Spies. Lies. Lumber.

  • The largest illegal timber scam in Russia this century was recently revealed in the country's Far East. Earthsight found 100,000 tonnes of lumber linked to the scandal entered Europe.
  • Timber giant BM Group plundered precious taiga forests home to brown bears, wolves and lynx. Boss Alexander Pudovkin now faces criminal charges of using bribes and corrupt deals to serve his business empire.
  • Prosecutors say his botched sawmill venture illegally logged 600,000 cubic metres of wood – that would fill London's Royal Albert Hall nearly seven times. Processed into finished products, this wood has a street value exceeding €870 million ($1 billion).
  • European imports continued even after the scandal broke, including into Germany, France and Belgium, thanks to poor enforcement of EU law and alarming failings of green label PEFC. Earthsight names the buyers, which include suppliers to leading DIY chains.
  • The findings provide urgent lessons for European lawmakers debating tougher rules to tackle the continent's role in driving global deforestation.
  • Explore Pudovkin's empire with this interactive map.

Unseasonal spring warmth bathed Siberia's Khabarovsk Krai the day masked men came for Alexander Pudovkin.

Normally at that time of year cold clasps the far eastern Russian territory, coating taiga forests of fir, larch and spruce in Arctic white; slowing the mighty Amur river, and life, to a standstill. But on 18 March 2019, weeks before the temperature flickers beyond the freezing mark, the thermometer stood defiant at 12 degrees Celsius. The sun hovered majestically that Monday. Passing clouds, a moderate south west breeze.

Rugby shirt and shorts weather, thought the 59-year-old. Arriving for work at 78A Oblachny Lane, the blue and white stripes with scarlet number one on the left chest splashed the corridor walls with colour as he rounded the corner into the office. He looked like a used car salesman. Or was he a lost motorist? If you didn't work at BM Group, you might assume he had come to fix the photocopier.

Alexander Pudovkin. Picture: FSB Directorate for Khabarovsk Territory

Alexander Pudovkin. Source: FSB Directorate for Khabarovsk Territory

Alexander Pudovkin. Source: FSB Directorate for Khabarovsk Territory

But no-one sniggered. When your boss is the sort of person the Russian president felt deserving of a state title, you keep quiet. And so, from the beige surroundings in Khabarovsk's eponymous main city, the Honoured Worker of the Forestry Industry took his usual seat atop an empire which claimed control over an area of woodland nearly as big as Belgium. More than 1,000 trees bowed low each day in service of the Taiga King, who churned out goods like logs, planks and fuel pellets on a scale few countrymen could match.

Decades of leadership earned Pudovkin wealth, influence and powerful friends, both in Moscow and China, his biggest customer. He used them to plunder the precious forests sprawling around him, cementing his dynasty through bribes and murky deals.

Pudovkin at the 2018 Eastern Economic Forum. Photo: Evgeniy Egorov/Roscongress Foundation/forumvostok.ru

Pudovkin at the 2018 Eastern Economic Forum. Photo: Evgeniy Egorov / Roscongress Foundation / forumvostok.ru

Pudovkin at the 2018 Eastern Economic Forum. Photo: Evgeniy Egorov / Roscongress Foundation / forumvostok.ru

But the operation's rotten foundations were exposed, and the FSB domestic spy agency had taken note. The tycoon had little time to exchange watercooler chat before the camouflage-clad siloviki (strongmen) burst open the front door, forced a bemused employee emerging with his hands up against the wall and seized files, computer servers and hard drives. As Pudovkin stared stone-faced into the handheld camcorder trained on him, two men in balaclavas carried a safe outside into the bright sunshine of the car park.

Confessions and court cases were to follow. Under the spotlight, the kingdom built over years would melt like winter snow.

1. The Rise

Asia Les sawmill, 2015. Source: BM Group / YouTube

Asia Les sawmill, 2015. Source: BM Group / YouTube

From Russia with logs

Deep in the Russian Far East, in the province of Khabarovsk Krai, money grows on trees.

Logging trains rumble through a vast region whose treetops stretch along the Pacific Ocean from the Arctic to the border with China1, where endangered Siberian tigers roam.2

This is what scientists call the taiga, or boreal forest. Home to bears, reindeer and wolves, the taiga rings northernmost Canada, Alaska, Russia and Scandinavia, forming the largest biome on Earth. Because of their vast stores of peat and deep-frozen soils, boreal forests store nearly twice as much carbon per hectare as their tropical cousins.3 Researchers say they are just as important to protect if catastrophic global heating is to be avoided.

Yet while rainforests like the Amazon grab headlines and David Attenborough documentaries, the taiga is also at risk. Studies show climate zones inside them are marching northwards much faster than the trees migrate.4

Siberian tiger. Picture: Magnus Johansson (licensed under CC BY-SA 2.0)

Siberian tiger. Photo: Magnus Johansson (licensed under CC BY-SA 2.0)

Siberian tiger. Photo: Magnus Johansson (licensed under CC BY-SA 2.0)

Warmer, drier, more variable conditions have likely contributed to permafrost melting and more extensive wildfires within them.5 Unprecedented forest fires in four Siberian regions forced Russia to declare a state of emergency in 2019.6 This year has been even worse, with an area larger than Greece burned.7

Logging fans the flames. Most start near roads and are ignited by human activity. Studies show increased logging in the Russian Far East and Siberia has led to more frequent fires. Fragmenting forests to harvest timber and lay logging roads also makes them more intense and, fuelled by dried out wood-waste left by loggers, what might have been a surface fire instead consumes the entire canopy.8

The taiga's rich resources make it a prime spot for logging, a lucrative trade worth billions. Russia alone exported more than €10 billion of timber last year.9 At least half of total timber production in the country's east is reckoned to be illegal. Equally rampant corruption enables this.10

Siberian taiga. Photo: Shutterstock

Siberian taiga. Photo: Shutterstock

Siberian taiga. Photo: Shutterstock

Khabarovsk territory, one of the country's largest timber producers, also borders the world's largest importer of timber, China. Most trunks felled here feed its neighbour’s insatiable appetite for wood for construction and processing. The superpower has also snapped up deals with homegrown firms controlling forest concessions across the Russian Far East and Siberia, stoking popular resentment against its closest international ally.

Locals, however, see little benefit from the bustle. Rural poverty, low rates of economic growth, corruption and toothless oversight from the country's capital seven time zones11 away mean easy access to official papers letting loggers cut down whatever they want, wherever they want – for a price, of course.

Tackling the illegal timber trade poses particular challenges in a mostly rural area with basic infrastructure. Regulators in Khabarovsk Krai grumble about outdated forest management plans, inaccurate information on woodland resources and weak logging controls – complaints common elsewhere in Russia, according to the United States Department of Agriculture.12 The limited arsenal makes local forestry bodies little match for the wealthy logging firms whose activities they are supposed to monitor. Few are as powerful as BM Group, led by timber baron Alexander Pudovkin.13

BM Group's business empire in Khabarovsk Krai, far eastern Russia. Illustration: Matt Hall for Earthsight

Illustration: Matt Hall for Earthsight. Explore Earthsight's interactive map here

Illustration: Matt Hall for Earthsight. Explore Earthsight's interactive map here

Taiga King

Alexander Pudovkin's roots in Khabarovsk Krai run deep.

The 59-year-old14 president of BM Group15, who did not respond to a detailed list of findings in this article prior to publication, has turned the collection of companies into one of Russia's largest manufacturers of wood products. From his office in the territory's eponymous main city, he directs a business empire which at its height stretched across 29,000 square kilometres of forest – an area nearly as big as Belgium.16

Inspection reports for a global body that vets wood suppliers show that as leader of "management company" BM Group LLC Pudovkin "makes decisions on all issues on a one-man basis".17 His responsibilities include implementing forest management plans, monitoring contractors and guarding against illegal logging in the forests under the component firm's control, the papers state. A 2013 corporate PowerPoint presentation contains a diagram showing a similar top-down command structure.18

PowerPoint slide from 2013 showing BM Group corporate structure. "Management company" Business - Marketing LLC (ООО "Бизнес Маркетинг") was later renamed BM Group LLC (ООО УК "БМ Групп").

PowerPoint slide from 2013 showing BM Group corporate structure. "Management company" Business - Marketing LLC (ООО "Бизнес Маркетинг") was later renamed BM Group LLC (ООО УК "БМ Групп").

PowerPoint slide from 2013 showing BM Group corporate structure. "Management company" Business - Marketing LLC (ООО "Бизнес Маркетинг") was later renamed BM Group LLC (ООО УК "БМ Групп").

Responding to Earthsight, the management of BM Group (from now on referring to the whole operation) said that the industry giant consists of "independent legal entities" which are "technologically interconnected". The firm’s website tells a different story, calling the various outfits part of a "vertically integrated timber holding company".19 While the component firms are not legally subsidiaries, Pudovkin's presence also lingers in a shifting web of shareholdings and directorships.20

For the timber tycoon, business, like politics, is a family affair. From 2009 to 2010 his wife21 Natalia Pudovkina, a trained economist aged 59, served as deputy director of BM Group processing outfit Amur Forest before being elected to the regional parliament.22 Son Ivan23, meanwhile, would enjoy a short stint as CEO of the group's export arm, Asia Export24, and jointly owns, with his brother Alexey, another BM stablemate called Logistic Les (Logistic Forest).25

Natalia Pudovkina. Source: Vesti Khabarovsk/YouTube

BM Group expanded rapidly by exploiting a giant loophole in how Russia hands out logging rights. Seeking a greater share of profits from its timber, in 2007 the country hiked export tariffs on raw logs and began aggressively cultivating homegrown processors.

