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The Segezha Pulp and Paper Mill (SPPM ) (Open Joint-Stock Company), Russia’s largest producer of kraft paper and paper sacks, was founded in 1939 in the north of Karelia, 700 km to the North from Saint Petersburg , on the bank of Lake Vyg. At those times, the mill had the most powerful equipment in Europe. Up to the 1990s, two thirds of all paper sacks consumed in the former USSR were produced in Segezha.

Since then, SPPM has retained its specialization, accumulating experience, renovating facilities and techniques, improving the production of its principal products: kraft paper and kraft paper sacks.

The mill has an advantageous geographic location, in close proximity of the Belomor-Baltic Canal, the railway and the motor highway St. Petersburg – Murmansk, which allows using flexible transportation schemes to deliver products to customers.

SPPM has been constantly modernized. The largest refurbishment of the mill was in the 1970s. A new stage of modernization covering the period up to 2005 started in 2000. A completely new and specific turn in the mill’s history occurred in 2003 in connection with signing of the Agreement of Intent between the Segezha Pulp and Paper Mill, Sberbank of the Russian Federation and the Government of the Republic of Karelia for implementation of SPPM modernization and refurbishment project.

Today the mill is able to produce up to 400'000 tons of sulphate pulp, 350'000 tons of sack paper and more than 500 million of paper sacks.

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Range of Manufacture: Sack paper, SP kraft liner, paper sacks, wood chemical products: tall rosin, distilled tall oil, fatty acids, turpentine.

Address: Karelia, 186420, Segezha, ul. Zavodskaya, 1
Year of Foundation: 1939
Number of Employees: 5300
Total Number of Employees of the Segezha Pulp and Paper Mill Group Companies: 7750
Telephone: (81431) 23311
Fax: (81431) 22663
E-mail: office@scbk.ru
httð://www.scbk.ru

Representative Offices:
In Moscow: telephone (fax) (095) 208 03 25
In Petrozavodsk: ul. Leningradskaya, 19
telephone: (8142) 765-108, 765-109, 765-110 fax (8142) 765-108

Company Management:
Director General - Vasily Fyodorovich Preminin
Financial Director - Oleg Konstantinovich Arminen
Marketing and Strategic Development Director - Andrey Vladimirovich Zasorin
Paper Sack and Packaging Production Director - Rustam Stanislavovich Chemerinsky
Controlling Director - Lilia Aleksandrovna Zhigalova
Production Director - Vladimir Anatolyevich Arsenyuk
Technical Director - Aleksandr Gennadyevich Ivanov
Personnel Director - Vasily Yevgenyevich Rombachev
Deputy Director General, Security - Valery Andreyevich Sinitsyn
Deputy Director General, Social and Administrative Issues - Sergey Gennadyevich Dolgachev

Principal Shareholder: Segezha Management Company (Limited Liability Company) (100% of shares)

HISTORY AND GEOGRAPHY

The Segezha Pulp and Paper Mill (SPPM), Russia’s largest producer of kraft paper and paper sacks, was founded in 1939 in the north of Karelia, on the bank of Lake Vyg. At those times, the mill had the most powerful equipment in Europe. Up to the 1990s, two thirds of all paper sacks consumed in the former USSR were produced in Segezha.

Since then, SPPM has retained its specialization, accumulating experience, renovating facilities and techniques, improving the production of its principal products: kraft paper and kraft paper sacks.

The mill has an advantageous geographic location, in close proximity of the Belomor-Baltic Canal, the railway and the motor highway St. Petersburg – Murmansk, which allows using flexible transportation schemes to deliver products to customers.

SPPM has been constantly modernized. The largest refurbishment of the mill was in the 1970s. A new stage of modernization covering the period up to 2005 started in 2000.

A completely new and specific turn in the mill’s history occurred in 2003 in connection with signing of the Agreement of Intent between the Segezha Pulp and Paper Mill, Sberbank of the Russian Federation and the Government of the Republic of Karelia for implementation of SPPM modernization and refurbishment project.

