Reference to the EU contract Number

With an enormous wealth of natural resources and amidst an economic recovery and institutional, legal and administrative reforms, Russia is currently entering a new period. The year 2002 was characterized as one of the most successful years for the Russian economy in the last decade marked by significant economic growth in all levels. Though extensive structural reforms are still required in order to create a functioning market economy, eliminate problems, improve the investment climate and remove high risks associated with foreign investments, the Russian private sector is dynamic and has the potential to fuel growth and create employment. Furthermore, Russia remains the focal point for business development, opportunities and knowledge exchange throughout the NIS countries.

Russia is the third largest energy consumer and holds the world's largest natural gas reserves, the second largest coal reserves, and the eighth largest oil reserves. It is also the worldwide third largest emitter of greenhouse gases. However, the comeback and transition of the Russian economy which is witnessed today, is accompanied by the challenge of strengthening the environmental and natural resource management posed by decades of Soviet and post-Soviet inefficient development, environmental negligence and recurring economic crises. Russia has acknowledged the need to focus on renewable energy options and on cleaner sustainable technologies in order to mitigate the threatening environmental risks, preserve its natural stability and protect its environment for future generations. Russia faces numerous critical environmental problems which need to be tackled and are related to air quality (in urban areas caused by heating, power generation, transportation and industry), deterioration of drinking water quality massive accumulation of hazardous industrial waste and widespread degradation of land, fisheries, and forests caused by the rapid recovery in industrial production and the increasing energy needs.

Russia’s Ministry of Energy has outlined its energy strategy priorities till the year 2020 to include:

Between the collapse of the Soviet Union in 1991 and the severe 1998 financial crisis, the Russian economy witnessed a prolonged recession and a decrease in the GDP with a rate of 6,2 % each year. But in 1999, the precipitous devaluation of the rouble boosted demand for local production, stimulated the industry, substituted imports while successful macro-economic stabilisation policies coupled with unexpectedly high world energy prices, brought about a recovery. The increase in GDP for the economic year 2001 was 5% and forecasts estimate annual increase of 4,7 – 5,2 % of GDP growth rate till 2020 [source: Pravda]. The transition of the Russian economy to a modern market economy is still continuing to experience difficulties. Though approximately 75% of industry has been privatized, many sectors are plagued by administrative bureaucracy and corruption.

The attained political and economic stability, has allowed the Russian government to perform a series of economic reforms and attempts to restructure, reorganise and liberalise the various sectors of the industry, especially the energy sector, from which the national economy deeply depends. It also has struggled to modify the intricate and bureaucratic tax and legal codes hoping to attract foreign investment funds. As a result of this, the number of economic activities requiring a license has been cut dramatically, now allowing the registration of a new company to be simple and quick, taking five days instead of the former three months.

Contrary to most European countries, Russia receives practically no share of its energy supply from renewable energy sources (excluding hydropower). Russia's utilization of renewable energy sources remains low relative to its use of fossil fuels (Natural gas accounted for over 54% of Russia's energy consumption in 2002 alone). It is important to note that according to the Russian Gas Law of 1999, the Russian natural gas market is supplied at a regulated price of approximately €16 per 1,000 cubic meters, which is less than the amount it costs for Gazprom to produce. However, since cheap natural gas deposits are almost totally exhausted and new ones inevitably entail huge investments, it is expected that the production cost of natural gas will dramatically increase in the following years. Starting on February 1, 2003, the Russian Government approved on increasing the natural gas prices by 20 percent on average for the residents of Russia.

Structural reforms in the federal policy and the energy complex necessary to stimulate demand for bioenergy utilization in Russia have been already identified, however the main activities and interests of the Russian government remain focused on the tangible effects associated with the liberalization and the restructuring of the colossal oil and natural industry. Nonetheless, there are enormous opportunities for bioenergy when taking into consideration the country size and potential, especially its abundant biomass resources from forests and agriculture yields. Until now, comprehensive and structured information is still unavailable, yet the Swedish Business Development Agency, NUTEK, has assessed the biomass resources in the European part of Russia alone to be over 450 TWh/year, consisting of:

The exploitation of bioenergy still retains considerable chances and many opportunities exist in certain areas of interest and niche markets.

