THE RUSSIAN FAR EAST AND THE NORTH PACIFIC REGION: EMERGING ISSUES IN INTERNATIONAL RELATIONS

Selected papers from a conference held at East- West Center, Honolulu, Hawaii

Edited by Mark J. Valencia

THE EAST-WEST CENTER is a public, nonprofit education and research institution with an international board of governors. The U.S. Congress established the Center in Hawaii in 1960 with a mandate "to promote bet• ter relations and understanding between the United States and the nations of Asia and the Pacific through cooperative study, training, and research." Some 2,000 scholars, government and business leaders, educators, journalists and other professionals annually work with the Center's staff on major Asia-Pacific issues. Current programs focus on environment, eco• nomic development, population, international relations, resources, and cul• ture and communications. The Center provides scholarships for about 300 graduate students from the Asia-Pacific-U.S. region to study at the nearby University of Hawaii, and conducts faculty and curriculum development programs focusing on Asia and the Pacific for teachers from kindergarten through undergraduate levels. Since 1960 some 28,000 men and women from the region have participated in the Center's cooperative programs. Officially known as the Center for Cultural and Technical Interchange Between East and West, Inc., the Center receives its principal funding from the U.S. Congress. Support also comes from more than 20 Asian and Pa• cific governments, private agencies and corporations and through the East- West Center Foundation. THE RUSSIAN FAR EAST AND THE NORTH PACIFIC REGION: EMERGING ISSUES IN INTERNATIONAL RELATIONS

Selected papers from a conference held at East-West Center, Honolulu, Hawaii

Edited by Mark J. Valencia

Cosponsored by

International Relations Program, East-West Center Center for the Soviet Union in the Pacific and Asia Region, University of Hawaii Supported by a University of Hawaii-East-West Center Collaborative Research Grant and published in November 1992 by the Program on International Economics and Politics, East-West Center, Honolulu, Hawaii. Printed in the United States of Ameri• ca. These conference papers may be reproduced in whole or in part without writ• ten permission of the East-West Center provided appropriate acknowledgment is given and a copy of the work in which these papers appear is sent to the East-West Center Program on International Economics and Politics. Additional copies can be obtained by writing to:

East-West Center Program on International Economics and Politics 1777 East-West Road Honolulu, HI 96848 CONTENTS

Foreword v

Acknowledgments vii

Map of the Russian Far East v/'/7

Historical Perspectives John J. Stephen 1

The Potential for Greater Economic Integration in Northeast Asia Burnham O. Campbell 4

Possibilities and Questions for Research Mark J. Valencia 23

Cooperation in Far East Development: Caveats and Concepts Won Bae Kim 26

The Far East Economy: The Crisis and the Solution Pavel A. Minakir 29

Problems with the Solutions Leslie Dienes 43

The Far East and the North Pacific:

The Strategic Context Vladimir I. Ivanov 47

Japan and the Far East Yutaka Akino 52

Present Problems Ivan S. Tselichtchev 54

The Korean Peninsula and the Russian Far East Vastly V. Mikheev 61 China and the Far East John Quansheng Zhao 68

Mongolia and the Far East Sh. Sandag and Mark J. Valencia 73

Western Canada and the Far East Robert E. Bedeski 78 iv Contents

Alaska and the Far East Victor Fischer 82

The Western United States, Hawaii, and the Soviet Union Robert Valliant 93

Notes 111

Contributors 117

TABLES

1. Northeast Asia and Four Major Countries: General Economic Data, 1985 5

2. Intraregional Factor Endowments and Comparative Advantage 12

3. Trade Emphasis of Northeast Asia and Four Major Countries, 1985 15

4. Future Demographic Change in Northeast Asia and Four

Major Countries 18

5. Japan-USSR Trade 55

6. Canada's Trade with the USSR, 1989 79 FOREWORD

In 1990, the International Relations Program of the East-West Center and the Soviet Union in the Pacific Asia Region (SUPAR) program of the University of Hawaii initiated a collaborative project to explore the rap• idly evolving relationship between the Russian Far East and its North Pa• cific neighbors. The project reflected recognition that developments in the then Soviet Union provided growing opportunities for integrating the geo• graphically vast but sparsely populated Russian territory in East Asia into the mainstream of economic and political life in the North Pacific. It was clear, however, that significant obstacles remained in both the development of broader ties between the Russian Far East and neighboring countries and for broader North Pacific regional cooperation. The project was designed to explore both these dimensions of the interaction of the Rus• sian Far East in the North Pacific region. In its first phase the project looked at the evolution of the bilateral connections and culminated in a conference in May 1991. Dr. Mark Valencia of the East-West Center was the principal organizer of this conference. Selected papers and parts of papers from this conference are included in this volume. The papers showed that economic, cultural, and other ties were increasing rapidly but from a low base. There remain many constraints to continued development of these links, not least of which is the political and economic uncertainties within Russia. A second phase of the project, to be initiated in 1992, will examine the prospects for enhanced North Pacific regional cooperation. This region is distinguished by the virtual absence of regional institutions which is due largely to the many political barriers to cooperation. On the other hand, problems requiring cooperation, such as economic development or trans- border environmental issues, have increased urgency. Although political barriers remain, especially in the Korean peninsula, the region is experienc• ing increasing momentum toward international cooperation. We hope that the project will contribute to the identification of those areas where inter• national cooperation involving the Russian Far East is both needed and feasible.

Charles E. Morrison Director Program on International Economics and Politics

v

ACKNOWLEDGMENTS

The editor of this volume and the coordinators of the Project on the Rus• sian Far East and the North Pacific wish to gratefully acknowledge the support of the University of Hawaii-East-West Center fund for collabora• tive research that made this conference possible. The conference organiz• ers wish to thank Lynn Haramoto, Dorine McConnell, Dorothy Villasenor, and Mendl Djunaidy for their logistical support for the conference. The editor of this volume thanks the rapporteurs—Chen Zhisong, Noel Lud- wig, Kazumi Ogawa, and Leigh Meyer-Mitchell for their faithful report• ing of the lively and complex discussions. Their reports, and the high quality of the papers and dialogue, made my job as editor relatively easy. The author of each paper is acknowledged at the beginning of each section. However, since I freely used, edited, and integrated the rapporteurs* notes with the papers, I must take responsibility and apologize in advance for any misattribution or misrepresentation of ideas or facts that may have occurred. Deborah Forbis copyedited the work. Ann Takayesu typed this manuscript in her usual highly professional manner.

Mark J. Valencia East-West Center

v/7

Russian Far East HISTORICAL PERSPECTIVES

John J. Stephan

THE SETTING Lying at the juncture of Eurasia and the Pacific, the former Soviet Far East1 (now called the Far East or the Russian Far East) has for centuries been a meeting ground for diverse peoples and cultures. Neolithic com• munities in the Priamur2 and Primorye3 shared affinities with counterparts in China, Korea, Japan, Siberia, and North America. A millennium of Chinese suzerainty and 300 years of Russian rule, punctuated by interims of politically contrived inaccessibility, have not attenuated the region's cos• mopolitan character. Wedged between China, Korea, Japan, and the United States, the Far East is today an arena where centrifugal forces pulling apart the Soviet Union interact with integrative trends in the Pacific Basin. It is both part of and distinct from Siberia, both separate from arid connected with China, Japan, and Korea.

INTEREST NOT NEW

Interest in the Far East is not new. Krushchev—not Gorbachev—was the first to invite a Japanese prime minister to Moscow, to return Japanese war criminals, to open Siberia to trade and investment, to allow regular plane and boat travel between Japan and the USSR, and to discuss inter• national trade in Far East coastal and marine resources. He was also the only Soviet leader to offer to return some of the Kuril Islands. Indeed, the development and global place of the Far East have been topics of discussion several times in the last one hundred years. For exam• ple, the concept of a "Pan-Pacific Zone'* was drawn up in the eighteenth century by one of Captain James Cook's men. Between 1898 and 1902 the Russians were selling coal, timber, and fish abroad in return for the steel necessary for the Trans-Siberian Railroad. There were several books and conferences on the development of the resources of the Far East be• tween 1942 and 1947. In 1944, U.S. Vice President Henry Wallace visited the USSR and wrote about minerals development there. Owen Lattimore went as well, and wrote that Magadan was a combination of the Hudson Bay Company and the Tennessee Valley Authority. In fact, some people, e.g., George Kennan, complained that American scholars were overly prais• ing the Far East in the 1940s.

1 2 John J. Stephan

Outside interest in the Far East waned in the 1950s and 1960s during the heat of the Cold War; Eric Teal was one of the few people to write about it during this period. Interest picked up again in the 1970s, with Ar- mand Hammer investing in Soviet petroleum and Yoshinari Komatsu in• vesting in Soviet timber. During this time Stephen Uhalley wrote about the Far East's growing participation in the Pacific, and this author wrote about how to develop trade with the Far East. Thus, "discovery" of the Far East in the 1990s is not an unprecedented occurrence but rather part of a long history of rediscovery.

WHAT IS NEW? What is new is that for the first time since the 1920s, Far Easterners are openly talking about their interests as opposed to those of the central government. People have become aware to what extent the party and ministerial bureaucracy dictated the size and shape of the regional econ• omy, siphoned off income from local enterprises, and circumscribed local international contacts. A center-periphery relationship once accepted as immutable has suddenly appeared inequitable and expendable. In 1989, local pundits began openly calling the Far East a "colony."4 In 1990, a regional newspaper headlined: "The Center betrayed us—let's save our• selves*'5 In 1991, Sakhalin Governor Valentin Fyodorov showed up in Japan during Gorbachev's visit, unveiled his own solution to the "Northern Ter• ritories** problem at a press conference, and publicly criticized the USSR president for neglecting Far Eastern interests.6 Various models for Far Eastern autonomy have been held up for emu• lation: a union republic, California, British Columbia, German Lander, and the Far Eastern Republic (FER).7 The latter garnered particular at• tention because it had actually existed in the region between 1920 and 1922. In 1990, the Far Eastern State University in Vladivostok republished the FER constitution and academics celebrated the FER*s seventieth anniver• sary with a major conference.8 In September 1990, a Far Eastern Republic Freedom Party (FERFP) was established in Vladivostok. Its leader, peo• ple's deputy Anatoly Zabolotnikov, claimed that he and 100 FERFP mem• bers would struggle for the establishment of an autonomous Far Eastern province (guberniya) with a free enterprise economy and its own de- ideologized army and security forces.9 A half-dozen regional organizations made their debut in 1990-91. Far Eastern deputies to the Supreme Soviet coalesced into a regional caucus.10 A Far Eastern economic association prepared to establish a Far East de• velopment bank and a Far Eastern stock exchange." A group of journalists established a Far Eastern news agency and inaugurated a newspaper Historical Perspectives 3 promoting regionalism.12 There was even a "Far Eastern People's Acad• emy of Science," at least on paper.13

DISUNITY WITHIN THE FAR EAST But disunity within the region poses serious obstacles to Far Eastern au• tonomy. Each oblast and kray pursues its own objectives with only inter• mittent thought about coordination, let alone collaboration, with other Far Eastern districts.1,1 Vladivostok, Nakhodka, Khabarovsk, and Magadan compete for subsidies and investment. Under Valentin Fyodorov, Sakha• lin strides along its own separate path to capitalism. The Jewish Autono• mous Oblast has declared itself to be an autonomous republic and has formulated its own economic development and foreign relations agenda. And Koryak and Chukchi national areas have declared their autonomy from Magadan and Kamchatka, looking for support in Moscow rather than in Khabarovsk or Vladivostok.11 Divisions even within districts further frag• ment a potential Far Eastern constituency. Fyodorov's resistance to mas• sive foreign investment met opposition from enthusiasts of integrating the island's economy with the Asia-Pacific region.16 Two groups submitted rival plans to Moscow for a Primorye special economic zone.17 Thus, whatever mechanisms are devised to define the Far East within the Russian Federa• tion or the North Pacific, actual changes are likely to lag behind public rhetoric. THE POTENTIAL FOR GREATER ECONOMIC INTEGRATION IN NORTHEAST ASIA

Burnham O. Campbell

UNTAPPED POTENTIAL OF NORTHEAST ASIA 8 Northeast China, the Korean peninsula, the Russian Far East, Mongolia, and Japan had about 290 million people in 1986" (see table 1), copious natural resources, large amounts of capital, and technical knowhow in the more developed portion of the region and the beginnings of high-level hu• man capital accumulation in the less developed portion. With Japan in• cluded, the region's GDP is $1,482 billion, or approximately 60 percent of the European Economic Community's budget. Without Japan, which has the largest population and accounts for about 90 percent of the regional GDPJ0, the region has a population of about 169 million and a total GDP of close to $154 billion, or approximately 75 percent of the combined GDP of the ASEAN countries, and about 67 percent of China's GDP without Northeast China21 but only 18 percent of that population. With a different history, e.g., as one country, the continental part of the region might have become one of the world's major economic powers. There is thus much untapped potential. But, apart from South Korea, the less developed Northeast Asian areas are not now near to tapping this potential. Apparently missing are adequate technology and the most bas• ic infrastructure—at least in competitive modern terms—including trans• portation and ports, communications systems, financial services, reliable energy supplies, and stable institutions. Also missing are the economic and political arrangements that would enable the realization of the clear poten• tial for much greater economic development than any one country could achieve by itself.21

A LAST FRONTIER Northeast China, North Korea, the Russian Far East, and Mongolia are in a sense a 'Mast frontier'' They badly need capital, especially physical capital, and modern technology. Japan and South Korea have both but lack natural resources and labor. Synergy is possible but not inevitable. Expectations for a positive outcome from increased regional integration

4 Table 1. Northeast Asia and Four Major Countries: General Economic Data, 1985 GDP Per capita Population Area Population (USSbillions) GDP (millions) (thousands km1) (kmVlOOO)

Northeast China3 31.9 331 96.3 956 9.9 North Korea 21.1 1,034 20.4 121 5.9 Russian Far Eastb 15.4 2,000 7.7 6,215 807.1 South Korea 86.2 2,097 41.1 98 2.4 Japan 1,327.9 10,993 120.8 372 3.1 TOTAL LESS JAPAN 154.6 934 165.5 7,390 44.7 TOTAL 1,482.5 5,178 286.3 7,762 27.1 United States 3,946.6 16,492 239.3 9,363 39.1 Canada 346.0 13,622 25.4 9,976 392.8 USSRb 554.8 2,000 277.4 22,402 80.8 China 265.5 255 1,040.3 9,561 9.2

Sources: Chinese State Bureau; John J. Siephan and V.R. Chickhanov, eds., Soviet-American Horizons on the Pacific, Honolulu: University of Hawaii Press, 1987; World Bank, World Development Report 1987, Oxford: Oxford University Press, 1987. a. Based on 1988 data from the Chinese Statistical Yearbook 1989.. b. GDP is estimated from population daia and an estimate of per capita GDP based on World Development Report 1987. 6 Burn ham O. Campbell are drawn from the potential for increased regional specialization based on market size, differences in natural resources, human and physical capi• tal endowments, demographic profiles, and the stages of development so far attained. The opportunities involved are largely untapped. In recent decades, the levels of interaction and economic cooperation across national boundaries within the region have been extremely low because of artifi• cial political barriers and incompatible ideologies. The minimal develop• ment of regional transportation and communication networks is ample evidence, and what does exist was originally designed to service Japan and European Russia and not the intraregional trade of Northeast Asia. However, many of the factors that prevented cooperation in the past have disappeared, especially the ideological differences, and a more pragmatic approach has been developing, setting the stage for investigation of the possible dynamic benefits of greater integration of the region's economies. There is a strong perception in Northeast Asia that the Russian Far East can become a stimulus for the development of the economy of the entire region, involving Japan, South and North Korea, and the north• eastern provinces of China. Some of the infrastructure for this develop• ment either exists or is under development, such as the free economic zones in the Far East, a link into North Korea, a new port, and a rail link into China at the junction of the Far East, North Korea, and China, connec• tions between the Russian and Chinese power grids, direct flights between the cities of the Far East and the rest of Northeast Asia (e.g., Harbin) and the possible development of Niigata as a freight center, currently a city that is the Japanese (and Korean) gateway to the Far East. Investors from Japan and South Korea have made a number of proposals for resource and infrastructure projects.

REGIONAL INTEGRATION—WHAT IS IT? Regional integration and cooperation cover a multitude of possible arrange• ments. An intuitive assessment of the possible gains in terms of faster regional per capita economic growth suggests they could be enormous. That still leaves open the exact substantive steps to be taken—currency union?' free factor movements? common tariff? free trade zone? The goal of eco• nomic integration enters into these decisions. Is it to increase specializa• tion and thus growth within the region as well as between the region and the rest of the world, or is it just the latter? Some suggest that integration means setting up ways to open the door for the flow of capital from South Korea and Japan and the repatriation—if desired—of profits, with the hope that the industries supported will generate much needed foreign exchange. Apart from the possibility that a concen• tration of joint ventures to supply the rapidly changing Japanese market The Potential for Greater Economic Integration in Northeast Asia 7

or equally rapidly changing structure of South Korea's exports is likely to fall behind the changes and so have a high risk of failure, this limited version of integration does not account for why Japan or South Korea would select Northeast Asian regions for resources and partners. They can go worldwide for this purpose and take the best price obtainable. Either costly "incentives" or access to the Northeast Asian market itself seem necessary to get and hold the attention of Japan and South Korea—or, for that matter, the U.S. West Coast or Western Canada. However, with parts of two countries involved in the overall region, an economic union along the lines of the EEC is out of the question. Un• der these circumstances, a customs union also seems unworkable. At the other extreme, tinkering with the fine points of tariff product lists as ASEAN has done will pass the time but accomplish little else. Perhaps the maximum that could be reasonably hoped for would be a free trade or preferential tariff zone covering the region." The minimum would be an agreed-upon set of rules for the movement of capital, services, and con• tract labor region-wide, usually on a project basis, perhaps with some pro• vision for negotiating preferential treatment in regional markets for the end products of these movements. Although the minimalist, narrower ap• proach may be politically more palatable, the broader approach that looks at integration in terms of intraregional as well as interregional specializa• tion promises far more economic benefits.

PROBLEMS FOR INTEGRATION A problem with any assumed level of integration is that Northeast Asia as defined involves parts of countries. Thus, the exchange rate that would, say, keep the ruble in line with national policy goals may not work at all for the Russian Far East as a participant in a Northeast Asian regional grouping. Or the monetary policy that "works" for China as a whole may be too restrictive or too expansionary for Northeast China in relation to its partners in a Northeast Asian regional grouping. It is difficult enough for groupings of nations to meet the criteria of similarity of movement in prices and aggregate demand necessary for the success of almost any level of real economic cooperation, much less a grouping of nations and parts of nations. Similar problems can arise when fiscal policies and in• centives or the rules of the game differ markedly between members of a regional grouping. Another issue that arises either when tariffs against others differ across a freer trade area or when parts of nations operate under different rules from the rest is nonproductive arbitrage. For example, some goods are im• ported into Japan at a lower tariff than they could be imported into the Russian Far East and then they are shipped to the Far East at whatever 8 Burnham O. Campbell regional rate applies, which—if real integration is envisioned—should be less than that charged non-regional exporters to the Far East. Or, capital is attracted to favorable terms into Northeast China and then it is re-lent profitably in Shanghai. Countries such as China or South Korea that have free trade zones in place have already come up against these problems and presumably found ways of preventing such rent-seeking activities from get• ting out of hand. However, given the command economies involved in all but South Korea and Japan, the many price distortions resulting would offer numerous opportunities for arbitrage as some parts or sectors liber• alize and become market guided, as must happen for economic growth to ensue from regional cooperation. But to fall back on price setting, quan• tity restrictions, and reporting of all activities to control arbitrage would also greatly reduce the expected benefits of economic integration. Essen• tially, some degree of rent seeking will have to be tolerated, the challenge being to make sure that rent seeking does not become the major thrust of economic integration. Another problem that is often ignored in looking at the positive side of greater economic integration is that, if successful, integration must in• volve structural adjustment. Intraregional competition for some goods or services will increase if intraregional trade expands. When new capital comes in and attracts labor and other resources, existing producers must face the resulting rise in resource costs, via prices or some state-run allocation mechanism. If successful integration raises exports more than imports,14 then the resulting real appreciation of regional currencies will penalize any exporters not keeping up with integration-supported increases in produc• tivity (e.g., traditional export industries and handicrafts). The point is, there will be losers as well as gainers from increased regional cooperation, and it is best to recognize that possibility up front and be prepared to deal with it. Finally, there is the common problem of the distribution of the ex• pected benefits between the partners in the regional grouping. Usually, it is not enough that all gain; rather all must gain equally or at least be per• ceived to gain about equally. This may be less important for Japan where the major incentive for participation would be the profitability of region• al integration for Japanese business. South Korea would also find this profitability incentive important, though the long-run security of the state will also be involved. North Korea is, on the other hand, driven by the goals of its leader(s) and is likely to cooperate only if its benefits seem equal to those of other participants, especially South Korea. While North• east China and the Russian Far East might well be happy if their growth rate takes a noticeable jump upward, even if others seem to gain more, Moscow and Beijing may not like the precedent thus set. The Potential for Greater Economic Integration in Northeast Asia 9

For all these reasons, regional integration may require pilot projects, such as the Tumen River project" to focus the effort and overcome the inertia arising from prior knowledge of so many problems. Although the pilot projects must be accompanied by the changes discussed below to have any long-run effect, their demonstration effect may be necessary in the political process.

HOW TO PROCEED This is essentially the minimal scenario and involves each country party to the project contributing some resource. Either existing constraints are relaxed or distortions removed, making a previously unattractive project attractive to whichever country or countries contribute the financial capital—the one resource with worldwide opportunity costs—or the other countries involved take steps to lower the "costs" of putting the project together. These can range from smoothing the bureaucratic path, with credi• ble promises to continue this smoothing as the inevitable problems arise, or direct incentives such as tax holidays. There must be many such projects given the constraints and distortions that now exist in Northeast China, the Russian Far East, and North Korea. Generally, where project-specific "constraint/distortion removal" of• fers some previously unavailable advantage to outside capital, the result• ing projects would have to be directed to markets outside Northeast China, the Russian Far East, and North Korea since constraints and distortions would still exist in these economies. This means the projects would be in• tended to supply the South Korean and Japanese markets or, even more likely, the world market. A problem is that the viability of such projects depends on removal of constraints or correction of past mistakes rather than unfettered comparative advantage. The result may be projects that would not occur if liberalization and reform were more generally applied, so projects with long-run linkages might be suspect. In any event, they would not bring conditions raising the economy-wide level of efficiency as would real integration. An example of this approach might be an integrated metal or mineral processing operation, say for export to the Japanese market, using Far East metals or minerals, Northeast Chinese and North Korean labor and loca• tions, South Korean capital and South Korean and Japanese equipment. Supportive infrastructure would have to come from the governments of China, Russia, and North Korea. For China and possibly Russia, the Asian Development Bank or World Bank funds could be sought; for North Korea, government to government loans from Japan would seem the only possi• bility. 10 Burnham O. Campbell

BENEFITS OF COOPERATION Assuming the necessary funds are available, the Far East would have some of its natural resources used at a comparative advantage that otherwise might have remained in the ground and there would possibly be some trans• fer of technology. But Russia's Far East would get few secondary benefits and a relatively small share of the projects that value added. China and North Korea would have the productivity of its workers increased and get the workers and land share of the resulting increase in value added. They would also get whatever taxes are relevant and the training effects and secon• dary ripple effects of the increased employment and wage bill. Of course, this increase in labor productivity may be "second or third best," since even greater increases might have been obtained—not neces• sarily in the project's sector—with more universal removal of current con• straints. In fact, though less expensive labor is an important element, projects of the sort being described often have a much higher capital in• tensity than local conditions warrant and so are not as viable if reform gets prices closer to reflecting opportunity costs in the whole economy. This possibility seems extremely likely in Northeast China and North Korea. South Korea would get the rest of the value added directly associated with the project, the interest and profit share, and a market for its machinery and equipment. Japan would have a similar market for its machinery and equipment, both in the infrastructure component and the production component, a presumably less expensive source of fabricated or processed metals or minerals and the income from any infrastructure loans—though this would be less than the opportunity returns in the open market. The problem here is whether or not the new plants would come up with output at some price advantage over current supplies available to Japan worldwide. If that does not happen and there are many possible problems, including exchange rate movements, that might negate any ex• pected advantage, and then the new operation would have to be subsidized. In the absence of general reforms in Northeast China and North Korea, any new plant and employment will be kept in operation whether profita• ble or not. Soft-budget constraints are the rule. In this case the attempt at integration will backfire. To justify the use of the resources of all participants over and above the political component in the capital supplied by Japan and South Korea, the project is going to have to move everyone, but especially North Korea, the Russian Far East, and Northeast China close to their production pos• sibility curves. The main gains are going to come from increased efficiency and from the dynamic effects of the technology transfer and learning from doing. All of these could result from economic reform without regional cooperation. The reason for regional "integration" of this sort would then be that it offers a politically acceptable route to (very partial) reform. The Potential for Greater Economic Integration in Northeast Asia 11

Actually, if that is what Russia's Far East and the other potential regional participants mean by regional cooperation or integration, the only remaining topics for discussion would be the general areas in which such projects are most likely to be successful. However, it might be useful for supporters of such a view to take a good look at the ASEAN experience with joint projects, which has very few success stories to report. Viable projects are difficult to pinpoint and real gains and benefits would come only from real integration—integration that increases intraregional trade and factor mobility. Real integration entails real reform, and in fact brings it about. There are costs in the structural adjustments required and loss of rent to the officialdom prospering from previous inefficiencies, but the gains to society as a whole would be even greater.