SUMMARY OF TECHNOLOGIES, power generation AND ENVIRONMENTAL ISSUES

Karelia forests rich in pinewood with unique properties provide the mill with inexhaustible source of raw materials to produce softwood sulfate. Kraft paper and sacks made from such chemical wood pulp, without the use of secondary raw materials, feature extraordinary strength. Used sacks and paper can be disposed of without the slightest detriment to the environment.

Currently the mill has three operating modern paper-making machines (PMM) (each having design capacity of 110 thousand tonnes), which allows manufacturing kraft paper with 60 – 120 g/m2 density. PMM No. 9 was commissioned in 1972; PMM No. 10, in 1973; PMM No. 11, in 1979. At present, SPPM’s capacities allow producing up to 330 thousand tonnes of kraft paper per year; the production is expected to grow by one third by 2005.

The process of pulping the unbleached sulfate (without using chlorine compounds) is environmentally sound and cost-effective. As far as by-products are concerned, the following wood chemical products are produced and are in steady demand: tall rosin, tall oil, fatty acids, pitch. Regenerating alkali liquors that form in the process of pulping, we conserve fuel, get extra energy and prevent environmental pollution.

In 2000, having modernized soda regenerating boiler (SRB) No.2, the mill was able decrease emissions of harmful substances into the air to make them as low as a tenth size. New powerful electric filters of the SRB-2 are capable of holding up to 98-99 percent of sulfate powder.

In February 2004, new Boiler Plant No. 7 was launched at SPPM Heat Power Plant No.1 . The new boiler allows burning any type of solid fuel and combustible waste “in fluid bed”, the producing capacity of the steam generating boiler plant increases by one fourth.

According to experts, launching of the new boiler will provide more efficient use of wood wastes (from both SPPM and the Segezha Wood Sawing and Working Plant subsidiary) as fuel, reduce total oil fuel consumption, decrease costs for repairs of the power-generating equipment, reduce hazardous emissions of sulfur and nitrogen oxides and dioxins into the atmosphere.

The fluid-bed burning technology is a modern method of most efficiently burning “all that burns”, even household rubbish and organic waste materials. The obtained cinders contain no cakes and are quite suitable even for manufacturing materials of construction. The expected saving of the fuel oil after the commissioning of the new boiler plant is 25 thousand tonnes, or up to 45 days of the mill’s operation.

Concurrently with the new boiler installation, the experts of SPPM and contracting organizations reconstructed the Heat Power Plant No. 1 power supply system, built a bark-conditioning unit (the bark-conditioning equipment was supplied by Saalasti, Finland).

The total cost of the entire work related to installing Boiler Plant No. 7, reconstructing the power supply system and upgrading the wood preparatory equipment exceeds 200 million rubles. The payback period is less than five years. The financial partner is, as always, the North-West Bank of Sberbank of the Russian Federation.

According to the reconstruction plan, Boiler Plant No. 7 will, in due course, replace Boilers Nos. 1-5 that are long since overused. For instance, the first two boilers are contemporaries of SPPM, the third and the fourth have operated since the 1940s. The “fluid bed” boiler efficiency is high enough for the pulp and paper production being modernized and expanded.

PULPING PRODUCTION

On 15 April in St. Petersburg, the Segezha Pulp and Paper Mill and the Andritz Group (Austria and Finland) signed an agreement for delivery of equipment necessary to modernize the pulp production line. Starting from June 2004, the continuous pulping installation (unique in Russia) using the “Lo-solids” technology is to produce high quality pulp, with the capacity more than one and a half times as much as the present one. The technology is in full compliance with the environmental requirements.

Andritz’s continuous pulping systems produce pulp of higher quality making minimum quantity of waste materials and using minimum quantity of chemicals. The “Lo-lewel” chips feeding system is more efficient than any other system that has existed over the entire history of pulping production. Furthermore, the ease of use of this system means low construction costs and lower operating expenses.

Delivery of the unique equipment also included a unique transporting operation. From the Andritz plant in Savonlinna, Finland – via Tallinn, St. Petersburg, Petrozavodsk – the oversized cargo was delivered to Segezha by the Intercargo shipping company in December 2003.

Seven special trailers were used to deliver the components of the installation steaming bunker and the flushing drum. The oversized cargo itself was moved on three trucks: components having the size of 5.2 meters high and same size wide, and also a unit of impressive weight of 46 tonnes.

