COLUMN ONE : Taking a Chance on Russia : Japanese entrepreneurs see financial opportunities in the Russian Far East. Small firms already are setting up shop there, but big businesses are waiting for political dust to settle.


When his classmates at elite Waseda University signed up dutifully for staid careers in Japan's corporate world, maverick Kimio Nakagawa defied his country's tacit freeze on relations with the Soviet Union and went to Siberia to seek his fortune.

The Russian literature major landed a job with Radio Moscow in Khabarovsk, the industrial center in the Russian Far East, then started a translating business, which grew into a fledgling importer of Russian fish. He dreamed fancifully of opening a first-class Japanese restaurant in this dreary, frosty city, until his young life was cut short.

Nakagawa drowned swimming in the Amur River on a spring day in 1989. But his trading company and his business scheme survived, and his restaurant is a smashing success--testimony to a rising phenomenon of grass-roots Japanese entrepreneurship in the Russian Far East.

This new pattern of commerce falls under a new label: the "Japan Sea Basin." And it is a hot topic in academic circles because it serves as a window on how a vast area of the former Soviet Union is likely to be developed.

The trend also offers new hope for prosperity on the Japan side of the sea, along the ura-Nihon or "back of Japan" coast, where provincial cities have been traditionally snubbed by the industrial growth on the Pacific seaboard.

Both countries, the theory goes, can make better use of their rear frontiers.

"Up until now, the Soviet Far East has been sacrificed to the Kremlin's economic policy," said Takashi Murakami of the Institute for Soviet and East European Studies, a Tokyo think tank. "The resources were exploited and brought back to the center.

"But now Siberians can tie up with Japan and export to our markets," Murakami said. "They will get some of the rewards themselves."

As the empire of the old Soviet Union reassembles itself this winter as a vaguely defined commonwealth, the need for foreign capital to stave off economic disaster has never been more critical.

Yet the Western powers, particularly No. 1 debtor America, are limited in their financial resources. Japan, however, with its expanding economy and its $90-billion trade surplus, stands out as the world's No. 1 creditor, the moneybags, the lender of last resort.

Indeed, Japanese economists see strategic opportunities for investment in resource-rich Siberia, and Japan's mighty keiretsu conglomerates are sniffing at coal, natural gas and mineral reserves beneath the Siberian forest and on nearby Sakhalin island. They've tasted limited supplies of Siberian timber for years--and want much more.

But don't touch, says the Tokyo government. Not until Japan gets its four islands back.

While Russo-Japanese relations seem to be warming on the surface, in substance they are locked in a Cold War time warp pending a territorial dispute that dates to the closing days of World War II. That was when soldiers of the Red Army descended to the gates of Hokkaido, grabbing up the southern Kuril Islands along the way.

Tokyo has refused to sign a peace treaty, vowing that significant economic relations won't progress until it gets satisfaction on the "Northern Territories" problem.

With Japan Inc. on hold, that leaves it up to little guys like the late Nakagawa--and his father, who continues the business after coming out of retirement--to rise to the challenge of a new frontier opening up across the Japan Sea.

A flurry of activity has begun already, with bold and sometimes rather naive entrepreneurs combing once-obscure Siberian cities for joint-venture partners and a chance to get established before the giants of the Japanese economy start stomping around.

They are noodling ahead of the rigid Foreign Ministry to open restaurants and build tourist hotels. They are finding buyers for high-end used autos, not the junk cars that Russian sailors bring home in the holds of their timber ships. A group of small manufacturers of tableware in Tsubame, near the Japan Sea port of Niigata, is exploring the idea of converting Siberian weapons plants into production sites, turning missile parts into forks and spoons.

Flights between Niigata and Khabarovsk were jammed last year with Japanese businessmen and delegations of provincial trade officials. Once-a-week flights inaugurated by Aeroflot in 1976 were expanded to four flights a week during the peak summer season, including one by cushy Japan Air Lines.

The key port of Vladivostok, long home to the Soviet navy's Pacific fleet, shed its veil of secrecy and opened to foreigners in October and is scheduled to receive foreign ships shortly after the start of the new year. Japanese tourism developers plan to be there with passengers in tow once the weather thaws. A Niigata sweater maker is sending yarn and test patterns to a workshop in the port.