Another example is district heating systems. Centralized district heating systems provide between 70 and 80 percent of Russian households with heat and hot water. Some district heating plants supply 100 percent of a city’s heat for more than 100,000 people. A number of Russian cities spend a third of their budget subsidizing citizens’ heat and hot water. The financial burdens imposed by these obligations have led cities to seek ways to reduce their energy consumption. One of the most viable applications is to replace gas, oil and coal in district heating stations. The Saint-Petersburg Energy Company that operates 400 small-scale district heaters in the region is cooperating with the Danish Energy Agency for the modernization of 57 boilers to be fuelled by biomass.

A pre-feasibility study on the opportunities of biomass solutions (Procurement of Technologies in the biomass field) conducted by NUTEK for the Council of the Baltic Sea States (CBSS) showed that the municipalities in Russia were sufficiently informed with biomass potential and expressed interest in the utilization of biomass boilers (mainly for small district heating plants and larger houses).

Several projects are under development to increase the use of biomass in Russia. One of them is the proposed Russian-Nordic programme for fuel switch to biomass in North-West Russia. It aims at a development of a Russian biomass boiler industry and a switch to biomass in 100-200 heating stations, replacing 2.5 - 5 TWh/year of fossil fuel. Investments to realise this has been estimated to 100 - 200 million Euro, part of which is expected to come from international financing.

During the last two decades, a number of biomass projects have been realized though the abundance of resources in oil and natural gas and the very low commercial prices (compared, for example, to domestic wood prices) have hindered the establishment of renewable energy projects. Despite guidelines of the new national energy strategy that promotes the role of biofuel as a local renewable energy resource alongside with the Russian government’s strategy to decrease domestic oil and natural gas consumption in order to maximize oil and natural gas exports, forecasts predict that in the coming 10 years oil and gas will make up about 70% of all produced energy and lead to the consolidation of the oil and gas industry.

On the other hand, the continuous growth of the Russian economy is expected to spur demand in the energy sector. Biomass is perceived as the most suitable solution used for power production and for cogeneration of heat and electricity, capable of meeting the increasing needs without inducing environmental problems. It is also a solution in order to reduce domestic consumption since Russia's economy is heavily dependent on the energy exports (the source of almost 40% of Russia's hard currency earnings and export revenues). On the financial scale, biomass can replace fossil fuel with the necessary investments since it has proven fast return of the capita especially with low-capacity power plants, which have proven extremely economically profitable.

The utilization of biomass may help Russia to meet the dire consequences and associated problems of environmental mismanagement. Russia is the third largest carbon emitter, accounting for 17.4% of the world’s emissions (1990 levels). Having signed the Kyoto Protocol and just recently promised to ratify it, Russia is committed to stabilizing its greenhouse gases 5%-6% below 1990 levels by 2008-2012. Since current emissions are 30% lower than 1990 levels, a situation caused mainly by the sharp drop in activities during the 1990s rather than by a more energy-efficient consumption and approach, the Kyoto quotas can be easily met. This allows Russia to sell carbon pollution “credits” to other countries, in order to finance and modernise its energy-intensive industries. High-energy costs still makes Russian manufacturers uncompetitive in many fields and burden municipal governments with heavy utility expenses, despite the transformation of the Russian economy enabling a growing number of foreign suppliers to find their way in to this important energy market.

Russian forests hold today over one fifth (22%) of the world's timber resources and represent 51% of total Russian territory. Russia's timber resources are three times larger than those of Europe covering 760 million hectares of land and amounting 73,600 million m³ according to Goskomstat, the Statistical Office of Russia (international rough estimates reach 89,100 million m³). The Russian forests are a natural resource of global importance, both ecologically and economically acting as a carbon sink by absorbing part of the emitted greenhouse gases. It also includes a great many forest landscapes, still intact, undisturbed by human development, such as the boreal forests in Siberia and the Russian Far East, which represent an important habitat for a rich variety of species.