COMPARATIVE ADVANTAGES The intraregional comparative advantages are summarized in table 2. Rus• sia's Far East and Northeast China have a regional comparative advan• tage in agricultural and mineral resources. All but Northeast China have marine resources in relatively large amounts. North Korea and Northeast China have relatively abundant labor and a comparative advantage— currently not taken up by either one—in labor-intensive production. South Korea and Japan have a regional advantage in all aspects of capital—human capital per worker, physical capital per worker, and so human capital and knowledge-intensive production and physical capital-intensive production. Northeast China and North Korea are currently inefficiently producing relatively large amounts of physical capital-intensive products under highly protected circumstances. But, even with more efficiency, they would not have a regional comparative advantage for now in physical capital-intensive production, though capital inflows could speed their obtaining it. Economic efficiency and the institutions bringing it about get a plus only in Japan, with South Korea neutral in this respect. All the others have much to gain from improved efficiency. Economies of scale because of market size, are present in Northeast China, Japan, and South Korea. The directions of trade by broad categories of products within the region that would follow with economic integration and reform are clear from this summary. For the region vis-a-vis the world, it is more difficult to draw conclu• sions. Japan's huge current account surplus, especially now that capital outflows are growing less rapidly, will tend to keep the yen strong along with currencies tied to the yen. This would tend to work against the manufactured exports of the other parts of the region in world markets, especially the less sophisticated and less established exports of the socialist countries, unless Japan transfers capital and production from home. With time and the aging of the Japanese population, this situation will change, but for now the region would not want to follow the yen in world markets. Table 2. Intraregional Factor Endowments and Comparative Advantage Soviet Far Northeast North South East China Korea Korea Japan Region

Agriculture - + /o - - - - Mineral resources + + + - - - + Labor* - - - 0 Human capital + /- - - + + + Physical capital/labor - - - + /0 + + Labor intensive production - + + - — 0 Physical capital intensive production - - - + /0 + + /0 Human capital intensive production - - - + + + Knowledge industries - - - + /o + + /o Economic efficiency - - - + /0 + + -/o Market size-numbers - + - + /0 + + Market size-income + /- - + /0 + + + +

* - Shortage + Surplus o Neutral The Potential for Greater Economic Integration in Northeast Asia 13

However, with Japan, the region would have a high technology and product-development advantage with a growing ability to carry out basic research. Labor-intensive manufactures might have a world comparative advantage if the region excludes Japan, but where standardized produc• tion with relatively unskilled labor is involved, even without Japan, the region would find it difficult to compete with South Asia, Indonesia, and the Philippines in world markets. More skilled and more specialized produc• tion, but still relatively labor intensive where experience counts, might be better supported for exports at competitive world prices by the economies possible from regional integration. In agriculture, except for forest products—a major export item—the region would have a comparative disadvantage and be a net importer on world markets, though there might be some displacement of current im• ports by sales to the region by Northeast China, diverted from sales to the rest of China. However, even if the average regional exchange rate re• flected Japan's export strength, the Northeast Asian region would have clear mineral intensive advantage in world markets. Just as clearly, without Japan, the region would have a comparative disadvantage in almost all service sectors. A regional grouping might help South Korea expand its service exports regionally and promote some regional import substitution in this sector. Having relatively abundant mineral resources and a sufficiently skilled labor force, with a large infusion of capital and technology, heavy indus• tries producing intermediate products or processing minerals could over time develop a lasting comparative advantage in Northeast China and North Korea. But that would be a somewhat distant goal. A more immediate problem with regional integration for these countries given their relative resource and their described factor endowments is that the industries that would develop along the lines of present comparative advantage should for now require relatively large amounts of labor, natural resources, and agricultural inputs compared to what is possible in nearby countries and countries worldwide. This raises significant structural adjustment issues since many of the state-subsidized heavy industries in Northeast China and North Korea would not meet these conditions and would not survive if exposed to world competition, or even regional competition, e.g., from South Korea. Fortunately, this is not as large a problem in the Russian Far East, where development to this point has been more closely based on comparative advantage. Here, in future, world exports could follow a wide range of factor compositions, from the most advanced technology in mining and processing to labor intensive, using imported labor for production based on the region's mineral and marine wealth. Western Canada—outside service-oriented Vancouver—is also heav• ily agricultural and raw materials and marine resource based—not unlike 14 Burnham O. Campbell

Northeast China, without that region's labor surplus, combined with Rus• sia's Far East. Alaska, minus the agriculture, also fits this description. Both Western Canada and Alaska thus have a set of comparative advantages that would make them competitive with Russia's Far East in most respects and with Northeast China's agricultural products in the rest of the North• east Asian region. For the products of the Russian Far East this would extend to world markets. Both Alaska and Western Canada have experience that could be useful in a facilitating, training sense in the Russian Far East, and Alaska might have some proximity advantages for joint ventures in parts of the Russian Far East. But regional integration in Northeast Asia would increase the competition for Alaska and Western Canada in world markets.

TRADE PATTERNS Present trade patterns for China, Japan, and South Korea for which com• parable trade data were readily available (see table 3) follow closely expec• tations based on the relative factor endowments. China exports almost no machinery and equipment, relatively large shares of textiles and other manufactured products, and a much larger share of fuels, minerals, and metals than either Japan or South Korea, much of it from Northeast China. South Korea has large export shares in textiles and other manufactured products and even larger machinery and transport equipment exports than China. Japan, of course, specializes in machinery and transport exports. Only China has a significant share of exports of other primary products— mostly agricultural and related products, much of which comes from North• east China.26 Based on other information, the Far East exports almost ex• clusively minerals and metals, mostly unprocessed, and marine products, which also conforms to the expected comparative advantage of this region." North Korea's very low exports largely consist of foods to Japan and in• dustrial products traded on a barter basis with other socialist countries. These exports do not follow North Korea's current comparative advantage. On the import side, Japan's extreme dependence on imported fuels stands out, as does China's independence of energy imports. China im• ports relatively large shares of other manufactured goods from Japan, Tai• wan, and South Korea via Hong Kong, unexpectedly large shares of food (1985 was a bad harvest year) and about an average share of other primary products (which in the World Bank classification is a real "grab bag"). Japan imports relatively large shares of food and other primary products, very little in the way of machinery and transport equipment—in relative terms—and increasing relative shares of other manufactured goods, as a result of Japanese joint ventures. South Korea and China, but especially South Korea, import relatively large shares of machinery, and South Korea Table 3. Trade Emphasis of Northeast Asia and Four Major Countries, 1985 Exports Exports/ GDP Exports Imports Exports/GDP per capita Imports (USSbillions) (USSbillions) (USSbillions) % %

Northeast China 31.9 5.1 — 16.0 53.0 — North Korea 21.1 1.5 2.1 7.1 73.5 71.0 Soviet Far East3 15.4 2.1 2.2 13.9 278.4 96.3 South Korea 86.2 30.3 31.1 35.1 736.8 97.3 Japan 1,327.9 175.9 130.5 13.2 1,455.8 134.8

TOTAL LESS JAPAN 154.6 39.0 35.5b 25.2. 235.8 110.0b TOTAL 1,482.5 209.8 166.0b 14.2 732.7 126.4b United States 3,946.6 213.1 361.6 7.0 890.7 58.9 Canada 346.0 87.5 81.5 27.0 3,445.0 107.4 USSR 554.8 87.2 82.6 15.7 314.4 105.6 China 265.5 27.3 42.5 10.3 26.3 64.3

Sources: GDP data from table 1; World Development Report 1987; Almanac of China's Foreign Economic Relations and Trade (1988);.U.S. State Department. a. Soviet Far East exports esiimaied as .87 (from Robert G. Jensen, Theodore Shabad, and Arthur W. Wright, eds., Soviet Natural Resources in the World Economy, Chicago: University of Chicago Press, 1983) x USSR export share x Soviet Far East GNP. b. Totals do not include Northeast China since imports through other parts of China could not be measured. 16 Burnham O. Campbell imports relatively large shares of fuel. Presumably the Far East imports relatively large amounts of consumer goods and machinery. North Korea imports fuels, machinery, transport equipment, and food, but there is no information on their relative shares. Most of this is predictable on the ba• sis of relative factor endowments and gives confidence that consideration of such endowments, in broad terms, will indicate the directions that com• parative advantage—within the region, between the region, and within the world—would take with greater economic integration. The system reforms underway in Eastern Europe will compete with Northeast Asia for capital, especially from the multilateral lenders or on subsidized terms. This will make the funding of the needed infrastructure more difficult and costly and will also raise the average level of return that will be expected from regional projects in order to attract funding. Even at the commercial level, profitable opportunities in Eastern Europe will compete with Northeast Asian projects. And Japan is likely to come un• der political pressure to shift funds to Eastern Europe. All of this would not rule out Northeast Asian integration, but would slow the pace of the resulting development. On the other hand, there are already substantial trade relations be• tween the socialist parts of Northeast Asia and Eastern Europe, and more rapid growth in the latter region could be to the advantage of exports from an integrated Northeast Asia. Greater economic integration elsewhere should also enhance the political climate for more regional integration in Northeast Asia and, to the extent it diverts trade, say replacing current net imports with production within the EEC, it enhances the benefits from creation of larger regional markets elsewhere. Also, where trade diversion occurs, there is an attraction to move capital (and production) behind the barriers creating the diversion, which would reduce the supply of capital to Northeast Asia. However, if trade diversion does not result and world economic growth is enhanced by increased regional integration elsewhere, then the benefits to be obtained by the greater ability to compete in world markets would benefit Northeast Asia. The absorption of Hong Kong by China would seemingly remove some of the special advantages Hong Kong has had as a trade conduit and would correspondingly improve the com• petitive position—if the transportation infrastructure is in place—of North• east Asian trade through the Yellow Sea and Northeast China. In structural terms, the fastest growing sectors of the industrialized economies are their service sectors and knowledge-based industries, espe• cially communications and information industries. This is now true of Japan and the United States and becoming more so for the EEC. The ef• fect of this, along with technological progress that has introduced many substitutes for traditional intermediate and primary products (spurred in• itially by the two oil shocks of the seventies) is to reduce the growth rates The Potential for Greater Economic Integration in Northeast Asia 17 for the latter, even to negative levels in some industrial nations. The sub• stitutions involved have not reached the same extent in less industrialized countries, but as they develop, similar changes in production structure are likely to occur. . There are three results of these developments of direct concern to Northeast Asia, again leaving out Japan. First, there is less incentive for Japan to invest in the development of metal or mineral input sources, even in energy sources that have direct implications for the Far East.11 Second, instead of mostly relocating production that has lost its comparative ad• vantage in Japan to countries where that comparative advantage remains, which could directly aid Northeast China, North Korea, and possibly the Russian Far East, Japan's direct foreign investment is more and more di• rected toward nonmanufacturing sectors. Third, the present structure of comparative advantage in Northeast Asia places heavy emphasis on exactly those primary products whose mar• kets are growing less rapidly and for which the search for substitutes, moti• vated either by environmental or relative price concerns, is motivating much research and development, e.g., fossil fuels and fossil fuel-based products and asbestos. These developments have an obvious negative long-run im• plication for regional integration based on this comparative advantage. However, since the substitutions involved have yet to begin in much of the developing world where growth potential is greatest, if quick action is taken these resources can help support a self-feeding growth process based on regional integration for some time to come. The long-run market trends these developments portend raise the current returns to Northeast Asian economic integration.

FUTURE PROBLEMS The potential impact of the continuing communications and information "revolution" and of the changed products and production techniques it makes possible is an important consideration in Northeast Asia's economic future. This revolution led to the rapid dispersion of taste changes, to the homogenization of tastes—so markets are more easily penetrated by outsiders—to the rapid spread of other forms of new technology, and to the more rapid obsolescence of existing technology. The combination of new developments in information systems with robotics is potentially so cost saving that it could reverse the present comparative advantage of many countries based on abundant labor. Clearly, the rapidly changing techno• logical scene carries both a threat and a promise. Flexibility in response to these changes and adaptability in the face of uncertainty will be the keys to success. Both characteristics will be enhanced by regional economic integration, but not necessarily by regional projects." Table 4. Future Demographic Change in Northeast Asia and Four Major Countries % of Population % of Population °fo of Population Average Annua) Growth Population Change in aEed °-'4 aEed aeed 65 + of Population (tt) (millions) Population 1986- 2000 1986-2000 1988 2025 1988 2025 1988 2025 1965-80 1980-86 2000

North Korea 28 .34 2.7 2.5 2.1 South Korea 49 .18 22.3 18.0 67.9 66.0 9.8 16.0 1.9 1.4 1.2 Japan 129 .06 19.6 15.7 68.9 58.8 11.5 25.5 1.2 0.7 0.5 United States 263 .09 21.6 18.0 66.0 61.2 12.4 20.8 1.0 1.0 0.6 Canada 28 .09 1.3 1.1 0.7 USSR 312 .11 0.9 1.0 0.7 China 1,279 .21 27.7 20.5 66.7 66.6 5.6 12.9 2.2 1.2 1.4

Sources: World Bank, World Development Report 1987, Oxford: Oxford University Press, 1987; UN Population Tapes. The Potential for Greater Economic Integration in Northeast Asia I9

Present and future population growth differs considerably in the region (see table 4). North Korea has and will have high population growth rates, Japan and Russia have and will have very low population growth rates, and China and South Korea are in between, with huge absolute numbers added every year in China. This implies rapidly changing and very differ• ent age compositions, and thus labor-force configurations in the future in these countries and in the region. In Russia, a decade or so later than in Japan, labor-force growth will become negative, and the proportion of older people will increase to un• precedented levels. This will surely work to reduce net savings in Russia and provide incentives for labor and capital-saving technologies, which may have negative connotations for the relatively capital-intensive extractive in• dustries of the Russian Far East. Nationally, pressure on wages may be put off by the large present amount of underemployment. Whether or not the Far East will have the same experience will depend on the extent of migration from the rest of the former Soviet Union. Even if efficiently used, labor is short in the Far East and meaningful growth could either be put off by, or soon come up against, labor constraints. In a more market- oriented economy, internal migration would depend on the pull of real wages, which would have to be considerably higher in much of the Far East to offset the harsher living conditions. One advantage of regional in• tegration would be to open the door to more temporary or even perma• nent immigration from the less-developed world.

ECONOMIC RESEARCH ISSUES AND QUESTIONS Assuming that minimal infrastructure needs will be met, there remain three very important and related general questions. First, without barriers to trade and capital movements, how would economic production and specializa• tion evolve in Northeast Asia? Second, what would be the likely compara• tive advantage—ignoring national boundaries—of this integrated region in world markets, both initially and in the long run, e.g., will trade crea• tion or trade diversion dominate? Third, what incentives not present now will result from integration to encourage the movement of capital and labor to and within the region? That is, why would those having the capital, either in or out of the region, invest their industrial capital in this region as op• posed to others? In terms of attracting capital, showing potential complementarity is not enough. Private international capital looks for infrastructure, labor with requisite skills at relatively lower cost than elsewhere, natural resources, stable institutions—especially those covering the rules of the game, which involves political stability and ownership rights—currency convertibility and low bureaucratic drag. Nor is complementarity enough to guarantee 20 Burnham O. Campbell any capital raised will be well used and will raise social stability. There could be regional difficulties at several points on this list, and to the degree success depends on attracting private funds, they have to be addressed. Also, more important for the resulting outcome than the complementar• ity issues often raised in discussing capital flows to an integrated North• east Asia, is whether or not any capital raised will be well and efficiently used. Efficiency in resource allocation is not a strong point of any of the socialist economies involved. And for China and Russia, finding a way to divorce the regional exchange rate from the national rate, which may be much more different, provides a major challenge. Finally, what provi• sions will be made for structural adjustment—especially in Northeast China and North Korea as development leads to substitution of production along the lines of comparative advantage and less efficient production now en• couraged by distorted prices and resource allocations? There are also many detailed technical questions about the implemen• tation of regional cooperation that should at least be posed if not answered. For example, in China and Russia, how can the regional exchange rate be divorced from the national rate, which may be more different than the regional one? Or, what provisions will be made for structural adjustment, especially in Northeast China and in North Korea as development leads to substitution of production along the lines of the comparative advan• tage established by cooperation for the existing less efficient production? Also, the critical question of who will gain regionally and by how much from improved production and from better use of resources needs to be investigated. At the project level, if that becomes a major part of the regional move• ment, many other studies would be needed. There has to be emphasis on the prospective economic rate of return for all projects to be implemented, not just from the standpoint of possible private investors but also from that of the countries (and regions of countries) involved. If funds are sought from the major international lenders, the Asian Development Bank or World Bank, this will become not only desirable but necessary. And, in today's world, unless the intent is to finance the whole development inter• nally, the environmental effects of each project contemplated will have to be evaluated and included in estimating the net benefits of the project.

RELATIVE FACTOR ENDOWMENTS AND COMPLEMENTARITIES One similar data gap is in some unified measure of the natural resource endowment across countries. There are data by specific minerals however, showing the leading producers. On the basis of one such compilation," the USSR was one of the top four producers of 15 of the 18 minerals cov- The Potential for Greater Economic Integration in Northeast Asia 21 ered. In the region, China meets this criteria for 3 minerals and is among the top ten producers of 9 of the 15 minerals included in a world resource study. A relatively large portion of the USSR's vast mineral wealth is in the Russian Far East, and Northeast China, on the basis of production data, has a significant proportion of China's much smaller mineral wealth. The rest are relatively poor in natural resources. There seems little doubt that the Far East has a wide range of miner• als in world class amounts. However, Far East mineral wealth may not be competitive in world markets at current world prices, given the relative in• accessibility of these deposits, bureaucratic inefficiencies, labor shortages, and the lack of needed infrastructure and exchange rates that are not yet competitive. Nevertheless, the Far East probably has a long-run comparative ad• vantage in mineral production. As the structure of demand changes away from traditional minerals and energy sources, there may be questions as to the relative long-term value of this comparative advantage. Taking this a step further, the Far East should also have a comparative advantage in fabrication of minerals and the potential of supplying the region and the world with processed metals and minerals on competitive terms in the long run. Northeast China has a larger than average share of China's mineral wealth and a likely comparative advantage in exports of basic minerals in world markets. Northeast China also processes minerals and markets them in China, but can they do this regionally? Or beyond? The rest of the region has a large comparative disadvantage in mineral wealth and production, and it is in this context that most discussions of regional complementarity begin. If the region obtains the necessary capital for infrastructure and in• dustrialization and has open trading, it is difficult to see how Northeast Asia can fail to have rapid economic growth, with the greatest relative in• crease in the subregions that now lag the most—North Korea, Northeast China, and Russia's Far East. South Korea will benefit by maintaining higher growth rates than would otherwise have been possible and, to a lesser extent, given Japan's greater coming adjustment problems and relative eco• nomic size, so will Japan. This greater growth will come from a variety of sources, including increased capital/labor ratios, technological transfer and catching up, increased specialization from trade (gains from trade), both within the region and between the region and the rest of the world; dynamic effects of capital flows, economies of scale from larger markets, and, most importantly from the effects of greater competition on economic efficiency. Apart from the general and major benefits from the efficiency effects of greater competition, the specific benefits from regional integration will come to different sectors and in different ways throughout the Northeast 22 Burnham O. Campbell

Asian region. The northeastern region of China has fairly abundant natural resources as well as abundant labor; it lacks infrastructure, physical capi• tal, and technological and management know-how and will gain all three. North Korea has a similar situation and would enjoy similar benefits. Though labor is now relatively abundant in North Korea, with growth North Korea would soon face labor shortages. The required structural ad• justments would be facilitated by regional integration. Russia's Far East is basically resource rich, with shortages of all other factors or produc• tion, and would benefit from the less costly access to these factors or their end products through the trade encouraged by regional integration. On the other hand, South Korea is relatively capital rich, both in human and physical terms, but it is becoming increasingly short of labor and has al• ways been short of basic natural resources. Moreover, as South Korea makes the transition to an ever higher technological base, the opportunity to "test" its technology in a large but nearby market could be a real advantage. South Korea will gain from increased integration with countries or parts of coun• tries possessing relatively large amounts of the resources in short supply in South Korea. Japan is far and away the most economically powerful country of the region, but the western part of Japan, the area initially to be most directly involved, has many of the characteristics of South Korea and this region would stand to benefit considerably from sustained high levels of economic growth in the rest of Northeast Asia. Western Japan would gain natural resources and markets and would contribute capital and technology. In the long run, the lack of domestic natural resources and the extreme labor shortages facing Japan should make regional economic integration with countries having abundant labor and natural resources more and more desirable for all of Japan's regions. Finally, natural resource sources will become more and more important in sustaining Japan's competitive edge in its remaining manufacturing sector—as will nearby markets—as com• petitors approach Japan's technological capabilities and the European countries become fully integrated. POSSIBILITIES AND QUESTIONS FOR RESEARCH

Mark J. Valencia

Liner shipping can be a catalyst of active industrialization and trade in the region. In the Pacific, liner-shipping tonnage is growing rapidly—by as much as 18.8 percent (excluding free registration) compared to 4.6 per• cent worldwide. The problem facing liner-shipping is tariff policies. The feasibility of establishing a subregional rate and liner shipping index re• quires investigation. The role of service contracts, currency adjustment fac• tors, and rate restorations also require analysis. Another area for cooperative research is the modeling of the international tramp-shipping market, its future, and the impact of accidental factors and operational decisions. Such models can determine if the upturn in freight rates will lead to a boom in shipbuilding and distort the market. The widespread use of such models can reduce uncertainty and increase the predictability of this market. There is an obviously inadequate throughput capacity of available land transport communications—rail, motor, and sea—between China and the former Soviet Union. China is modernizing and integrating its rail, mo• tor, and waterway systems in its coastal areas. In a world of better rela• tions, perhaps China's merchant fleet and maritime ports could be used to ship Russian exports and imports. Chinese provinces that do not have outlets to the Sea of Japan could use Soviet ports. Specific ideas include using Russian lighter-aboard ships for inland- river lighter transportation in China; using container-feeder ships from Hong Kong to Russian ports; using towed barges to transport timber and timber products from Russian ports to Chinese ports; increasing roll on— roll-off lines between Russian-Chinese lines; using bulk cargo coasters to ship goods to third countries; using Russian tankers for Chinese oil and oil products; using Russian-bulk cargo ships to move Chinese coal; using alternatives to marine transport for re-export of foreign cargo over Rus• sian and Chinese territories; using rail to transport national and re-export cargoes from China to Russia and back—via Grodekovo and the Khasan district to Primoyre, via Zabaikalsk to Eastern Siberia and the Far East, via Mongolia to Western and Eastern Siberia, and through Xinjiang Uygur Autonomous Region to Kazakhstan and Europe—increasing border mo• tor transportation; and using the navigable rivers of the Amur-Sungari basin for joint transportation, including the use of "river-to-sea" ships; and fi-

23 24 Mark J. Valencia nally using a combination of Chinese maritime ports or Chinese and Rus• sian railways (especially after their joining in southern Kazakhstan) to reach the shortest Europe-Asia container route. International tourism development is another possible area for cooper• ation between the Russian Far East and the Asia-Pacific region. Primorye has unique natural and climatological conditions. Involvement of foreign tourist firms is the most effective way to develop tourism in the region. Zones for international tourism operating under free-economic-zone legis• lation could be established in Primorye. Traditional medical centers for treatment for tourists-patients by experienced specialists could be an at• traction that would overcome the shortage of modern hotels. Refurbished ships could be used as floating tourist centers, moving along the coast from site to site. Cruise liners could move from "summer" (south) to "winter" (north). Port calls could begin in Japan and South Korea and move to Rus• sia bringing tourists to ski, skate, and absorb winter scenery. The fishing industry is another possible area of cooperation. In this field, Russia has intergovernmental, interdepartment, and private-level re• lations with Japanese, North Korean, and South Korean organizations and firms. Such cooperation includes licenses, repair of Russian ships in for• eign wharves, and transport of marine products and technical equipment to the Russian Far East. Existing joint-fishing and processing ventures fo• cus on herring and pollock. A salmon-propagation project is also operat• ing in the region. But the Russian fishing industry remains underdeveloped. Such un• derdevelopment delays technical re-equipment of the fishing industry and accumulation of progressive foreign experience in management, and is an obstacle to better quality output and improvement of fish products and their sale on domestic and external markets. New forms of joint ventures are needed to exploit resources in the 200-mile fishing zone and coastal areas of Russia's Far East. The main industries of the Far East are marine transport, fishing, ma• rine construction, ship repair, and ship building. Problems include a poor basic infrastructure, lack of labor, and a poorly developed service sector. There are many other factors that hinder the development of marine in• dustries, such as low levels of technology, an aging fleet, a poor dispatch service for port berthing, a low level of mechanization and automation in loading, unloading, fish processing, and ship repairing, and a shortage of mooring lines. Joint ventures with foreign firms are expected to help solve these problems. Such joint ventures would be sited in special eco• nomic zones like Nakhodka and Vostochny. Principal activities might in• clude processing of fish, timber, and mineral resources; repair of ocean equipment; and development of scientific products and import substitutes. The joint-venture zone in Posiet is envisaged as a large international resort Possibilities and Questions for Research 25 and recreation center with ecologically "clean" industries such as aqua- culture and mariculture, food manufacture, and biotechnology. Cooperative studies are needed to determine appropriate policies and legislation and the most feasible and mutually beneficial joint ventures. Other priority spheres for cooperative academic analysis should include the present state of principal commodity markets and their export poten• tial; the role of export-oriented industries in bilateral relations; and the stipulation of measures for development of industries. COOPERATION IN FAR EAST DEVELOPMENT: CAVEATS AND CONCEPTS

Won Bae Kim

The imbalance of military and economic power hinders regional coopera• tion in Northeast Asia. China and North Korea, the two socialist econo• mies with poor living standards, have considerable military might as well as security arrangements with each other, whereas Japan and South Korea even though they are economically prosperous have less military muscle. Manipulative uses of bilateral trade and economic ties for political and other gains can become a zero-sum game, and conflicts of interest may yet develop into crisis situations. Trade imbalances and disparate interests are and may continue to be major problems, especially between the planned economies of China and North Korea and the market economies of South Korea and Japan. The current trade pattern between the two groups of countries can be charac• terized as a vertical division of labor—the former group supplies raw materi• als to the latter group and in return imports manufactured goods from the latter.11 Such vertical relationships are often disadvantageous to the underdeveloped countries and regions exporting raw materials. It is defi• nitely not a trade pattern that China and Russia desire in the long run. The need for comprehensive regional development in Russia's Far East and China's Northeast with a substantial processing base for added value, rather than simple extraction and export of raw materials, has been clearly stated in Chinese and Soviet policies and proposals." Obviously Russia's Far East and China's Northeast need a massive infusion of capital investment and technology from Japan, South Korea, and other countries to achieve comprehensive regional development. This may not be forthcoming. The current capital flows and their characteris• tics, in particular direct foreign investment (DFI) from Japan and South Korea, reflect their interests in Far East development. Japanese interest in resource development there has waned over time. After the second oil shock, the Japanese economy transformed to a lower energy consumption base, and thus its need to secure a stable supply of raw materials became less acute. Also, the pattern of Japanese DFI over the last three decades indi• cates a movement away from resource development. The share of com• merce and services in total Japanese DFI has increased over time, and manufacturing accounts for about one-third of the total. The primary des• tination of DFI for resource development has been Southeast Asia, espe-

26 Cooperation in Far East Development: Caveats and Concepts 27 daily Indonesia and the Philippines" and manufacturing investment has been flowing into North America and Southeast Asia. Japanese DFI in China has been concentrated in services and manufacturing mostly in elec• tric machinery, particularly in Northeast China which has historical ties to Japan.34 South Korea's DFI pattern shows the greater importance of resource development in its overseas investment," although manufacturing and ser• vices have gained in recent years. The primary destinations of Korean DFI are Southeast Asia and North America. South Korea's DFI in Southeast Asia is concentrated in manufacturing, taking advantage of cheap labor and resource development (primarily in Indonesia), whereas its DFI in ser• vices is mostly concentrated in developed countries. In China, low-cost labor is the major attraction for South Korean firms involved in joint ventures. Most products are for export, although a few joint ventures in consumer electronics are aimed at China's domestic market.36 South Korea's investment in the Soviet Union began very recently and only a few projects have actually been implemented. Intended or agreed- upon projects between South Korea and the Soviet Union reflect a major emphasis on resource development. Consumer goods, import-substitution industries, and services are other targets of South Korean DFI. If Far East development is implemented as envisioned by the New Development Pro• gram,37 there will be an increasing participation of the Korean construc• tion industry. But high costs of construction in Siberia and the Far East together with the uncertain demand for the resources in the region make it necessary for the Russian government to provide sufficient incentives to compensate high development costs and risks. Furthermore, rules and regulations governing foreign involvement in China and the Far East are not well developed, and it is difficult to foresee the nature of their evolu• tion. Negotiations for a contract may take a long time because of subjec• tive interpretations of guidelines and bureaucratic delays.38 In the short run, DFI in resource development in the Far East, in• cluding fisheries and timber, will probably be feasible and can be extended gradually to processing industries. But in comparison with Northeast China where a substantial manufacturing basis has already been developed, the Far East is at a disadvantage for either machinery production or labor- intensive light industries. In the long run, perhaps energy-intensive heavy industry—including some processing of local raw materials—may be com• petitive with industries in China and other resource-rich countries. Labor, another important factor of production, is abundant in North• east China and to a lesser degree in North Korea. In general, labor moves toward places with higher wages and benefits. However, migration and labor movement are controlled in a socialist-planned economy even internally. Crossing borders will not be easy even though there are sufficient incen• tives for the workers to do so. If the Siberian and Far East development 28 Won Bae Kim plan is indeed implemented, there will be a huge demand for Chinese workers—up to 5 million in the next few years and as many as 50 million in the long term. Chinese labor contracts with the Soviet Union jumped to US$130 million in 1989 from US$5 million a year earlier. In 1991 about 15,000 Chinese were working in Russia. Heilongjiang, expected to be the main supplier of workers, has about 9,000 workers in Russia already. South Korea is very much interested in Chinese contract workers, in particular Korean Chinese. One hundred sixty Chinese workers are working in Svet- laya timber for Hyundai Timber Co." Obviously, an increasing South Korean involvement in Far East resource development and infrastructure construction will require a large number of contract workers, perhaps from Northeast China.

