

As early as July, the Segezha Pulp and Paper Mill and Rosgiproles (Russian State Design and Survey Institute) signed an agreement for development of the forest management project. After examining the characteristics of the Karelia forest reserves in the area of the Segezha Mill's operations, in 2003/2004 Rosgiproles is to develop the project for discovering and utilizing additional pine resources on the basis of the continuous and sustainable forest management by specialized forestry enterprises with the relevant cutting period.

As a result, the Segezha Pulp and Paper Mill and the Segezha Wood Sawing and Working Plant, a subsidiary of our holding company, will receive the guaranteed long-term and continuous supply of raw materials (pulpwood and sawlog) by such specialized forestry enterprises-not less than 300 thousand cu.m of wood per year. Besides, we expect the project developer to provide us with proposals for efficient concepts of timber logging and transportation, as well as forest management in the context of the overall development of production.

What environmental projects are being implemented by the Segezha Pulp and Paper Mill?

It just so happens that all of our projects designed to reduce expenses and enhance economic performance "automatically" incorporate environmental issues. Incidentally, I mentioned it at the September international scientific and practical conference on sustainable development of the forest products industry of Northwestern Russia and expansion of cooperation with EU countries in environment protection.

The "Fluid Bed Boiler" is not only a reduction in expenses for the "purchase of fuel oil." It is also an actual decrease in the discharge of sulfur contained in fuel oil into the air. Burning lumber waste means removing debris from production areas and forests. As they say, what is burned is what won't rot . . . .

Another example is the modernization of pulp production and wood preprocessing, the rehabilitation of the entire process stream of PMM No. 10. In addition to its economic potential, it is the reduced use of chemicals, additional effluent treatment, etc.

The cooperation with Rosgiproles in improving the methods of using forest resources also settles environmental issues: if we expect active stand growth, if we harvest mature wood timely and selectively, then we should expect the cleaner, oxygenated air "in the area of the Segezha Mill's operations" . . . .

What is your attitude toward the idea of privatization of forest reserves?

A positive attitude; however, I understand that it takes time and effort to establish this important institution after the declaration of "private ownership." Perhaps, more time and effort than expected. Private ownership is impossible without the efficient owner and the normal, actually effective regulatory regime.

There is another topic that could be a far more fruitful matter for discussion: a long-term lease or concession of forest resources. However, it is necessary to grant, and properly regulate, the right of pledge of forest resources. This will insure procurement of loans for production development with far fewer fears that forest, our wealth, may fall into the hands of an inefficient manager. If the borrower fails to repay the loan, the forest reserves will be returned by the lender to use, or the state will purchase such forest reserves from the lender and bring them into requisition at its discretion.

Василий Фёдорович Преминин

Vasily F. Preminin, Director General, Segezha Pulp and Paper Mill

Mr. Vasily Fyodorovich Preminin was born on February 2, 1952, in Arkhangelsk. He graduated from the Arkhangelsk Forestry Engineering Institute in 1974 as a Mechanical Engineer in the Pulp and Paper Industry. In 1974-1986, working for the Petrozavodsk Commissioning Directorate of Soyuzorgbumprom as an Engineer at first, he was eventually promoted to Deputy Chief Engineer, participated in the commissioning of the Kotlas, Arkhangelsk, Kherson, Solikamsk, Segezha, Kondopoga, and Okulovka pulp and paper mills. In 1986-1994, Mr. Preminin was a Senior Researcher and, later, the Head of the Research Department of the NIITsmash Institute (Petrozavodskmash Joint-Stock Company). In 1994-97, he held the office of Deputy Director of the Republic of Karelia Territorial Agency of the Federal Insolvency (Bankruptcy) Administration. In 1995, he finished the Bankruptcy Commissioner Training Course. Mr. Preminin graduated from the Northwestern Branch of the Academy of Civil Service in 1997 as a Manager-Economist in Public and Municipal Management. In 1998, he was appointed as bankruptcy commissioner of Segezhabumprom, a company undergoing bankruptcy proceedings at that time.