	Total Forest Area (million ha)	Percentage of Global Forested Area
Russia	764	22
Brazil	566	16
Canada	247	7
U.S.	210	6
China	134	4
Indonesia	116	3
Zaire	113	3
Nordic countries	53	2
All other	1,239	36
Source: The World Bank 1996

The Russian Lumber Industry has been traditionally concentrated in Northwest Russia, especially the Karelia and Archangelsk regions, and around Krasnoyarsk and Irkutsk in Siberia. Recently, the Khabarovsk and Primorskii krais regions in the Russian Far East have received increased attention. The Russian Forest Industry employs a little less than two million employees.

The forest industry in Northwest Russia accounts for 11.5% of total industrial production, although in terms of export revenues, the industry is much more important. The timber resources in this region amount to 8,063 million m³, nearly four times the size of Finland with an annual felling of 38 million m³. Its major advantages are the relatively good transport connections to the European market (via the seaports of St. Petersburg and Archangelsk, as well as via the seaports of Finland and the Baltic countries). A great number of Finnish companies are activated in the region exporting to Finland around 10 million m³ per annum.

The Irkutsk region (Siberia) is among the richest ones in Russia in terms of forest resources with a forest density 1.7 times higher than the Russian average. As with all other industrial sectors, following the significant devaluation of the national currency in 1998, the Irkutsk forestry industry experienced substantial growth since timber exports became extremely profitable and a number of businesses flourished.

The Russian Far East accounts for almost 40 percent of Russia’s total forestry products, with about 80 percent consisting of conifers (fir, larch, and pine) and 20 percent of hardwood (oak, ash). On the other hand, the timber industry in the Russian Far East and Siberia is currently entirely dependent on the export of raw logs leading to unsustainable logging with alarming results on the region and its biodiversity.

The annual growth of the Russian forests is nearly 1,000 million m³ though only half of this enormous potential can be utilized economically due to environmental constraints and other practical reasons. Over the past few years, the Annual Allowable Cut (AAC) slightly exceeds 500,000,000 m³ (544.6 million m³/year in 1999 including 309.7 million m³/year of coniferous tree species).

Year	1965	1975	1985	1990	1993	1997
Total	603.9	620.4	617.2	603.0	529.0	511.7
Coniferous	402.1	398.1	390.1	381.9	315.0	305.4
*Source: The Finnish Forest Industry in Russia, Finnish Nature League & Taiga Rescue Network, 1999

After more than a decade of severe recession, the Russian forestry sector is currently going though a revival. Logging, pulp and paper production are continuously recovering and are among the fastest growing sectors, particularly in Northwest Russia and the Far East while consumption in domestic market is continuously rising. However, the local wood-processing industry still remains extremely underdeveloped, characterized by inefficiency and poor planning (Russia accounts for only 3 percent of the international timber market). As a result, many European (Finnish, Swedish, German, Italian) companies have entered the local market and gained a strong reputation for the quality and advanced features of their equipment.

USAID and the Russian government are accepting comments on a draft concept paper that addresses forest management policy and could help increase biomass energy use in Russia. The potential and benefits of biomass energy/cogeneration in the RFE and Siberia are very significant, especially in the areas where there is a lack of traditional fossil fuels, but surplus of wood waste in sawmills as well as resources of low quality timber (yellow birch), timber damaged as a result of fire, pests, and forest disease (Solar & Renewable Energy Outlook, 1/28/00).

Russia is a traditional agricultural country with a vast agricultural resource-base and a significant potential to expand its output, particularly through increased crop-yields. The latest information for the year 2002 indicates that approximately 15% of the total Russian population engaged in the national economy is employed in the agricultural sector producing about 10% of the national income.