The "priority investment projects" scheme for forest development was introduced the same year.26 Companies promising to build large new mills could log large tracts of forest cheaply under the initiative, rights which would normally be auctioned. It also offered huge public subsidies and halved rent payments until a company paid back generous government loans. A windfall was up for grabs and, because the scheme devolved key decisions to local officials in remote forest areas, a little influence could go a long way.27

PowerPoint slide from 2013 showing BM Group sawmill Amur Forest ("Амур Форест"), named a priority project in 2008.

Pudovkin's BM Group milked this lucrative status for all it was worth, setting up no fewer than five sawmill ventures between 2008 and 2017. Together, they handed over combined rights to cut more than two million trees each year, catapulting it into the ranks of the world's largest timber makers.28

But it didn't take long for the schemes to unravel, leading to their dramatic collapse and dire consequences for Pudovkin himself.

BM Group corporate structure. Illustration: Matt Hall for Earthsight

BM Group corporate structure. Lines connecting entities do not reflect majority or minority ownership (unless otherwise stated) but reflect the structure as advertised by BM Group itself in past presentations, certification documents and its own website, plus additional relationships based on ownership or directorships past and present of Pudovkin family members. Responding to our findings, BM Group management told Earthsight that the different companies are only "technologically interconnected". See report text for full explanation. Illustration: Matt Hall for Earthsight

BM Group corporate structure. Lines connecting entities do not reflect majority or minority ownership (unless otherwise stated) but reflect the structure as advertised by BM Group itself in past presentations, certification documents and its own website, plus additional relationships based on ownership or directorships past and present of Pudovkin family members. Responding to our findings, BM Group management told Earthsight that the different companies are only "technologically interconnected". See report text for full explanation. Illustration: Matt Hall for Earthsight

The China connection

The most ambitious venture was Pudovkin's pet project, Asia Les (Asia Forest). The tycoon led the project as director of a specially-created company that bore its name, which promised to build a state-of-the-art wood processing complex at Beryozovy, in the territory's central Solnechny district; attracting attention and, officials hoped, cash, from the major European, Chinese, Korean and Japanese markets.

The eye on Asia was deliberate as, unlike others under the BM umbrella, the enterprise was almost entirely owned by a Chinese trading company. A shrewd businessman, Pudovkin developed close ties with powerful players in the neighbouring superpower, by far the biggest customer for his timber. Company filings show BM firms Asia Export and BM DV hold a small stake in Asia Les (and so therefore, indirectly, does Pudovkin himself), with the China-based Suifenhe Songlin International Trade Company controlling the remaining bulk.29

Songlin International's parent is Heilongjiang Songlin Group30, a major importer of Russian timber. Owner Yao Songlin is a member of the legislature in the northernmost Heilongjiang province encompassing most of the border with Russia and a large part of the timber trade crossing it.31

Songlin Group did not respond to an email seeking comment. On its website, the Chinese parent company says that it formed a "strategic alignment" with BM Group between 2006 and 2010, and now harvests more than 700,000 cubic metres of wood from Khabarovsk Krai each year.32

Zhang Jingwei, secretary of the Chinese Communist Party in Heilongjiang, visited Khabarovsk in September 2017, according to a corporate news release archived on Songlin Group's website.33 The trip included a meeting with the region's then governor, Vyacheslav Shport, and the signing of a €21.7 million deal between the Chinese parent firm and Asia Les to supply softwood and sawn lumber.

Later that year, at noon on 19 December 2017, Songlin Group representatives had lunch with the Russian deputy prime minister Yury Trutnev and various regional and federal government officials, another archived announcement reports.34 A member of the Russian delegation at the meal gave a speech citing the Asia Les joint venture and, after the plates were cleared, Songlin president Mr Ma talked business with Trutnev.

Songlin Group and its Khabarovsk counterpart, BM Group, later signed a deal for a wood processing enterprise in the Russian region's Solnechny district at a business event held in the territory in June 2018, according to Russia's state-owned Sputnik news agency.35

Asia Les signs €21.6 million ($26 million) deal with China's Heilongjiang Songlin Group to supply softwood and sawn lumber, 13 September 2017. Photo: Deleted photo from Heilongjiang Songlin Group website

The pitch

In a corporate presentation dated 2013, BM Group claimed some 700 workers would cut, dry, sort and store wood at the planned Asia Les complex, on a sprawling site 38 football pitches in size.36

Sat next door to its existing logging and sawmill operation, Amur Forest, the finished facility would turn the boggy grounds lain with logs into a wood-eating machine capable of churning out 200,000 cubic metres of dry sawn lumber and 100,000 cubic metres of planed, profiled planks each year – enough to fill a dozen shipping containers every day37 – plus 84,000 tonnes of fuel pellets.38 From a rail depot connected to the Baikal-Amur Mainline spanning far eastern Russia, a steady stream of goods would flow to major ports and, thence, to customers worldwide.39

It was a bold pitch, especially since, when Asia Les was proposed, BM Group's two existing priority projects – Amur Forest and a joint venture called DalEuroLes – were beset with debts and delays, respectively (see 'BM Group's other blunders')

BM Group's other blunders

While Asia Les was the largest investment project BM Group used to gain access to Russian forests, it wasn’t the only one – there were four others.

And while there is no evidence of the same kinds of bribery and abuses underpinning them, they also ran afoul of the authorities for failing to deliver on their promises.

Click here to read more

Pudovkin's prestige trumped any doubts. In April 2011, one year after the Russian president awarded him the title of "Honoured Worker of the Forest Industry" for his services to the industry48, the Khabarovsk regional government approved plans for the sawmill.49

The following year, after a request by local politicians, the federal Ministry of Industry and Trade added Asia Les to the priority projects list.50 Forests, funds, political clout – now Asia Les had them all, plus the right to chop down nearly one million cubic metres of wood each year.

PowerPoint slides from 2013 lay out BM Group's vision for Asia Les.51 They include a detailed plan of the site, complete with a new electric substation, log sorting line, debarking section, pellet plant, administrative complex and three warehouses for drying wood.

PowerPoint slide from 2013 showing BM Group's existing sawmill, Amur Forest ("Амур Форест").
PowerPoint slide from 2013 showing Asia Les ("Азия лес") sawmill plans. Existing Amur Forest ("Амур Форест") facilities are found in the top right of the diagram.

PowerPoint slide from 2013 showing Asia Les ("Азия лес") sawmill plans. Existing Amur Forest ("Амур Форест") facilities are found in the top right of the diagram.

PowerPoint slide from 2013 showing Asia Les ("Азия лес") sawmill plans. Existing Amur Forest ("Амур Форест") facilities are found in the top right of the diagram.

Expectations for the venture only grew and, by 2015, BM Group felt free to flex its muscles. The loggers published a promotional video on YouTube showcasing their expensive hardware.52 Amid drone footage of the site set to swelling strings, it featured hulking machines hauling logs and piling finished goods high. "We work 24 hours a day," an unseen narrator declares in the English-language version, "seven days a week." He went on to trumpet Asia Les's priority status.

Watching shots of planks glide along a conveyor belt, you'd be forgiven for thinking that the sawmill was up and running ahead of its deadline. Foreign firms seemed to, as customs records show Asia Les supplied them with nearly 3,600 shipments of wood that year.

By 2016, when Asia Les was scheduled to complete the project, trucks and trains laden with wood were rolling in and out of Beryozovy. But, at the sawmill site, construction had barely begun.53

BM Group promotional video, November 2015. An English-language version was published to YouTube two months later. Source: BM Group / YouTube

Money, money, money

BM Group shrugged off mounting delays. The sawmill, it said, would be ready in 2018, then 2019. Then 2020.54 Under the latest deadline, the company forecast that the project's proceeds would be more than €1 billion within its first five years, an archived web page shows.55

By law, a delay of one year or more was reason enough to remove the project's priority status, and with it, its forest leases and subsidies.56 But the years ticked by with business as usual. Khabarovsk territory's regional government and the federal industry and trade ministry, which is in charge of priority projects, had not agreed or approved additional time, yet public money continued to foot some of BM Group's bills.57 Railway tracks were laid to support the project, as were 63 kilometres of roads and a metal bridge across the Nimelen river.58

The small village of Vladimirovka, the unofficial capital of the Negidal indigenous group and containing around half of their estimated 600 members worldwide59, quickly made use of the crossing.60 Reliant on boats for transport, villagers had hitherto waited out winters surrounded by frozen waters. Now the seven-span, 246-metre bridge and forest road offered a lifeline to the outside world.61

Nimelen river, July 2013

Nimelen river, April 2019

Back at the sawmill site, the loggers brought in a log sorting line with an x-ray scanner for detecting internal defects in wood, Russia's first, and expensive equipment from world-leading European manufacturers.62

PowerPoint slide (undated) shows construction on Asia Les log sorting line and pellet plant.

Dmitry Medvedev, Russia's prime minister at the time, officially launched the sorting line and wood pellet production plant via videolink in December 2017.63 Khabarovsk governor Vyacheslav Shport joined him on screen to praise Asia Les as "the most modern timber processing enterprise in the region" and the "500 new jobs" it brought.