The group of actions with a view to modernizing Pulping Installation No. 4 will enable the mill to:
· create technological and economical preconditions for stable and cost-effective pulping production (in the short term, one unit No. 4 is to fully supply two paper-making machines, PMM No. 10 and PMM No. 9, with unbleached pinewood pulp);
· increase capacity of one process flow from 600 to 900 tonnes of pulp per day;
· stabilize and improve the quality of pulp.

Apart from this, it is expected that the pulping unit modernization should lead to reducing costs of raw materials, chemicals, energy resources, and also machinery overhaul expenses.

The aggregate investments involved in the project exceed 10 million euros. To procure the new equipment, SPPM is to obtain a bank loan. SPPM’s partners in this project are the North-West Bank of Sberbank of the Russian Federation and the Globus-Leasing company. The project’s recoupment period does not exceed the banking standard of 5 years.

PAPER-MAKING

In April 2000, PMM No. 11 started producing SP (Segezha Paperboard) kraft liner with the density of 115 g/m2. In 2001, a new equipment of the transportation and packing line was mounted on this paper-making machine, which allowed satisfying the full demand of the consumers for any formats of produced paper and paperboard.

The PMM No. 10 modernization accompanied by the installation of a microcreping machine (in January 2002) and the highly concentrated pulp milling machine (commissioned in August 2002) allows, as soon as 2002, offering the customers a new type of sack paper with increased strength – microcrepe kraft paper. The equipment for modernization was purchased from the reputed companies: Feut-Sulzer (Austria) and Metso Paper (Finland).

The Segezha microcrepe paper firstly manufactured in August 2002 became the first product of this type produced in Russia.

On 2 September 2003, in Petrozavodsk, at the conference hall of the State Council of the Republic of Karelia, in the presence of Mr. S. L. Katanandov, Head of the Republic of Karelia, and Mr. Petteri Kotilainen, Finnish Consul in Petrozavodsk, the Segezha Pulp and Paper Mill signed a contract with Metso Paper for reconstruction of the process stream of Paper-Making Machine (PMM) No. 10. This order for delivery of the equipment intended for final modernization of SPPM’s PMM No. 10 was one of the largest orders in the pulp and paper industry for the last 20 years.

As a result of the modernization, according to experts, PMM No. 10 will become the world’s third machine of this type producing sack paper – judging by technical, speed performance, and quality. Besides, the cost value of the paper produced by PMM No. 10 will be lower than that of its equivalents worldwide.

In March 2004, the process ventilation of Paper-Making Machine (PMM) No. 9 was replaced. The equipment for renovating PMM No. 9 was supplied by Petrozavodskmash, the installation work was carried out by Prombummontazh. Concurrently with replacement of the process ventilation, the mill’s specialists performed overhaul of the machine.

PMM No. 9, having design capacity of 110 thousand tonnes of paper per year, was put into operation in 1972. The process ventilation of the machine was never repaired over the three decades, which was one of the reasons for its power decrease. Now that the ventilating equipment has been renovated, the PMM No. 9 capacity is to increase by 10-15%.

PACKAGING INDUSTRY (SACKS AND PACKAGES)

Since August 2003, the packaging industry has been singled out as a special product line. The new management of manufacturing paper sacks and packages was headed by Rustam Stanislavovich Chemerinsky (prior to this appointment, Marketing and Strategic Development Deputy Director).

In August 2002, a brand-new general-purpose sack-making line, currently unique in Russia, manufactured by Windmoller & Holscher (W&H), Germany, was put into operation.

For the first time, a Russian pulp and paper enterprise could offer a wide range of products with new consumer properties and high quality of multicolor print to the domestic and foreign packaging markets.

In 2003, negotiations were conducted in terms of procuring one more line from the Windmoller & Holscher company. This new line was installed in April-May of this year and is currently undergoing precommissioning operations. It is to be commissioned in June 2004.