DEVELOPMENT CONCEPTS Conceptually, two regional development strategies in the Far East are pos• sible: territorial and project-sectoral. The Far East has been heretofore a major supplier of raw materials for the USSR and has specialized in a few industries. Even though there was an attempt to develop production com• plexes in Siberia and the Far East, this approach has been primarily based on projects exploiting specific resources. If large-scale resource develop• ment projects are not a viable strategy for the Far East, a territorial ap• proach that takes advantage of agglomeration economies and interindustry linkages would help diversify the region's economy. As shown by the Chinese example of "special economic zones" (SEZs), setting up free eco• nomic zones in the Far East would concentrate development resources— both domestic and foreign. The location of such zones must be near the existing centers, e.g., Vladivostok. Port expansion and road and rail con• nections with other major cities and ports are essential to provide accessi• bility to the zone and through it to the whole Far East. Another type of territorial approach would be "corridor" develop• ment, when the two end centers have substantial agglomeration econo• mies—e.g., a corridor between Vladivostok and Khabarovsk. This approach would provide much wider developmental effects than the zone approach; however, it requires many more resources. With a shortage of investment capital, it would seem desirable to start from special economic zones and expand to a corridor development pattern. In the development of SEZs, leasing of land to foreign investors and developers would relieve the bur• den of infrastructural construction since the developer will assume the full responsibility of improving the land, leasing it to potential investors, and managing it. The idea of setting up a special industrial estate by leasing the land from China is under serious consideration between Chinese and South Korean business people. This idea can also be applied in the Far East. THE FAR EAST ECONOMY: THE CRISIS AND THE SOLUTION

Pavel A. Minakir

Prosperity for the Far East region sits finely balanced and dependent on the vagaries of the domestic Russian situation. Within Russia, the Far East has the greatest potential for economic independence. First, because of its great distance from the heart of the country, it is difficult to control from the center. Second, in terms of geographic location, it is advanta• geously situated to facilitate economic exchange with those countries fac• ing the Sea of Japan. Third, in the Far East there is none of the political confrontation with the central leadership born from ethnic nationalism (which is occurring in those areas now outside "Russia"), and the lack of such friction with the center should facilitate integration into Asian and Pacific region economies. Fourth, the Far East possesses rich energy resources such as oil and natural gas. The Far East economic situation is set in the context of the economic conundrum of the entire country. By 1991, the entire country and particu• larly the Far East was in serious economic crisis. Over the previous two years the Far East barely managed to balance on the verge of virtual eco• nomic collapse due to its stable extractive industry and the favorable atti• tude on the part of the central government toward the region's foreign economic ties. The worsening national economy and tough foreign eco• nomic policy aggravated the crisis in the Far East. Naturally, further cooper• ation with the Asia-Pacific countries will be fruitless if the economic situation throughout the country is not properly redressed. In the USSR, the disproportion between the output of means of production and military commodities on the one hand, and production of consumer goods, on the other, was self-imposed for a long time. At the same time, the predominant doctrine of centralized planning states that the criterion of efficient production is complete use of productive resources. It implied unavailability of reserves and opportunities to flexibly respond to the change in demand. Within such a system, demand could not be ex• pected to regulate production. It was true supply-side economics—in which the supply of goods and services became the regulator of the economy. To ensure the dictate of supply over demand, rationing of consumption was introduced. Demand should be made only in accordance with the norms of the planning system. The demand for funds was always equiva-

29 30 Pavel A. Minakir lent to the supply. This resulted in production planning and large gaps be• tween real demand and supply. Under perestroika, especially since 1988 when business enterprises were switched over to khozraschet, and were given a large measure of auton• omy in defining their financial and productive policies, the supply system began to fail. Demand began to jump dramatically, especially in the produc• tive and consumer sectors of the economy. As wage policy was also liber• alized, consumer demand was increasing in relation to raised nominal wages. If a market economy were in place, this increased demand would bring about the use of reserve productive capacities and funds, which would improve the supply of goods and stabilize the ratio between supply and demand. The price increase due to the increased demand would thus stimu• late production, and the increased supplies would curb inflation. But the overall situation in the USSR was different. Reserves were not available. Accumulation was also impossible because of the officially proclaimed policy of encouraging expenditures for consumption. Because the dramatic jump in the demand for the consumer market could not be matched by an increased supply of goods and services, there was uncon• trolled inflation and excessive release of capital. The latter, in turn, ex• acerbated inflation and resulted in a heated consumer market. Money lost its value and became rapidly repumped into goods. Production came to a halt, goods began to disappear, and the value of money depreciated. The picture was similar in the productive sphere. A sharp increase in productive demand could not be met due to the absence of productive reserves and capital. Enterprises were faced with this situation when de• mand far outdistanced supply and prices remained fixed for a long time. Under these conditions, money lost its value, and business enterprises be• gan to resort to barter exchange to avoid disequilibrium between the de• mand for money and the supply of goods. Permission to control prices did not bear fruit. Prices began rising, reflecting excessive demand, but commodity circulation was expanding since the required resources were not available to augment production. The unstable consumer market made it impossible to turn the growth of revenues into an expanding labor market. Labor incentives were lost; even by paying higher wages, the enterprises could not enlarge the scale of labor. In addition, the unstable market for productive goods and ser• vices resulted in disintegration of the natural production structure. Link• ages and ratios were destabilized, halting some production which, in turn, deeply affected other production systems. The way out of this conundrum could be identified by three economic measures: 1. Swiftly saturate the commodity market; The Far East Economy: The Crisis and the Solution 31

2. Make financial resources available for actual accumulation based on the huge potential demand; and 3. Regulate money circulation and credit policy and implement a tran• sition to convertible currency. The only way to realize these measures is to open the national economy to the free movement of goods and capital.

THE ECONOMIC SITUATION IN THE FAR EAST The Soviet Union engaged in a lengthy experiment to convert the Far East and the Transbaikal into a source of raw materials. It fostered a mono- product economy by pumping the natural resource revenues into the bud• gets of the state, ministries, and departments that monopolized control of the regional natural resources, and by financing the social and infra- structural programs in the Pacific coastal areas on the basis of the so-called principle of the "remainders." This exhausted the traditional, readily avail• able resource potential of the Far East and Transbaikal and brought on the economic and social crisis. The resource base for the region's economic development has been substantially transformed, and to maintain the output of resource-based industries, especially as a basis for economic development, the current cap• ital costs per unit of final product must be dramatically increased. New technologies and technical systems must match the characteristics of the resources and the conditions for their development. There is also a need for increased infrastructure—particularly in the energy and transport sectors—to develop the resource sector, all with an emphasis on environ• mental protection. The Long Range State Program for Economic and Social Develop• ment (LRP) of the Far Eastern Economic Region and Transbaikal to the year 2000 adopted in August 1987 was the last effort to correct the problem by centrally administered re-rationing of capital investments and their structural reorientation in favor of the social sphere. But between 1980 and 1988, the share of extractive industries in the Far East grew from 24.6 percent to 28.5 percent. And between 1986 and 1990, the growth of in• dustrial production in the Far Eastern Economic region was 14.9 percent compared to the 21 percent envisioned by the LRP and the 17.5 percent specified by the primary five-year plan. Then growth rates dropped and average rates for 1987 to 1990 were about 3 percent—lower than the in• dex of 3.4 percent for the five-year period of 1981 to 1985, the worst in the previous 15 years, and lower than the 3.7 percent index of the previ• ous program period, 1971 to 1985. None of the program's targets for the materials production industries were implemented during the past five- 32 Pavel A. Minakir year period. Actually, by the end of that period, the scale of production had decreased by 1 percent as compared to 1988. The program enjoyed state status, and 200 billion rubles of capital investment was supposed to have been allocated from centrally administered resources since 1989. However, the region experienced restrictions in capi• tal investments, and the ministries and departments concerned avoided their responsibility for this program under the pretext of a transition to a mar• ket economy and of khozraschetny autonomy being given to the enterprises. The region itself does not possess any resources to finance production, in• frastructure, and social programs. The rates of the region's economic development in 1991 to 1995 were to be maintained at only the 6.3 percent level envisioned by the LRP. If so, the deficit of capital investments in the Far Eastern economic region alone would be at least 25 billion rubles if the region cannot rely on cen• trally administered financial resources, and locally accumulated resources from business activities do not increase. But even this level of deficit could be maintained only if a net profit of 75 percent is withdrawn from the enterprises after tax, insurance, and bank interest payments. This burden would undermine the autonomy given to enterprises and the market, and would contradict the Law on Enterprise. Without withdrawals of profits from the enterprises, the local Soviets would find themselves financially strapped because their shortage of financial resources to provide the over• all social base would increase as compared to the present deficit of nearly 40 percent, and would soon total about 30 billion rubles in the Far Eastern region. Moreover, in the Far East, the market for foodstuffs and consumer goods was being ruined by the processes in the country at large. Natural economic ties between the enterprises and the region, including agreements on contract prices and fixed prices on raw materials, added to the problems. A much higher share of regional extractive industry (as compared to the heartland of the country), and heavy dependence on interregional exchange (at least 50 percent of the gross national product of the region is in im• ports and exports) made the region unable to finance the needed supply of goods and prompted a resort to barter because locally produced raw materials were not the region's property. The Far East is apparently an unattractive place to live. Although it occupies nearly 28 percent of the former Soviet territory, its population amounts to less than 3 percent of the total. At the end of the 1980s about 1 million people annually were immigrating to the Far East from other parts of the country, but approximately 800,000 also left in the same year. About 100,000 left after spending two winters, and only a few remained as permanent residents. Policies "from the center" resulted in the failure of the housing program, lowered the level of personal incomes of the popu- The Far East Economy: The Crisis and the Solution 33 lation in the region as compared to other areas in the country, created a hungry market for most commodities and a rationing of foodstuffs and industrial goods. All this occurred against the background of flourishing neighbors—Japan, the Republic of Korea, China, Taiwan, Hong Kong— that are not rich in natural resources. The Far Easterners thus lost confi• dence in traditional plans and programs of any kind if their implementa• tion was to be controlled by ministries and governmental agencies, and if resources allotted are dissolved in "the common boiler." And the central planners of Gosplan (the State Planning Commis• sion, USSR) still insisted on pursuing the former policy in the Far East. In particular, the Far East was supposed to expand supplies of raw materials to other regions of the country. This was unrealistic, and, given the condi• tions of raw natural resources and low production technology, would natur• ally lead to further degradation of productive opportunities in the region's raw material industries. Furthermore, the emphasis on the domestic mar• ket would rapidly worsen interregional exchange. With this approach, by the year 2000, there would have been a trade deficit of as much as 30 bil• lion rubles per year given the output and population estimated by the LRP. The plan also mandated that foreign economic activity be encouraged, mostly through the broadening of exports of Far Eastern goods, which implied a much higher export of raw materials. This could not be achieved without large capital investments to modernize the raw material extrac• tion industries. Further, priorities were to be given to the development of the social sphere. But with an imbalance in procurement, commodities, and finances, social improvements could not be achieved without a fundamentally changed system of economic management and an increase in the region's revenue. And this would be possible only through very active business ac• tivity involving partners from overseas. The policy also called for reduc• tion of the shortages in .commodity exchange between the Far East and other parts of the country at the expense of supply and development of the machine-building sector and the export of machinery products out of the region. This policy is fine for economically developed regions that pos• sess proper infrastructure. But for the Far East, it may have worsened the situation in the raw material sector and infrastructure. Besides, the Far East has a shortage of highly skilled labor.

AN ALTERNATIVE DEVELOPMENT POLICY One alternative policy for the development of the Far East would be a mixed-market economy with equal rights for all economic units, encourage• ment of business activities, and a mostly open policy for cooperation with Asia-Pacific countries. A modernized policy for the Far East should pro- 34 Pavel A. Minakir ceed from two basic principles. First, the region's own economic resources must be the basis for its economic development. Their utilization must be strictly linked to commercial goals within the constraints of the region's environmental and economic goals. Second, the region's economic develop• ment must be oriented toward creating strong and deep economic ties with the nations of the Asia-Pacific region, not only in the form of commodity trade but also in the exchange of technologies, capital, and activities. Essential elements of this policy are flexible taxation, custom duties, currency exchange, bank operations, and other measures to secure mar• kets and stimulate lively business activities. Such measures are expected to include incentives for investments and entrepreneurial activities. Some examples follow. 1. Preferential taxation terms a. A three-year deferment of profit tax for all enterprises after a declared profit. For foreign and mixed companies, the deferred payment period would be five years. b. When the total tax reaches about 20 percent of profits, enter• prises with advanced technologies and enterprises producing a large share of export-oriented goods would be granted preferen• tial tax rates, perhaps 50 percent of total taxation. c. Within the first five years of operation, the revenue remitted by foreign and mixed enterprises and the incomes of foreign staff would be tax free. d. Joint ventures would be taxed on the share of the declared revenue committed to financing social and productive infra• structure, and on that reinvested, provided the reinvestment is committed for three years. e. Speedy amortization of fixed capital would be allowed for all enterprises in the region and could remain at the disposal of the enterprise. f. Capital investments to modernize production, develop new tech• nologies, implement technical systems, and develop the region's social and cultural spheres would be deductible. 2. Preferential financial rates All foreign enterprises and joint ventures as well as national ex• port enterprises would be granted the right to convert their assets in rubles into foreign currency via commercial exchange through the Far Eastern Bank of Economic Development. 3. Organizational privileges a. Simple processes for the registration of foreign enterprises and joint ventures would be set up by decision of local governments after consultation with experts. b. National state-owned enterprises would have the right, indepen- The Far East Economy: The Crisis and the Solution 35

dent of higher authorities, to set up joint ventures, but in com• pliance with conventional rules. c. All economic units would be granted the right to carry out com• modity exchange and intermediary operations on goods and services produced within the region. d. All economic units would follow uniform business bookkeep• ing according to foreign standards and techniques. e. A commodity exchange would be organized to procure needed raw materials. Intermediary organizations and firms would directly procure raw materials, equipment, and components out• side the region on contractual terms. Joint and foreign enter• prises in the region would be granted the right to carry out foreign-trade transactions without license. National enterprises and organizations would have to have a license to do so. Local governments would be delegated the right to grant licenses to all except when restrictions on trade and economic relations are imposed by an authorized agency of the central power due to military-political considerations. 4. Preferential customs duties a. Imports and exports of goods and services produced in the region or those designed for export outside the region would be duty free. b. Duties on goods and services produced in the region and im• ported to the national domestic market would be deferred and reduced to a sum equivalent to the cost of an imported compo• nent of these goods and services. c. Export goods and services in transit through the region from the inland of the country would have a duty equivalent to the value added in the Far East and the Transbaikal.

REORGANIZATION OF THE FINANCIAL SYSTEM The basis for a new financial system would be the institutionalization of the Far Eastern Bank of Economic Development (FEBED) as well as a network of commercial banks and branches of foreign banks. The Far Eastern Bank would function as a commercial bank but would be closely related to the National State Bank and the State Bank of the Russian Federation. The FEBED would provide convertible ruble deposits corresponding with the degree of economic activity in the region and on the basis of ex• port operations, at a defined ruble rate in relation to foreign currencies. The circulation of the ruble would be maintained in the region, including within the taxation system. Guarantees for foreign investment and loans 36 Pavel A. Minakir would be institutionalized to support the FEBED's use of the convertible ruble. Its activity would be determined by operations in convertible cur• rency and the volume of assets guaranteed by foreign partners. Institution• alization of this fund would be based on the natural resources of the region, including reserves of nonferrous and precious metals, forestry and fishery resources, and all furs. Their ownership would be transferred exclusively to the local government by agreement between the Association of the Far Eastern Territories as the region's representative and the national govern• ment. The currency transactions of the FEBED and partial payment balance would be secured by the gold reserves in the FEBED at the ex• pense of the region's gold-mining industry. In addition, the sources for the guaranteed fund could include: 1. Revenues in hard currency drawn from the sales of enterprises to foreign juridical and physical persons. 2. Partial revenues in hard currency from foreign trade and business activities accumulated by local governments. 3. Partial revenues from rental payments, concessions, infrastructure services, etc. 4. Partial tax revenues in hard currency, and revenues from securi• ties, and deposits in foreign banks. 5. Foreign credits extended for a guaranteed fund and to provide con• vertible means of payment in the region. 6. Guaranteed funds in hard currency especially allotted by the na• tional monetary fund. 7. The property of national enterprises and local governments, in• cluding land. 8. Land designated for economic activity that under certain condi• tions can be transferred to foreign partners as compensation for losses. To maintain a ruble currency in the region, the retail trade, salaries (except for those of the foreign staff), and social expenses of the state and local government would be paid exclusively in rubles at the official bank rate. Transactions in shares and securities in the territory of the region would be permitted, including those in foreign markets. Price formation in the region would be based on free market principles. Prices at the state-owned enterprises may be fixed by the state agencies concerned. Prices and tariff rates on municipal (public) production and services would be fixed by lo• cal governments. To guarantee a minimum cost of living in the region, particularly at the initial stage when the commodity market has not yet been saturated, and producer competition has not yet developed, a system of guaranteed retail prices on foodstuffs and certain industrial goods would be introduced. The difference between market prices and guaranteed retail prices would The Far East Economy: The Crisis and the Solution 37 be compensated by taxes on the turnover of commodities at free prices. Both reduced and stabilized prices could be achieved only through incen• tives for producers, e.g., restrictions on taxes on profit with reduction in price or vice versa, which would mean higher taxes on profit taxes propor• tional to the increase of the price index.

ESTABLISHING AND PROTECTING A FREE MARKET A commodity and services exchange would be the basis of the interregional wholesale market. Access to the wholesale market would be open to en• trepreneurs in the region as well as to trade transactions elsewhere in the country. The balance between the flow of goods and the flow of money would be guaranteed. The access of enterprises from other regions to the internal market of the region would depend on their capital account in the FEBED (or other banks) or on the total earnings from trade of their goods in the region's market. The capital from these accounts may be with• drawn only in the form of payments for goods and services, and as invest• ments, but cannot be converted into foreign currency. Intermediate transactions involving resale of goods and raw materi• als imported from other areas of the country and the region would be pro• hibited. A fixed share of imported goods could be processed on the region's territory for further export. But this would not apply to transit goods pass• ing through the Far East's territory. The FEBED's payment transactions and the ruble-rate rubles earned from the sale of goods imported from other regions of the country and republics may be remitted only at a sum determined by agreement between the region and other regions and repub• lics on the supply of competitive goods exported to the Far East.

STATE GUARANTEES AND SUPPORT With a market economy, the state budget would not be able to and should not finance the entire economic development and all elements of the so• cial program. But without state support for the region, the program of economic modernization and the market mechanism cannot be guaran• teed. State support should be in the form of a special fund for the de• velopment of the Far East (FDFE). This fund would finance projects of regional importance oriented mostly toward balancing conditions for eco• nomic development, toward maintaining social standards, and toward secur• ing a modernized economic structure, rather than earning a profit. Such projects would include: 1. Modernization and development of the raw-material sector of the region's economy. 38 Pavel A. Minakir

a. Development of hydrocarbon deposits offshore Sakhalin and construction of a transport facilities complex and natural gas and oil facilities to provide, by the year 2000, 10 million cubic meters of oil to Sakhalin Oblast, and the Maritime and Khabarovsk Krays. b. Modernization of extraction and processing of nonferrous and precious metals. c. Creation of facilities, particularly those small in size, for process• ing of forestry and fishery resources as well as the necessary equipment for the tasks.

2. Creation of modernized infrastructure for socioeconomic de• velopment. a. The electrification and modernization of the Trans-Siberian Railway, involving reconstruction of the railway tracks in the area of Vanino as well as its port facilities to create new effi• cient access to the Pacific Basin, particularly to Japan, com• pared to the limited traffic capacities of the Trans-Siberian Railway leading to the ports of Nakhodka and Vostochny. b. Financing of important road building. c. Creation of modern lines of communication inside and outside the region, such as an optic-fiber system and satellite commu• nication stations. d. Construction of up-to-date international airports and recon• struction of the present airports in Khabarovsk, Vladivostok, Youzhno-Sakhalinsk, Magadan, Nakhodka, Birobidjan, and Gladoveshensk. e. Partial financing of the basic infrastructure for local free zones in the region's territory, in particular in Nakhodka, Khabarovsk, Bladovenshensk, Birobidjan, e.g., construction of roads, air• ports, and energy plants. f. Financing the geological survey designed to enhance the regional potential of mineral resources and fundamental research work. 3. Construction and reconstruction of energy supply units. a. Construction of new coal mining enterprises for the region's energy supply, in particular in the areas of Erkokovetsk, Lou- chegorsk, Urgal, and Solntsevo. b. Development of the regional energy base for construction (this will require an annual investment of 400 to 500 million rubles). c. Construction of large-scale energy supply units of regional im• portance (the Bureyskaya HES, the Khabarovsk AES, main en• ergy transmission lines, etc.). The Far East Economy: The Crisis and the Solution 39

d. Social support for the population, including provision and main• tenance of a minimum cost for housing, public services, health care, and education. In particular, financing is required for hous• ing and construction of units for health care, education, and culture to maintain social infrastructure at a level not lower than the national average, given the funds allotted by local govern• ments and enterprises.