Asia Les, July 2011

Asia Les, July 2019

Asia Les, July 2011

Asia Les, July 2019

Between 2014 and 2018, the venture received nearly €15 million in federal budget subsidies.64 And while the sawmill stalled, the logging originally meant to fuel it went ahead apace. Satellite images show necklaces of cleared woodlands connected to logging roads extending across the forest plots leased to the company.65 Thanks to the generous lease terms, BM was paying the state just €0.34 for each felled tree66, one hundredth what the same tree could be sold for unprocessed to China.67

All this time, Russia's industry and trade ministry did not visit the site. Instead, officials relied on documents submitted by the company to inform them of the project's progress and costs incurred.68

Showered with vast sums amid little scrutiny, Pudovkin could carve his name deeper into the annals of Russian forestry. Forests flattened at his command and money sprouted from the stumps, and that was it. Life can be good at the top.

I, spy

Towards the end of 2017, as subsidies continued to pour into deepest Khabarovsk, the sawmill caught the attention of Russia's domestic spy agency – the Federal Security Service, or FSB.

From the corridors of the Lubyanka, the spooks' imposing stone headquarters in Moscow, a request reached the country's federal accounts chamber to look into the project. Over six months, from June to November 2018, auditors combed figures and receipts.69 Their finished report, published in December 2018, revealed rampant wrongdoing.70

Asia Les was moving thousands of tonnes of goods out of Russia. But the report found that the sprawling site was far from finished, having created fewer than a third – 171 – of the jobs promised.71 Handed vast forests and funds to make planks and pellets, the company had simply chopped down the trees and sold most of the wood as raw logs to China, a breach of the deal with no expensive new facilities needed.

Lubyanka headquarters of Russia's FSB domestic spy agency. Picture: Artem Svetlov (licensed under CC BY 2.0)

Lubyanka headquarters of Russia's FSB domestic spy agency. Photo: Artem Svetlov (licensed under CC BY 2.0)

Lubyanka headquarters of Russia's FSB domestic spy agency. Photo: Artem Svetlov (licensed under CC BY 2.0)

Strangely, for a sawmill, there was no sawmill. The report revealed how, with no place to cut logs into lumber despite the whole project hinging on one, Asia Les was also passing off planks made elsewhere as its own.72 The accounts chamber said this was done on equipment leased from another firm, an accomplice later confirmed as the firm's next-door neighbour and BM Group stablemate Amur Forest, liquidated in 2017.73

Essentially, the audit report found that this was a scam. And because it depended on the cheap rights to the forests, it extended to the logs and timber. According to the report, the loggers claimed compensation for €7.6 million to transport goods with nothing to do with the project for export.74 The industry and trade ministry reimbursed another €2.6 million in transport costs, against the rules, after the venture overran its original deadline.75

With its log sorting line and rail depot, the fabled complex was little more than a glorified loading bay. Wood pellet production was in place, true, but this was nowhere near its promised capacity and ran on chips from another business.

Emblem of the Accounts Chamber of the Russian Federation. Source: Wikimedia Commons

Accounts Chamber of the Russian Federation. Source: Wikimedia Commons

Accounts Chamber of the Russian Federation. Source: Wikimedia Commons

Asia Les, the report concluded, broke the rules and its promises, and received public money to which it was not entitled – with no punishment from regulators.76 The ministry of industry and trade, it said with the cautious understatement typical of bureaucrats, had carried out "insufficient monitoring".

In a likely attempt to pre-empt the accounts chamber's findings, the provincial government ordered Asia Les to have everything up and running by a new deadline: 10 April 2019.77 But by this stage Pudovkin had quietly stepped down as the company's director. Company filings show he left Asia Les at the end of November 2018, shortly before the damning audit was made public.78 However, he remained in charge of BM Group LLC and an Asia Les shareholder.79

Inside the Lubyanka, FSB agents pored over the report, trying to connect names to the figures. One suspect stood out: Vasily Shikhalev, Khabarovsk's former forestry chief.

Stumped

Big things awaited Vasily Shikhalev, a politician and playmaker with a trademark slug moustache. Qualifications from the Omsk Institute of Railway Engineers and the St Petersburg Institute of Management and Economics, experience in local politics, three years leading a logging firm – his resumé proved it.80

His rise in the regional legislature began in 2002, when he became minister of the territory's forestry industry, then, in 2009, deputy chairman and minister of natural resources. May 2015 saw him appointed first deputy chairman of the provincial government, a role he held until September 2018, stepping aside after the landslide electoral defeat of his ally, governor Vyacheslav Shport, to Sergei Furgal.81

Retirement proved short-lived, for six months later, on 18 March 201982, balaclava-clad FSB officers detained Shikhalev in the resort town of Belokurikha83, flew him back to Khabarovsk and escorted him, handcuffed, down the aircraft boarding stairs into a waiting minivan.84

Vasily Shikhalev, Former Khabarovsk Government Deputy Chairman. Picture: FSB Directorate in Khabarovsk Territory

Vasily Shikhalev, Former Khabarovsk Government Deputy Chairman. Source: FSB Directorate for Khabarovsk Territory

Vasily Shikhalev, Former Khabarovsk Government Deputy Chairman. Source: FSB Directorate for Khabarovsk Territory

In the same sweep, masked men marched into the headquarters of BM Group, taking his friend Alexander Pudovkin into custody and seizing files, computer servers and hard drives.85 Footage posted online shows two men in camouflage carting a confiscated safe down a corridor. In another clip, a stone-faced Pudovkin dressed in a striped rugby shirt and patterned shorts listens to an officer read his arrest warrant.

FSB raid BM Group and detain Vasily Shikhalev, March 2019. Source: FSB Directorate for Khabarovsk Territory / Люди ДВ / YouTube

The so-called siloviki (strongmen) also searched the offices of four vice-governors in the provincial government's headquarters building, Amurpress reported.86 All four have since left their posts.87

One room belonged to the deputy chair for social affairs in Furgal's government, Natalia Pudovkina, the BM Group boss's partner and ex-wife, who swiftly went on holiday and resigned shortly thereafter.88 Around that time, a detained Alexander Pudovkin told a court that he and Natalia divorced on an unspecified date, though media reports suggest the couple still lived together.89

The timber tycoon and Shikhalev, 5990, were later released from pretrial detention and placed under house arrest.91 As the authorities circled closer to the sawmill, both men knew it was time to cut a deal. Pudovkin agreed to cooperate with the investigation and name names, reportedly in exchange for having some criminal charges, such as fraud, dropped.92 A veteran lawmaker, Shikhalev was also no stranger to behind-the-scenes bargaining. Favours, guile, luck. He would need them all.

Fightback

After the FSB raids and arrests, few thought the sawmill would be ready in time for the provincial government's deadline of 10 April 2019.

The date should have marked the final nail in the company's coffin. Instead, with its dying breath, the business hit back.

On deadline day, Khabarovsk governor Sergey Furgal announced Asia Les would be stripped of its prized priority status.93 No more forests fresh for the chop, generous rents and swimming in subsidies: he was turning off the money tap – and making the company repay about €746,000 to the federal budget. In another blow, Furgal added that sister sawmill Logistic Les would be struck from the list too, for unspecified breaches.

The following month, BM Group employees staged a protest to beg the governor for help.94 Demonstrators warned that the company teetered on the brink of bankruptcy. Their warning proved well-founded as arbitration court filings show a Chinese firm called Suifenhe Que Mei Timber LLC submitted an insolvency petition against Asia Les around the same time.95

"The company, with the writing nevertheless clearly on the wall, scrambled to cut down trees."

No luck. On the federal industry and trade ministry's orders, Asia Les fell from the priority list on 22 May 2019.96 As in the rise, so in the fall, Logistic Les followed shortly after.97

Yet when the regional government ripped up its lease agreement with Asia Les, staff stood firm. They refused to hand back the forests over which they had allegedly obtained rights fraudulently. In its opening salvo, the authorities filed a motion for an interim ban on logging during proceedings. It mimicked a successful motion by claimants in another Russian region, Irkutsk Oblast, in a nearly identical arbitration case held around the same time.98

The court, however, refused, and the company, with the writing nevertheless clearly on the wall, scrambled to cut down trees.99

Forest monitoring data analysed by Earthsight (see 'Chop, chop') shows a sharp rise in logging in forests under BM Group control that year. The company's legal shenanigans allowed its loggers to invade and degrade a further 150 square kilometres of virgin forest.

Earthsight gif of tree cover loss in BM Group forest concessions (extent marked in black). Green indicates tree cover in 2000; pink, tree cover loss; blue, tree cover gain from 2000 to 2012. Data: Hansen/UMD/Google/USGS/NASA (licensed under CC BY-NC-SA 4.0)

Earthsight gif of tree cover loss in BM Group forest concessions (boundary marked in black). Green indicates tree cover in 2000; pink, tree cover loss; blue, tree cover gain from 2000 to 2012. Data: Hansen / UMD / Google / USGS / NASA (licensed under CC BY-NC-SA 4.0)

Earthsight gif of tree cover loss in BM Group forest concessions (boundary marked in black). Green indicates tree cover in 2000; pink, tree cover loss; blue, tree cover gain from 2000 to 2012. Data: Hansen / UMD / Google / USGS / NASA (licensed under CC BY-NC-SA 4.0)

Chop, chop

Using official data, Earthsight tracked changes to “intact forest landscapes” (IFLs) – undisturbed woodlands each at least 500 square kilometres (or 70,000 football pitches) in size – in BM Group concessions over a period covering nearly two decades.