In macroeconomic terms, this is still a tiny radar blip. Japan's two-way trade with the republics of the former Soviet Union remains a mere 1% of its total exports and imports. But chroniclers of microtrends in the Asia-Pacific region are excited, and they say what's happening here is a textbook example of a dynamic "trade hub" in the making.

Other countries in the neighborhood of the Japan Sea Basin are in the game as well.

South Korea has pumped investment into Siberia as part of its nordpolitik strategy, which involves outflanking its arch foe, North Korea, by currying favor with Moscow. The Hyundai conglomerate invested in a Siberian logging joint venture in 1990 and is now building a 200-room hotel in Vladivostok, initially to lodge its employees.

Massive infrastructure development at the mouth of the Tumen River, on the border between China and North Korea, is being studied with multinational cooperation in mind.

"The Sea of Japan has been a frozen sea," said Saburo Okita, the former foreign minister and adviser to government. "Now the climate is changing."

Even some Alaskans are making the scene, trying to catch up with the Japanese. And trailing the Japanese businessmen and tourists are shadowy characters from Japan's underworld, several of whom were recently observed on what appeared to be a bizarre "sex tour," testing the waters of Khabarovsk's furtive prostitution racket in the bar at the Hotel Intourist.

"The Russian women are tall, but to tell you the truth I'm disappointed so far," said a beefy man from Okayama with a squarish head and the signature butch haircut of a Japanese thug. Asked his name, he responded with a grunt.

A flight aboard Aeroflot's Siberian Express, from Niigata to Khabarovsk, is an odd adventure--not just in terms of pre- perestroika aeronautics. Small businessmen dig their knees through the thin seats into the lower backs of professors returning from conference junkets in Japan. Russians and Japanese trade business cards across the aisle. Even idle chatter has portent.

"The situation in Russia is changing very quickly," sighed Arkady V. Alekseev, deputy director of the Pacific Oceanology Institute in Vladivostok, on a recent flight. "I've been away for two weeks, and right now I have no idea what's going on."

A program officer from the Sasakawa Peace Foundation, a right-wing philanthropic organization set up by the aging ultranationalist Ryoichi Sasakawa, also was aboard the aging airliner, guiding a small group of "back of Japan" provincial opinion leaders--a college professor, a town hall administrator, a mechanical engineer.

Masafumi Nagano, who said his group operates independently of its controversial benefactor, planned a Siberian tour for his entourage aimed at promoting "people-to-people" exchanges across the Japan Sea Basin, "to develop new relationships in the region that will prevent the kind of friction we have with our American partners.

"Please don't call this a grass-roots exchange," Nagano requested. "That has a leftist ring to it in Japan."

On the ground in Khabarovsk, the best meal in town--for those lucky enough to possess hard currency--is undoubtedly served behind the high-tech electric doors of the Sapporo Restaurant on Karl Marx Street.

The first two floors of this food palace offer Russian "cuisine" for the ruble-bearing proletariat, but on the third floor one can order a board of top-grade sushi or crab-claw tempura for $20, prepared by a team of Russian and Japanese chefs.

Kimio Nakagawa's legacy is profitable, too, because the cash flow from third-floor patrons resolves the need for hard currency that keeps joint ventures viable. The restaurant, with its two satellite ramen stands and its fish-trading parent company, is a model of how a risky joint venture can succeed.

Here's how it works: Nakagawa's original translation company, Media Craft of Tokyo, linked up with a fishing cooperative in the Russian port of Vanino to create Amur Trading Co., a joint venture in which the Japanese side provided state-of-the-art marine technology and the Russian side delivers the seafood--nearly $16 million in 1990. Some of the choice catch goes to the restaurant.

When Nakagawa died three years ago, his father inherited a morass of complex negotiations with officialdom.

"I thought about dropping the whole plan, but the people on the Russian side wouldn't let me," said Hideo Nakagawa, a retired railroad union official in the city of Sapporo. "The mayor of Khabarovsk begged me to go ahead, and my son's friends urged me on.