4. Conversion of the region's defense industry, which accounts for 70 percent of the region's economic output, 30 percent of the region's total machine-building capacity, the largest shipyard, and electronics and manufacturing plants. At present, the program for modernizing the machine-building sector should focus only on con• version of the defense industry because only this sector has machinery which can be reoriented toward the interregional and international markets. This would also be a partial solution to the problem of improving the region's total output but only at the ex• pense of a high share of added value. The contribution to regional economic development on the part of the state will be an important test of Russia's commitment to develop its Far East. In addition, state support is necessary to secure social guaran• tees for the population and the economic relations of the Far East with other regions. Just as state support should be concentrated in less profita• ble spheres of large-scale infrastructure and structural modernization, and in social programs, the involvement of local authorities should be focused on development of the social sphere, public services, local energy supply and transport, roadbuilding and communication, environmental protec• tion, and education and culture. Economic activity by itself should be ex• clusively the sphere of entrepreneurship, including state-owned and municipal enterprises, but operating on the basis of market principles. The role of the local Soviets, if they still exist, would be to promote entrepreneurship, including that on the basis of private property. A most efficient way to use funds designed for the Association of the Far Eastern Soviets and the state FDFE would be for privatization and development of small businesses, along with obligatory guarantees to small businesses to build productive activity. Besides, a market environment, even at an ini• tial stage, will require the transfer of small businesses engaged in trade, public catering, and services to collective ownership or to private property, together with the purchase of their activities at market prices. Unprofita• ble or less efficient enterprises should be the first priority. Indeed unprofita• ble and insufficiently profitable industrial enterprises should be transferred to private and public ownership. But they must be provided with funds along with substantial privileges. 40 Pavel A. Minakir

THE FIRST STEPS HAVE ALREADY BEEN TAKEN Given the momentous changes, this alternative policy and the measures to realize it are no longer the speculations of armchair scholars. From 1987, regulations for establishing joint ventures became more liberal. The Soviet partner does not have to have control, i.e., at least a 51 percent share. Nevertheless, the foreign partner's share is more than 50 percent only in exceptional cases. For the first time, a foreigner could be the chairperson or general director of the joint venture. The most radical change, from the government's point of view, was the granting of permission for Soviet en• terprises and organizations to establish joint ventures by themselves after approval by the upper management body or territorial authority (in case of new construction or large-scale reconstruction). Formerly it was the USSR ministries and republican councils of ministries that had rights to establish joint ventures. Though this policy has yet to become an integrated system and is not supported by clear-cut arguments, it is already being im• plemented in some territories of the Far East and has found support on the part of the Association of the Far Eastern Councils of People's Deputies. The major principles of this policy gained support at the third session of this association held in February 1991, in Khabarovsk, and the concept was adopted by the association in May 1991. For the first time, the local authorities of the Far East officially refused to support the con• cept of the region's economic development proposed by the former USSR State Planning Commission. Instead, they adopted a resolution to immedi• ately begin implementing the above concept of an open-mixed market. But the legislation to put this policy into effect has been slow in coming. The main idea is to create a favorable investment climate throughout the Russian Far East with eight principal features: 1. Formation of a Regional Economic Administration to draw up financial plans, to stimulate policy and infrastructure programs, to react to economic and financial results, and to receive sugges• tions for new regulations. Decisions are required on registration of foreign firms and national investors, training of labor, and pro• vision of additional advantages to investors. 2. Establishment of a special regional bank to enable foreign inves• tors to operate with rubles and to guarantee conversion of rubles into hard currency at the market exchange rate. This will solve the problem of profit repatriation. 3. Autonomy for local enterprises to keep up to 30 percent of their output and most of their foreign currency earnings. 4. Transfer of import and export licensing rights to local authorities. 5. Tax advantages, e.g., reduction of taxes on profit to competitive levels; differentiation of tax rates in various industries, with prefer- The Far East Economy: The Crisis and the Solution 41

ences for processing of fishery, forestry, and nonferrous metals, high-tech industries, banking and domestic trade; partial or com• plete waiver of taxes on profit repatriation; waiver of tax on funds reinvested in the project; accelerated amortization, with priority for certain industries; and free import of machines and equipment for projects financed by foreign investors. 6. Formation of investment funds for regional projects using both internal sources and international financial organizations or com• mercial banks. 7. Formation of a commercial credit system in the Far East through utilization of domestic and foreign credit resources plus quotas of foreign bank operations given by the central regional bank. 8. Permission for foreign banks and their branches to operate in the region. The proposal to establish a free economic zone in the Primor terri• tory is an attempt to lay the foundation for a market economy in the region. The U.S.-Soviet International Law Centre for the Far East is drawing up regulations for the free economic zone with eight objectives: 1. Allow foreign ventures to lease land for at least 50 years. 2. Eliminate visa requirements for foreigners. Approximately 10 to 20 percent of the province, however, would remain off limits to foreigners because of the security restrictions imposed by the navy. 3. Guarantee favorable customs treatment. Imports into the zone would be free of charges, and duties would be imposed only on unprocessed goods shipped to the rest of the country. 4. Encourage foreign-exchange and commodities markets. Foreign banks and other financial institutions would be given equitable treatment as an encouragement for them to set up branches throughout the province. 5. Establish investment guarantees. Foreign investors would receive the same treatment as local ones. 6. Simplify business-registration procedures. It now takes one month to register a new business. The aim is to cut this to several hours. 7. Develop a basic tax system. 8. Create a labor structure that would encourage workers and manage• ment to solve disputes autonomously, not through state inter• vention. Further support has been manifested by the readiness of many other territories to obtain free-economic-zone status. Nakhodka, Sakhalin, the Maritime Kray, the Jewish autonomous Oblast, and the Khabarovsk Kray claim to be special economic zones. This implies the creation of an open market economy able to provide flexible incentives for entrepreneurship. 42 Pavel A. Minakir

The territories have energetically begun their task, and in February 1991 the necessary documents for the Sakhalinsk Oblast and the Jewish Au• tonomous Oblast were delivered to the Supreme Soviet of the Russian Soviet Federated Socialist Republic (RSFSR). The processes of privatization of public ownership are in full swing, particularly in Sakhalin. Adoption of the Law on Land by the Russian Parliament immediately resulted in a more active formation of farmers' households in the Far East than anywhere else in the country, and local governments are trying to render them as• sistance. The unilaterally declared Nakhodka free trade zone covers 4,300 km1. Foreigners can now register their joint ventures in Nakhodka. Eight foreign joint ventures have already been set up in the Nakhodka zone which offers 10-year tax holidays to joint ventures with 30 percent foreign owner• ship, 7-year land leases, and duty-free status on imports and exports. Tariffs apply only on goods brought into the zone and then sold elsewhere in Rus• sia. The ventures include three restaurants with German, North Korean, and Vietnamese partners; the International Law Center for the Far East; a Soviet-U.S. scrap-metal recycling operation; Soviet-US. computer sales and software programming ventures, and two ship-repair companies. Nak• hodka has three foreign consulates, including one for Japan. Vladivostok officially became an open city on 1 January 1992. This is significant be• cause it has a fine harbor, seafood, and other resources, but no direct for• eign flights and no authority to issue visas freely. This is not universally welcomed, however, as it is already bringing crime, noise, crowds, disin• tegration of law and order, and shortages in food, clean water, energy, and housing. These preliminary activities are preparations for full-scale reali• zation of the alternative policy for the development of the Far East's econ• omy, which in turn, will become an efficient way to promote foreign economic ties between this region and Pacific Basin nations. PROBLEMS WITH THE SOLUTIONS

Leslie Dienes

A number of factors stand in the way of full economic independence for the Far East. First of all, the region consists of many administrative units (four provinces, two territories, and one republic), and the coordinated po• litical body necessary to facilitate the overall promotion of regional au• tonomous economic development does not yet exist. Secondly, there is an excessive dependence on the central government for energy supplies, and without investment and aid from overseas to establish a system of self- sufficiency, the Far East area is not capable of implementing a coordinat• ed development plan by itself. Third, even though there are approximately 8 million people living in the Far East, there is still a labor shortage. Moreover there is insufficient agricultural production to sustain even this population, and infrastructure is poor and sparse. Fourth, the Far East harbors a "military-industry" complex, and the entire area is under the strong influence of the Ministry of Defense. This region occupies an ex• tremely important position in terms of Russian security, and the influence of the Ministry of Defense will make it difficult for the region to convert to an open economy and society. If the region cannot produce goods re• quired for everyday life nor export products that would lure foreign capi• tal, then it will be difficult to develop the area. There are many problems affecting the long-term development of the Far East. Since the state program for development of the Far East created in 1987 after Gorbachev visited Vladivostok has collapsed, and it is un• certain if and when the promised 200 billion rubles will be invested there, the Far East must initially reduce imports from countries with which trade is imbalanced due to a lack of hard currency. For example, the Far East must cut back on importation of goods from Australia and cannot main• tain an economic presence in Southeast Asia. By the mid-1990s, the eco• nomic relationship of the Far East with the Asia-Pacific region will be actually on a lower level than it was in 1985. In addition to the investment climate, guarantees, and general eco• nomic and political stability, the most important factor for effective inter• national economic cooperation is labor. The general situation in Russia as a whole is very confused. On the one hand, large-scale unemployment is expected around 40 to 50 million. But on the other hand, there is a large- scale structural deficiency of labor. There are many vacancies in construc• tion, services, machinery, forestry, and fisheries. It is very difficult to evalu-

43 44 Leslie Dienes

ate the situation because of disorder in wages, and in organization and technology. There must be a correlation between wages and production. And labor organization and technology must be improved. The Far East has both unemployment and a labor deficit. Unemploy• ment is due to a shortage of high-wage jobs (for example, in nonferrous metallurgy in Magadan), and the deficit is due to a surplus of low-wage jobs. Labor flows are an important condition for effective capital flows. New investments in the Far East will be effective only if labor problems are solved. It is impossible to improve labor conditions without large in• vestments and modernization of all industrial relations. There is a short• age of housing and housing is connected to jobs. Workers will not change their jobs and lose their housing. The import of foreign workers to the Far East began in the 1970s, when North Koreans were invited for timber cutting. In 1988, some or• ganizations in the Far East began to import foreign workers mainly from Vietnam and China. Guest workers are now employed in three industries besides forestry: construction, agriculture, and light industry. It is in these industries where there are problems with wages and labor conditions. The total number of guest workers in the region is now about 30,000. But this is not really an international flow of labor. Guest workers in the Far East are not free people with contracts with their employers. Russian organiza• tions strike a bargain with Chinese or Vietnamese organizations and pay the main part of the workers wages to these organizations in the form of commodities (cement, steel, cars, oil products, fertilizer, Fish, timber, coal). Rather than an international labor flow, this is the renting of guest work• ers. To use foreign labor as a stable and effective impetus to economic growth in the region, it is necessary to change the rules of immigration for Russian and foreign people. But most important is to recognize the necessity of a normal labor market with labor being the private property of each worker and with wages arranged on the basis of agreement be• tween employers and workers, with a minimum wage guaranteed by the government. Further, without the proper development of infrastructure in the Far East, stable and effective international cooperation will be impossible. The most important element of the infrastructure system is transport, shipping in particular. Presently, railway transport and sea ports are the main base of Soviet "service export" because of the flow of containers on the Japan- Europe route. Nakhodka and Vostochny are nodal ports in this flow and are being expanded. These ports are also the main elements of the Nak• hodka and Vladivostok free economic zones. Vanino port on the Okhotsk Sea in Khabarovsk territory will be developed as a feeder for the Baikal- Amur Railway (BAM). It will thus be a second container route. Problems with the Solutions 45

Although the lumen River project will benefit the Khasan area, it would mean a loss of potential cargo for these ports. Thus, the economic development potential of Nakhodka-Vladivostok, Vanino-Komsomolsk, and the BAM area will decrease. And capital invested in Far East sea ports and railroads will be devalued. Part of the capital was invested by Japanese firms and this may discourage further such investments. The lumen River project may even create competition rather than cooperation in Northeast Asian economic development. Transfer of pollution may become a problem. Taiwan is presently in• vesting heavily in Northeast Asia, including the Far East, and this invest• ment has been increasing rapidly in the past two years. Taiwan is becoming polluted, and the Taiwanese want to transfer polluting industries to the Asian mainland. But such investments in the Far East could lead to widespread ecological destruction there. The prerequisite for the alternative development program is constitu• tional rights for the Far East, which only members of a true federation can possess. Indeed, some parts of the program must rest on rights that only members of a confederation can enjoy. But such exchange-rate regu• lations, trade barriers, and custom levies are not enjoyed even by U.S. states. Monitoring and control of interregional imports so that only a predeter• mined fixed share could even be processed in the region will raise ques• tions among many reform advocates. Yet technically it would be feasible, despite the enormous physical extent of the Far East. The transport net• work is so thin and exit and entry points so few that such policing is prob• ably much less difficult technically than in the European parts of the country. However, what is to prevent each province of the Far East from following suit? And if the transport links are not with the Amur-Maritime south, as is the case with most of the Yakut Autonomous Soviet Socialist Republic (ASSR), the less rationale there is for accepting such regulations. In addition, given the remote entry points, massive black marketeering and bribery cannot be avoided. There is a more serious question however. Does a true internal com- munality of interest exist among subunits of the Far East? Yakutia and Magadan Oblast may come to regard their relationship to the Amur- Maritime region as the Far East now regards its relation to distant Moscow. If the gold and foreign currency reserves of the Far Eastern Bank are to be built up chiefly from gold and diamond output in the Northeast, issues of nationality and equitable distribution of revenues from such resources will arise. Another serious issue is that the Far East must continue to depend on the center for the modernization and development of its extractive sec• tor and for huge infrastructure! investments, eg., the Sakhalin project with 46 Leslie Dienes its transport and distribution outlays, coal and power supplies, nonferrous, precious metals, and forest industries, electrification of the Trans-Siberian Railway and other railway improvements, the expansion of port facilities, new airports, etc. The long list of proposed projects would be a tall order even for a healthy national economy, let alone for one that is struggling with a budget deficit of some 200 billion rubles this year. A special De• velopmental Fund for the Far East to Finance these investments is proposed but were such a fund to be established for the Far East, other regions and republics would immediately demand the same. Skeptics argue that military conversion will not solve the problem be• cause for the most part military production does not occur in the Far East. Further, the purpose of the Trans-Siberian Railroad is to transport goods across the country. It will not populate or develop the area along the rail• road lines and by itself will not create a thriving economy. The mineral resources are mostly in the north, are geologically complex, and are easier to get elsewhere. Climate and distance make the cost of energy extraction very high. Some of the proposed economic rights are not even possessed by U.S. states. And as power devolves, internal conflict, ethnic and native- rights issues will almost certainly arise. This view holds that the Far East may have to lower its expectations, even if perestroika succeeds, and even if the region acquires much greater political and economic control over its destiny. A booming North Atlan• tic economy during the 1950s and 1960s did not sweep with it most of Maine, Canada's Maritime Provinces, and Labrador on the western mar• gin, nor most of Ireland, Wales, and Scotland on the eastern margin. Nor has Alaska experienced a major structural transformation, despite the bonanza of oil development. The Far East is peripheral to the booming Pacific economy today and may have to accept an economically periph• eral role. Its undeveloped nature, wide open spaces, and still largely pristine environment may, in the long run, become its greatest resource. Freedom from central control and open cross-border trade, however, will result in small-scale, localized development that may improve the lot of the popu• lation. THE FAR EAST AND THE NORTH PACIFIC: THE STRATEGIC CONTEXT

Vladimir I. Ivanov

PACIFIC SUPERPOWER POSTURE ARTIFICIAL Some feel the superpower position of the Soviet Union in the Pacific was entirely artificial. It was maintained at enormous cost by the western regions of the country. The entire eastern half of the Soviet Union (8 percent of the surface of the earth) was home to only 17 to 18 million people and contributes at most 7 percent to the Soviet GNP, and 5 percent to Soviet trade. Ironically, while the USSR was becoming a military giant in the coun• try's Atlantic half, the investment shares of the Far East and of Siberia east of the Ob remained constant, the enormous cost of the Baikal-Amur Railway (BAM) notwithstanding.

NEW SOVIET ATTITUDES New Soviet attitudes toward the Asia-Pacific region spotlighted in Gor• bachev's speeches and statements marked a departure from the Soviet tradi• tional "look West" foreign policy. The process began with his July 1986 address in Vladivostok. It was followed by the signing in New Delhi in November 1986 of "The Declaration of Principles for a Nuclear-Weapon- Free and Non-Violent World." A year after the Vladivostok speech, Gor• bachev elaborated upon his existing proposals and offered others in an interview with the Indonesian newspaper Merdeka. In September 1986 at Krasnoyarsk he outlined seven specific proposals on East Asian security. But in the last five years, both the logic and spirit of the Vladivostok ini• tiatives were reflected in Soviet foreign policy in East Asia and the Pacific. The three main goals of Soviet leaders were: (1) to escape from political isolation; (2) to avoid further military buildup and confrontation; and (3) to change the overall global strategic position of the country.

MILITARY CONFRONTATION Soviet deployment of SS-20s in the Far East had a catalytic effect on Japan, South Korea, and China's evaluation of the "Soviet threat" and their in• sistence to link the security of Europe with that of East Asia. The Soviet sea-based strategic forces build-up in the Northern Pacific had played a

47 48 Vladimir I. Ivanov role in growing military tension in both the Sea of Japan and the Sea of Okhotsk by attracting US. aircraft carrier task forces, attack hunter-killer submarines, and ASW forces modernization and expansion. Thus the Western Pacific became an area of confrontation linked to the strategic nuclear balance and global arms-control process. Within the Far Eastern theater the "two-fronts" phenomena existed, complicating the tasks for defense-planners, military commanders, and diplomats. It was also possible to distinguish between theater forces and strategic sea-based nuclear forces, located primarily within the Sea of Ok• hotsk and Kamchatka area, which had to be protected against possible preemptive strikes and ASW operations. A further complication stemmed from the fact that the Far Eastern Military District, based in Khabarovsk and covering the whole of the eastern part of the region from Vladivostok to the Bering Strait, including Sakhalin, the Kuril Islands, and the Sea of Okhotsk, had a potential dual role: to defend against China's forces deployed in the northeastern provinces and to defend against the United States and its allies in the Pacific. This dual function made it difficult for Moscow to "disentangle" the military, naval, and air forces on very different missions for the purpose of force reductions, relocations or disbandments.40 At the beginning of the 1990s there remained several major sources of military tension in the region: (1) the Soviet-US. naval confrontation; (2) the Soviet Union's concern about the U.S. forces in Japan and South Korea; (3) the tense situation on the Korean peninsula; (4) tension on the Soviet-Chinese border; and (5) the gradual, but not yet final, solution in Cambodia. Against this foreign-policy background the new leadership has to plan the reorganization and reduction of its forces in the Far East and the Pacific along two lines: (1) a new "defensive" military doctrine vis-a• vis China, mainly on land, and (2) its application to a sea-island-air en• vironment against US.-Japan and South Korean forces, coordinated by the US. Pacific Command.

REDUCTION OF TENSION To be truly dynamic and comprehensive this process has to involve the United States and its allies, as well as China. Nevertheless, unilateral Soviet force reductions were significant. The January 1989 half-a-million troop reduction included 200,000 to be removed from the Asian part of the coun• try, including 120,000 men from two military districts facing China and the Pacific coastline. Some 57 ships and submarines were also withdrawn. Since 1987, the USSR has deactivated 3 cruisers, 13 destroyers, 9 frigates, 10 submarines, and 3 corvettes from the Soviet Pacific Fleet. But there is a clear difference between force cuts in the "China sector" and develop• ments in the Far Eastern Military District and the Pacific Fleet. Naval and The Far East and the North Pacific: The Strategic Context 49 air force units have been withdrawn from, or reduced in the Indian Ocean and Cam Ranh Bay, but ground, air, and naval units appear to be main• tained at approximately their 1988 strengths around Vladivostok, the Mari• time Province, Sakhalin Island, and the Kurils. The Soviet Union's defense efforts in the Far East clearly contradicted its economic interests and hampered economic cooperation with the United States, Japan, and other states associated with them. In the 1990s, the pro• file of former Soviet entities in the Asia-Pacific region will be increasingly dependent on their involvement in regional economic affairs as well as bilateral trade and investment. Obviously foreign policy and confidence building in security relations have to be shaped in a way that provides more opportunities for Russian economic interaction with the Asia-Pacific and Northeast Asia in particular. It is important to remember that the former Soviet entities are not economic powers in the Asia-Pacific region and they retain a large, out• dated military. The dismantling of this force is a prerequisite for further development of the Russian Far East. It may still be premature to expect dramatic changes in U.S. military posture in Northeast Asia until the United States is willing to launch a multilateral political dialogue in the Asia-Pacific region on an official level. Although the reduction of tension in the Asia-Pacific region is in the long-term interests of the United States, Washington has been prepared only to support those steps which will not weaken deterrence and endanger its nuclear strategy in the western Pacific. The United States believed that both CBM negotiations and arms-control steps would weaken its military, strategic, and political edge in Northeast Asia. "Aggressive patrolling prac• tices" (the tactic of attacking Soviet SSBNs in the Sea of Okhotsk with conventional weapons during the early stages of a conventional conflict) dominated areas close to Soviet SSBNs and minimized the opportunity to lower tension. The tragedy of the situation in the northern Pacific, the Sea of Ok• hotsk, and the Sea of Japan in particular, is that everything was connected with this naval confrontation. Even such proposals as prior notification of exercises were opposed. The United States rejected presence of observ• ers and other initiatives advanced by the Soviet Union, like antisubmarine warfare-free zones, maritime-nuclear weapon-free zones, and limits on naval operations near international shipping lanes and international straits. Be• ing locked into the strategic logic of offensive deterrence, the U.S. Navy was insensitive to the concerns its offensive exercises generated in the USSR—especially the more provocative exercises of the mid-1980s. On the contrary, the USSR and China actually had common interests and concerns: (1) the possible military resurgence of Japan; (2) stability and dialogue on the Korean peninsula; (3) foreign military bases in the 50 Vladimir I. Ivanov western Pacific; and (4) U.S. naval domination in the area. These shared concerns could have increased the willingness of the two countries to cooperate in regional affairs, though such cooperation might never have gone beyond the point of complicating China's relations with the United States or Japan. Scenarios based on U.S.-China-USSR and U.S.-Japan- USSR triangles all ignored the importance of China-Japan relations. And China and Japan are not necessarily status quo powers. Further, all major powers politically close to North Korea (DPRK) or South Korea (ROK) recognize the complexity of the situation and the importance of eventual normalization of relations by both sides. The key to a viable Korean policy for any power is a dialogue and good working relations with both Koreas. Russia comes close to filling this role.

SEA OF JAPAN IS KEY The important issue now is dialogue within the Sea of Japan area. The Sea of Japan region continues to be very much strained politically, militar• ily, and psychologically. Compared to many other geographically compact parts of the world, the Sea of Japan rim is not an area of intensive trade and economic cooperation, people-to-people contacts, cultural and aca• demic exchanges, intensive political dialogue, and collective security ef• forts designed to ensure peace, stability, and prosperity. The economic and trade links within the Sea of Japan are limited, political and cultural con• nections are uneven and not well developed, and security concerns con• tinue to be relatively high on all nations' agendas. Although Moscow is pushing hard to expand economic and political relations with Asian states, its main stake in the region remains its military presence. The Russian mili• tary may continue to influence the making of Russian foreign policy in the region. Because of the switch to a more defensively oriented doctrine, the Rus• sian navy's focus is now mainly on coastal defense, especially in the Sea of Okhotsk, which has become a bastion protecting Russia's submarine- based nuclear deterrent. This concentration on coastal defense may still represent a danger for conflict because much Russian naval activity will take place in the immediate vicinity of the seas around Japan. Russia is presently in the middle of dramatic, historic changes that both inspire and depress its residents and friends and that have caused it to lose momen• tum, timing, and foreign friends. Although the Russian Republic is still in the very initial stages of recovery from these changes, there are some positive developments. Much remains to be done. In particular, Russia must work harder to open not only Vladivostok, but all of Russia to greater scholarly, economic, political, and cultural interactions. The Far East and the North Pacific: The Strategic Context 51

In October 1991, a series of confidence-building measures designed to reduce tensions with Japan over the disputed southern Kuril Islands were agreed during talks in Moscow with Japanese Foreign Minister Taro Nakayama. The measures include a 30 percent reduction in the number of Russian troops stationed in the Kurils and visa-free entry islands for Japanese citizens. Japan agreed, in return, to allow Russian residents,of the islands visa-free entry to Japan. Further progress in Russo-Japanese relations can be anticipated. JAPAN AND THE FAR EAST

Yutaka Akino

In the Cold War era, the Soviet Union viewed Japan as a client state and discounted it due to its lack of military power. Japan had a victim mental• ity and saw itself as a victim of Soviet betrayal. Japan used its economic might to pressure the Soviet Union and was reluctant to consider the Soviet Union as an Asia-Pacific power, partly because it could become competi• tive with Japan. There was also a Japanese fear of complicating its rela• tions with the United States. But as Soviet-US. relations improve through major progress in CFE and START, the importance of Petropavlovsk in the Kamchatka peninsula will be reduced. If SLBM-carrying submarines can be moved to the Arctic Ocean, the strategic importance of the four northern islands, in particular the Etorofu Straits, would diminish.