Earthsight calculated that BM Group logged and degraded an area of virgin forest the size of London during the last decade alone.

Click here to read more

Explore Earthsight's interactive map here

Timber!

The bitter arbitration battle ended on 29 August 2019, when Khabarovsk territory's arbitration court ruled that the provincial authorities were right to cut off Asia Les from the forests.103

Emboldened, the plaintiffs launched a flurry of further claims aimed at recovering roubles.104 The cases unearthed, amongst other things, that the company had failed to fulfil reforestation measures.105

BM Group staff protests continued106 – again, to no avail. Khabarovsk governor Sergei Furgal on 6 September 2019 confirmed that Asia Les and Logistic Les had been booted from the priority list in comments to the TASS news service at the Eastern Economic Forum.107

By October, dozens of employees had left Asia Les and those who remained counted down to layoffs.108 Staff told reporters of seizures of company equipment, likely to prevent its resale.109 Natalia Pudovkina, now back in the fold with her husband as the BM Group's managing director and public face, criticised the media "hype" surrounding the arrests and complained that the regional government treated them unfairly.110

"Starved of forests, Asia Les would be lucky to last another month"

In Vladimirovka, the small village by the Nimelen river, residents feared the return of long, lonely winters. Rumours emerged that the end of the leases would mean demolishing their beloved bridge. How would an ambulance reach them now?

The debate it sparked forced governor Furgal to appeal for calm in an interview with TV channel Gubernia, reassuring viewers that the bridge and associated road "will continue to stand".111 Informed sources told the press the falsehood had been promulgated by the company in an attempt to turn public opinion against the authorities seeking to clamp down on their law-breaking.112

Starved of forests, Asia Les would be lucky to last another month, reported Russia's official news agency, Interfax.113

Then, finally, it happened. The territory's arbitration court on 5 December 2019 declared the sawmill bankrupt and appointed an external administrator to manage the winding up process.114 The Russian bankruptcy register confirms the court's decision, and charts creditors' ongoing attempts to claw back funds.115

"Investigators alleged that Asia Les illegally logged enough wood to fill London's Royal Albert Hall nearly seven times"

State development bank Vneshekonombank, known as VEB, recently filed bankruptcy suits against Pudovkin116 and two of BM Group LLC's three co-owners117, Andrey Krymsky118 and Konstantin Beznosyuk119, who, together, also own the logging giant's export arm, Asia Export.120 Another letter landed at the door of the Asia Les sawmill's Chinese owners, Suifenhe Songlin International Trade Company.121

As investors gathered and decided on next steps, so did law enforcement. Two days before Christmas 2019, representatives from the prosecutor's office brought crimes connected to the sawmill swindle to the head of Khabarovsk territory's elected government, Furgal.122

Based on the fraud uncovered, investigators alleged that Asia Les illegally logged nearly 600,000 cubic metres of wood – enough to fill London's Royal Albert Hall almost seven times – on the leases concerned.123 Helped, of course, by taxpayers' money.

Processed into finished products such as cladding, Earthsight estimates this wood had a street value in excess of €874 million ($1.025 billion).124

Far from connecting Khabarovsk to the world, Asia Les had conducted industrial-scale environmental crime, and the time had come to hold the perpetrators accountable. First in the dock: the former forestry chief.

Alleged connections and conflicts of interests in the Asia Les scandal

Russian prosecutors say Alexander Pudovkin's sawmill venture gained forests and funds through bribery and corrupt deals. Earthsight's diagram lays out the alleged connections and conflicts of interests in the scandal, including a kickback scheme involving former federal official Vladimir Potapkin. He denies the charges against him. Sources: court papers; testimony of Alexander Pudovkin, BM Group president; Prosecutor's Office of the Chukotka Autonomous Region; company filings; news reports; Photos: FSB Directorate for Khabarovsk Territory / minpromtorg.gov.ru / LinkedIn; Василий Шихалев; Illustration: Matt Hall for Earthsight

Russian prosecutors say Alexander Pudovkin's sawmill venture gained forests and funds through bribery and corrupt deals. Earthsight's diagram lays out the alleged connections and conflicts of interests in the scandal, including a kickback scheme involving former federal official Vladimir Potapkin. He denies the charges against him. Sources: court papers; testimony of Alexander Pudovkin, BM Group president; Prosecutor's Office of the Chukotka Autonomous Region; company filings; news reports; Photos: FSB Directorate for Khabarovsk Territory / minpromtorg.gov.ru / LinkedIn; Василий Шихалев; Illustration: Matt Hall for Earthsight

Get out of jail card

The Khabarovsk Central District Court on 13 March 2020 found Vasily Shikhalev guilty of abuse of office and handed him a suspended prison sentence of four years and six months.125

The court heard how, between 2013 and 2018, while in charge of the region's forestry industry, he lobbied and did favours for Pudovkin.

Banning him from public office, the court found Shikhalev illegally secured Asia Les cut-price rents for state forests without tender, significantly understating their size (estimated damage to the federal budget, according to prosecutors: more than €840,000). When the project ran more than a year behind schedule, he ordered officials not to take action and hid evidence of rule breaking.126

Vasily Shikhalev in court, March 2020. Source: Vesti Khabarovsk/YouTube

Vasily Shikhalev in court, March 2020. Source: Vesti Khabarovsk / YouTube

Vasily Shikhalev in court, March 2020. Source: Vesti Khabarovsk / YouTube

"He had a conflict of interest – to make a positive impression of his work on the governor of the Khabarovsk territory – to create the appearance of the effective attraction of investments," prosecutor Konstantin Kurguzov told the court.127 "Shikhalev was also friendly with Pudovkin and decided to help him to keep his project in the list of priority investment projects."

As a result, Shikhalev allowed nearly €11 million in illegal federal subsidies and illegal logging worth €98.6 million.128 Total losses to the state treasury are estimated at as much as €117 million.129 In a separate civil suit, he agreed to pay the Federal Forest Agency more than €840,000 in fines – the same sum his dodgy land leases cost the Russian taxpayer.130

Despite prosecutors demanding the disgraced politician spend time behind bars, he was spared jail after reaching a pretrial agreement with investigators. The criminal case was therefore tried without examining evidence.131

LinkedIn profile page of Vasily Shikhalev Jr (screenshot taken 6 December). Source: Vasily Shikhalev Jr/LinkedIn

LinkedIn profile page of Vasily Shikhalev Jr (screenshot taken 6 December). Source: Василий Шихалев / LinkedIn

LinkedIn profile page of Vasily Shikhalev Jr (screenshot taken 6 December). Source: Василий Шихалев / LinkedIn

This meant the court didn't hear quite how close the corrupt former politician's family was to Pudovkin and the botched business venture to which he had provided patronage. A Russian corporate register shows that in February 2019, the month before his arrest, his son, Vasily Shikhalev Jr, was CEO at Asia Export, the BM Group affiliate controlling a small stake in Asia Les and jointly owned by Pudovkin's sons.132 Vasily Jr has also worked as BM Group's strategic development director since July 2018, according to his LinkedIn profile.133

In Khabarovsk, it seems, the line between loggers and forestry officials is blurred to the point of invisibility. As it turns out, the corruption in this case extends all the way to Moscow.

Russian roulette

A lawyer, a lumberjack and a bureaucrat walk into a restaurant.

Prosecutors won't give you a punch line, only details on an unlikely encounter that gave Pudovkin another friend in a high place.

The first details emerged on 21 June 2019 when agents in Moscow detained Vladimir Potapkin, a former department head at the federal industry and trade ministry who quit on an unspecified date earlier that year.134 He was sent to Khabarovsk where a court arrested him on corruption charges.135

Investigators in the territory accused Potapkin of accepting bribes totalling €876,000 from Pudovkin in return for showering Asia Les with state subsidies.136 An official press release says the sawmill firm received €5.3 million as a result.137 He is also said to have helped place the project on the priority list.138

Vladimir Potapkin. Photo: Russian Ministry of Industry and Trade

Vladimir Potapkin. Photo: minpromtorg.gov.ru

Vladimir Potapkin. Photo: minpromtorg.gov.ru

Prosecutors in the trial against the ex-official say Pudovkin paid kickbacks from 2016 to 2019 – when the sawmill ran beyond its original deadline – through a mutual friend, lawyer Anton Tolmachev, who fled the country to avoid prosecution.139

Their witness, none other than Pudovkin, admitted coming up with the scheme and told the court Tolmachev acted as a conduit for money sent in the guise of interest-bearing loans. The payments reportedly occurred after Potapkin introduced the pair to each other at a Moscow restaurant.

His evidence differed slightly from his earlier claim to investigators that the transfers were Potapkin's idea – which, if proven, may have got him off the hook legally.140 Regardless, the BM Group boss had confessed to orchestrating bribes to serve his business interests.

The defence argues that Pudovkin testified against their client to have two of his three charges dropped.

Russia's deputy prosecutor general Dmitry Demeshin last month sent the case against the disgraced tycoon to court. Pudovkin is charged with bribery "on an especially large scale", one count of which he admitted to in an indictment hearing announced on 19 November.141

The official press release on the upcoming case alleges that money changed hands under "threats" from the bureaucrat.

