NEW YORK, Aug 17 (Reuters) U.S.-based International Paper Co. said on Friday it had signed a defini

NEW YORK, Aug 17 (Reuters) U.S.-based International Paper Co. said on Friday it had signed a definitive agreement to form a $1.6 billion joint venture with Russia's leading forestry firm, Ilim Holding.

International Paper, which signed a letter of intent with Ilim in October, said it would pay about $650 million for a 50 percent stake in the venture, to be called Ilim Group. It expects to close the deal in the fourth quarter.

''We view the deal ... as positive for IP both from a strategic and financial standpoint and continue to view the company's growing emerging market presence as an attractive long-term strategy,'' said JPMorgan analyst Claudia Shank, in a note to clients.

The partners will invest $1.5 billion in Ilim's four pulp mills over the next five years to upgrade equipment, increase production capacity and make high-value paper products.

''The joint venture with Ilim positions us very well within low-cost, high-growth markets in Russia and Asia,'' said International Paper's Chief Executive John Faraci.

JPMorgan's Shank noted that the deal could add at least 20 cents a share to International Paper's 2008 earnings, while adding that the deal offered the largest U.S. paper company an opportunity for margin and revenue improvement.

However, Credit Suisse analyst Mark Connelly noted that the deal would be cash flow negative for a few years.

''The investment will result in cash outflows for the first six years, so while the math says the deal may be accretive, the project is expected to result in negative free cash until about 2013,'' said Connelly, in a research note.

Ilim Holding has an enterprise value of about $1.6 billion and produces more than 2.5 million tonnes a year of market pulp, uncoated papers and packaging for sale to Russia and Asia.

The company reported earnings before interest, taxation, depreciation and amortization (EBITDA) of about $212 million in the first half of 2007 and full-year EBITDA is forecast to surpass $400 million.

Russian President Vladimir Putin has called on the country's forestry industry to invest more in processing and cut exports of logs. Moscow this year announced export duties on unprocessed timber to encourage development of the Russian industry.

Ilim Group Chairman Zakhar Smushkin said the joint venture, which was approved by Russia's federal anti-monopoly agency in June, was a response both to global market challenges and appeals from the Russian government.

''I hope this alliance will not just give a powerful impetus toward Ilim Group's development but will also open the way for the inflow of investment and know-how that our industry so badly needs,'' Smushkin said.

Ilim has grouped its pulp and paper mills, the largest in European Russia and Siberia, for inclusion in the joint venture.

The venture will not include International Paper's pulp and paper mill in the Russian town of Svetogorsk. Ilim Pulp will, meanwhile, fold its wood-products business into a separate holding company that will be Russia's largest timber processor.

The joint venture will be headquartered in St Petersburg.

Smushkin will chair a board that will include four directors from either company. International Paper Senior Vice-President Paul Herbert will be the joint venture's chief executive.

International Paper has operations in more than 20 countries and has annual sales of about $22 billion.

Shares of International Paper rose 2.1 percent to $33.01 in midday trade, after having risen as high as $33.71 earlier in the session.

REUTERS SR PM2330