On 26-27 April 2004, a cement mill of the Mordovcement company successfully conducted experimental packing of cement into small-format sacks with a sealable flap manufactured by SPPM. Such sacks were manufactured in Russia for the first time – so far only imported sacks have been used by the construction materials industry in this technology. And more: for the first time in Russia, cement has started to be packed into 10-kg white sacks.

The quality of the sacks manufactured in Segezha has been highly appreciated by Haver&Boecker, Germany, a leader in packing equipment production.

After successful testing of Segezha sacks, the Mordovcement company immediately placed an order with SPPM for manufacturing a large run of sacks with sealable flaps.

In the nearest future, the new sacks are to be equipped with special handles to make them more convenient. The new products have good prospects of usage not only in the cement and chemical industries, but also in the food and trade industries.

The quality of the products and the service level of SPPM make it possible to conclude long-term agreements for delivery of bulk consignments of sacks with different standard sizes. The first agreement of this type was signed in early 2004 between SPPM and Eurocement, effective for three years until 31 December 2006. The total approximated quantities to be delivered during three years amount to 90 million sacks.

An important clause of the concluded agreement is that the cement company agrees not to procure similar products from other manufacturers during the term of the agreement. The Segezha paper-makers, in their turn, intend, after completing thorough summertime tests at Eurocement enterprises, to offer to the strategic partner their new products in the nearest future – sacks made of microcrepe paper of special strength.

QUALITY

The quality of SPPM products has always been regarded as excellent. In 1948, the mill was honored the highest award of the USSR – the Order of Lenin. Nowadays SPPM’s brand is preferred by over 10 000 companies in Russia and in 80 countries of the world.

At the fifth international show “All-Russian Brand (3rd Millennium) Quality Label of the 21st Century” that was held in Moscow in April 2001, all products exhibited by SPPM were honored highest awards. According to the results of testing carried out by experts of the Russian Testing and Certification Center (Rostest – Moscow) of Gosstandart of the Russian Federation, the paper sacks were honored a Golden Quality Label, and the Segezha paperboard was honored a Silver Quality Label.

When SPPM took part in the International Week of Packaging at the Sokolniki Exhibition Center from 18 to 22 June 2002, one of the promoters of the show, Soyuzupak, awarded the mill a gold medal of the winner of the “Packaging – Russian Star 2002” contest for a batch of paper sacks. In addition, SPPM was awarded Diplomas in the nomination “Rigiflex Packaging Printed Using Flexographic Method” for a batch of paper sacks and for active participation in the show.

The 8th international exhibition “ROSUPAK 2003”, held in Moscow from 16 to 21 of June, had 445 participants representing Russian and foreign companies, including SPPM. At the “Packaging – Russian Star 2003” contest held during the exhibition, the mill was awarded a gold medal for a batch of paper sacks.

In March 2003, 14 building companies – Eurocement, Shurov Cement, Belgorod Cement, Byelorussian Cement Mill, Novoroscement, Krichevocementoshifer, Krasnoselskstroimaterialy and others – conducted commercial tests of new products: three- and four-layer sacks made of microcrepe paper. It was their strength that was tested in the first place: the sacks were dropped, and the number of impacts that a sack full of cement could endure was counted. The result is considered to be optimal (to international standards) if the package remains intact after 7 – 8 drops (the exact number of reloads that a sack full of cement goes through).

The sacks manufactured at SPPM endured from 7 to 20 impacts.

In a similar way, two-layer sacks made of microcrepe paper were also tested at some enterprises, which led to the common conclusion: the sacks can be used for 25-kg cement packing. Sacks for such packing are the first product of this type in Russia.

FOREST RESOURCES

Today SPPM consumes 1 million cubic meters of wood substance per year in the form of round timber and chipped wood. The nearest five-year plan provides for increase of raw materials purchases twice as much. In order to provide itself with raw materials on a guaranteed basis, reasonably build up financial flows, the mill had AS SOON AS 2000 acquired the majority interest in three integrated logging-lumbering enterprises in Karelia and the Segezha Wood Sawing and Working Plant.

At the Segezha Wood Sawing and Working Plant, the chipped wood output, during sawing raw materials, is almost 40%. Chipped wood is the raw material used by the pulp and paper industry. With a timber-works utilized at full capacity, the mill obtains a supplier of products with a volume of a large logging enterprise.