Vladimir Potapkin in court, October 2020. Picture: Vesti Khabarovsk/YouTube

Vladimir Potapkin in court, October 2020. Source: Vesti Khabarovsk / YouTube

Vladimir Potapkin in court, October 2020. Source: Vesti Khabarovsk / YouTube

Potapkin, who maintains his innocence, appeared in the defendants' cage in Khabarovsk on 12 October wearing a t-shirt, jeans and – because of the coronavirus pandemic – a powder blue surgical mask.142

He denied lobbying for Pudovkin and receiving money from Tolmachev, saying it was "very stupid" to have supposedly entrusted a known gambling addict to relay such large sums. "Tolmachev was losing all the money that got to him," news outlet RBC quotes him as saying.143 "It was a fact that all his acquaintances knew about. He borrowed and lost money from many of our friends."

Drawing on casino receipts and a psychiatric report on Tolmachev, Potapkin's legal team argues instead that the lawyer was probably borrowing funds to feed his habit.

The trial continues.

BM Group's foreign buyers

When its major projects fell from grace and dirty tricks emerged – corruption, lies and, as Pudovkin himself admitted at an indictment hearing, bribery – BM Group kept selling sought-after wood in plain sight. This went on week after week, month after month, in shipments of suspect lumber abroad.

Shipping records obtained by Earthsight show that three BM Group companies – Asia Les, Logistic Les and Asia Export – and another outfit closely linked to them, SDS Logistic, made €186.3 million from wood exports between January 2015 and April 2020, the entire period for which data is available. They sold 1.4 million tonnes of BM Group logs and lumber – more than one and a half times the weight of the Golden Gate Bridge in San Francisco.144 Raw logs went to China, while beams and boards also entered the EU, Japan and elsewhere.

The products were overwhelmingly Dahurian larch, with some Siberian spruce and Yezo – or dark-bark – spruce. Tougher than most softwoods and water resistant, larch is a popular material for cladding buildings, building yachts and interior panelling.145

Asia Les is listed as 'manufacturer' of three-fifths (62 per cent) of the BM-linked goods exported over the period, mostly in 2017 and 2018. More than 890,000 tonnes of trunks and sawn wood bearing its name, worth €97.1 million, entered supply chains across Europe and Asia, as well as the Marshall Islands.

According to the records, Pudovkin's pet project produced nearly all the group's exports in the two years before the damning audit report was released. Its exports then halted, only for BM affiliate Logistic Les to pick up the baton.

Dahurian larch forest. Photo: Shutterstock

Dahurian larch forest. Photo: Shutterstock

Dahurian larch forest. Photo: Shutterstock

Satellite images show Asia Les was still logging, but officially, at least, it had stopped exporting. Sister firm Logistic Les, on the other hand, suddenly sprang out shipments of the same wood in the same quantities to the same customers. It seems likely this was laundered Asia Les timber.

In response to a detailed list of facts in this article, BM Group management told Earthsight that all products exported were harvested in accordance with all relevant laws and regulations. They claim the wood had nothing to do with the activities and criminal case against "individuals" like Pudovkin.

But neither BM Group management nor their European customers could explain the coordinated switch in supplier. Even if the wood wasn't from the same source – and there was no way buyers could be sure – it was tainted by association, given the close links between Logistic Les and its affiliate, links highlighted in media reports of the sawmill scandal.146

So where did the dodgy goods go, both before and after the news broke? BM Group's biggest customer was China, accounting for nearly €111.3 million (60 per cent) of export sales, followed by Japan (€38.4 million, representing 21 per cent of sales). But most of the rest – wood worth €28.8 million (and about four times that at point of retail) – made its way to Europe, despite laws there meant to stop it.

SDS Logistic

Khabarovsk haulage firm SDS Logistic shipped tens of thousands of tonnes of wood manufactured by Logistic Les over the period covered by the shipping records.147

Representatives for BM Group say the firm is "independent" of Pudovkin's business empire, but close links between them challenge this claim.

SDS Logistic founder Svyatoslav Sochnev, who led the firm until October this year, previously served as general manager of Logistic Les.148 His departure coincided with SDS moving address from a quiet residential road to the same building as BM Group. Only a few offices separate them.

BM Group and its affiliated companies list the name and contact details for the same company representative as SDS Logistic on documents filed to a leading certification scheme for wood suppliers (see Chapter Four: 'The Watchdog').

BM Group office headquarters, Khabarovsk. Source: FSB Directorate for Khabarovsk Territory

Sources: FSB Directorate for Khabarovsk Territory; Rusprofil

BM Group office headquarters, Khabarovsk. Source: FSB Directorate for Khabarovsk Territory

Source: FSB Directorate for Khabarovsk Territory

SDS Logistic moved from here...

...to here

Enter the EU

The European Union in 2013 banned imports of timber sourced illegally, including wood traded, processed or harvested as a result of bribery, corruption and fraud.149

The flagship law, known as the EU Timber Regulation or EUTR, also requires importers to carry out due diligence on the wood they buy, to reduce the risk of trading illegal goods to a "negligible" level.

The rules and associated guidance make clear that they cannot rely solely on documents issued by governments in the country of origin for these checks, or on independent certification.150 The bloc passed EUTR as part of a package of measures to address the wood consumption in member states that was driving rampant illegal logging overseas. Though cases involving tropical wood from rainforests in countries like Brazil and Indonesia got more attention, lawmakers did not focus solely on them and widespread illegal logging in Russia was well known.151

Indeed, when the law took effect, studies suggest nearly as much stolen wood was entering the EU from Russia as it was from all tropical countries combined.152 A review of the rules commissioned by the bloc in 2016 confirmed the growing importance of Russia and its neighbours Ukraine and Belarus as sources of illegal wood and recommended paying them more attention.153

EUTR guidance for importers made on the EU's behalf acknowledges that Russian wood remains risky, due to widespread corruption in the country. The guidance cites figures suggesting that four-fifths (80 per cent) of harvesting in the Russian Far East is illegal.154

Given this, one might expect EU timber imports from Russia to dwindle once the rules came into force, with less risky wood taking its place. The opposite happened – imports increased by 50 per cent in terms of weight and rose even more in value. Last year the bloc imported some €2.9 billion of wood and wood products from Russia, up from €1.9 billion in 2012.155

One product with a particularly rapid rise in demand is Russian larch. Increasingly fashionable for use in cladding buildings, imports leapt by a third in just the last two years.156

European importers, of course, may have just become very adept at distinguishing good from bad, and buying only legit Russian goods. BM Group's sales suggest otherwise: it has done a roaring trade in suspect larch.

Shipping records reveal that more than 20 European companies bought lumber from BM Group affiliates over the nearly five-and-a-half-year period studied, including seven of the top 10 European importers of Russian larch. Many continued to place orders after the Asia Les swindle first became public in December 2018 with the release of the accounts chamber audit report. A number – including four of the continent's five biggest Russian larch dealers – even continued following the high-profile FSB raids and arrests in March 2019.

Firms from 11 EU member states purchased 100,000 tonnes of timber linked to the con. Asia Les supplied them with about 78,100 tonnes of planks and boards, worth €21.2 million. The records list the sawmill firm with no sawmill as 'manufacturer' of €12.6 million (or 45,800 tonnes) of sawn wood, nearly all of which – €12.4 million (45,200 tonnes) – the company sold direct.

German firms have been EU's biggest buyers by far, making up two-thirds (69 per cent) of BM Group export sales to the bloc. Estonia also received substantial volumes. Smaller amounts went to companies in France, Belgium, Sweden, Latvia, Slovakia, Czech Republic, Denmark, Lithuania and Austria.

European Union (EU) flags. Picture: Thijs ter Haar (licensed under CC BY 2.0)

The big spenders

Shipping records show nine EU companies spent at least €1 million on BM Group timber during the last five years. Together, they account for 92 per cent of sales to Europe. Only two of these companies halted purchases once the scandal first came to light. Six of them, including the three largest, continued after the FSB raids and arrests made news.

The top spenders, all but one of which BM Group's website confirms as customers, are hardly household names, but big players nevertheless within the multi-billion dollar timber trade between the EU and Russia.157 That trade's most lucrative product is sawn lumber, and the largest European market for this lumber: Germany, home to five of BM Group's nine favourite customers in the region. Weissenbach International, for example, which was the second biggest buyer from Asia Les, is Germany’s largest importer of Russian timber.158

The largest single European customer – before and since the scandal broke – has been Hamburg-based wood and paper merchant Jacob Jürgensen, which paid BM Group affiliates almost €8 million over the period, including €3.2 million for goods made by Asia Les. During the peak period of 2017, two lorry loads of Asia Les timber arrived at its gates on average every five days.159 The German firm continued to purchase from Logistic Les when the scandal emerged, recording shipments at least as recently as April 2020, the most recent month for which records are available.

BM Group's list of European customers (screenshot taken 23 September). Source: BM Group

BM Group's list of European customers (screenshot taken 23 September). PBM Import was later renamed ISB France. Source: BM Group

BM Group's list of European customers (screenshot taken 23 September). PBM Import was later renamed ISB France. Source: BM Group

Serving customers on five continents160, Jacob Jürgensen claims to be Europe's largest importer of Siberian larch.161 Cargo ships from St Petersburg, each carrying 20,000 cubic metres of larch from Siberia, sail into the Baltic port of Kiel every fortnight in its service.162 The rapid growth of its Russian larch business forced it to lease a giant new warehouse there in 2018. Shed 12 stores products on route to Italy, Spain and Portugal, and destinations as far as Australia, New Zealand and South America.163

Jürgensen's purchases from BM Group-linked firms actually increased after the FSB raids, from an average of 500 tonnes a month to more than 900. In the year to April 2020, Logistic Les was Jürgensen's second largest supplier, providing almost a quarter of its Russian larch.164

BM Group's top European customers' average monthly imports of wood manufactured by Asia Les or Logistic Les, before and after the damning audit report (orange) and FSB arrests (red) became public.

