Next Step : Hope Rises in Far East of Russia, Despite Obstacles : Once-isolated region is now strong lure for foreign investors. Rapid change also brings hardships.

Konstantin Latkin wanted a modest remodeling in the dreary building housing his small trading company--enough sprucing up to impress his foreign partners and customers. He quickly got a lesson in the difficulties of bringing Western business practices to this long-slumbering city, which bears a geographical resemblance to San Francisco and now aspires to a similar international role.

“We tried to remodel the restrooms on this floor to have everything as it is in foreign countries,” Latkin explained. “We wanted to cover the walls with good tiles. The workers went on strike. They said it isn’t reasonable, in this very difficult situation in the country, to spend so much time and money for decoration of the corridors and restrooms.”

Latkin got the strikers back on the job only after a nasty battle in which he hammered home a capitalist notion: No work, no pay.

From the Amur River city of Khabarovsk, through villages that seem lost in a time warp, to the great ports of Vladivostok and Nakhodka, the Russian Far East is caught up in wrenching change. Geography and politics long made this region one of the most isolated in the world. Now it is Russia’s window to the Pacific. Japan’s banks are next door. China’s cheap consumer goods lie across a rapidly opening border. The neighbors all lust for Siberian timber, oil and minerals.

Meantime, the years of isolation have left a small-town naivete that softens the harsh edges of the transition in this region.

On summer evenings in Khabarovsk, for example, the record hop is the place to be. American hits like “Hotel California” waft from loudspeakers as youths dance in a downtown park. The scene, utterly divorced from the hip lyrics, radiates the forgotten innocence of a small-town high school dance in the American Midwest.

Cities and towns exude the atmosphere of old Europe: a second-class, run-down Europe facing distress, but Europe nevertheless, with shady, tree-lined streets and central plazas graced by heroic statues. Here one sees neither the grinding poverty still endemic to much of neighboring China, nor the spotty veneer of flashy modernity brought to Chinese cities by foreign investment over the past decade.

Small towns like Grodekovo, on the Chinese border northwest of Vladivostok, and even Khabarovsk, a city of growing regional importance, retain much of their slumbering ambience. Young couples push baby strollers along the sidewalks. Elderly women sell home-grown bouquets of flowers to supplement meager pensions. Friends out for the long, bright summer evenings stop to buy plums or raspberries from private sidewalk stalls.

Vladivostok, a city of rolling green hills and 19th-Century commercial buildings and mansions, has a more bustling atmosphere. Rush-hour traffic jams feature used cars imported from Japan. Boys practice skateboard skills on a concrete ramp near the central square. A busy free market stands next to the pastel green Vladivostok train station, a quaint small-scale replica of Moscow’s famous Yaroslavsky Station.

The two stations mark opposite ends of the Trans-Siberian Railway, key to Vladivostok’s historic attachment to western Russia. But the future lies in the Pacific, a source of optimism here that may be lacking in more landlocked regions. Uniformed sailors are a frequent sight on Vladivostok’s streets, while Russian navy ships bristling with electronic equipment share the harbor with cargo vessels. There also are more Asian faces in the crowds here--Chinese traders from across the border, or ethnic Korean citizens of Russia whose parents came here decades ago.

Shoppers queue for everything from bread and meat to fruit and vegetables. But in these days of high prices, the lines result as much from inefficient service as from actual shortages. And the highway north from Vladivostok to the Chinese border passes a spectacular symbol of technological prowess: a set of huge satellite communication discs mounted on sturdy columns, rising eerily above the rural landscape. The troubles here come not from any lack of fundamental capabilities.

Against this background, hope and despair hang in a fragile balance. The promise of a better life competes against frustration that simmers everywhere.

“We are now moving toward capitalism, and under capitalism the rich live comfortably and the poor must die,” grumbled Mikhail Maximovich, 80, a pensioner whose world has collapsed around him. “I know what capitalism means. I have an idea. There is one rich family for 1,000 poor families.”

Even though Maximovich has seen his pension increase significantly, the money buys much less, and he wishes that “there were no private stores, only state stores with fixed prices.”

But such objections cannot block the tide. Maximovich himself spoke at a Khabarovsk free market as he sold fish he caught in the Amur River. A few paces from the vegetable stalls, he laid out his excess catch on an old newspaper, selling 10-inch fish at 5 rubles (about 3 cents at the official exchange rate) each. It was clear he would pocket at least 100 rubles for activities that a few years ago were an economic crime.

No one knows what hardship the coming winter holds. But at least there is movement now. Goods may be unaffordable, but they are back on the shelves. State enterprises may be failing, but private businesses are sprouting. Output at former state farms, now run as ill-defined collectives, continues to fall. But production at dachas and newly distributed private plots is up.