THE POLITICAL CONTEXT Mutual benefits accrued from Gorbachev's April 1991 visit to Japan. The Soviet president's visit established a minimum level of mutual trust that was previously lacking. Japanese-Soviet relations can now indeed be de• termined by future political developments in the Soviet Union. Surely there will be major progress made on the northern territory issue as the Soviet Union continues perestroika. But even if there are no substantial develop• ments on the territorial issue, Japanese assistance to the Soviet Union can and will occur as part of overall international aid to the Soviet Union. The greatest benefit from Gorbachev's visit to Japan is that the Japanese now understand that current Japanese-Soviet relations depend largely on the "Soviet Problem." Many of the conditions for improvement of Soviet- Japanese relations have already occurred. The components of the Soviet Union have become independent. Tension between the United States and the Soviet Union has evaporated. In particular, the Russian Republic is shifting toward a more open market economy. Further, post-coup Russia is more inclined to settle the issue. Thus the northern territory problem will be solved in a manner satisfactory to Japan, and large-scale Japanese aid to the former Soviet Union can commence. As soon as the dust settles, it would be important for Japan's Prime Minister Kiichi Miyazawa to visit Russia and for Japan to provide considerable aid to hasten Soviet reforms. On the heels of the failed coup, Japan has announced a US$2.5 billion aid package for the Soviet Union, consisting of US$700 million in govern-

52 Japan and the Far East 53 ment credits and US$1.8 billion worth of trade insurance designed to en• courage Japanese exports. In December 1991 the Russian Republic was recognized as a sover• eign nation. As a "developing" nation, it should be eligible for Overseas Development Assistance (ODA). Japanese can now visit the four north• ern islands without visas, and there are prospects for freer economic ac• tivities there. This suggests that Soviet sovereignty in the islands has been considerably eroded. If economic activities, including fishing in the islands' EEZ becomes possible for Japanese, then the national movement for the return of the northern islands could lose its core momentum regarding the legal aspects of sovereignty, and there should be a concomitant decline in support for the movement for the return of the islands by the very peo• ple who have been its strongest leaders. Politically, the dynamism of the movement for the return of the islands would be lost. Since this move• ment was the domestic foundation supporting Japanese policies toward the Soviet Union then these policies would change. The Japanese business world has been negative toward investing in the economy because of fear of civil war and the problem of outstanding Soviet debt to Japan. For the Japanese business world, stabilization of the domestic system and a shift toward a market economy are more impor• tant than any concessions the Russians might make regarding the north• ern islands. If the political and economic situation begins to improve, there is no doubt that investment from private enterprise in Japan will increase, mainly centered on energy in the Far East. PRESENT PROBLEMS

Ivan S. Tselichtchev

Present Russo-Japanese economic relations are stagnant (table 5). Trade growth is very limited. In 1990 the volume of bilateral trade was only 13.0 percent higher than in 1981 ($5,924 million compared to $5,280 million) with Japanese exports declining for the third consecutive year. In fact, the USSR's share in Japan's foreign trade was steadily decreasing. In 1990 it amounted to only 1.1 percent compared with nearly 3 percent at the be• ginning of the last decade. As of July 1990, Japanese investments in joint ventures in the Soviet Union since January 1987, when the first joint ven• tures were registered, reached only $25.6 million, or 0.5 percent of all the investments made by Western nations. Practically all Soviet-Japanese joint ventures are small companies concentrated mainly in the lumber industry, processing of marine products, and services. Timber comprises about 23 percent, coal 17 percent, fish and fish products 17 percent, and rare and nonferrous metals (gold, nickel, platinum, and palladium) 17 percent. Large-scale resource development projects in the Far East and Siberia—one of the main driving forces in bilateral relations in the 1970s— have lost momentum. The Soviet Union failed to upgrade its export struc• ture and thus to provide expected quality and timely deliveries of goods. Meanwhile, there were structural changes in the Japanese economy, espe• cially a rapid development of resource-saving high-technology industries and diversification of energy and raw material supply sources. Another obstacle to bilateral ties is the delay in Soviet payments for delivered Japanese goods. At the beginning of 1991 the amount owed reached about 400 million yen. This is not a substantial sum when compared to the Japanese economy as a whole, but small and medium Japanese compa• nies dealing with the Soviet Union have faced capital flow difficulties they could not ignore. The Japanese business community now sees transactions with Russia as very risky—on a par with Latin American countries. According to an opinion poll conducted by the Nikkei newspaper in March 1991 among 107 chairmen and presidents of leading Japanese companies, 50.5 percent of those questioned found it difficult to put forward concrete proposals on Japanese-Soviet cooperation. Some 10.3 percent replied that long-term cooperation is needed despite some sacrifices that may be required on the Japanese side. The need to expand economic cooperation to support Presi• dent Gorbachev was mentioned by 8.4 percent, and 7.5 percent believe that

54 Present Problems 55

Table 5. Japan-USSR Trade

1970 1984 1989 Category m (%) m Japan's Exports to the USSR Textiles 30.5 7.8 4.5 Chemicals 12.0 9.2 11.8 Steel 13.3 37.9 25.4 Machine tools 20.4 20.4 25.6 Electric machinery 4.0 5.3 12.4

USSR's Exports to Japan Foodstuffs 2.1 8.3 8.3 Cotton 5.1 5.5 2.0 Lumber 41.1 25.5 20.7 Coal 9.1 8.5 14.9 Oil 4.9 9.5 3.9 Chemicals 2.5 3.1 2.2 Nonferrous metals 15.9 20.3 26.4 Gold — 4.6 7.6 Others 19.3 14.0 14.0

Source: Japan Association for Trade with Soviet Union and Socialist Countries of Europe (Soren Too Boekikai), Tokyo. in the future, the Soviet Union will become a large market for Japanese products. Only 20 percent was actively interested in bilateral cooperation. These results reflected the state of mind of the Japanese business commu• nity, and could only have worsened as political and economic conditions in the Soviet Union continued to deteriorate in 1991, leading to the un• ion's dissolution before the end of the year. Although they have not lost interest, cautious approaches obviously prevail. Further, activities of Japanese businesses have actually been restricted by government. For ex• ample, the Japanese government recently banned the opening of a branch of a local Japanese bank in the Far East. With the close relationship be• tween business and state authorities, government approval is a necessary precondition for the business community to substantially increase its in• volvement in the development of the Far East.

HOPEFUL SIGNS In Japan "the age of regions," or provinces, is now a catch-phrase. There is recognition of the need for some decentralization, promotion of local development, and encouragement of prefectures to make better use of their 56 Ivan S. Tselichtchev comparative advantages. Prefectures on the Sea of Japan coast, which tradi• tionally were considered the less developed part of the country, are now trying to find their own identity, especially their niche in foreign economic relations. These prefectures are situated very close to the Far East, which is for them a natural economic partner. The Japanese people living along the Japan Sea coast are certainly enthusiastic about exchange with the Far East even though they under• stand that the prospects for doing profitable business are presently not bright. Thus the Japanese desire for exchange may not be economically driven but only a luxury born of economic prosperity. This exchange should be actively carried out by local and prefectural government bodies, and through non-governmental organizations. Television and radio should offer routine information to the population in the Far East, such as weather forecasts. Also, it is important that a Japanese language education center be established in the Far East. One of the significant developments in 1991 was the founding in March in Niigata Prefecture of a company for the promotion of investment in the Soviet Union. The company was established by about 60 Japanese cor• porations representing a wide scope of industries: construction, machine- building, wholesale trade, finance, insurance, real estate, and transport ser• vices. They include both corporations based in Niigata and some other prefectures and leading Japanese companies with their headquarters in Tokyo, such as Kagoshima Construction, Obayashigumi, Misawa Home, Odji Paper, Hitetsu Metals, Mitsui Trading, Mitsubishi Corporation, Daiwa Securities, and Japan Airlines. The new company's capital is 6 billion yen (more than $43 million). Its first undertaking will be the construction of two hotels in Khabarovsk and Vladivostok equipped with advanced com• puters and communication systems. Construction is to be carried out by a joint venture that the investment company will set up in Russia. The com• pany also plans to start such operations as consulting, feasibility studies, information gathering, and loans and technical support for Japanese com• panies planning to invest in the Far East. The core organization of the com• pany is the Central Bank of Niigata. On the Russian side, local ties are also being promoted. Primorski Province, the most developed in the Far East, includes the important ports of Vladivostok and Nakhodka, and has suggested a joint program of ac• tion with Japan, in particular, the setting up of a working group and com• mittees to study possible concrete areas of cooperation. There are also increased ties between Niigata and Khabarovsk or Vladivostok, and be• tween Hokkaido and Sakhalin. A new development in Russo-Japanese economic relations has been Japan's technical and "intellectual" aid to perestroika. The range of areas where such assistance may be granted includes practically all aspects of Present Problems 57 economic management and organization at both macro- and microlevels. Distribution and railroad systems, banking and finance, the capital mar• ket and its institutions, implementation of macroeconomic policies, labor relations, promotion of small and medium enterprises, and antimonopoly legislation are probably the most important. Exchanges of delegations, Japanese feasibility study groups and expertise, and plans for "model" enterprises on Russian territory have grown into a significant element of bilateral relations. Daiwa Securities became an official consultant to the Soviet government on problems of the transition to a market economy as well as a consultant to the Moscow stock exchange. Some Japanese or• ganizations and think tanks have been consultants on the concept of com• prehensive development of the Far East. Nevertheless, "intellectual aid" remains limited and largely resembles educational or "enlightenment" programs on an ad hoc basis. There are no regular training programs and, especially important, Russian business people do not have a chance to work, even for a limited period of time, at Japanese enterprises within the Japanese economic and managerial en• vironment. The strict distinction drawn by the Japanese government be• tween intellectual and financial support for perestroika, has not allowed for a comprehensive approach of assistance for Russian economic reforms. Increased financial support directly linked with progress toward market- oriented reforms has become the most urgent task. The linkage could in• clude such areas as, e.g., promotion of private businesses, in particular small and medium enterprises, implementation of restrictive money supply and budget policies, price liberalization, and the foundations of an institutional framework for the market system. There are some attempts at self-help in the Far East, but they need assistance. In Sakhalin Province, local authorities have launched a pro• gram to help private businesses and improve the infrastructure of com• modities, grains, and securities markets in 1991 and 1992. Three hundred private enterprises were created in the province in 1990, a commodity market opened in the city of Yuzno-Sakhalinsk in December, and a wheat and securities market opened in March. To implement these programs, according to the estimates of local authorities, $2 million in aid (possibly credits) is needed. Although this is a very small amount for Japan, it cannot be granted under present political constraints. Nevertheless, the structure is in place as political relations warm. Despite structural changes and the diverse supply of natural resources to Japan, natural resource development is likely to remain the major driv• ing force for cooperation in the Far East. Japan, the newly industrializing economies (NIEs) and other dynamically growing Asian economies will need greater amounts of energy and mineral resources. Some forecasters even predict resource bottlenecks and rising prices at the end of the cen- 58 Ivan S. Tselichtchev tury or even in the second half of this decade. Far Eastern coal, oil, na• tural gas, lumber, water, and minerals are expected to be in demand, though fluctuations of a cyclical nature are inevitable. It is symbolic that C. Itoh Company for the first time in the history of Russo-Japanese economic re• lations delivered Far Eastern coal to a third Asian country—South Korea. Several more large-scale Soviet-Japanese resource development projects are now under discussion. The fourth forestry project in Siberia entails the delivery of 6 million cubic meters of lumber and 400,000 cubic meters of lumber products within five years in exchange for Japanese construction equipment and lumber machinery. The value of this transaction is expected to be about $1.4 billion. Talks between Japan and Russia on the Sakhalin project have been underway since 1975. In Japan, the Sakhalin Oil Development Company (SO-DECO) was set up for this purpose. Political bottlenecks including the northern isles issue and other problems, such as Afghanistan and oil price fluctuations on the world market, have blocked any substantial progress. For Japan, Sakhalin probably remains "a last resort" in case of drastic changes or shocks in the world energy market. Participation of major American oil companies may give the Sakhalin scheme a new meaning—the meeting of a great technological challenge for the provision of a stable supply of energy for long-term Japanese energy security. A con• tract let to Mitsui Trading Co., Macdermott International, and Marathon Oil Co. of the United States means Sakhalin development is gaining momentum. Some possibilities exist in high-tech industries, especially those con• nected with the conversion of the Soviet defense industry. Mitsubishi Cor• poration, for example, has already undertaken several projects based on this conversion. The most recent one carried out with Brother Co. is the assembly of sewing machines at a factory in the city of Kuibishev on the Volga River. This factory is one of the large enterprises of the defense in• dustry. Some of the assembled machines are supposed to be exported. Some other Japanese companies have also expressed interest in such conversion including the application of conversion technologies in Japan. Toyo En• gineering was the first Japanese company to purchase Soviet aerospace technology. In research and development, Sekisui Dzushi and Nippon Zoki Seyaku are planning joint research on plastics and pharmaceuticals with Russian research institutes and companies. Some companies, eg., Toray, have maintained a productive relationship with Russian counterparts in research and development for a rather long period of time. Among proposals put forward by the Russian side for productive cooperation are modernization of the Russian petrochemical industry, ma• rine transportation, and railroads, construction of tourist centers, and research on superconductivity, biotechnology, new materials, and the ex- Present Problems 59 ploration of Mars. In Primorski, a Far East telecommunication center is to be set up, probably with Japanese participation. The potential also exists for promotion of production of consumer goods, including those for the Japanese market. The consumer goods mar• ket in Japan has become segmented and there is growing demand for unique products with their own identity. Marine products, foodstuffs, and nonal• coholic beverages produced in the Soviet Union, including the Far East, can possibly find their way to Japanese consumers if Japanese corpora• tions provide marketing and distribution for Soviet producers. The focus would have to be on products that are difficult to get in Japan and that are definitely of higher quality or less costly than those produced by Japanese companies, e.g., such foodstuffs as berries, mushrooms, honey, natural juices, fruit jams, some marine products, probably textiles, etc Such developments might be beneficial for Japanese consumers, and are fully consistent with import promotion policies officially proclaimed by the Japanese government. Some small, but unique projects are underway in food and beverage production. For example, Michinoky Bank of Aomori Prefecture in north Honshu has announced plans to invest together with a Japan-Soviet trading company in a joint venture producing bottled water from Lake Baikal for sale both in the Soviet Union and abroad. Resorts, rehabilitation centers, sanatariums, and research facilities provide some pos• sibilities for fruitful cooperation. These opportunities take into consider• ation such "assets" in the Far East as beautiful wild scenery, favorable climatic conditions in vast areas, and a rather well-developed academic research infrastructure and educational system, especially if Siberia is in• cluded. The required investment in infrastructure for a very limited free eco• nomic zone in the Nakhodka area (only about 10 km2) may be 600 million rubles (about $330 million). Concessional financing similar to the ODA system to develop infrastructure would be highly desirable, and such pos• sibilities are being discussed by some Japanese experts. Long-term com• prehensive development of the infrastructure of the Far East requires the support of Japanese state agencies including OECF, JAICA, and the Export-Import Bank. In September 1991, the Japan Association for Trade with the Soviet Union and Central-Eastern Europe (Sotobo) sponsored the first multinational consumer-goods exhibition in Vladivostok, including exporters from China, South Korea, Hong Kong, Thailand, and the United States. Japanese trading companies hope to serve as middlemen finding markets for timber and other raw materials in exchange for consumer goods. Some infrastructural projects, may also be carried out by the private sector such as the newly established investment company in Niigata. For example, recently an agreement was reached between a Japanese road con- 60 Ivan S. Tselichtchev struction company, Yoshida Roads, and an enterprise in the city of Irkutsk in Siberia to establish a joint venture—Baikal Yoshida specializing in road construction and maintenance, sales and leasing of construction equip• ment, resort area development, and even export to Japan of some products from the Irkutsk area. The general feeling in the Japanese business community is that a recipient country has to provide the infrastructure for major development. However, if this is impossible, Japanese business will probably cooperate if Japanese government funds and insurance are available. When the ter• ritorial issue is resolved, this will be set in motion. Until then more active involvement for Japan will depend on multilateral economic cooperation with the Far East. Japan is in the process of choosing a formula for cooper• ation in East Asia and the North Pacific that works in its own interests. Japan could play a bridging role between the Russian Far East and other Asian or North Pacific countries by promoting cooperation based on con• tributions by the Far East to the development of other neighboring coun• tries. An economic cooperation system acceptable to Japan probably will have to include the United States and Canada and remain open to any non- regional countries. It will also probably have to be a North or Northwestern Pacific economic cooperation scheme rather than an East Asian scheme. Japan will necessarily play a key economic role in such an undertaking, but politically, the decisive factor will be the position of the United States. In the medium term, some form of cooperation between the Far East and Asia-Pacific Economic Cooperation (APEC) may also be considered, especially if APEC countries remain true to the principle of open region• alism, which is based in part on the presumption that measures to pro• mote trade within APEC and joint projects carried out by its members are open to outsiders. Japan played a major role in formulating the con• cept of open regionalism. If cooperation on this basis within APEC gathers momentum, the Far East can probably be included in its infrastructure, training, and other projects, and Soviet-Japanese relations can acquire a new dimension. However, resource development and processing, mainly in lumber and marine products, services, and Niigata-style infrastructure projects, together with expanding intellectual aid will probably constitute the major framework of the Japan-Far East bilateral economic relation• ship for the near term—probably with some limited intrusions into more technology-intensive industries. THE KOREAN PENINSULA AND THE RUSSIAN FAR EAST

Vasily V. Mikheev

What are the basic tendencies in the development of relations between the two Koreas and Russia? What are the possibilities of the USSR and other powers exerting a positive influence on the Korean situation? What can be the role of the Korean peninsula in the evolving structure of interna• tional relationships in Northeast Asia? These are relevant questions in con• sidering the future of this region. The Soviet-South Korean relationship was characterized by two main contradictory tendencies. The first consisted of developing wide economic connections prior to official diplomatic recognition. The credit of $3 bil• lion granted by Seoul to Moscow, including $1 billion to pay interest on its external debt, was a step warmly welcomed. Although there were some who were not pleased with this step, Moscow viewed it as proof that South Korea would keep informal promises. The second tendency consisted of a conceptual deadlock in relations. Poor information about Soviet economic reforms, inexperience in doing business with centralized economies, and the vague prospects of the re• forms produced a deep discordance between the euphoria of South Korean businessmen and the reality of doing business in the USSR. Although Soviet-South Korean trade grew dramatically, from nothing to $1 billion, failed payments, incomprehensible powers of central and local bodies, and the incompetence of Soviet bureaucrats and businessmen have come to light. As a result, those who have burnt their fingers have become more cautious and those who did not are in no hurry to experience for them• selves the complications of entering socialist economies. Moscow's relations with Pyongyang are also complex. The USSR has potential influence on North Korea but the means of exerting this influence are not clear. The USSR cannot exert direct influence on its neighbor, and indirect influence on North Korea, to stimulate internal reforms, has little chance of success, nor does it base economic relations on purely commer• cial principles. The regrettable experience of economic reform in the USSR so far may in fact yield an opposite effect. For example, as the economic situation in the USSR worsened, the country returned to the rationing sys• tem that existed for a long time in North Korea. Although the cause was the incompetence of Soviet administration, not reform, the latter was in• terpreted by North Korean leaders as a main cause of the crisis.

61 62 Vasily V. Mikheev

In the mid-1980s, North Korean leaders were considering reforms that would allow individual non-state forms of property in agriculture, small production and services, as well as the involvement of foreign capital in open zones of joint enterprise. But in the end, the leaders of North Korea discarded reform because it could have threatened their monopoly on power. The political elite would lose its advantages and privileges. This is also true of South Korea where the privileges of the most conservative forces of the South are mainly based on the national syndrome of the "threat from the North." Moscow must separate its relations with the South and the North. This would provide freedom to maneuver within the tough confrontation between Pyongyang and Seoul. It must stabilize its relationship with North Korea, but not through a military basis. Rather the relationship should be on pragmatism and North Korea's interest in economic cooperation. Under no circumstances should Russia participate in attempts to isolate North Korea. In this way, it can become an intermediary in the dialogue between North and South. Moscow will be well-positioned to find an op• timum solution to the problems concerning the relationships between totalitarian and market structures, and the problems of reforming totali• tarianism using its own experience in reform and that in Eastern Europe. In this context, multilateral cooperation in the development of the Far East could be one of the most efficient forms of Moscow's indirect in• fluence on the situation in Korea. The economic reform initiated by the Soviet government and more vigorously in many of the republics has given much hope to many partners, and put in motion a process of interesting proposals, e.g., tripartite cooperation on the Tumen River, the exploita• tion of Far East natural resources, and South Korean investment in this region. But there are reasons to question if tripartite forms of cooperation are practical. This skepticism is based on the contradictions and incom• patibilities between the motivation mechanisms of the market and com• mand economies. In the market economy, profit is the main goal of production, and if the state offers guarantees, this builds confidence in the private sector. In the command economy, a system of distribution of raw materials, capital, and manpower is operative and the goal of the producers is to fulfill the order of higher administrative bodies. Naturally, the administrative system can invest additional resources in a particular project, establishing special conditions for it. But this system does not guarantee that the connections with other sectors of the economy will work without interruption, because all enterprises cannot have the same prior• ity. This is one of the main reasons why there are not many examples of effective cooperation between market and command economies. The situation in North Korea is worse than that in the Russian Far The Korean Peninsula and the Russian Far East 63

East. The administrative system in this country serves the economic in• terests of the North Korean establishment, but this country is less ready than the Far East to fulfill important economic projects. It depends on imported energy supplies, and weather can wreak havoc with food produc• tion. These factors make the North Korean economy very vulnerable to distortion and interruptions in supply. Moreover, few enterprises have per• mission to act freely on the international market in a normal manner, and even then they must render an account to the administration of their ac• tivities.

RUSSIAN-SOUTH KOREA ECONOMIC COOPERATION Russia has placed great hopes on the development of economic relations with South Korea, and the population and economic institutions of the Far East have displayed a keen interest in such cooperation. Direct eco• nomic relations have existed since 1988. While relations were improving, a Soviet Chamber of Commerce and Industries for exchange of business information and consultation was formed and delegations of businessmen were exchanged. Coordination of the most promising areas for coopera• tion was accomplished through the Soviet-South Korean Council for Eco• nomic Cooperation and the Korean-Soviet Association, and several economic institutions in both countries established close contacts. In De• cember 1988, the USSR Chamber of Commerce and Industries and the Korean Trade Association signed an agreement on cooperation. Soviet-Korean trade increased from $164 million in 1987 to almost $1 billion in 1990. The main exports from the area that was once the Soviet Union are raw materials such as coking coal, cast iron, nickel, aluminum, timber, and fertilizers. Imports from South Korea include mainly finished articles and services, e.g., ship-repair works and ship building, equipment for videorecorder production, electromotors for domestic appliances, elec• tronic and electrotechnical wares, and footwear. Investment cooperation and coproduction on a commercial basis has recently begun. South Korean companies are mostly interested in organizing joint ventures for exploita• tion of natural resources derived from coal, gas, timber, and fish, and manufacturing of consumer goods such as textiles and electronic equip• ment. Among existing joint ventures are one in timber cutting (1 million cubic meters) with Hyundai, and another with Jindo in the coproduction of fur articles. Assembly of color television sets and videorecorders from South Korean elements in some Russian cities is also ongoing. Other projects about to be implemented include: • Tobolsk petrochemical plant construction (Hyundai, $1.5 to $2.0 billion) 64 Vasily V. Mikheev

• Exploitation of gas deposits in Yakutia and gas-main construction (Hyundai, $15 billion) • Exploitation of coal deposits (Hyundai and Taeson) • Cellulose and paper plants in the Far East to produce 300,000 tons a year of cellulose (Hyundai, $700 million) • Plants for assembling personal computers in the Far East (Hyundai, $4 to $5 million) • Coproduction (technological input from South Korea) of color TV sets and refrigerators • Several joint ventures that will produce washing machines, clothes, medical instruments, and fish processing equipment • Supply of consumer goods to Russia South Korean companies will also help set up infrastructure for tourism and international business, and develop roads and means of communica• tion. In the future, cooperation in science and technology, particularly in the commercialization of Russian scientific potential in biotechnology, soft• ware, the space industry, and low temperature physics could be the most important areas of cooperation. Traditional forms of cooperation, such as exchange of specialists, information, and trading of licenses will also continue. Regional cooperation has just begun, i.e., joint activities between lo• cal government bodies and their South Korean partners to develop Far Eastern resources, including the processing of raw materials and building of public amenities. There is good potential for coastal trade with small and medium South Korean companies that are interested in establishing business contacts with the Primorski and Khabarovsk regions and with Sakhalin. This coastal trade is organized by local government bodies and South Korean producers' associations and cooperative societies, not only individual Korean companies. The South Korean credit of $3 billion granted should stimulate such contacts.