BM Group's top European customers' average monthly imports of wood manufactured by Asia Les or Logistic Les, before and after the damning audit report (orange) and FSB arrests (red) became public. Source: Earthsight analysis of customs records (January 2015 to April 2020)

BM Group's top European customers' average monthly imports of wood manufactured by Asia Les or Logistic Les, before and after the damning audit report (orange) and FSB arrests (red) became public. Source: Earthsight analysis of customs records (January 2015 to April 2020)

The next two largest BM customers in Europe specialise in Siberian larch. Ost-West Holzhandels (OWH) in Germany claims to handle upwards of 70,000 cubic metres of it each year.165 Estonia's Wellmax Baltic, meanwhile, says its "mission" is to import the stuff.166 The Kurtna-based outfit owns a Siberian subsidiary to help with purchasing, and has supplied high-profile projects in its home country, such as a new clubhouse for the home of Estonian golf and seating and decking for a seafront promenade in capital city Tallinn.167 Both it and OWH increased their shipments of BM Group-linked wood in 2019, despite the well-publicised scandal.

Plenty of industries will gladly snap up the goods these firms import. Construction projects across the continent use BM Group's big buyers' products, and larch sawn boards, cladding and decking line shelves in builders' merchants and DIY chains including Obi in Germany.168

ISB larch cladding on sale on Leroy Merlin's website (screenshot taken 13 December). Source: Leroy Merlin

ISB larch cladding on sale on Leroy Merlin's website (screenshot taken 13 December). Source: Leroy Merlin

ISB larch cladding on sale on Leroy Merlin's website (screenshot taken 13 December). Source: Leroy Merlin

Take the largest French BM customer, ISB France. It forms part of ISB Group, a supplier of sawn timber and wood panels to industrial wholesalers and hardware stores like Mr Bricolage and Castorama.169 Its larch cladding is on sale in branches of Leroy Merlin, one of Europe's largest DIY retail chains with over 400 stores across the continent.170

On its website, ISB Group says "it is impossible to work with wood and ignore the warnings about deforestation and ecology," and claims to "carefully screen our suppliers and incoming timber".171 Yet this is not its first Russian run-in. In 2017, the environmental advocacy organization Greenpeace linked one ISB supplier to logging in vulnerable forests in the country, including in proposed protected areas. The same report also fingered BM’s top EU customer, Jürgensen.172

'So-called facts'

Earthsight contacted the major European buyers for comment on our findings. The responses varied from apparent concern to complaints and curt dismissals.

Jürgensen said that it did "not see any fact-based information to doubt" its EUTR compliance, which it said was monitored strictly in Germany. OWH and Wellmax did not respond, and neither did ISB.

Ghent-based trader van Hoorebeke Timber, which also continued to source from Logistic Les after the FSB arrests, admitted buying BM Group goods through third parties but insisted the purchases were above-board. Nevertheless, it said it would investigate our findings.

"We consider your allegations superficial and inappropriate!"
IWT Seesen boss Eugen Ockert, in email to Earthsight

IWT Seesen, which received shipments from Asia Les claiming to have been manufactured by Logistic Les after the audit report but stopped before the FSB arrests, confirmed that it had "not had any business relationships with BM Group or Asia Les since February 2019". IWT boss Eugen Ockert added that "any conduct by our supplier can in no case be interpreted at our expense" and that Pudovkin would be "held accountable under Russian law".

The only firm to admit prior knowledge of the sawmill swindle was leading importer of Russian lumber Weissenbach International, which sought to shift the spotlight to its competitors. "We can assure you that we were one of the few importers in Europe who refused to accept any cut lumber from Khabarovsk Krai offered by Mr Pudovkin, [BM Group] and [Asia Les] due to the 2019 scandal," managing director Toni Weissenbach told Earthsight.

He added that Weissenbach International "refused all shipments" in the beginning of 2019. The claim contradicts customs records Earthsight had mentioned in our request for comment, showing imports briefly resumed during December 2019 and January 2020. The trade logs record five shipments of goods manufactured by Logistic Les and bound for Weissenbach International during the period, at the time connected company SDS Logistic was handling supplies.

Shipping record showing SDS Logistic exported Logistic Les-made Dahurian larch lumber to Weissenbach International, January 2020. Source: Earthsight

Customs record showing SDS Logistic shipped Logistic Les-made Dahurian larch lumber to Germany's Weissenbach International, January 2020. Source: Earthsight

Customs record showing SDS Logistic shipped Logistic Les-made Dahurian larch lumber to Germany's Weissenbach International, January 2020. Source: Earthsight

The remaining two firms, which also imported from Asia Les before the scandals broke but not thereafter, offered contrasting responses. Speaking on behalf of Hamburg's Ludwig Holz and Co, managing director Kai-Henning Ludwig denied any wrongdoing, calling Earthsight's findings a collection of "assumptions", "repetitions" and "so-called facts".

Fredricsons Trä, a major Swedish dealer in Russian timber, denied any deliberate involvement in wrongdoing. In a statement, the company says it "strongly dissociates itself from any alleged illegal action the supplier is said to have engaged in," adding that it "has no current business relationship with BM Group."

Swedish authorities had signed off on its due diligence process as meeting EUTR requirements, the statement went on, stressing that these checks did not rely solely on third party certification schemes. Even so, Fredricsons Trä said it would launch an investigation into our findings in line with its commitment to "continuously improve" its due diligence process.

Channel hopping

Even though the customs records show them importing large volumes of Dahurian larch, the buyers' websites do not mention the species. Instead, they say they sell its close cousin, Siberian larch. Both trees have much in common, including the Russian regions in which they grow, but are distinct. Dahurian larch is, however, commonly marketed as Siberian.173

This Siberian brand has become particularly popular in the UK in recent years as cladding for houses, owing to severe Russian winters producing slow growth and denser, hardier wood than native kinds.174 The trend received a boost in 2016 when hit TV home improvement show Grand Designs showcased its "plentiful, affordable and durable" qualities – to quote host and design guru Kevin McCloud.175

The UK is the third largest consumer of Russian larch in Europe.176 Customs records list significant volumes of BM Group timber bound for the British Isles, though the goods' ultimate customers remain hidden thanks to secretive consignees (see 'London calling'). Direct shipments across the Channel stopped shortly before scandal engulfed BM Group, but there is a good chance some larch lumber continued to enter the UK via Germany.

Siberian larch-cladded house featured on TV home design show Grand Designs. Source: Bennetts Timber

Siberian larch-cladded house featured on TV show Grand Designs. Source: Bennetts Timber

Siberian larch-cladded house featured on TV show Grand Designs. Source: Bennetts Timber

During phone calls with an Earthsight investigator posing as a would-be buyer, representatives for several top EU importers confirmed they supply bulk orders of larch lumber to the UK, though one, Weissenbach, subsequently claimed that this did not include BM Group wood.

As recently as March this year, Jacob Jürgensen was doing this through a UK subsidiary that maintains "a landed stock of Siberian larch" in the country, a sales representative for the daughter company told the undercover Earthsight investigator via email.177 A representative for one of their customers said this larch is then processed at a UK sawmill and distributed from two locations: Widnes, in Cheshire, and Harmondsworth, west London.178

British businesses will shoulder greater responsibility for this trade at the end of the Brexit transition period on 1 January. As part of the EU, they could depend on their mainland suppliers to do due diligence for them. When the UK completes its tortuous journey out of the bloc, they will have to show that wood brought in from the EU has been legally harvested in the country of origin, regardless of whether mainland importers carried out checks.179

London calling

Customs records identify two UK-registered companies as BM Group customers. Unlike their counterparts on the continent, the pair seem to act as middlemen, running paperwork for shipments sent from Russia for others.

One shares its registered address with a massage parlour in Covent Garden, London; the other, a Scottish letterbox linked to the Paradise Papers.

Click here to read more

4. The Watchdog

BM Group production line employee at work. Source: BM Group / YouTube

BM Group production line employee at work. Source: BM Group / YouTube

Greenwash

How did all these firms end up sourcing suspect wood seemingly in breach of EU law? In one word: certificates. In another: greenwash.

Though some told Earthsight that their due diligence went further, all rely to a significant extent for their EUTR compliance on certificates from leading forestry and wood supply accreditation bodies the Forest Stewardship Council (FSC) and its main competitor, Programme for the Endorsement of Forest Certification, known as PEFC.

Bookcases and bed frames, wardrobes and wallpaper, coffee cups, toilet roll, napkins and straws – all commonly bear these watchdogs' clean, green logos. The symbols tell shoppers that to make this product, loggers receive fair working conditions, trees are felled sustainably and legally, and forest dwellers protected.

Unfortunately, mounting evidence shows illegally sourced and high-risk wood has repeatedly received their stamps of approval, due to fundamental flaws and conflicts of interest within the green schemes. BM Group wood, it turns out, is no exception.