The new holding enterprises have raised production efficiency twice as much over the period of one year. The holding company combining the whole process – from procuring raw materials to manufacturing finished products – represents a complete and effective model of managing the wood processing complex in its entirety. The development of similar holding companies is provided for in the all-Russian plan of developing the wood processing industry for the nearest years.

Currently the Segezha Pulp and Paper Mill is a vertically integrated holding company comprising 7 logging enterprises and the Segezha Wood Sawing and Working Plant. The mill is a shareholder of the Karellesprom holding company and four logging enterprises in Pudozh Rayon.

SPPM takes all necessary measures to ensure a steady supply of raw materials. The Forest Resources Directorate was established in 2003.

In July 2003, SPPM and Rosgiproles (Russian State Design and Survey Institute) signed an agreement for development of the forest management in the specialized enterprises organized in the forest fund of the Republic of Karelia to provide SPPM with raw materials.

In accordance with this agreement, by 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, SPPM and the Segezha Wood Sawing and Working Plant 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. The project developer is also expected to provide efficient concepts of timber logging and transportation, as well as forest management in the context of the overall development of production.

In 2001-2003, the average wood-cutting fund development by all seven logging enterprises of the SPPM holding company, remained at the level of 90-95%.

Actually, all roads in the leased forest areas are constructed and reconstructed by SPPM at its own expense: up to 60 km per year as far as permanent roads are concerned. Every year more than 100 km of winter roads are constructed and 3-5 bridges are repaired.

PERSONNEL

The employer-employee relations are regulated by the Collective Agreement.

There have been no salary debts since November 1998, and there have been no delays in salary payments since then. The average wages and salaries at the mill in the middle of 2002 were 5200 rubles. In July 2003, the average wages and salaries at the mill were 6300 rubles; in April 2004, 7025 rubles.

Due to mutually beneficial co-operation with Sberbank, SPPM employees have received salaries by using plastic cards since the autumn of 2001.

There has been introduced a new remuneration system aimed at the eventual result. A program of advanced training, professional retraining and in-service training is being realized. At present, every third employee at SPPM – from a workman to a director – improves his or her qualification or acquires a new specialty.

The mill’s employees take an active part in the social life of the town of Segezha. According to the 2002 election results, one third of the Segezha Town Council is employees of SPPM and the Group’s enterprises. The mill’s specialists also head two of the three deputy committees. A specialist of the mill, Mr. S. G. Dolgachev, Deputy Director General – Social and Administrative Issues, was elected a Member of Legislative Assembly of the Republic of Karelia in 2002.

The mill’s management adheres to the philosophy of “complete openness”. The mill has contributed to creating the town’s local television (“Nika+Segezha”), and full information on all activities and actions with clarifications is transmitted through television and the mill newspaper (and now through the website, mass media of Karelia and Russia). The SPPM press service has worked since 2000.

The best publications of the Segezhsky Bumazhnik large-circulation newspaper are annually issued as separate booklets. Newspaper editor V. V. Tsareva was acknowledged as the best essayist of Karelia for 2002. Since May 2004, the newspaper has been offset printed.

In 2000, after a longstanding break, the mill radio broadcasting resumed its operation; its live air is used for speeches by not only the mill’s managers and employees but also well-known, popular town inhabitants and guests.

According to the results of the “Revival of Karelia” contest held in 2000-2001, the SPPM press service was awarded a Certificate of Honor of Chairman of the Government of the Republic of Karelia.

PRODUCTS offered

Beginning from 1998, the mill’s commercial service reconstructed quickly the system of sales, including a network of agents throughout Russia and CIS countries. Each agent had the right to sale only in a specified region. In the foreign market, relations with all European reputed traders were established.

The created network of agents enabled the mill to control prices in the market and significantly enhance the geography of paper consumers. In 1999, growth in exports was 37.8% as compared with 1998; in 2000, 15.4%. The products were sold in more than 35 countries of the world, mostly, in Turkey, Syria, Iran, Vietnam, China, Morocco, Tunisia, Sri Lanka, Singapore, England, Germany, the USA.