ECONOMIC RELATIONSHIPS WITH NORTH KOREA More than 40 percent of North Korean exports and about 60 percent of its foreign investment has been with the USSR. In 1990, USSR-North Korean trade reached 1.2 billion rubles ($2 billion), having decreased, in comparison with 1989, from 1.5 billion rubles ($2.5 billion). Most of the North Korean economy's demand for machinery, equipment, and energy was satisfied by the Soviet Union. The USSR imported North Korean steel, rolled metal, building materials, nonmetallic minerals, and articles produced by light industry. About 10 percent of the Soviet metallurgy industry used magnesite clinker received from North Korea. USSR technical assistance The Korean Peninsula and the Russian Far East 65 to North Korea was also considerable. With Soviet help, more than 70 fac• tories were built, which produce 25 percent of North Korea's industrial goods, including 60 percent of its electric power, 50 percent of its coal and oil products, 30 percent of its steel, and from 10 to 20 percent of its fer• rous metals, chemical fertilizers, and cast iron. However, further progress in cooperation is hampered by the inabil• ity of the administrative systems to cooperate and the resultant complica• tions in the bilateral relationship. Every year North Korea failed to supply the agreed amounts of zinc, lead, magnesite clinker, and other valuable goods. Incomplete deliveries meant Soviet enterprises could not fulfill their production quotas. North Korea has had a chronic negative balance of trade with the USSR. The question of debt repayment will become partic• ularly sharp in the early nineties when the bulk of North Korean payments comes due. In 1991 North Korea owed 800 million rubles based on the previ• ously granted credits. North Korea has been nominally paying its credit debts during recent years, but according to trade agreements, the debt pay• ments from the credits gained by delivery of Korean goods were turned immediately into new debts. The efficiency of cooperation is low. North Korean institutions are unable to realize the potential of the production capacities created with Soviet help and to guarantee production at projected levels. In 1989-90, for example, the mechanical engineering, chemical, and petrochemical plants built with Soviet assistance were operating at 50 percent or less of capacity. The inefficiency of bilateral relations is stimulating new approaches. For instance, the Soviet Union receives finished textiles in exchange for raw materials. This type of exchange is supposed to become one of the most important forms of direct relations between Soviet and North Korean enterprises. As a new area of cooperation, some North Korean building companies have participated in the construction of public amenities and production units in the Far East. This form of cooperation was designed to help North Korea pay its debt to the Soviet Union and was initiated by an 8 August 1989 Soviet-North Korean interstate agreement concern• ing principles of cooperation in building projects. The agreement covered hotels in Khabarovsk, Vladivostok, and Nakhodka, and a circus in Khabarovsk. According to the terms of the agreement, 50 percent of the contract costs of the construction facilities offered by North Korean com• panies will be used to pay the country's debt arising from previously granted credits. As of mid-1991 there were still about 4,000 Soviet economic ad• visers and technical experts in North Korea, and North Korea has about 16,000 to 20,000 forestry workers in the Far East around Khabarovsk. It also sends 2,000 to 4,000 seasonal agricultural workers to Russia annually. Russian-North Korean economic relations are also developing in other 66 Vasily V. Mikheev areas, e.g., mechanical engineering, ship repairing, medicine, and fishing. Specific examples include some North Korean machine-building plants producing simple articles or elements for delivery to Russia according to Russian design using Russian components and materials; repair of Rus• sian ships in North Korean shipyards; joint cultivation of vegetables, soy• bean, and food grains on the farms in the Primorski, Khabarovsk, and Amur regions; joint production in mariculture and fish processing; con• sulting rooms for oriental medicine in Russian cities; and joint restaur• ants with Korean cuisine. A retrospective analysis of Soviet assistance to North Korea reveals the defects of the command-administrative system. The approach focused on growth of capital construction instead of full exploitation and modern• ization of new capacities based on new technology. The structure of the technical assistance was not rational and in fact stimulated the growth of the military-industrial complex. For example, 60 percent of Soviet credits was invested in energy-related industries and the ferrous metal industry, 10 percent in mechanical engineering, only 3 percent in light industry, and nothing in agriculture. Many production units were built without taking into account available raw materials, technology, and labor. Today they are standing idle due to shortages of these essential ingredients. The com• bined strategy did not stimulate the creation of a competitive export poten• tial, but instead favored import substitution. As part of its plan to change the basis of its trade with all socialist countries to world prices and free convertible currency, on 2 November 1990, an agreement was signed with North Korea specifying that from 1 January 1991, both countries will implement new terms of mutual trade. Henceforward payments are to be made separately for each deal without balancing them at the state level. At the same time North Korea's debt is to be evaluated in freely convertible currency. Because there is no mar• ket reform in North Korea, the November agreement had shocking after• effects for Soviet-North Korean commercial relations. Foreign economic institutions of both countries were in a state of total confusion since Janu• ary 1991 and trade decreased drastically. Neither export nor import con• tracts had been signed by February. They could not coordinate their method of evaluating contract prices and the exchange rate of rubles to dollars. In traditional fashion, the same institutions were waiting for their govern• ments to coordinate the evaluation rate. Talks on this topic, as well as those related to the evaluation of the state debt were delaying any progress. Mean• while delivery of oil, coke, coking coal, tires, TNT, etc., was delayed, with heavy consequences for the North Korean economy. By October, North Korea's largest oil refinery was shut down. North Korea imported 440,000 tons of crude oil from the Soviet Union last year but imports in the First half of 1991 totalled only 40,000 tons. Many Russian enterprises that were The Korean Peninsula and the Russian Far East 67 dependent on North Korean materials were in an analogous situation. There are two ways out of this situation. The first, which is the most probable, assumes that the Russian and North Korean state structures fi• nally come to an understanding and that trade, although not very active, will nevertheless be revived. The second assumes that Russian economic reform will be accelerated and that the state monopoly in North Korea will weaken. The new principles of price formation and mutual trade pay• ments apply only to this version. Therefore, in economics, as well as in politics, a pause is coming in the Russia-North Korea relationship. Within this period, the situation in North Korea should be studied thoroughly and Russia must be prepared for changes in its approaches if the North Korean reality requires them. However, the North Korean situation should be kept in perspective. North Korea's debt to the USSR is only $1.3 million, while the trade volume is about $2 billion. In addition, North Korea is receiving a $3 billion loan from South Korea. So North Korea's dependence on the USSR should not be overestimated. The benefits that Russia may receive from South Korea will be very short-lived, since there is a huge size difference between the two countries. When that relationship crumbles, it will be too late for Russia to turn to North Korea. Thus, North Korea and Russia must maintain good relations. North Korea may be seen as Russia's wife, and South Korea as Russia's mistress. The task is to promote good relations between the wife and the mistress. What will be Russia's policy toward Korea? Russia will still be a power with more than 70 percent of the former Soviet Union's territory and popu• lation. As such it will become a successor of the Soviet Union in interna• tional relations, including activity at the United Nations. But the new Russia can develop policies free from the restraints of the old Soviet Union. Rus• sia inherited diplomatic relations with both Korean states and thus can play the same intermediary role initially proposed for the Soviet Union. In its search for a new international position, Russia can revise out-of- date articles in the Soviet-North Korea security treaty. It also has an op• portunity to balance its relations with the North and South by signing new friendship agreements with Pyongyang and Seoul based on the new politi• cal thinking. South Korea will obviously play a more important role economically for Russia than North Korea. And economic cooperation between Russia and South Korea—the former now freed from the interference of a central government—will grow rapidly. The major problem for economic cooper• ation is the extension of South Korean credit to the USSR. It could be reasonable for South Korea to suspend credit to the Soviet Union now so that it may transfer it to the new Russian authorities. The situation with debt payments could then become much clearer. CHINA AND THE FAR EAST

John Quansheng Zhao

In the years since World War II, the Sino-Soviet relationship has under• gone more dramatic changes than perhaps any other bilateral relationship in the theater of world affairs. Since the establishment of the People's Republic of China (PRC) in 1949, the relationship with the Soviet Union has come full circle from the political and military alliance in the 1950s, to the bitter ideological debates and the bloody border clash of the 1960s and the anti-hegemony campaign of the 1970s, to the rapprochement and normalization of relations of the late 1980s, and finally a progressive de• velopment of bilateral relations in the early 1990s. However, the momen• tous developments in the Soviet Union and China's reaction to them may mark the beginning of a new cycle in the relationship. Beijing is generally negative toward the transformation that the Soviet Union and Eastern Eu• rope is undergoing.

DECENTRALIZATION OF POWER In China, the relationship between the central government and local elites and the emerging role of entrenched local interest in foreign relations, for• eign economic relations in particular, is becoming important. Some areas are "open" e.g., coastal cities or provinces in east and south China, such as Guangdong, Fujian, Shandong, Shanghai, and Tianjin, and also in the provinces and regions bordering the Far East including Heilongjiang, Ji- lin, and Xinjiang. Local governments in these areas have obtained a rela• tively higher degree of authority in terms of local economic activities, and external economic relations. The central government, for example, permits these local governments to retain a proportion of the foreign exchange they earn in order to encourage exports and local economic development. With greater access to foreign currency, provinces along the Sino-Far East border could enjoy unprecedented autonomy in conducting external economic ac• tivities. A good example is the large trade fair, specifically designed for developing economic relations with the USSR and held in June 1990 in Harbin, capital of Heilongjiang Province. Every province, municipality, and autonomous region of China sent delegations to the fair. The fair dis• played 27,000 varieties of commodities and, in total, proposed several thou• sand cooperative projects between the two countries. The fair generated 3.8 billion Swiss francs worth of transactions/1

68 China and the Far East 69

The struggle to retain and strengthen local power has not slowed. There have been frequent reports of resistance on the part of provincial officials to the efforts of the central government to tighten control over local eco• nomic and external activities. In some cases several provincial governors have worked together to oppose recentralization of certain economic poli• cies. Provincial power has also been strengthened by the promotion to lead• ing positions at the center of provincial governors or first party secretaries. For example, before becoming premier of the State Council, and later the party general secretary, Zhao Ziyang served for a long time as provincial boss in Guangdong, Inner Mongolia, and Sichuan. The current party gen• eral secretary, Jiang Zemin, was previously first secretary of Shanghai. Li Ruihuan, member of the Politburo's Standing Committee was promoted from the positions of mayor and first party secretary of Tianjing. These promotions have inevitably increased the influence of local interests and strengthened the ties between the center and the local level. Nevertheless, one cannot overemphasize the fact that the participation of local elites is primarily limited to local affairs and can be further limited by the central government at any time. Indeed, starting from 1 January 1991, Beijing has decided to remove export subsidies, a measure designed to crimp the grow• ing independence of regional governments.42

CHINA'S NORTHEAST STRATEGY43 China's Northeast Asia strategy solidified in 1985-86 due to a conjunc• tion of several international and domestic factors. Demands generated by the economic reforms in China's northeast, and a decision to reduce petrol• eum exports44 stimulated a new trade strategy: to establish a trade network in Northeast Asia between the Soviet Far East, China's northeast (Man• churia), South Korea, and Japan (and eventually incorporating North Korea) whose intent and effect would be to move the region toward "dealignment." Politically motivated trade between Moscow and Beijing, which dates back to the 1700s, essentially involved only luxury items. Sino-Russian bor• der trade, by contrast, is a much older practice and has involved daily neces• sities. This trade flowed from a conjunction of three distinct geographic areas—the forests of the north, the steppes of the west, and the agricul• tural areas of the south. The actual point of confluence was located near Ch'angch'un in Jilin Province, and historically this city was the hub of trade. With the strengthening of political boundaries, the northward ex• pansion of agriculture, and the construction of railroads, the city of Har• bin and the province of Heilongjiang have become the focal point. Much of Sino-Soviet border trade in the 1957-66 period valued at approximately 145 million yuan (US$38.6 million),45 was carried out between the 70 John Quansheng Zhao

Khabarovsk region and Heilongjiang. Officially suspended in 1968 because of the Sino-Soviet border conflict, although perhaps continuing on a more limited scale, trade was officially reinstituted after an April 1982 exchange of notes and the establishment of a trade corporation in Heilongjiang. Sino- Soviet trade was sought by China's inland areas because of China's poor infrastructure, lack of rail transport to move products from inland areas to the coast, and because of the preferential treatment given products of the coastal areas at China's ports in trade with the Asia-Pacific region.46 The Soviet Union provided a market for Chinese exports such as textiles that face import restrictions in the United States, Japan, Canada, and Eu• rope. China's search for export markets appeared to drive the expansion of Sino-Soviet economic relations, although barter trade imposed limits on this. The easing of tension in the region allowed this trade to expand. The existence of trade networks were a contributing factor to the rapid unleashing of trade demand under the economic reforms. Sino-Soviet trade expanded so fast that by 1986 border trade constituted only 16 percent of total overall trade valued at $2.64 billion.47 China's exports to the Soviet Union included mainly agricultural products, chemicals, and light industrial products. Its imports have cen• tered on those commodities in short supply in China and too energy- intensive for Chinese industry to produce in sufficient quantities. These included rolled steel, timber, chemical fertilizers, and cement. The two coun• tries' trade complementarity arises from China's rejection of the Soviet model's emphasis on heavy industry and its decision to restructure its econ• omy to emphasize light industrial products and consumer goods that are less energy-intensive than heavy industry. Trade imbalances do not occur because trade volumes are fixed in annual agreements and have taken the form of barter trade. The recent inclusion of petroleum among Chinese imports has been on a limited scale, but expanded following a December 1986 Chinese decision to be more flexible on petroleum imports and ex• ports.48 Contracts worth $500 million were signed in October 1986 for telecommunications equipment, power plant generators, and railway locomotives leading China to seek loans from the Soviet Union for the first time since the 1950s. The barrier to expanding Sino-Soviet trade fur• ther will remain the Soviet Union's capacity to provide loans in sufficient quantities to sustain this trend.

THE CHINESE NORTHEAST AS A "CONTINENTAL BRIDGE" China's long-range plan for the region projects an international division of labor between northeast China, Mongolia, the Russian Far East, Japan, and the Korean peninsula, with the Chinese northeast as its hub.49 The China and the Far East 71 plan addresses the development needs of Heilongjiang for technology, in• vestment and trade, and Liaoning's need for markets. The opening up of the port of Dalian—allowing it to manage imports and exports indepen• dently—presents an additional route for connecting the resource-rich Far East with Japan, and provides a means for involving Japan in developing the natural resources of both the Far East and Heilongjiang.50 China would thus be a critical link in the "Northeast continental bridge," a continuous land route that would give Russia a warm water port and access to the Asia-Pacific market through Dalian, and also provide Japan with a land route and access to Europe. The plan foresees a triangular compensation-and-barter trade rela• tionship under which Heilongjiang will obtain machinery, capital, and tech• nology from Japan to upgrade its textiles, food-processing, and other light-industrial factories, and then sell the finished consumer products to the Far East in exchange for timber, petroleum, and other resources. The province could then use some of the Far East products to pay Japan. Al• ternatively, Heilongjiang could be a major processing center, importing raw materials from Russia and exporting the finished products to Japan.51 Aside from the economic benefits is a strong interest in lessening tensions in Northeast Asia and developing a peaceful environment conducive to Chinese industrialization. However, it is not clear that a trilateral arrange• ment is acceptable to the other nations involved as a substitute for bilat• eral trade relations. China has experimented with agricultural reform that made the ini• tial significant impact on trade possibilities for the northeast, generating a surplus that permitted the export of foodstuffs. This complements the needs of the Far East where the recently completed sections of the Baikal- Amur Railway (BAM) zone must import two-thirds of their food. The region traditionally has relied on northeastern China for this. The indus• trial reforms created demand for technology imports, which in turn led to the need for trade reform.

PROVINCES FOLLOW OPEN DOOR POLICY IN THE NORTHEAST The three provinces of the northeast—Heilongjiang, Jilin, and Liaoning— all responded enthusiastically to the opportunities presented by the liber• alization and decentralization of authority over foreign economic relations in 1984. The northeastern region clearly benefited from the open door pol• icy, especially Heilongjiang in Sino-Soviet trade. The province's exports in 1985 were $412.69 million, a 21.5 percent increase over 1984; imports were $93.27 million, an 88.7 percent increase over the previous year. Of total export volume in 1985, the Soviet Union's share was 36.4 percent, 72 John Quansheng Zhao

Japan 16 percent, Hong Kong 19 percent, Southeast Asia 8.8 percent, and North Korea 6.7 percent. Crude and refined oil represented 61 percent of exports followed by agricultural products at 27 percent. Border trade be• tween Heilongjiang and the Far East resembles the province's overall trade composition except for petroleum. In 1985 exports—food products and consumer goods—to the Far East were $13.3 million, 16.6 percent more than 1984, and imports were $6.79 million, 16 percent over 1984. Jilin's exports in 1985 were valued at $427 million, an increase of 71 percent over 1984. They consisted of 81.2 percent agricultural products, 12.4 percent light industrial goods, 6.4 percent heavy industry products, and found markets primarily in Japan, the United States, the Soviet Un• ion, Hong Kong, and Southeast Asia. Import volume was $123 million, increasing 33.3 percent over 1984, and included steel, chemical fertilizer, vehicles, and televisions. Liaoning's exports in 1985, valued at $5.01 billion, constituted 20 per• cent of total Chinese exports and were distributed as follows: Japan 55.33 percent, United States 11.95 percent, Singapore 7.97 percent, Hong Kong and Macao 6.77 percent, EEC 3.23 percent. Primary exports were steel wire, machinery, petroleum products, and light industrial goods. Liaoning's im• ports in 1985, valued at $340 million, were up 280 percent over 1984. Within Liaoning, two cities are given autonomy in managing their own foreign economic relations, Shenyang and Dalian. Shenyang's export volume in 1985 reached $69.52 million, more than half of which went to Japan and Hong Kong, while the United States and the Soviet Union were the other two major trading partners. The total volume of imports in 1985 reached $111.88 million. Dalian, an open coastal city in 1985, exported $420 mil• lion worth of goods ($78.6 million handled by Dalian itself), of which petroleum products made up $290 million worth. Imports were $5,272 mil• lion." Trilateralization of trade is an effective domestic political strategy since it does not pose increased Soviet trade as an alternative to trade with Western industrialized economies and Japan, but rather as complemen• tary to it, thereby maintaining the domestic consensus for the open door policy. Opening China's inner Asian border to increased trade prevents the benefits of the open door from accruing only to the coastal areas. Trilater• alization may also be a solution to China's trade deficit and dependence on Japan which China seeks to decrease. Nevertheless, China is moving more toward interdependence than independence, and as a result, previ• ous barriers to a more open trading system have been transformed. MONGOLIA AND THE FAR EAST

Sh. Sandag and Mark J. Valencia

Mongolia wishes to break with its isolationist past and overdependence on Russia. Putting its own version of glasnost and perestroika into prac• tice, Ulan Bator has declared that it will develop economic relations with any country regardless of ideology and will open wide the door to foreign investment. It wants to be considered a part of Northeast Asia, to be part of the detente occurring there, and to be included in evolving schemes of economic cooperation such as PECC and APEC. Sandwiched between Russia and China, Mongolia is the fifteenth larg• est independent country in the world extending over 600,000 mi2 of moun• tains, grasslands, and desert. But it has just 2.1 million people and US$2.2 billion GDP in 1988. It has extremely poor basic infrastructure, a small market, a paucity of management and administrative skills, financial bot• tlenecks, poor labor ethics, and an insufficient information base. Since Mongolia's independence in 1921, the Soviet Union dominated its political and economic affairs and prevented it from joining the world market and gaining access to modern technology. About 80 percent of Mon• golia's trade has been with the USSR and 18 percent with Eastern Europe.

FOREIGN RELATIONS . Mongolia established relations with the United States in 1987 and more recently with South Korea. It has joined the Asian Development Bank and is considering joining the Berne Convention on Intellectual Property, the Stockholm Agreement, GATT, and others. The Mongolian head of state visited China and the USSR, and the chairman of the Council of Ministers visited Japan. It has won most-favored-nation status from Japan and the United States. In August 1991, Toshiki Kaifu became Japan's first prime minister to visit Mongolia, and US. Secretary of State James Baker has visited twice, greatly helping Mongolia's attempts to broaden its political and economic relations. Mongolia's relations with China—hostile since the Sino-Soviet rift— were normalized in May 1989. Chinese President Yang Shang Kun made a state visit to Mongolia in late August. Mongolia has proposed measures to bring about improved relations in the Northeast Asian region. Specifi• cally its Mongolian initiative seeks to promote peace and security among the former USSR, the United States, China, Japan, Canada, North Korea,

73 74 Sh. Sandag and Mark J. Valencia

South Korea, and Mongolia by setting up permanent machinery for regu• lar consultations on pressing issues of mutual concern. Mongolia hopes to turn its precarious geographic position between two big powers into an advantage, realizing Owen Lattimore's 40-year-old vision of Mongolia serv• ing as a bridge between China and Russia.

ECONOMIC RELATIONS At present Mongolia can only play a limited role in regional economic cooperation. The economy is based on agriculture and natural resources, reflected in its exports—mainly livestock, animal products, wool, and hides, plus minerals—fluorospar, nonferrous metals, and phosphates. Mongo• lia's main imports include machinery, petroleum, cloth, and building materials. However, Mongolia has great natural resource potential. The largest project in the country is the Erdenet mining and processing complex—a Mongolian-Soviet joint venture, operating from the early 1980s and founded on the large copper-molybdenum deposits at Erdenetiin Ovoo in the Bul- gan aimak, northern Mongolia. It produces some 350,000 tons of copper concentrate and 3,300 tons of molybdenum concentrate per year. The other Mongol-Soviet joint venture is the "Mongolsovtsvetmet" corporation, including the Bor Under mining and ore dressing operation, three enterprises for mining flourspar of different qualities—Bern, Khar Airag, and Khajuu Ulaan, and the Tolgoit alluvial gold plant, all in eastern Mongolia. This corporation produces an annual output of about 500,000 tons of fluorspar ore of various qualities. "Mongol-Czechoslovakmetal" is undertaking geological exploration in the country, as well as the mining and processing of the Modot alluvial tin deposits, and the Chuluut Tsagaan Del fluorspar mine in eastern Mongolia. A Mongol-Bulgarian joint ven• ture was established to explore the Uvur Chuluut and Muhar Ereg alluvial gold deposits in Bajan-Khongor Aimag in southern Mongolia. At present, they are processing about 200,000 m3 of gold-bearing sand. Known mineral resources include coal, copper, molybdenum, phosphates, tin, nickel, zinc, tungsten, fluorospar, gold, and silver. There is also petroleum potential. British Petroleum is exploring for oil in the north, east, and southeast of the country, and Amoco and Chevron are waiting for a law on oil explora• tion to be passed by Parliament before negotiating contracts. Very prelimi• nary estimates of oil reserves are 200 million barrels of which perhaps 40 percent can be recovered. The country's eastern, western, and central regions abound with coal. Large electric power stations and coal processing facto• ries could be based on huge deposits like those at Tavan-Tolgoi, Baga-Nuur, Shivee-Ovoo, and Saikhan-Ovoo, where geological survey work has already started. The central part of Mongolia is rich in nonferrous metals. In eastern Mongolia and the Far East 75

Mongolia, promising resources include two polymetal deposits near Choibalsan, and a copper-molybdenum deposit near Sain-Shand in East Gobi aimak (province) and a tungsten-molybdenum deposit at Undur Tsagaan. Mining and processing factories could one day process these deposits. Mongolia wants to take advantage of its legendary beauty. Foreign investors could develop ecotourism as an alternative to the hunting trips popular with some today. Tourist camps and health resorts could com• bine wilderness holidays with Mongolian culture. Such tourism is being promoted by the Mongolian Association for the Conservation of Nature and the Environment—a 700,000 strong nongovernmental organization. Joint ventures in the food, mining, chemical, and machine industries also are possible. Particularly desired arc foreign partners for production of machines for cattle-breeding and manufacturing of foodstuffs, com• munication facilities, measuring equipment, and some electronic goods. In the mining industry, high-tech processing is needed to smelt and fur• ther process lead and zinc from polymetallic ores in the east of the coun• try. Also targeted is the establishment of silver mining and processing in the west of the country. Mongolia also hopes to export coking coal from Tavan-Tolgoi and to process rare metals such as silicon as basic materials for microelectronics, optics, and other high-tech industries.

RUSSIA AND CHINA Meanwhile, Mongolia is not neglecting its centuries-old cooperation with its two neighbors—Russia and China—and intends that 50 percent of its trade should remain with these traditional partners. It agreed with the USSR to use world market prices and convertible currencies in its trade and com• mercial operations from 1991. The two countries have also agreed to re• structure bilateral cooperation and emphasize mutually advantageous projects in mining, food industries, agriculture, transport and communi• cation, and the tourism and service sector. Considerable progress is being achieved in developing frontier trade and cooperation with these countries. Since normalization of relations with China, border trade has increased tenfold, train service has been initiated, and Mongolians visit their rela• tives in China in droves. However, problems in Mongolia's economic and even political relations with Russia loom. Soviet authorities revealed that Mongolia's debt to the USSR is US$15.8 billion. There is cooperation along the border. Border trade has been carried out with the Soviet Union since 1974, covering the Buryat and Tuva Au• tonomous Soviet Socialist Republics (ASSRs), and the Altai, Irkutsk, and Chita regions. Mongolia purchases spare parts, equipment, drugs, fertiliz• ers, and gene pools of animals from Russia. Railways and roads cross the 76 Sh. Sandag and Mark J. Valencia border, cattle forage across boundary lines, and people cross frequently to render help with the workforce and equipment during hay harvesting, and to repair equipment and supply spares for the timber and power in• dustries. Mongolia granted hayfields and grazing grounds in its territory to several state farms of the Buryat ASSR and Chita region and also deli• vered mixed feed, silage, grain, gene pools and sheep, and unused parts for machinery and equipment. An agreement on border-trade development in 1988 broadened the scope of organizations entitled to conduct border trade and enabled the development of new forms of economic interaction such as direct ties, production cooperation, establishment of joint enterprises, and economic amalgamations. Recently, a working group for border-trade development was founded under the intergovernmental Mongol-Soviet Commission for economic, scientific, and technological cooperation. Its tasks include the consideration and solution of problems concerning further growth of bor• der trade and providing unified management and control over it.

OPPORTUNITIES FOR COOPERATION Mongolia wants very much to join in the global economic integrationist trend in Northeast Asia, to aid its own economic and political opening. For trade with Northeast Asia, it needs access to China's coast, and China has agreed to provide Mongolia access to the port of Tianjin. The Trans- Mongolian Railway links Moscow, Ulan Bator, and Beijing. And the Baicheng-Arxan line could be connected to the eastern Mongolian line, thus shortening the route to Europe. Mongolia is considering declaring a special economic zone in eastern Mongolia to foster trade and develop• ment. It has even been suggested that Mongolia lease a small area for eco• nomic development to Japanese investors and businessmen, for example, in exchange for Mongolian use of a production site on Japan's coast. If Mongolia is to export oil, a 1,375 kilometer pipeline would need to be built to the China coast. Perhaps exported oil could be traded to South Korea in return for assistance in setting up a refinery system. Or, perhaps crude oil could be exchanged with China or Russia for refined products. One possibility is a triangular development zone including Irkutsk- Ulaan-Ude-Selenge aimak (one of the northern provinces of Mongolia) where infrastructure would be built for the exploitation of resources through joint ventures. Another idea is to construct a highway across the Mon• golian steppes from Ulan Bator to Tientsin, which would then be the short• est route to the sea for transporting goods. Another possibility for cooperation would be for Mongolia to par• ticipate in the Tumen River scheme proposed by China. This proposal would establish adjacent special economic zones in China, North Korea, and the Mongolia and the Far East 11

Soviet Union along the Tumen River basin. It would be designed to at• tract South Korean and Japanese capital, technology, and managerial ex• pertise to process natural resources from the Russian Far East using labor from North Korea and China. Products would be exported from the Tu• men River to markets in South Korea, Japan, and beyond. Mongolian mineral resources could be processed here with some of its own coal provid• ing the enormous energy required. Some of these ideas are obvious and realistic. Others are imaginative, if no less practical. Whatever schemes are developed, Mongolia's challenge is clear. It must spread its reputation and performance as an attractive eco• nomic partner as wide and well as the conquering armies of the most fa• mous Mongolian ever—Ghengis Khan. WESTERN CANADA AND THE FAR EAST

Robert E. Bedeski

POLITICAL CONTEXT Postwar Canadian-Soviet relations were marked by mutual distrust. Un• like the course of Sino-Canadian relations, where Canadian foreign pol• icy diverged considerably from U.S. policy, Ottawa's relations with Moscow have more closely paralleled the rhythm of Washington. This was largely because of a more synchronized view of the former Soviet Union as a threat, and because of Canadian participation in NATO. Even Canada's security focus was on the European Soviet Union and the Arctic frontier. The Pa• cific theater was, and remains, of relatively small concern to Canadian Armed Forces—already small in comparison to other NATO members. Canada has participated in RIMPAC exercises, but was not expected to play a major role in any war. With his Vladivostok speech, Gorbachev turned away from Brezhnev's treatment of the Far East as a military frontier, and presented his vision of it as a bridge to Asia. He has sought South Korean and Japanese par• ticipation in its economic development, with far greater success in Seoul than in Tokyo. Increasingly, Canadians also hope to play a role in restruc• turing, while recognizing the numerous pitfalls inherent in the transition away from rigid socialism. With the reduction of threat perception, trade and investment has become increasingly attractive for both sides. For Western Canada, this could present a new set of opportunities, especially with its sea proximity to the Far East. In several speeches, former foreign minister Joe Clark stressed the mul• tidimensional aspects of modern security. It is no longer merely a military concern, and requires "a shared sense on all sides that the survival of others is in the mutual best interest."" He proposed that "one means of enhanc• ing regional stability in the Asia-Pacific region would be the establishment of a system of cooperative security that would be self-reinforcing through the fostering of habits of cooperation, negotiation, and compromise—in short, a habit of dialogue—across the broadest possible spectrum of is• sues." The first meeting of seven nations' non-governmental organizations (NGOs) met in Victoria (6-9 April 1991) to hammer out themes for fur• ther discussions and workshops. Participants included delegates from the USSR, United States, PRC, South Korea, North Korea, Japan, and Can• ada. This meeting followed a Canadian Task Group visit 3-7 June 1990

78 Western Canada and the Far East 79

to Vladivostok—the largest Soviet naval base on the Pacific coast. The visit took place under the auspices of the military exchange agreement signed by Prime Minister Brian Mulroney in November 1989 during his visit to the USSR. It was part of the continuous series of confidence-building meas• ures (CBM) initiated in 1985 under the Stockholm Agreement.