PEFC features prominently on BM Group's website (screenshot taken 6 December). Source: BM Group

PEFC features prominently on BM Group's website (screenshot taken 6 December). Source: BM Group

PEFC features prominently on BM Group's website (screenshot taken 6 December). Source: BM Group

Earlier this year, Earthsight revealed how FSC had certified illegal wood from Ukraine ending up in IKEA products.190 The report also documented the green scheme's long history of failure to spot or stop crime and human rights abuses in forests across the tropics.191

Yet, as Earthsight reported at the time, FSC is still the best of a bad bunch, at least compared to rival PEFC (see 'PEFC-no-evil').

Whether good, bad or merely a rubberstamp, a certificate does not prove timber traders follow the law on its own. Yet PEFC actively encourages buyers to believe that, with rules that treat certified wood as low risk regardless of origin and exempt it from the due diligence duties imposed on buyers by the scheme.192

PEFC-no-evil

Though touted as a shield against crooks, PEFC has made some major blunders.

Fundamental flaws have led environmental groups to dismiss the label as "greenwash" for trafficking illegal wood.

Click here to read more

When presented with Earthsight's findings, which included a critique of the green label, many BM customers still sought to defend themselves by pointing out that their purchases were PEFC certified. The same attitude is common among the bodies enforcing EUTR in each member state: "competent authorities". Over the past few years, Earthsight has exposed a litany of cases where suspect timber entered Europe in apparent breach of the law thanks to such certificates.

Jacob Jürgensen managing director Rolf von Loßberg told Earthsight that the German competent authority "sees PEFC, among others, as a very relevant tool and considerable instrument in exercising due diligence", a view he saw no reason to doubt.

Its Russian supplier clocked this early on.

Sleeping watchdog

In a corporate presentation, BM Group called papers from a leading certification scheme like PEFC or FSC "the main condition" to selling timber abroad.198

It gained PEFC status for most of its forest leases in late 2012, just before EUTR took effect, and quickly plastered the non-profit's name on web pages, PowerPoint slides and promotional videos.199 Affiliated companies – including Asia Les – also obtained PEFC certificates for their mills. Duly reassured, European customers started signing cheques.

The forests which would receive the PEFC stamp of approval included areas leased to Asia Les, as well as to neighbour Amur Forest and sister sawmill Logistic Les. Audits specifically claimed that everything was shipshape legally; the forest leases were legit, taxes duly paid. This meant the European buyers, in complying with their own PEFC certificates, could if they wished mark the wood down as "low risk", no further checks needed.200

PowerPoint slide from 2013 describing BM Group's involvement in the PEFC certification scheme.

Missing a scam centred on a sawmill that does not exist is one thing. Failing to act when the news broke is worse. And yet, today, the world-leading watchdog is still greenwashing companies and wood linked to Asia Les.

The scandal drew countless column inches and airtime on flagship current affairs programmes when news of the March 2019 raids and arrests appeared online on the same day they occurred; the damning accounts chamber audit report exposing fraud at the sawmill was made public months before. The auditors appear not to have noticed either. Instead, after a few days spent perusing paperwork in mid-February last year, they issued BM Group and, with it, Asia Les a shiny new certificate on 23 March 2019 – five days after cameras captured security service officers taking Pudovkin and his friend Shikhalev into custody.

Previous BM Group PEFC forest management certificate covering Hokinus, Asia Les and Logistic Les forest leases. Document became valid on 23 March 2019. Source: Earthsight

Past BM Group PEFC certificate covering Hokinus, Asia Les and Logistic Les forest leases. Document became valid on 23 March 2019. Source: Earthsight

Past BM Group PEFC certificate covering Hokinus, Asia Les and Logistic Les forest leases. Document became valid on 23 March 2019. Source: Earthsight

Both the factory and the forests of Asia Les have now lost their PEFC status.201 But the wider BM Group empire, though weakened, still stretches over 1,537 square kilometres of certified forests – an area the size of London202, and including a planned nature reserve.203 The credentials, issued to the management company of which Pudovkin remains CEO, covers leases listed under the name of BM affiliate Hokinus204, itself ultimately owned by his two sons.205

Papers accompanying the certificate and last amended in June 2020 state that BM Group LLC – i.e. Pudovkin – remains in charge of protecting biodiversity within these woodlands as well as developing and monitoring compliance with logging plans. Other responsibilities include protecting them from illegal logging. Nowhere in the documents is there a mention of the scandal or that the certificate has been revised and the Asia Les leases dropped.206 The global green body swept the whole thing under the rug, leaving the perpetrators in charge.

Current BM Group PEFC certificate covering Hokinus forest leases totalling 1,573 square kilometres. Source: Earthsight

Current BM Group PEFC certificate covering Hokinus forest leases totalling 1,573 square kilometres. Source: PEFC Russia

Current BM Group PEFC certificate covering Hokinus forest leases totalling 1,573 square kilometres. Source: PEFC Russia

PEFC International CEO Ben Gunneberg and Andrey Ryzhkov, director of PEFC Russia, said that credentials for Asia Les were withdrawn in the summer of 2019. The move, they added, came after the non-profit launched an investigation into the company auditing BM Group firms, SGS Vostok207, after learning of the scandal from the news media.

The full results of the probe, carried out by Moscow-based accreditation body Industrial Safety208, have never been published, but Ryzhkov said they led to annual inspections by PEFC of the auditing firm. This time interval had been extended, he went on, because of disruption caused by the coronavirus pandemic.

Screenshot of Earthsight interactive map showing overlap between BM Group forest leases (red), PEFC certified forests (yellow) and planned Dusse-Alin nature reserve (purple). Source: Eathsight

Screenshot of Earthsight interactive map showing overlap between BM Group forest leases (red), PEFC certified forests (yellow) and planned Dusse-Alin nature reserve (purple). Source: Earthsight

Screenshot of Earthsight interactive map showing overlap between BM Group forest leases (red), PEFC certified forests (yellow) and planned Dusse-Alin nature reserve (purple). Source: Earthsight

While dismissing Earthsight's findings as "rather tendentious" and stating that they "do not correspond to the facts", Ryzhkov said PEFC would investigate SGS Vostok afresh. Two days after Earthsight wrote to PEFC International, the head office filed a formal complaint with the auditing body against certificates issued for BM Group, Logistic Les, Asia Export and SDS Logistic.209

SGS Vostok issued a short statement that did not address Earthsight's specific findings but said that its activities comply with PEFC standards and Russian law.210 At the time of writing, it has yet to respond to PEFC about the complaint.

SGS Vostok statement to Earthsight. Source: Earthsight

SGS Vostok statement to Earthsight. Source: Earthsight

SGS Vostok statement to Earthsight. Source: Earthsight

Just friends

The auditing body on whom PEFC pins blame, SGS Vostok, is not a tinpot outfit but, rather, a subsidiary of the world's leading inspection, verification and certification firm, the multibillion-dollar stock exchange-listed Swiss corporation SGS SA.211

Its profits are great, its reputation in forest certification less so. In fact, the multinational has a uniquely troubled track record in this area. Earthsight revealed in an investigation earlier this year that SGS had issued FSC papers to an IKEA supplier in Ukraine caught breaking logging laws.212 Our report also documented numerous scandals relating to FSC and involving the Swiss firm, including in Indonesia, Romania and Guyana.213

Earthsight's report revealed SGS had issued forest certification papers to an IKEA supplier in Ukraine caught breaking logging laws. Source: Earthsight

Earthsight's report revealed SGS had issued forest certification papers to an IKEA supplier in Ukraine caught breaking logging laws. Source: Earthsight

Earthsight's report revealed SGS had issued forest certification papers to an IKEA supplier in Ukraine caught breaking logging laws. Source: Earthsight

Given the fundamental flaws within PEFC systems (see 'PEFC-no-evil'), especially in spotting organised crime and corruption, the certification system's failure in this case does not simply boil down to the actions of a single auditing firm. The auditors certified precious virgin forests as ripe for logging (see 'Chop, chop'), for example, but according to PEFC standards that was OK. Bring on the bulldozers.

That said, a glaring conflict of interest suggests there's something fishy here. PEFC records for BM Group list one Alexey Prikhodko as the company's representative. His name and contact details also crop up for affiliated companies Asia Les, Amur Forest, Logistic Les and Asia Export, as well as for SDS Logistic. Prikhodko is not an employee, however, but a part-time consultant. BM Group management, answering questions sent to him and forwarded on, said that he "represents [our] interests in certification issues as a competent and experienced specialist".

PEFC records list Alexey Prikhodko as company representative for BM Group, its affiliated companies and SDS Logistic (screenshot taken 28 October). Source: Earthsight

PEFC records name Alexey Prikhodko as company representative for BM Group, its affiliated companies and SDS Logistic (screenshot taken 28 October). Source: PEFC

PEFC records name Alexey Prikhodko as company representative for BM Group, its affiliated companies and SDS Logistic (screenshot taken 28 October). Source: PEFC

So far, so understandable. But here's the hitch. Prikhodko sat on BM Group's side of the table during the certification process, while, on the other, charged with independently verifying its activities, was his Facebook friend and business partner Andrey Zakharenkov.

PEFC documents name Zakharenkov as one of two SGS representatives who inspected BM Group's leased woodlands in 2016. Two years later, he set up a forestry services firm called LessCentr, jointly owned by himself and Prikhodko.214 Then, in 2019, when BM Group's certificate came up for renewal, Zakharenkov took his usual place among the auditors, as did his friend, for the loggers. Despite the arrest scandal hitting headlines mere days before, a reissued certificate was waved through.