As in the other countries of the NIS, the agricultural sector was largely affected by the dissolution of the Soviet Union. The economic reform and the transition to a free market initiated after 1992 substantially reduced agricultural output, which continued for many years. After the rouble depreciation, the sector re-strengthened /rebounded following the increase in other industrial sections. Agrarian production rose last year for the third consecutive year in 2001 by 6.8 percent and the grain output, in particular, expanded by 30% turning Russia gradually into one of the strongest grain market makers. The on-going land reform process and large-scale restructuring has encouraged more efficient farming, resulting in farmers having changed into entrepreneurs though in comparison with other European countries, the technological and technical level can be described as insufficient. This in turn is spurring demand for more modern processing equipment for a whole range of products.

More than 208 million hectares (ha) of agricultural lands are used in agricultural activities, including 125 million ha of arable lands, 19 million ha of hayfields, and about 60 million ha of pastures. The latest data on agricultural production can be seen below:

	1999	2000
	Gross harvest, million tons
Grains (weight after processing)	65.5	85.2
Sugar beet (factory)	14.1	14.6
Sunflower seeds	3.9	2.7
Flax-fibre, thou. Tons	51.2	58.0
Potatoes	34.0	35.0
Vegetables	12.5	13.3
	Yields_,100 kg per hectare
Grains (weight after processing)	15.6	19.4
Sugar beet (factory)	188	199
Sunflower seeds	9.0	7.8
Long flax (fibre)	5.5	5.0
Potatoes	105	109
Vegetables	146	155
*Source: Russian Handbook 2002

	Cattle	including cows	Hogs and pigs	Sheep and goats
Farms of all types	26.9	12.3	15.9	14.8
of which:
agricultural enterprises	15.8	6.1	8.6	4.4
private household farms	10.5	5.9	6.9	9.4
private (peasant) farms	0.6	0.3	0.4	1.0
*Source: Russian Handbook 2002

The industrial and domestic organic wastes produced in Russia amount to more then 390 millions tons annually. The large majority of solid waste (97 %) generated in Russia, consisting of organic materials for 50-80%, is disposed in dumps and landfills and only 3 % is treated in waste processing plants. Landfills cover more than 100,000 ha and accept a wide variety of solid wastes including paper and cardboard (over 30%), metals (8.5%), plastics (8%), food wastes (7.5%), glass (7%), rubber, leather, textiles, wood, etc. Landfill biogas installations are perceived as a source of energy and revenues for local governments and municipalities.

The EU is Russia's largest trade partner, accounting for nearly 25% (close to € 20 billion) of Russia's imports and some 35% (€ 45 billion) of her export trade. Russia currently provides over 15 percent of the EU's energy needs in imported fuel (21% of total net EU oil imports in 1999 and 41% of EU gas imports in 2000 came from Russia). Recent agreements between both sides aim to establish the institutional framework for bilateral relations and set principal common objectives and calls for activities in a number of policy areas of trade and economic cooperation in a range of sectors.

At the sixth EU-Russia Summit in Paris on October 2000, the EU and the Russian Federation established a strategic Energy Partnership and agreed to institute an energy dialogue on a regular basis with a view to address mutual problems working to ensure future energy security. Both sides are concerned with matters pertaining to short and long-term reliability of energy supplies, energy efficiency, conservation and greenhouse emissions, long-term investment security, opening of energy markets and enhancing the infrastructure and the technology base of the economy’s energy sector. (http://europa.eu.int/comm/external_relations/russia/intro/index.htm)

With respect to renewable energy, both parties stressed the importance of an extensive use of ecologically clean renewable sources, i.e. biomass, wind, solar energy, etc but pointed out the difficulties arising without appropriate support by state policies. The EU has expressed its readiness and willingness to provide technical assistance for improving the legal and regulatory framework and to share its experience, which can be used and adjusted to realities of recent Russian development.

	decrease the energy intensity in production and energy supply expenditures of the society
	reduce the impact on the environment
	improve the economic competitiveness of local companies
	implement the concept of sustainable development.

	265 TWh/year of unused forest wood;
	109 TWh/year that is already used as firewood;
	45-50 TWh/year of surplus wood residues from wood industries;
	58 TWh/year of unused agricultural residues.