TRADE Through the past two decades, Canada has enjoyed a comfortable trade surplus with the USSR, reaching a high of over C$2 billion in 1985. In 1989, the figure was C$568.2 million. Trade with the Soviet Union represents a minuscule 0.29 percent of Canada's total trade and places Canada at a competitive disadvantage with Western European countries, which have been important customers for Soviet energy products (table 6).54 Cana• dian businessmen set up the Canada-USSR Business Council in Novem• ber 1989 to take advantage of the bilateral relationship, and to facilitate realization of commercial opportunities. The Canadian Export Develop• ment Corporation extended a C$500 million line of credit to the Soviet Union, along with loans of up to 85 percent of funds needed by the Soviet enterprises to purchase Canadian goods. Commercial banks in Canada seek federal loan guarantees for the other 15 percent.55

Table 6. Canada's Trade with the USSR, 1989

Value Top five products (CSmillion)

Exports Cereals (wheat, grains) 511.7 Salt, sulphur, cement, etc. 39.3 Ore, slag, and ash 33.5 Wood pulp 29.4 Nuclear reactor equipment 18.9 TOTAL 685.3

Imports Natural and cultured pearls 38.7 Nickel 20.2 Mineral fuels and oil products 8.1 Ore, slag, and ash 7.9 Fish 6.2 TOTAL 117.5

Source: The Toronto Star, 30 May 1990. 80 Robert E. Bedeski

Few Canadian value-added goods have been exported to the Soviet Union, with the important exception of Canadian oil and gas technology and equipment. These were attractive because they were developed under similar conditions." Because of this similar resource-extraction orienta• tion, there is a market for technology exchange. Canadian Foremost Ltd. of Calgary is a partner in a project to build a 70-ton carrier for oil and gas pipeline construction in the Russian high Arctic. A Winnipeg firm is constructing a hotel in Leningrad, and was negotiating joint-venture agree• ments for other hotels. Canada's large trade surplus with the USSR was almost entirely due to wheat. In 1988 Canada sold $973 million worth of wheat or 22 percent of all its wheat exports to the Soviet Union and imported $156 million in Soviet products. The USSR had a five-year agreement to buy 25 million tons of Canadian wheat, which expired in 1991. Alberta and Saskatche• wan produce most of Canada's wheat.

DIVERSIFICATION In 1988, a provincial business journal publicized the growing potential of the Soviet Far East, and the possibility of its becoming a major competi• tor to British Columbia in supplying lumber and raw materials to Japan. Both the provincial and the federal government have recognized the need to diversify away from resource-based industries. The federal government has initiated the program of Western Economic Diversification Canada. Ottawa began the C$1.2 billion fund in August 1987, and had allotted C$675 million to 1,300 projects from Manitoba to British Columbia by early 1990. British Columbia had over 400 projects that have been given C$125 mil• lion. The projects are diverse, and extend from specialized software and armored diving suits to new food products and airplane parts. The federal and provincial governments help business through the Western Diversifi• cation Fund by providing no-interest loans. Both Canada and Russia are captives of their geography. Western Canada—especially British Columbia—has access to the growing prosperity of the Pacific Rim but relies largely on agricultural, forestry, and mineral resources for export. In the past two decades, these contributed to the prosperity of British Columbia. Although Vancouver has become a fast- growing center on the Pacific Rim, most of its attention has been focused on China, Japan, and Southeast Asia. Wheat sales from the prairie provinces of Alberta and Saskatchewan have gone to the USSR, but largely the European USSR. With the major financial resources concentrated in Ontario and Quebec, much of the major impetus for trade and investment has come from Toronto and Montreal. Western Canada has given little at• tention to the Soviet Far East. 84 Victor Fischer

Branch. Less than four hours flying time from Anchorage, it is designed to facilitate collaborative work by scientists from the Alaska and the Far East, as well as from other parts of the United States, Russia, and from other countries. While much of this scientific collaboration is invisible to the public, it constitutes the most solid and lasting of all relationships be• tween Alaska and Russia.

CULTURAL AND FRIENDSHIP TIES In spring 1986, Gennadi Gerasimov, then Novosti Press correspondent in Washington, D.C., accepted an invitation to Alaska from Juneau peace ac• tivist Dixie Belcher. Over the weeks he spent in the state, Gerasimov, soon to become a key Soviet Foreign ministry official, agreed with Belcher that people getting to know each other was an essential step toward peace be• tween the superpowers, and that art and culture were the appropriate ve• hicles. In the fall of that year, Belcher organized the "Alaska Performing Artists for Peace," a collection of 65 Alaskans, including Eskimo dancers, rock performers, and gospel and folk singers. Gerasimov opened the door, and the group performed to enthusiastic crowds in six Siberian and other Soviet towns. The following year, 1987, the Soviets began allowing some direct cross-border contacts. In August, Marathon swimmer Lynne Cox was permitted to swim from Little Diomede to Big Diomede Island together with an escort boat. In September, the National Oceanic and Atmospheric Administration research vessel Surveyor made a warmly received port call at Provideniya on Chukotka. The year 1988 saw real progress in Alaska's relationship with its western neighbor. • In April, the Alaska State Chamber of Commerce, through its Siber• ian Gateway Project, and the Alaska Office of International Trade sponsored a conference on Alaska-Siberia relations, featuring Ger• asimov, who made one of his four Alaska visits. • In June, an Alaska Airlines jet carried Alaska public officials, Eski• mos with relatives in Chukotka, and national media representatives on a 30 minute "Friendship Flight" from Nome to Provideniya. • In October, Alaska Commissioner of Health and Social Services Myra Munson and director Ted Mala of the University of Alaska's Insti• tute for Circumpolar Health Studies led a delegation to Chukotka and to Magadan, where a scientific cooperation protocol was signed. • Also in October, an Alaska trade delegation, headed by the gover• nor's chief of staff, visited Khabarovsk, Nakhodka, and Vladivostok. A sister-state agreement was signed with Khabarovski Kray, and cooperation protocols were signed with the other regions. • In November, a 15-person delegation from Magadan arrived in Nome Alaska and the Far East 85

on a Soviet research vessel. The group, including Magadan region's Governor Vyacheslav Kobets, flew to Anchorage and met with Alas• ka Governor Steve Cowper. Interest was expressed in joint venture opportunities in tourism, reindeer processing, mining, and commu• nications. These ice-breaking exchanges were the basis for a major event in Febru• ary 1989: a week-long visit by close to a hundred guests who came to An• chorage by a chartered Aeroflot flight from Moscow and Magadan. They included a Russian folk group and Eskimo dancers who joined local choir groups and dancers for a gala concert, a top Soviet rock group that per• formed in Anchorage's sports arena before a crowd of thousands, top regional leaders, and high Soviet officials who also went to Juneau for meetings with the governor and state legislators, business delegates, school children and teachers, and a large contingent of print and TV media. The event was billed "Soviet/American Reunion 1989." Anchorage received the visitors with enthusiasm. Most of them lived in private homes and had their first exposure to American life. When people parted, it was with tears and lasting friendships. This people-to-people event was the first of many large-scale visita• tions. Now the presence of Russians has become so routine that the public accepts it as part of daily life. Yet the excitement continues, especially on occasions such as when Fairbanks hosts its sister-city Yakutsk, or when Juneau (Alaska's capital with 30,000 people) opens its arms to a delega• tion of 150 from its sister-city Vladivostok (700,000). The following are some other examples: • Anchorage Rotarians have made three visits a year to Magadan in groups of 40 or more. They organized a Rotary Club there, and this has given rise to massive return visits to this side. • Hundreds of students and teachers have been involved in exchanges, extending from large cities to small hamlets on both sides. Most Alaskans have gone to the Far East, though some have visited schools as far away as St. Petersburg and Kishinev. • An international reserve, called the Beringia Heritage Park, is being established along the Seward and Chukotka Peninsulas in accordance with a 1990 agreement signed by President George Bush and Presi• dent Mikhail Gorbachev. • The University of Alaska has a variety of cooperation agreements, covering faculty and student exchanges and research, with higher edu• cation institutions in Yakutsk, Vladivostok, Novosibirsk, and else• where. The university is assisting Magadan authorities in establishing a pedagogical university in that region. • Sports events occur all the time: kayak and umiak voyages between Chukotka and Alaska; ski and dog team expeditions; exchanges of 86 Victor Fischer

hockey, basketball, and other teams; a mass swim across the Bering Strait between the two Diomede Islands. • An ecumenical center for religion and culture is being jointly devel• oped in Magadan; the project is spearheaded by Anchorage Arch• bishop Hurley and the Magadan Religious Affairs Department. • Four conferences at University of Alaska Fairbanks attracted more than 150 participants from the Soviet Union. • Nome, Alaska, businesses accept rubles from Russians, which are then sold to American tourists. • A close relationship has been established by several Eskimo villages and native regional corporations in Western Alaska with Eskimo and Chukchi communities and organizations in Chukotka. Aleut ties are similarly evolving. • A total of close to 9,000 people have flown directly between Alaska and the Russian Far East.

THE ALASKA-FAR EAST TRADE CONNECTION: TWO EXAMPLES Community Enterprise Development Corporation of Alaska (CEDC) was asked to help with disposal of goods brought over by the Russians from Magadan. CEDC is a statewide, community-owned, non-profit organiza• tion devoted to rural development. It controls a number of profit-making subsidiaries, including Alaska Commercial Company (ACC), founded almost 200 years earlier as the Russian American Company, and retail stores in rural Alaska. After seeing the goods and becoming acquainted with as• sociated problems such as import duties, indeterminate prices, uneven qual• ity, and limited quantities, CEDC decided not to participate in disposal of those particular products. They did, however, sign a protocol express• ing a willingness to further explore business possibilities. An invitation came immediately after the group returned home, and representatives of Alaskan companies were in Magadan within a month after the first meetings. Their concerns about doing business with the Rus• sians only grew after further exposure. Impediments were due principally to their counterparts* total lack of understanding of how American busi• nesses function. Basic concepts of wholesaling and retailing, packaging, pricing, accounting, financing, costs and profits, and others that Ameri• cans view as fundamental were simply lacking. CEDC did agree with local authorities to establish a joint trading venture—Magadan-Alaska—to import goods and wholesale them out of Anchorage. Part of the arrangement, insisted on by CEDC, was a busi• ness management training program. Under this program, promising mid- level mangers are detailed from Magadan to Alaska for practical, hands- Alaska and the Far East 87 on experience in every aspect of running a business. As a result of the train• ing, there are Far East citizens with whom CEDC staff can communicate intelligently and who can help Magadan-Alaska function in the American environment. One trainee, who has been in the program for almost two years, has virtually become an American businessman and serves as Alas• ka representative for a number of Russian enterprises and organizations. Magadan-Alaska, the joint venture, has in the meantime been on a steady, though slow, track. This has been due largely to unreliability and frequent unavailability of goods shipments from the Far East. The com• pany has concentrated on import of high quality handicrafts to the United States. It quickly became apparent that there were not enough sources in Magadan and the Far East to provide a steady supply for export. Accord• ingly, a nationwide buying program was instituted, extending to the Cau• casus and even to Krasnodar in southeast Russia. Magadan-Alaska is currently negotiating with a number of product sources to assure continu• ing supplies of goods. Then, when the inevitable delays occur with one source, others will be able to provide the goods. Demand for its sales products remains strong, so it is likely that Magadan-Alaska will continue to expand. Another example is the Doug Drum story. On his visit to Alaska, Magadan Governor Kobets went to Indian Valley Meats, a company producing a full line of smoked meat and reindeer sausage products. Kobets and his people liked what they saw. Owner Doug Drum became intrigued with the idea of helping to set up meat processing in the Magadan region. He had a lifelong background in the meat business and had worked with reindeer herders all over Alaska, improving herding and slaughtering fa• cilities and training. Since he likes to hunt, fish, and fly airplanes, Drum gladly accepted Kobets' invitation to visit Magadan and explore business possibilities. A joint venture, Magal, was promptly created, and Drum went to work developing the meat processing enterprise. A plant was designed in Alas• ka and built by the Soviets on a state farm northeast of Magadan. Equip• ment was purchased by Drum, motors were rebuilt to suit the local power supply, everything was flown over from Alaska, and the plant was set up in three days. Meanwhile, proper slaughtering was established, and tech• nicians and other personnel were trained. Sausage was placed in local mar• kets seven months after Drum set foot in Chukotka, to the wonderment of the Russians who said that development of the plants alone would or• dinarily take over three years. In response to invitations from throughout the country, Drum is put• ting in four more plants—one in Yakutia, two on Kamchatka, and one near Archangelsk—and is building a slaughtering facility for 10,000 animals. More meat processing facilities are planned for the future. Drum has es- 88 Victor Fischer tablished a training center at his plant near Anchorage, where students take a three-week course to learn sanitation, meat processing, cutting, and other operations. Videos are being prepared to show how to make each type of product, from raw meat to cutting to placing on the shelf. Russian techni• cians are also taught necessary maintenance and use of computers for in• ventory, equipment, and maintenance. Meat products are sold for rubles. The 1 million ruble profit already earned through the initial plant has been put into the local school to provide direct benefit to the community. Drum receives compensation through the sale of horn, sticks, hides, and other animal products. Thirty percent of the hard currency obtained from sales in Asian markets goes into consumer goods for the community; the rest is reinvested in equipment and new projects. Drum is now diversifying. He is putting in three concrete block plants, a cheese factory, and a dozen small ice cream plants. He is also manufacturing glazed tile for export. Several characteristics are common to the CEDC and Drum ventures. It was the Magadan region authorities that defined the need and requested the Alaska parties to come to the Far East and help establish joint enter• prises. In both instances, Alaskans responded not from greed but out of a desire to help their Soviet neighbors solve some of their economic problems. Both programs began in the Magadan region, starting small and then branching out, and stressing training as an essential element. In neither case did national political turmoil significantly affect operations. There are also differences. CEDC and Magadan-Alaska relied almost exclusively on Russians to run all aspects of the joint operation, from ob• taining supplies to marketing. Doug Drum was clearly the entrepreneur, the general manager, who was in full control of his operations. Magadan- Alaska imported Russian goods to the United States, and the Soviet Un• ion's lack of "most-favored-nation" status added significantly to product cost. Thus, duty for imported goods has been as high as 110 percent of goods value. Drum was unaffected, as he manufactured food products in Russia for sale there. His operation was less impeded by the ruble's non- convertibility since his return was made by selling reindeer horn and other products outside Russia. The ruble's nonconvertibility, however, dampened CEDC's interest in undertaking business activities in the Soviet Union.

TOURISM AND RECREATION Tourism is one of Alaska's major industries, catering to both U.S. and in• ternational visitors. Since the Far East is so akin to Alaska, yet so intri• guing to outsiders, many firms have ventured into joint tour and recreational activities. Alaska Airlines is mounting the latest tour opera• tion. Beginning in June 1991, Alaska is flying three jets a week from An• chorage to Magadan, and from there to Khabarovsk. A variety of tour Alaska and the Far East 89 packages are available, including trips to Irkutsk and Lake Baikal. Local arrangements are handled by lntourist and other businesses. Numerous smaller Alaska companies are also helping open visitor in• dustry opportunities in the Far East and eastern Siberia. They work with local and regional enterprises and occasionally with government agencies. Activities include everything from high-cost sport Fishing and hunting to float trips and wild river rafting in remote wilderness areas. Several scien• tific tourism ventures have also been developed in cooperation with aca• demic research institutes and local authorities, including expeditions to Wrangel Island in the Arctic Ocean and other distant locations.

RESOURCES AND ENVIRONMENT A number of multinational petroleum companies are pursuing potential oil exploration and development in the Russian North. Among these is the Alaska headquarters of Exxon, which could bring major Arctic oil de• velopment experience to the task. A specific reserve has been identified in the Far East, and negotiations have taken place with Soviet, Russian, and regional government officials. Decisions to proceed have not yet been taken, partly due to company executives' concern about political and eco• nomic instability. Other firms are dealing with mineral development, e.g., a joint ven• ture, ZVZAL, established under Soviet law to develop mineral deposits and market mining technology both in the Soviet Union and in North America. The Soviet partner, Severovostokzoloto, is an enterprise within the structure of Glavalmazzoloto, the USSR's main department of pre• cious metals and diamonds. It is based in Magadan. The Alaska partner, Bering Straits Trading Company, is owned by Bering Straits Native Regional Corporation of Nome and Ron Sheardown of Greatland Exploration, Ltd., of Anchorage.

TRANSPORTATION AND COMMUNICATION Alaskans can travel directly to the Far East without having to travel east• ward around the world as before. Russian flight personnel, ground crews, controllers, and other personnel have received extensive training with the help of Alaska Airlines, the University of Alaska Anchorage, and other organizations. Joint arrangements have also been made between Alaska and Russian authorities to assure air navigation safety and to provide emer• gency rescue and medical services. Bering Air, a regional carrier serving western Alaska out of Nome, has authority to fly charters across the Ber• ing Strait to Provideniya on the Chukotka Peninsula. Bering Air has flown more than 350 trips and carried over 2,500 passengers on this route. Sixty 90 Victor Fischer percent of the passengers have been Americans, including Eskimos. The airline has allowed Russian passengers to pay their fare in rubles, and used the proceeds to cover expenses on the Russian side and to provide capital for investment. Three years after its pioneering flight to Provideniya and following two years of intensive negotiations, Alaska Airlines was awarded the first United States air carrier route to the Russian Far East. Beginning in June 1991, the airline flies three times a week between Anchorage and Magadan, continuing south to Khabarovsk. The service is premised largely on serv• ing the tourist trade and is, therefore, scheduled for the summer only. In August 1991, a trans-Pacific all-cargo service began between the United States and the Far East. Northern Air Cargo provides scheduled freight service between Anchorage and both Magadan and Khabarovsk. Northern Air Cargo also provides scheduled service between Seattle and Anchorage and can, therefore, make freight connections to the Far East from other parts of the United States. Northern Air Cargo will initially provide once-weekly service on this route. It is authorized to fly up to four times per week, and future expansion of the schedule will depend on de• mand. The carrier will use the B727-100 freighter, capable of hauling ig• loo cargo containers as well as large freight, such as trucks or oildrilling equipment.

ARCTIC SEA ROUTE In 1987, Gorbachev suggested that the Soviet Union could open the North• ern Sea Route for commerce between Pacific nations and Europe, Alaska and the U.S. Pacific Northwest have long been interested in the potential of a closer sea link to Europe via the Russian North. Alaska's Dutch Har• bor is strategically located to be a principal staging facility for convoys that would ply the Arctic sea route. It currently serves the multinational fishing fleets in the North Pacific and the Bering Sea, including many Rus• sian vessels, and is the leading fishing port in the United States. This con• cept has been thoroughly pursued with Far East Shipping Company and other Soviet officials. Telephone calls and faxes go direct to the Far East, rather than being routed via Pittsburgh and Novosibirsk. Current service is via VHF line- of-sight from Alaska to a receiving point 64 miles across the Bering Sea. Communication then proceeds on the Russian side using existing systems. The service is still quite inadequate by Western standards, and Alascom is working with Russian communications authorities to upgrade the sys• tem by linking to Magadan via the Alascom and Russian satellites. That will allow users such as the University of Alaska to obtain clear channels for both voice and data transmission. Alaska and the Far East 91

GOVERNMENTAL COOPERATION The state of Alaska has had three governors during the current era of reestablishing Alaska's relationship with Russia. At the end of his term in 1986, Governor Bill Sheffield received Gennadi Gerasimov and fully en• dorsed the state's moving in that direction. During his 1987-90 tenure, Governor Steve Cowper made the Alaska-Soviet relationship a top prior• ity of his administration. And the current governor, Walter Hickel, has taken steps to expand the scope of ties to Russia. The governors promoted trade, establishment of joint ventures, mutual technical assistance, and other means toward greater economic cooperation. More important, they estab• lished close personal relations with regional governors in the Far East, par• ticularly with Governor Vyacheslav Kobets, who has been a frequent visitor to Alaska and become a particularly close friend to many Alaskans. Governor Cowper hosted the Third Northern Regions Conferences in September 1990. High-level delegations came from II nations. Part of the conference was a governors' summit, that brought together leaders from 20 northern political entities, including Lapland, Finland; Greenland, Den• mark; Trondelag, Norway; Yukon, Canada; Heilongjiang, China; Hok• kaido, Japan; and others. Far East representatives included the governors and chief executives from Primorski, Sakhalin, Khabarovsk, and Magadan regions, and from the Chukotka, Jewish, Koryak, and Yamalo-Nenetski autonomous areas. The conferees agreed to establish a permanent secretariat for the Northern Region Conference to provide an ongoing forum and to con• duct advocacy and research on northern models of cooperation in eco• nomics, science, and technology. The governors also signed a statement calling on Arctic nations to go beyond traditional bilateral efforts and push for true regional cooperation on issues of shared importance, such as en• vironmental protection and economic well-being of northern peoples. They also entered into a variety of protocols concerning trade, the natural en• vironment, and relations with indigenous peoples. One protocol, signed also by Far East Shipping Company (FESCO), dealt with developing the northern shipping route between Europe and the Pacific Forums and work• shops dealt with business, international trade, rights of indigenous peo• ples, circumpolar health, education, and other topics. Governor Hickel, who took office in December 1990, is providing a secretariat to continue this work. This is a major step toward establishing the Northern Regions Conference as a permanent body, as recommended by the governors and other delegates. Hickel, who has a long-standing familiarity with Russia, has vigorously pursued strengthening of ties. In April 1991, the governor met with Russian Prime Minister Ivan Silayev. They reviewed pertinent issues and laid out a broad agenda for coopera- 92 Victor Fischer tion. Included were such subjects as control of fisheries, exchange of in• formation on agriculture in the North, petroleum and mining technology, preserving values of Native culture, Arctic environmental protection, the northern sea route to Europe, and others. These governmental contacts by the State of Alaska have received the support and endorsement of the United States Government, particularly the Department of State. Alaska's comparative advantages in the Far East and North are well recognized, and direct contacts and access have been greatly facilitated through fed• eral actions. Internal policies largely determine Russia's interaction with other na• tions. Reduction of obstacles to free business dealings and trade will mean greatly expanded economic activity between the Far East and other regions of the world. The close relationships and access that already exist will po• sition Alaska to benefit as a business and trading partner. Alaska can like• wise serve other regions as the bridge to the Far East and Siberia. This is true not only in terms of air and sea transportation and telecommuni• cation, but also as a facilitator of economic relations. While Alaska lately has had a love fest with Russia, it has long maintained far more solid eco• nomic relations with Japan and South Korea. Each has a consulate in An• chorage, and Alaska has a state office in Tokyo and in Seoul. Timber, coal, fertilizer, chemicals, and seafood are among the major exports to these countries. The Japanese also have invested in Alaska's largest ski resort, Alyeska, located near Anchorage. Public officials and enterprise managers in the Far East would prefer to work with and through Alaskans in their dealings with Asian nations. It is likely, therefore, that the combination of Alaska's economic ties to Japan and South Korea with Alaska's rela• tionship with Russia, could make a three-way working arrangement quite beneficial to all parties. Ultimately, the Russian Far East must save itself, and to do so, it must use independent, individual initiatives, and like Alaska, develop its own foreign policy. THE WESTERN UNITED STATES, HAWAII, AND THE SOVIET UNION

Robert Valliant

The end of the Cold War raises more problems than it solves. These new problems are difficult to compare with those of the past. Compared to the irrationality of strategic nuclear confrontation, they are smaller, less acute, and less dangerous. Nevertheless, these problems are concrete and conventional and more visible to the public. For four decades, Russia and the United States had little positive interaction. There was no business in• teraction or meaningful political dialogue. Their defense communities were in constant confrontation, very often for good reasons on both sides. In• telligence and foreign services were busy, sometimes merging their efforts to secure political and strategic "advantages" in Northeast Asia. The era has come to a close with the demise of communism and the disintegration of the USSR. Strategic nuclear submarines and other ex• pensive weapon systems and strategic installations now have no clear pur• pose and remain simply expensive high-tech toys. The remaining security alliances are searching for mission and justification. The U.S. consulate general will soon be issuing visas for former Soviets right in the middle of Vladivostok, a closed strategic naval base until six months ago. But the removal of the "security blanket" reveals difficulties related to political and economic interaction, the lack of information and knowledge availa• ble to each country about the other, differences in goals and cultures, and general economic incompatibility. It was convenient for the United States to deal with Russia as an ad• versary. Now as potential partner and Pacific neighbor the building of new meaningful and mutually beneficial relations requires considerable money, energy, and effort. Attraction of private-sector money demands more at• tention and government support, even in areas with a better climate and infrastructure than that of the Russian Far East. Revitalization of bilat• eral relations is proceeding slowly because both governments are interested in other problems, other areas, and "other" people. Bureaucratic paralysis is more the rule of international life and inter• state politics than an exception. It often dominates relations even between close friends and tightly interdependent economies, let alone former ad• versaries in the process of rediscovering each other anew. What are the forces which can bring new life to the U.S.-Russian relations in the Pacific?