Corporate registry names LessCentr co-founders as Alexey Prikhodko ("Приходько Алексей Петрович") and Andrey Zakharenkov ("Захаренков Андрей Сергеевич"). Source: Russian State Register of Legal Entities

Corporate registry names LessCentr's joint owners as Alexey Prikhodko ("Приходько Алексей Петрович") and Andrey Zakharenkov ("Захаренков Андрей Сергеевич"). Source: Russian State Register of Legal Entities

Corporate registry names LessCentr's joint owners as Alexey Prikhodko ("Приходько Алексей Петрович") and Andrey Zakharenkov ("Захаренков Андрей Сергеевич"). Source: Russian State Register of Legal Entities

Responding to questions, Prikhodko confirmed a friendship with Zakharenkov but denied that the connection created a conflict of interest skewing the PEFC certification process in BM Group's favour. "We have a lot of friends in the professional community," he said, adding that, as far as he knew, his friend is a contractor to the SGS branch and so could not approve PEFC certificates.

He went on to claim that Zakharenkov stepped down from certification audits in April 2018. Yet the public summary of the PEFC assessment of BM Group LLC in February 2019 clearly names Zakharenkov as an auditor.215

Public summary of 2019 PEFC assessment on BM Group naming Alexey Prikhodko as the loggers' representative and   Andrey Zakharenkov as SGS "Auditor 1". Source: PEFC Russia

Public summary of 2019 PEFC assessment on BM Group naming Alexey Prikhodko as the loggers' representative and Andrey Zakharenkov as SGS "Auditor 1". Source: PEFC Russia

Public summary of 2019 PEFC assessment on BM Group naming Alexey Prikhodko as the loggers' representative and Andrey Zakharenkov as SGS "Auditor 1". Source: PEFC Russia

Prikhodko's contact details contain another possible connection. He lists a Mail.ru email address whose username – the bit before the 'at' sign (@) – "ecolesdv" may refer to DVNII EcoLes, a defunct forest partnership that Zakharenkov co-founded.216 Prikhodko denies ever having any link to DVNII EcoLes and says the username reflects his affiliation with ecological issues in the region's forestry sector.

The apparent conflict of interest is especially concerning because there are grounds to suspect that the rot in BM Group's logging operations spread much further than the criminal investigation revealed. Forest management plans and cutting permits for the company's logging leases remain secret, while the coronavirus pandemic has kept their remote sites even more inaccessible to outsiders. Truly independent checks by Earthsight or others on whether the loggers complied with a wide range of other regulations meant to reduce harm to fragile habitats are, therefore, not possible. Corruption, like a fungus, thrives in the dark.

Even if PEFC's auditors meant well, they stood little chance of finding anything. Inspectors had only a few days to assess logging across a sprawling, remote stretch of woodlands accessible only along a few winding roads. And experience elsewhere shows how easy it is for corrupt officials and venal companies to control what auditors do and don't see.217

Over less than a decade, the Asia Les swindle exposed major blind spots in tackling the illegal timber trade.

In what may well be the largest single scandal of its kind, Earthsight has estimated that European consumers have shelled out somewhere in the region of €59 million to €316 million cladding their homes with illegal Russian wood.218 Far from EU laws preventing them from handling this timber, European companies profited handsomely from it.

Disgraced but still in business, BM Group president Alexander Pudovkin will soon appear in court for a bribery charge, one count of which he admitted at an indictment hearing. Former federal official Vladimir Potapkin faces up to 15 years in prison if convicted of accepting the kickbacks, and a question mark remains over middleman lawyer Anton Tolmachev's whereabouts.

After a fine, corrupt former politician Vasily Shikhalev is free once more to enjoy his retirement.

Justice may still be done, perpetrators punished, but this is uncertain. Either way, it won't bring back those swathes of precious virgin forests or prevent another timber baron taking Pudovkin's place, with a new corrupt official in their pocket. Nor will it prevent a new Taiga King selling to eager buyers.

PEFC may very well pull the certificates of the firms responsible, a hollow victory given most of them will soon cease to exist. What's left of Pudovkin's empire is mostly in the hands of liquidators.219

Preventing a repeat of the scandal will take meaningful action to address root causes, both in Russia and Europe.

Russian president Vladimir Putin recently ordered his government to strengthen state oversight over priority projects following the timber baron's grand logging scam. A list of instructions approved after a videoconference meeting with officials on 29 September includes penalties for companies who fail to submit progress reports on time and banning the sale of unprocessed or rough wood from forest plots provided under the scheme, the latter measure seemingly drawn directly from Asia Les.220 It isn't much, given the entrenched problems with timber corruption in the vast nation. But it is something.

Picture: Office of the Russian President

Russian president Vladimir Putin holds videoconference on the development and decriminalisation of the forestry industry, 29 September. Photo: Office of the Russian President

Russian president Vladimir Putin holds videoconference on the development and decriminalisation of the forestry industry, 29 September. Photo: Office of the Russian President

BM Group customers in Europe, though, largely deny any structural problems exist, as apparently does PEFC. For them, it's business as usual.

When the EU's flagship timber law took effect, Brussels admitted that the bloc was "an important export market for those countries where levels of illegality and poor governance in the forest sector are most serious".221

Seven years later, Pudovkin's prolific waste of Russian forests and funds shows this is still the case. The sawmill saga stresses how importers in Europe need to stop waving through suspect wood on sight of shiny certificates or official papers from corrupt countries. But most importantly, the bodies enforcing EUTR should demand that they do more, or look elsewhere for their wood.

Making sure companies comply with the law isn't easy, especially when many authorities tasked with this job in member states are understaffed and underfunded. But this case shows the problem goes deeper.

It is no secret that Russia is the EU's largest supplier of high-risk wood, and long-standing guidance on EUTR stresses that illegal logging is a particular problem in the Russian Far East. The vast majority of the bloc's imports from that region are of larch. Who's the single biggest buyer of that larch? Jacob Jürgensen. Their second largest supplier? BM Group. Arguably, monitoring shipments of this wood from BM Group to Jürgensen should have been the top priority for EUTR enforcement anywhere in Europe.

Authorities in Germany, Belgium, France and elsewhere are clearly failing in their duties. Until this changes, chainsaws will continue to roar to supply unwitting European wood customers, bringing big paydays for crooks.

The European Parliament last month demanded additional powers to stop the EU contributing to deforestation and associated human rights abuses worldwide. MEPs voted to extend the existing checks on illegal timber to other goods driving forest loss like palm oil, beef and soy, in a measure which could also extend controls on timber to encompass wood from legal sources if it led to deforestation.

The UK government is also considering something similar. Whether any such laws reach the statute books remains to be seen. But one thing is certain: they will stand little chance of achieving their goals if, like EUTR, they are not made to work.

As authorities dither, loggers drive deeper into forests crucial to confronting the climate crisis and home to some of the planet's rarest animals and plants. Chop, chop.

Addendum: The Taiga King and I

Earthsight asked BM Group president Alexander Pudovkin to comment on a detailed list of findings in this article through the company's official email address and publicly available contact details attributed to a company representative, Alexey Prikhodko. Prikhodko was also sent a separate series of findings concerning another wood supplier whose interests he represents, a haulage firm supposedly independent of BM Group but closely linked to it.

We never received a direct reply from Pudovkin. Instead, BM Group management sent responses through the representative.

There followed a complaint about the time granted for a response, a threat to sue and an unsubstantiated claim that Earthsight's investigation had been "ordered" by an unspecified party, which added that Earthsight had showed "disregard for generally accepted rules of business ethics" and "complete disrespect" for the PEFC complaints process. Reporting facts they didn't like was "incorrect and biased", apparently.

The stern words didn't end there. By giving the other parties mentioned in the report the chance to comment, Earthsight, said BM management, "disseminate false information that casts a shadow on the legality of exported products and the company’s reputation."

Earthsight duly BM Group's deadline for comment by nearly two weeks, after which time BM Group management responded to the findings concerning the supposedly independent haulage firm – and left the longer letter to Pudovkin unanswered.

Part of their response said the company will sue Earthsight for what they "consider libel and slander", another that Pudovkin would "comment personally" on the letter to him. But first, Earthsight had to hand over the source of information on the criminal case against him.

Given that his name was plastered across the internet, and anyone can read about the case with a few taps on a smartphone, Earthsight declined, telling the representative that Pudovkin and his company are perfectly capable of commenting on the facts set out in the letter. After all, BM Group management had already responded to one set of findings. Further time was granted for Pudovkin's reply.

The representative then told us in a carefully-worded response that he no longer wanted to relay messages concerning Pudovkin, and that, in his opinion, "BM Group considers it unethical and inappropriate to comment on your observations before a court decision."

At the time, no trial date had been set for Pudovkin. A week later, Russia's deputy prosecutor general sent his bribery case to court.

The press release announcing the decision, Mr Pudovkin, is found here.222

Earthsight has included responses from BM Group management and Alexey Prikhodko throughout this publication. We have yet to hear from BM Group's lawyers.

December 2020


Credits

Cover art and illustrations: Matt Hall

Cover art images: FSB Directorate for Khabarovsk Territory / Arbitration Court of the Khabarovsk Territory / Magnus Johansson (licensed under CC BY-SA 2.0) / BM Group

China-Russia deal signing and lunch photos: Heilongjiang Songlin Group news releases (archived)

European Union flags photo: Thijs ter Haar (licensed under CC BY 2.0)

Film trailer: Sandy Watt

Satellite imagery: Maxar Technologies / Google Earth

Full list of references available here