According to the results of a contest among Russian export companies, held by the Expert RA rating agency, SPPM was included into the 100 largest export companies in 2000. Furthermore, the experts stated that SPPM belonged to the five most dynamic exporters as per the results of 2000.

Controlling 56% of the market of paper sacks, SPPM is a Russian market leader and is included into the monopolist register for this type of product. Russia and CIS countries represent a strategic market for the sacks. SPPM intends to retain its leadership in Russia and plans to increase its share up to 70% in the nearest years.

Actually, 90% of the market of sacks used for quick building compounds in Russia is occupied by imported products. In the current year 2004, SPPM has introduced into the market a similar product and is about to fully displace imported sacks from our market during the next two-three years.

SPPM is the world’s second company by volume of sack paper production. Today, 60% of standard sack paper is sold by SPPM to more than 50 countries of the world, many of which consider the mill to be their key or large supplier. The primary market outlets are: Turkey, Syria, Iran, Vietnam, China, Germany, Italy, Spain, Finland, etc.

The sales policy for the new product – microcrepe paper – does not include any geographical restrictions at this time. A short-term objective is to present this product to as many customers as possible. The company’s long-term sales policy will be formulated according to the sales results.

FINANCES AND CREDITS. THE NEW STRATEGY

In September 2001, SPPM and the North-West Bank of Sberbank concluded a General Agreement on co-operation, the mill obtained a $150 mln. credit line for the nearest five years with a view to implementing the program of overall modernization.

A new turn in history was made in 2003.

Sberbank of Russia, the Government of the Republic of Karelia and the Segezha Pulp and Paper Mill signed the agreement of intent to implement the ˆ410 mln. large-scale investment program of the Segezha PPM modernization and expansion.

This agreement was signed in St. Petersburg on 19 May 2003, at the conference attended by the Russian President, Plenipotentiary Representative of the Russian President in the Northwestern Federal District Valentina Matvienko, Head of the Republic of Karelia Sergey Katanandov, Chairman of the Board of Sberbank Andrey Kazmin, First Deputy Chairman of the Board of Sberbank Alla Aleshkina and Director General of SPPM Vasily Preminin.

The SPPM modernization and expansion project was recognized as a vitally important one for Russia: it is the dynamic development of the processing industry to which belongs the pipe and paper industry that will enable Russia to become a manufacturer and exporter of value added goods. This can be achieved not only with national support for the industry, but also in partnership with the country’s leading financial institutions, the largest of which is Sberbank of Russia.

This mighty project requiring such a large credit, unprecedented in the industry, is the result of pursuing the new strategy of SPPM.

SPPM initiated elaboration of its corporate strategic development program in 2001. Jaakko Poyry Consulting, Finland, the world’s leading consultant and expert in the industry, was invited to participate in elaborating the strategy. This work was finished in early 2003. Out of five development alternatives, the optimal one was selected and taken as the basis for the investment project.

Further technical upgrading of SPPM provides for modernization of the paper-making machines, pulping and wood-conditioning process lines. With all this being done, the mill intends to improve the quality of pulp and increase pulping capacities 2.2 times as much – up to 535 thousand tonnes. Under the project, it will also be necessary to master the production of market softwood bleached pulp and increase production volumes of high-quality microcrepe sack paper to 170 thousand tonnes per year.

The implementation of SPPM’s strategic development program will greatly influence the economy of Karelia:
· Volume of processed low-grade wood would increase from 1.2 mln. m3 to 2.6 mln. m3, including pine pulpwood, process raw materials, chips from timber-works
· Revenue receipts from SPPM to all budget levels are expected to increase by 680 mln. rubles per year (including receipts from related enterprises (logging, transport enterprises, etc.), by 750 mln. rubles).

Taking into account financing sources and VAT, the total amount of four projects to be developed in 2003-2004, namely, Continuous Pulping Unit No. 4 modernization; final stage of PMM No. 10 modernization; PMM No. 9 ventilation replacement, and installation of the new sack-making line and printing machine, exceeds 100 mln. euros.

Segezha Pulp and Paper Mill Press Service
smi@scbk.ru
phone (501) 376 01 24
phone/fax (81431) 3 48 56