“I was absolutely desperate a year and a half ago, when there was nothing to buy in the stores,” said Svetlana N. Zhukova, an editor for the independent daily newspaper Vladivostok. “Now practically everything is available, but you can’t afford it. Ordinary people have to spend all their wages on foodstuffs.”

Zhukova, short and very plump, admitted that even at the worst of times, she and her family never lacked food on the table. Like many others here, when she says nothing was available, she means there was nothing that she really wanted.

“My husband is used to very good and tasty food, and he won’t eat things that aren’t good,” she explained. “That’s why I had to rush to different stores to search for good food, and I couldn’t find anything. Now there is no problem, although the wages of myself and my husband are spent entirely on food. . . .”

Zhukova estimated that about 10% of the people of Vladivostok are better off now than they were several years ago, before major economic disruptions began. About 20% have seen little change in their living standard and 70% find themselves worse off, she said.

Vladivostok--which as home of the Soviet Pacific Fleet opened fully to foreigners only last October--also hopes to gain quickly from new ties to the world.

“Today we have more than 100 foreign joint ventures, and we hope to have many more such enterprises in the near future,” said Sergei S. Solovyov, chairman of the Vladivostok Soviet of People’s Deputies. “We hope to have, by the end of this year, regular flights to Niigata (Japan) and other foreign cities.”

Japanese tourists flood Khabarovsk. Expansion of Moscow-Tokyo ties has been held back by a territorial dispute, dating from the end of World War II, over a group of small islands just off Japan’s large northern island of Hokkaido. But growing numbers of Japanese local government officials are taking matters into their own hands, flying to Khabarovsk to explore prospects for expanded regional cooperation. Many Japanese businesses have opened representative offices in the best hotels of Khabarovsk and Vladivostok.

A Russian businessman based in Khabarovsk spoke in glowing terms of how his city’s air cargo links to Anchorage, Alaska, placed it in prime position to supply high-value goods such as salmon to the U.S. market. From his perspective, Anchorage is an ideal central distribution point, with easy connections to Los Angeles, New York and many places in between.

The region also enjoys expanding cross-border trade with China, with large-scale bartering of Russian goods such as fertilizer and timber in exchange for Chinese consumer products. Flights between Khabarovsk and the northeastern Chinese city of Harbin began two years ago, providing the first convenient air connections between China and the Russian Far East.

A U.S. consulate is due to open soon in Vladivostok, which will further promote links with the United States.

“I have great hopes and dreams that in the far future we shall look, if not like San Francisco, at least like a very civilized city,” said Evgeny D. Iosilevich, vice governor of Primorsky Territory. “We even want to build a suspension bridge, like in San Francisco, but we have no money for it. I am absolutely sure that . . . due to our geopolitical situation, we will have a great economic zone. . . . Foreign investors are eager to invest money here, but they are afraid because there are no laws that will guarantee the investments.”

Such problems will eventually be overcome, Iosilevich said.

“We shall develop because we are the only window to the ocean,” he said. “The Siberian regions have to bring all their resources through our ports.”

In the meantime, however, economic dislocations and falling living standards, mixed with new freedoms and confused authority, are taking a toll on social order.

This past winter, rival gangs battled for control of extortion and prostitution rackets at the Vladivostok Hotel, one of the city’s best. The hotel, far from fancy but with a certain aging charm, is said to have calmed down after victory by one gang. The city itself is still torn by rivalries between hometown gangsters and newcomers from the republic of Georgia.

The city has seen a sharp increase in murders, with about 50 in the first half of this year, Solovyov said.

There also are people who appear to be homeless.

Underpasses are haunts for street musicians. One afternoon, a young couple playing a familiar song on balalaika and accordion struck a responsive chord in a middle-aged passerby. She burst into song with an operatic voice of great natural talent or years of training.

Such moments of human warmth hint at a capacity to carry on, to endure the sufferings that still lie ahead. Most may be worse off materially than a decade ago. But many still treasure their new freedoms.

“If there was no perestroika (restructuring) , I would be working as a teacher in a school,” said Natalia Trofimenko, 21, senior assistant in the Primorsky Territory government’s International Trade and Foreign Affairs Department.

“Getting a job like this would have been impossible,” she explained. “You had to have connections with people who work here to get a job--family relations or friendship. Now you can get work according to your abilities and knowledge, not your social position.

“Old people say that seven years ago we lived much better because we could buy food and clothes at low prices,” Trofimenko added. “But of course I don’t agree.”