"Most joint ventures aren't going so well, but we're out ahead of the others," he added. "I think the success of economic relations here is going to depend on whether we Japanese and Russians can develop trust, and at the stage we're at now, small-scale ventures are testing that trust."

So far, as many as 20 Japanese trading companies have sent representatives to the Russian Far East. Times are now lean.

"Business is not so good--the Russians have no money," moaned Munetaka Okamoto, who represents the trading company Nissho Iwai in Khabarovsk. "It's difficult to get export licenses, we don't know who owns the land, and the big state enterprises are already exporting timber and coal--they don't respond to new business."

Okamoto said his office handled $40 million in sales in 1989, when it was the first trading house on the scene. Volume shrank to about one-fourth that amount as others elbowed in on his business--which he said included selling some 700 new Toyotas in three years.

"The pie is getting smaller," Okamoto said, "and the competition is getting more fierce."

But the trading companies are digging in for the day when deal-making begins in earnest. Outside the Japan Sea Basin, that's cause for concern.

Last month, for example, U.S. Ambassador to Moscow Robert Strauss challenged American companies to invest in Russia. He warned that Japanese and German firms are rushing in to seek opportunities while Americans sit on the sidelines.

"The Japanese aren't whining about the convertibility of the ruble the way American businessmen are," said John H.G. Wigand, who heads the Anchorage-based consultancy Soviet Economic Development Co. "The Soviet Far East has every natural resource that Japan could ever want, so they aren't here for quick profits.

"The funny thing is that the Russians would prefer to deal with the Americans, not Japanese," said Wigand, who was in Khabarovsk to probe oil exploration opportunities off Sakhalin. "But they'll go with whoever gives them economic help. It's the old starving man syndrome."

Of the about 100 foreign joint ventures in the Russian Far East, more than 70 involve Japanese partners, according to Pavel Minakir, director of the Institute of Economic Research, a think tank in Khabarovsk affiliated with the Russians' Academy of Sciences.

"Japan has monopolized the know-how on doing business in the Soviet Far East," Minakir said. "It knows the people, the conditions, the human resources, and it understands the potential for business. It can strike its blow before the competition begins."

Once the situation stabilizes, Japanese companies are backed by $1.8 billion in government loan guarantees, part of a $2.5-billion package of assistance pledged by Tokyo for the crumbling economies of the former Soviet Union. But finding initial financing may be tough--the government program leaves 2.5% of a contract uncovered, which is a risk banks are not eager to assume.

Skepticism crops up even among those dedicated to the "Japan Sea Basin" concept. In Niigata, which is perhaps the unofficial capital of ura-Nihon , a group of bankers and manufacturers have pooled capital and formed an investment entity, the Soviet Union Investment Promotion Co. But they are having trouble getting started.

Ryutaro Omori, president of the Niigata Chuo Bank and chairman of the investment consortium, said conditions still are primitive in Russia.

"These people have incredible skills at launching rockets into space," Omori said, "but they're lacking the technology to build a solid hotel on the Earth's surface."

His group wants to build a $38-million, 500-room hotel in Khabarovsk by importing prefabricated cottages from Japan, once they get final approval from "whoever is in charge on the Russian side," he said.

But if that scheme fails, Omori has what he thinks is an even better idea. On farmland outside Niigata, Omori and another group of investors under his leadership hope to build a theme park and resort development--Roshia Mura, or "Russia Village."

This $380-million project would feature a grand hotel "patterned after aristocratic palaces of czarist Russia," a pamphlet says, and offer Japanese tourists an art gallery emulating Moscow's Hermitage Museum, a replica of a Russian Orthodox Church (for weddings), an imitation "Bolshoi Theater" and a "high-class" riding club drawing from the "Cossacks theme."

If Siberians can eat sushi, why not?

"A lot of people say Mr. Omori is trying to take Russian culture out of its context," said Seiji Suzuki, a reporter for the Niigata Nippo newspaper. "But there's support from the Russians for this. A lot of good businesses have been started by chasing dreams."

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