Russia’s Gateway to Nowhere : Despite a Prime Locale, the Far East Has Yet to Be Center for Trade

At the Australian restaurant serving kangaroo steaks, in the television programming from Japan and Korea and on the billboards hawking American apple juice and computers, this former Cold War fortress now seems eagerly embraced by capitalism.

But equally apparent is the clinging grasp of Moscow, holding back its eastern territories from what federal authorities see as defection to the Pacific Rim.

The shabby housing blocks are shrouded in darkness from 6 p.m. to midnight because Vladivostok, a Pacific Ocean port 6,000 miles and seven time zones away from Moscow, is at the end of the receiving line for Russia’s sparse supplies of gas and electricity.

By the same out-of-sight, out-of-mind mentality, the Far East’s state workers are among the last paid from the capital’s coffers, prompting frequent strikes to demand back wages.

Most disturbing for the local entrepreneurs and their would-be foreign partners, from Korea’s Hyundai conglomerate to U.S. wood-products giant Weyerhaeuser, is the regularity with which promising deals falter because of the chaotic federal tax system, conflicting legislation and corrupt government middlemen who stand in the way.

“In the long run there are opportunities here, but for the time being no one knows what to expect,” Vladimir D. Gavrilyuk, Australian consul general and trade commissioner for the Russian Far East, said in an interview. “This is a very difficult time for foreign investors to come here.”

Although dozens of Asian and North American companies have established offices in Vladivostok since the once super-secret naval port was opened to the world in January, 1993, the Pacific Rim pioneers concede productive ventures remain years, if not decades, away.

Alaska Airlines has secured the rights to operate direct flights from here to Anchorage, Seattle and San Francisco, AT&T; is working on the region’s antiquated telephones, and professional services firms such as Deloitte & Touche and Pacific Law Center are helping with contracts for Russian-Pacific Rim joint ventures.

But little has progressed beyond watching for opportunities.

Weyerhaeuser has been examining the vast Far East forests for a timber deal for nearly five years without success, said Timothy Smith, the U.S. consulate official in charge of commercial affairs. Regional officials blame Moscow for vetoing proposed sales and harvesting contracts or imposing prohibitive taxes.

“They still have a representation here, but they’ve just about given up,” Smith said.

Likewise, recalls Gregory Elftmann, another consulate official, a major U.S. sportswear designer had arranged to manufacture clothing at a factory in Nakhodka and export the finished goods from that purported free-trade zone but pulled out at the last minute because Moscow refused to guarantee how it would be taxed.

Aside from such tax uncertainties, investors are discovering that activity on Russia’s Pacific Coast does not necessarily give them access to the distant and more populous interior.

The Primorsky Region, as the coastal area is known, has been all but cut off by federal authorities in the course of a protracted power struggle between regional Gov. Yevgeny Nazdratenko and federal ministers in Moscow who accuse him of having a dictatorial style and evading taxes.

The power struggle has exacerbated other obstacles to industrial development and cast the Far East in the traditional Third World role of being a provider of natural resources. To create jobs and generate income, local officials have been exporting vast quantities of timber, fish, coal, gas, oil and minerals.

Russia’s regions have the right to determine extraction and sales levels for most resources, but much of the revenue ends up back in Moscow. Investment in the local infrastructure is so paltry that there is not even a functioning gas station in Vladivostok, a regional capital of 700,000. Fuel is sold to motorists at curbside directly from the tankers driven in from gas-producing provinces.

Meanwhile, another potential arena for foreign investment--Russia’s commercial fisheries--have become too entwined with Russian organized crime to be attractive to foreign companies that simply want to do business, according to Pacific Rim diplomats.

The Far East accounts for more than 60% of Russia’s total sea harvest, and fishing is the region’s leading industry with more than 150,000 employees. Nonetheless, its troubles reflect the country’s overall economic crisis.

Depleted fish stocks, the lack of money for investment, high energy prices and poor transportation have combined to cut the quantity of seafood Russia has brought to market each year from 5 million tons in 1990 to about 2 million tons today.

Academics with a long view of what ails Russia’s Far East say the region suffers primarily from official neglect.

“The Far East has great exposure to the Pacific Rim trade routes, and Vladivostok is the main eastern hub of Russia’s railway network,” said Alexander P. Latkin, director of the International Institute of Economic Analysis and Forecasting here. “This region could benefit immensely from its favorable positioning between the wealth of natural resources in Siberia and the only ice-free ports in eastern Russia.”

With the loss of the Baltic Sea ports to independent Estonia, Latvia and Lithuania, as well as Black Sea shipping facilities now belonging to Ukraine, the Far East’s importance for Russian trade should be obvious to federal authorities, according to planners and business people.

However, for all their natural advantages, Vladivostok and the Pacific Coast region remain a gateway to nowhere.

Rail transportation from the Far East to the populous western areas of Russia is so expensive that it easily outweighs the savings of importing food and consumer goods from Pacific Rim suppliers instead of European producers who charge higher prices.

“The decline in the Russian economy further aggravates this condition, as people in the interior have less disposable income to buy imports and there are too few people on the Pacific Coast to constitute an attractive market,” Latkin said.

Latkin blamed the openly hostile relationship between Moscow and the Primorsky officials for the virtual paralysis in what should be a prosperous frontier for Russia.

He noted with exasperation, for example, that a 12-mile railroad spur is all that is needed to link northeast China with the port of Kraskino, through which Chinese manufacturers would like to trade with Pacific Rim partners. The Chinese authorities have already built hundreds of miles of railway up to the border, but Russia has not yet moved its smaller share of the project off the drawing boards.

“China needs access to our port to boost its trade with Japan and Korea, but our authorities are still arguing over who has to pay for housing customs officers and border guards at the crossing,” Latkin said.

Latkin worries that Russia, with its bureaucracy and indecision, is risking the loss of potentially lucrative transport routes, and he warned that this country is also competing poorly in the contest for industrial investments attracted by cheap labor. China and Vietnam both offer lower wages and greater efficiency, he said.

Those fears are justified, according to Asian businessmen who have been watching the region and weighing its potential as a partner. Kim Dae Shik, the regional representative for South Korea’s Hyundai, says foreign investment in China is 10 times greater than in Russia.

Hyundai has had an office in Vladivostok since it dropped its off-limits military status three years ago, and did business from the Far East city of Khabarovsk for three years before that.

But except for a $60-million hotel and business center undertaken with Russian partners, Hyundai has no productive activities in the Far East.

“There are no benefits for foreign investors at the moment,” Kim says. “I don’t know if it’s that [federal officials in Moscow] fundamentally disagree with the view that foreign investment is a priority, or if they are just too slow to respond to the needs of foreign business.”

So why does Hyundai persist?

“Sooner or later--no one can say whether in one year or in 10--we expect the Russians to reform their tax system and the efficiency of their infrastructure,” Kim says.

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A Hole in the Rim

Vladivostok, once a super-secret Soviet naval port, was opened to the world in 1993. It is seven time zones away from Moscow but fortuitously perched on the Pacfic Rim: China is just a few miles west, North Korea is immediately to the south, and Japan lies due east. It seems a rich opportunity for trade, but so far Russia has botched it.