93 94 Robert Valliant

What are the sources of dynamism in this new relationship? What are the obstacles left by the difficult past and the ways to overcome them? Where do we stand and where are we heading? What lessons, if any, can we learn from the experiences available, both bad and good? It is true that the Russian Far East was never totally closed to jour• nalists and scientists, but they visited infrequently. Therefore, current ad• justments are going to be difficult and sometimes painful. The relationship has gone from one in which both sides routinely spied off each other's coast, from one in which the United States simulated "at• tacks" on Soviet naval bases and the Soviet Union regularly dropped mis• siles into the Pacific Ocean near Hawaii, to a relationship in which the ships and commanders visit each other's naval bases to the cheers of thousands. With the complete turnabout in relations, there are now attempts to institutionalize the relationship and put it on a more sound footing— particularly in the cultural and educational spheres, and most importantly in business. But in the latter case, the going is proving anything but easy, and success remains elusive. Still it is better than what came before when the most developed and dynamic areas of economic interaction were de• stroyed by the Cold War.

THE EARLY 1980S: THE END OF SOVIET SHIPPING ON THE WEST COAST The Soviet invasion of Afghanistan touched off a storm of protest on the West Coast, most of it harmless. In one of the potentially more serious incidents in January 1981, an anonymous caller telephoned Sacramento's radio station KZAP and claimed that a band of patriotic scuba divers had mined the 34-mile-long Sacremento Deep Water Channel to prevent the Nikolai Karamzin, a Soviet freighter taking on a 20,000-ton cargo of feed corn in the Port of Sacramento, from departing. The channel was closed to all vessels, and the U.S. Navy minesweeper Gallant began searching for the homemade explosives. Eight hours after the original call a second caller reported the threat was a hoax, but the coast guard decided to sweep the channel as a precaution. The Karamzin finally sailed after the Gallant and two U.S. Army vessels swept the chan• nel again." One of the last Soviet ships in San Francisco entered the Port of Stock• ton on 26 December 1981. Three days later President Ronald Reagan im• posed sanctions on the USSR requiring Soviet ships to apply to dock at U.S. ports 14 days in advance instead of the pre-sanction 24 hours.38 Fesco (Far Eastern Shipping Co.), the only Soviet company serving the West Coast, decided in May to discontinue its California-Far East and The Western United States, Hawaii, and the Soviet Union 95

California-Australia services on 1 July and offered a scaled-down service from Vancouver and the Pacific Northwest ports instead. The decision was sudden because the line had announced only a month before that it would open a new container service from Moji, Japan, to Seattle in May. The company planned to put four ships on the new route.59 Fesco had operated large container ships between Oakland and Long Beach, California, and Japan, Hong Kong, and Australia for the past 10 years. It offered low rates and attracted a lot of business from cost-conscious shippers. However, increasing tensions caused business to fall off. In the first five months of 1980, it dropped by 60 percent, according to Walter Abernathy, executive director of the Port of Oakland. Abernathy said many American shippers switched to other carriers because they feared the United States would cancel the agreement that permitted Soviet ships to call on the West Coast. E. W. Lukes, vice chairman of the Pacific Westbound Con• ference, a San Francisco-based shipping organization that set rates, felt there was "a natural and sort of instinctive distrust" on the part of a lot of shippers. In any case, J. S. Dale, vice president of Morflot Freightliners Ltd. of Vancouver, Fesco's West Coast business agent, was undoubtedly correct when he claimed that the decision to quit the once lucrative Califor• nia trade was an economic, not a political decision.60 After the embargo and Fesco's withdrawal, Soviet ship visits to the West Coast were virtually non-existent. In 1982, of 3,438 ships arriving at San Francisco's Golden Gate Bridge, only 18 were Soviet. At one time about 10 a month called at Bay Area ports. During the first nine months of 1983 no Soviet ship docked in San Francisco. Officials in Oakland said no Soviet ship had called between 1979 and October 1983. During 1983, 8,738 tons of cargo inbound from and outbound to the USSR crossed Oak• land docks. None of the tonnage moved in a Soviet ship. Steve Sato, Long Beach port spokesman, said only a handful of Soviet ships came each year.61 One estimate put the embargo's effect on California crops at $15 to $20 million. The commodities most affected were almonds, raisins, prunes, lemons, and hops.62

THE SOVIET CONSULATE IN SAN FRANCISCO: A QUESTION OF SPIES Perhaps 20 or 30 years from now we will learn more about this part of the Cold War from documents released from archives in Moscow and Washington. But back in January 1983, a delegation of the Academy of Sciences invited to the United States by IREX to discuss problems of the Asia-Pacific region with American scholars was followed through the streets of San Francisco. American scholars visiting Moscow, Khabarovsk, and Nakhodka met similar "hospitality?* 96 Robert Valliant

Intelligence agencies also influenced diplomatic relations. Through• out the 1980s the Soviet consulate in San Francisco, the only one on the West Coast, acted as a lightning rod for protest of one kind or another. The most serious incidents involved the role of the consulate as a suspected headquarters for spies. In December 1982 a mysterious, small, gray plywood structure ap• peared atop the consulate. The Cow Hollow Association, an organization of about 400 homeowners, complained to the city since the Soviets had not informed the city planning department or the association. The build• ing was already 40 feet higher than the height limit. This shed raised the spying issue. For years the consulate building had been believed to be one of the main Soviet electronic listening posts, with supersophisticated equipment that enabled intelligence agents to intercept microwave transmissions from Silicon Valley, eavesdrop on private long• distance phone calls, and monitor other communications. Soviet diplo• mats claimed the shed was used for repairing the roof.63 Dianne Feinstein, then San Francisco's mayor, managed to defuse the situation and peace returned to the neighborhood until November 1983 when the Planning, Housing, and Development Committee of the city's Board of Supervisors passed a resolution by a 2 to 1 vote calling the Soviet consulate in San Francisco an international spy nest and a public nuisance that should be relocated out of the Cow Hollow area. The supervisor who voted against the resolution did not do so out of sympathy. He wanted the consulate closed completely.64 The full Board of Supervisors approved the resolution by an 8 to 3 vote. This reaction to the consulate was partly the result of the downing of KAL 007 on 1 September and partly the result of complaints about traffic-clogging demonstrations at the consulate. Mayor Feinstein vetoed the resolution, but only after the U.S. State Department warned that it might lead to Soviet retaliation against U.S. diplomats in the Soviet Union.65 The Board of Supervisors decided to let the mayor's veto stand.66 The whole question of Soviet spying on the West Coast is one that can be discussed at great length. Several sensational cases have been re• ported, including some that have been turned into books and motion pic• tures. A few of the cases from the early years provide examples. • 1977. Christopher John Boyce, an employee of defense contractor TRW, was sentenced to 40 years in prison for selling secrets to the Soviet Union. He escaped from Lompoc in 1979 and spent 19 months on the run. He was recaptured in Washington state in August 1981. His partner, Andrew Daulton Lee, allegedly sold secrets because he wanted money for drugs; Boyce, allegedly, because he was disillusioned with the American "system." The Western United States, Hawaii, and the Soviet Union 97

• 1979. Gerald R. Starek and Carl R. Story, president and vice presi• dent respectively of I.S. Industries of Sunnyvale, and Robert C. John• son, former president of Kasper Instruments in Mountain View, were fined $25,000 each and placed on three years' probation for export• ing semiconductor equipment worth almost $300,000 to East Germany. • 1980. Walter J. Spawr of Corona and his wife Frances were convicted on charges of illegally exporting high-technology laser mirrors to the Soviet Union through Germany and Switzerland. • 1981. Peter F Gopal, a Sunnyvale consultant, was charged with bribery, conspiracy, and possession of stolen property in a case involving ille• gal shipments of electronic equipment and trade secrets to the Soviet Union. He was sentenced to two years and eight months for stealing trade secrets from National Semiconductor Corp. and Intel Corp. of Santa Clara and Zilog Inc. of Cupertino. • 1981. The FBI broke up a spy ring allegedly run by West German citizen Werner Bruchhausen and a Russian-born U.S. citizen, Anatoli Ma- luta. They were indicted for shippping equipment, including a sensi• tive microwave receiver used by U.S. Navy submarines, from California to the USSR via West Germany, using a complicated web of 13 com• panies. Maluta was convicted and sentenced to five years in prison. • 1981. The FBI unraveled a pattern of theft from Intel that included the diversion of 22,000 microchips to the USSR and East Germany. In that case two Intel employees were convicted of felony grand theft.67 • 1983. James Durward Harper, 49, of Mountain View, was arraigned in U.S. District Court on charges of selling to Polish and Soviet intel• ligence agents top secret documents disclosing the U.S. ability to sur• vive a nuclear attack. American officials said he took 100 "extremely sensitive" documents from Systems Control Inc., a Silicon Valley defense contractor.68 The newspapers are replete with such cases, and there is little need to belabor the point. The FBI kept close watch on the Soviet consulate in San Francisco. According to the bureau, about a third of the Soviets who worked in the consulate under diplomatic cover were probably intel• ligence agents. Under federal restrictions the consular staff could not travel further than 25 miles from the consulate without State Department per• mission. The constant revelations of Soviet and East Bloc spying led the U.S. government to place large areas of the United States off limits to Soviet diplomats, journalists, and businessmen in November 1983. Silicon Valley was included. The restrictions did not apply to Soviets in the United States for special reasons, such as scholarly or scientific exchanges. However, the State Department had to approve their travel plans.69 In November 1986, as relations deteriorated, the U.S. government or- 98 Robert Valliant dered reductions in the number of Soviet diplomatic personnel in Washing• ton, New York, and San Francisco. As a result, 13 Soviets left the consu• late in San Francisco under a State Department order. Spying accusations were not all one sided, however. Izvestiya accused the United States of spying on the Soviet embassy in Washington and on the consulate in San Francisco. A January 1980 news article reported that an "impressive eavesdropping system" had been found at the Soviet con• sulate in San Francisco.70 When the city put telephone and power lines underground on Green Street, it included a manhole in front of the USSR consulate to provide access to its circuitry. The Soviets had a man there all the time watching the workers and taking pictures. Local gossip still continues about a tun• nel under the consulate dug by the FBI to plant listening devices in the consulate.71

STRATEGIC CONFRONTATION: SIMULATED ATTACKS AND MISSILE TESTS The question of spying in San Francisco reflected the general increase in tensions worldwide and particularly in the United States. The West Coast and Hawaii felt the tension acutely because the Third and Seventh Fleets of the U.S. Navy are responsible for those areas. CINCPAC (Commander- in-Chief U.S. Pacific Command) is located in Honolulu and is responsible for an area from the West Coast to Africa. According to a U.S. Navy spokesman, ships of the Soviet Pacific Fleet crossed the North Pacific, lingered off the Trident nuclear submarine base in Puget Sound, cruised down the West Coast to monitor U.S. surface and submarine activity off San Diego, and then went on to Hawaii.72 Four Soviet warships made the journey in September 1981. The U.S. Navy said it was the closest Russian naval approach to the U.S. West Coast in 10 years. The U.S. Navy, U.S. Coast Guard, and Canadian naval forces kept the Soviet force, composed of two guided missile frigates, a guided missile cruiser, and a supply ship under observation. Except for a Soviet research ship that passed by Hawaii earlier in the year, the task force was the first in Hawaiian waters since 11 September 1974, when three ships moved within 50 miles of Niihau and 130 miles north of Oahu.73 Other Soviet Navy ships were reported in Hawaiian waters in Janu• ary 1982, September 1983, February 1984, December 1984, January 1985, June 1985, August 1985, November 1985, February 1986, April 1986, and October 1987. U.S. Navy exercises in the North Pacific drew Soviet interest in Oc• tober 1982. Two U.S. aircraft carriers and their battle groups conducted maneuvers south of the Aleutian Islands, and the Soviet Union reacted The Western United States, Hawaii, and the Soviet Union 99 at once! Bear and Badger reconnaissance aircraft shadowed the two battle groups, and they were soon joined by submarines and intelligence gather• ing ships. The rationale for the exercise was that Alaska would be a primary naval target in a war between the superpowers.74 By the mid-1980s, relations had deteriorated to the point that U.S. Navy jets staged secret mock "attacks" on Petropavlovsk-Kamchatskii in retali• ation for increased Soviet flights near Alaskan borders. A-6Es from Adak flew an estimated 24 to 27 missions between the spring of 1986 and Oc• tober 1987. These attacks broke off about 90 miles from the city and naval base. C1NCPAC Admiral James Lyons, approved them.75 And it wasn't just aircraft intruding. According to a TASS report, in May 1987 the U.S. cruiser Arkansas violated Soviet waters in the area of Avacha Bay on the Kamchatka coast.76 Soviet missile tests proved another irritant. The USSR had been fir• ing test missiles into the Pacific Ocean since the 1960s. International ship• ping and aircraft were always warned to stay out of the danger areas. But in October 1987 the Soviet Union test directed two unarmed nuclear mis• siles into an area 500 miles northwest of Hawaii. TASS announced the tests 27 September, but no one bothered to inform Hawaii's governor. That cre• ated quite a stir.77 Even as relations improved in other areas, it was business as usual in the military. In May 1989 just before Soviet Defense Minister Dmitrii Yazov visited San Diego, Lieutenant Commander Robert Anderson, a spokesman for the Pacific Fleet at Pearl Harbor, reported that Soviet spy activity off the U.S. Pacific Coast had actually increased over the past two years. Soviet AGI (auxiliary general intelligence) eavesdropping ships had been detected two out of every three days off the U.S. West Coast, espe• cially close to southern California and near the Hawaiian Islands. This was in contrast to the early and mid-1980s when Soviet ships were found fewer than one out of every 10 days.78

SWIMMING AGAINST THE TIDE: SCIENTIFIC AND CULTURAL CONTACTS Relations in the early 1980s may have been bad, but they were never en• tirely absent. Cultural groups continued their activities, and scholars and scientists visited back and forth. Even in the economic sphere, both sides displayed some interest in putting relations on a better footing. In terms of cultural relations there has always been an undercurrent of good relations, as Americans tried to achieve some understanding about the Soviet Union. In 1982, Seattle groups sponsored two series of semi• nars and neighborhood-group discussions on Soviet-American relations. Almost 8,000 people participated in 520 small group discussions. KING 100 Robert Valliant

TV-5 in Seattle enabled Soviet commentator Vladimir Posner to make a series of five TV programs for general showing.79 Posner is perhaps most famous for his "space bridges" broadcasts linking ordinary Americans and Russians by means of radio and later television—an idea that originated on the West Coast. On 5 September 1982 an open-air concert in San Bernardino was broadcast in the Soviet Union. By April 1990 the concept had developed sufficiently that citizens of San Francisco and Leningrad spent almost two hours discussing the poor quality of drinking water, water pollution, and remedies for this environ• mental hazard.80 However, even as late as 1986, relations remained difficult enough that the San Francisco Symphony canceled a trip to the Soviet Union. A few scientists and scholars visited the Soviet Far East even when it was a closed area. John Stephan, a history professor at the University of Hawaii, traveled back and forth to Khabarovsk over several years in the early 1980s and managed extended periods of residence while working on a joint monograph with Valerii Chichkanov, director of the Institute of Economic Research. The University of Hawaii has a long-standing rela• tionship with oceanographers and geologists from Sakhalin. Scientific ex• changes and expeditions occurred throughout the 1980s. In the economic sphere, it was more difficult to generate interest in mutual business ties between the two Pacific coasts. San Francisco Mayor Dianne Feinstein went to the USSR with a U.S. trade mission in December 1984. While her trip wasn't concerned with the Soviet Far East, she did offer to host two business meetings in her city with Soviet participation.81 At that time California's trade with the USSR amounted to less than $100 million. Los Angeles-based Occidental Petroleum Corp. was build• ing a 250-kilometer coal slurry pipeline in western Siberia. Beyond that, California exports were largely agricultural products, such as wheat, almonds, and raisins. Levi Strauss was conducting exploratory talks about expanding its limited jeans sales in the USSR. But Silicon Valley remained off limits to Soviets for national security reasons.81 The actual improvement in relations did not start on the West Coast. It began in Alaska. Alaska has its own special relationship with the Far East, and it was through the stubbornness and sheer hard work of a few people that today it is possible to visit back and forth so easily. But once Alaska opened the way, West Coast organizations quickly followed. If the San Francisco Ballet had to cancel its 1986 tour, three years later it could put on performances in Frunze, Kirgiz SSR.83 Seattle and Novosibirsk artists staged an exhibition in Novosibirsk in June 1990. The display included about 150 modern paintings, graphic works, and objects of decorative and applied art. The exhibition was part of a Soviet and American art festival, cosponsored by Novosibirsk artistic organizations, The Western United States, Hawaii, and the Soviet Union 101 the American organizing committee of the Goodwill Games, the Bainbridge School of Arts, and the Association of Painters of Seattle and Bainbridge Island.84 From the other direction, San Diego hosted the "most extensive lineup of Soviet art and culture ever assembled in the United States" from 21 October to 11 November 1989. The festival included 23 Faberge Imperial Eggs, Leningrad's Maly Drama Theater, an exhibit of irons, enamels, crosses, and jewelry, a production of Boris Godunov, and three weeks of programs by the San Diego Symphony." Later the city awarded its honorary "Sea Horse" prize to the Soviet government. This was the first time in San Diego's history that the prize had been awarded to a foreign government. Mayor Maureen O'Connor said the award reflected deep respect for the revolutionary changes in the Soviet Union and gratitude to the Soviet leadership for taking the initia• tive in developing mutual understanding between the peoples of the two countries. The "Sea Horse," a crystal figurine, is presented annually by the San Diego city council to political and social activists, businessmen, and journalists for active participation in the city's life.86 Perhaps one of the largest exchanges came during the summer of 1990 when Seattle hosted the Goodwill Games. While the games did not limit themselves solely to the Soviet Far East, they did focus world attention on the U.S. Pacific coast, and the free access of the Soviet athletes to the games from the other Pacific coast. Isolated cultural contacts may provide an immediate emotional and aesthetic appeal, but they can't support and sustain a relationship. That takes institutionalization developing at all levels. Local agreements and as• sociations have provided a focus for more long-term relationships. Traditionally sister city-state agreements have been important in dealing with the former Soviet Union. Because in such a structured society, an agreement provided the means of meeting various Soviet officials, at cul• tural, economic, and political levels. For example, a whole series of sister city-state agreements were con• cluded between U.S. West Coast cities and Soviet cities: Seattle-Tashkent; Salem, Oregon-Simferopol; Modesto, California-Khmelnitskii; Santa Cruz, California-Alushta; San Francisco-Leningrad. Eugene, Oregon, and Irkutsk became sister cities in 1988. A delegation from Eugene visited Irkutsk for 10 days in September 1989. One of the first agreements between two Pacific coast cities was that between Bellingham, Washington, and Nakhodka. Nakhodka is an open port, and a U.S.-Soviet joint venture has an office there: U.S./USSR Ma• rine Resources, Inc. The U.S. partner is based in Bellingham. Other cities have followed suit. Portland, Oregon, and Khabarovsk agreed to become sister cities in 1988. Oakland, California, and Nakhodka 102 Robert Valliant have also become sister cities and agreed to exchange high-school students. Beaverton, Oregon, and Birobidzhan, center of the Jewish Autonomous Oblast, Khabarovsk Kray, signed a sister city agreement in August 1990.87 Tacoma hopes to become a sister city of Vladivostok. Washington Secre• tary of State Ralph Munro signed a protocol in Vladivostok that pledges cooperation between Tacoma's port and Vladivostok's port. Vladivostok authorities told a Washington delegation that Tacoma and San Diego are the top candidates to become Vladivostok's sister city.88 Hawaii is work• ing to establish a sister-state relationship with Primorskii Kray. The state legislature has passed a joint resolution, and now it is up to the governor to activate the agreement. At the private level, local organizations can provide the necessary struc• ture for first contacts. The Khabarovsk branch of USSR-U.S. Friendship Society was established in April 1990. According to the executive secre• tary, Nina Fomina, "The society branch has mapped out a program which includes the days of sister cities, roundtable meetings with the participa• tion of U.S. guests, and stimulation of tourism."89 Educational exchanges and organizations are doing their part to in• stitutionalize the relationship and put it on a more solid course. They pro• vide regular channels for communication, travel, and a wider dissemination of knowledge about areas. Certainly, the Soviet Far East is almost unknown on the West Coast and in the United States at large. The United States is probably even less known in the Soviet Far East. Both sides have much to learn about one another. The University of Hawaii and Far Eastern State University in Vladivostok have signed an agreement, and several Hawaii Russian lan• guage students will spend the summer in Vladivostok studying Russian on the Soviet campus. Lewis and Clark College of Portland, Oregon, is working on a student- faculty exchange with Khabarovsk Pedagogical Institute. President James A. Gardner said the college chose Khabarovsk because of its Pacific Rim location and focus.90 Portland State University and the Institute of Na• tional Economy in Khabarovsk signed an agreement under which the American school offers Soviet students courses in Western business methods." Washington State University has also signed an exchange agree• ment with Far Eastern State University, and Stanford University has been paired with Novosibirsk State University for a student exchange program. Soviet scientists participated in a cruise aboard the Scripps Institu• tion ship Thomas Washington in a 10-day mission in 1988 along the Koman• dorskie Islands.92 U.S. botanists from California and Alaska took part in a joint expedition to Lake Baikal and the taiga of Khabarovsk and Magadan.93 The University of California at Berkeley along with the Ko- diak Area Native Association and the Sakhalin Regional Museum are work- The Western United States, Hawaii, and the Soviet Union 103 ing on a dig at what appears to be the foundation of the Russian Ameri• can Co. headquarters at Three Saints Bay, site of Russia's first colony in North America.94 To provide a focus for study of the Soviet Far East, the University of Hawaii established SUPAR (the Center for the Soviet Union in the Pa• cific and Asian Region) in March 1986. SUPAR's goal is to foster a greater, more sophisticated understanding of the USSR's historical and contem• porary presence in East Asia and the Pacific. Currently, it is acting as an information clearing house. It publishes the SUPAR Report twice a year, an annual compilation entitled New Books on Asia Announced for Pub• lication in the Soviet Union, and a monograph series. The first volume is with the University of Hawaii Press. SUPAR is also building a database as a research aid. The North Pacific Studies Center, Portland, Oregon, is part of the Oregon Historical Society. The Historical Society has a long history of research and publishing in the field of Russian America and Russian voyages. The center began operation in 1989 with a grant from the US. Department of State. It planned a series of conferences on the North Pa• cific under the rubric, "The Great Ocean." However, only the first, deal• ing with the period up to 1600, was held.9i Unfortunately, since the center did not receive the anticipated federal funds, it has closed. The National Bureau of Asian and Soviet Research, a non-profit or• ganization with close ties to, but not affiliated with, Seattle's University of Washington, focuses on the economic, political, and strategic issues af• fecting U.S. relations with the Soviet Union, China, Japan, and other areas of East Asia. It is interested in the Soviet Far East.56

CREATING A STRUCTURE FOR NEW RELATIONS Confidence Building Improvement in relations between the Soviet and U.S. armed services lagged behind that in other areas, but it did come. For the U.S. West Coast it be• gan when Soviet Defense Minister Dmitrii T. Yazov, his wife, and a party of 22 senior officers toured U.S. military installations in San Diego in Oc• tober 1989. He visited the Belleau Wood, an amphibious assault ship, and then observed a landing exercise at the Marine base at Camp Pendleton.'7 As part of a naval exchange agreement, the Soviet Pacific Fleet and the U.S. Pacific Fleet exchanged visits. Three ships from the Soviet fleet, the destroyers Admiral Vinogradov and Boevoi, and the supply vessel Ar• gun arrived in San Diego on 31 July 1990 for a four-day visit. Commander- in-Chief of the U.S. Pacific Fleet, Admiral Charles R. Larson, greeted his counterpart Admiral Gennadii Khvatov. In less than two hours the U.S. 104 Robert Valliant

Navy handed out 8,000 tickets to go aboard the Soviet ships. A Russian song-and-dance troupe gave several performances in the city, and there were numerous athletic events.98 From the United States, a naval squadron visited Vladivostok from September 10 to 14. The cruiser Princeton and the frigate Reuben James under the flag of Admiral Larson arrived in Vladivostok in the first visit by U.S. ships since World War II, and only the second time since 1937 that U.S. Navy warships sailed into the port. The Princeton and Reuben James left California on 16 August. The ship's store on the cruiser sold about $25,000 worth of goods for Vladivostok. Thousands of Soviets toured the ships, and the sailors toured the town.99 Economic Relations Because the Soviet Far East was closed to the world, there was little possi• bility for a flourishing economic relationship. When relations began to improve, the West Coast continued to hang back. The Alaskans once again led the way. Now it is possible to distinguish four ways in which contacts have been made. The first is by individuals or small delegations that go to the Far East for specific reasons. The second is through informational meetings or trips. The third is large international meetings at the official level, and the fourth is through the visits of large business delegations. All can be effective. For the first-time visitor, the fourth type is often the most effec• tive. Then, after contacts are made, it is possible to pursue them in more direct meetings. There are several representatives of the first type. One of the earliest missions visited the Soviet Far East in December 1987. An Oregon trade delegation made a one-day visit to Vladivostok. It toured Dalryba, the fish• ing administration for the Far East; the ports of Nakhodka and Vostoch- nyi; and fur farms, looking into possible joint ventures.100 Over a year later, Elisa Miller, a University of Washington adjunct professor and business consultant, led a business delegation to Magadan at the invitation of Magadanagroprom in March 1989.10' Examples of the second type are the meetings held in May 1989 by the San Francisco Chamber of Commerce and the USSR Chamber of Com• merce and Industry in San Francisco to explore the development of eco• nomic relations between the two Pacific coasts and even the hinterlands.102 Newspaper articles are also a good source of information about an unknown area. The Seattle Post Intelligencer sent a reporter to the area in 1989. She visited Khabarovsk, Vladivostok, and Nakhodka. Her series appeared in the paper in August. Meetings and newspaper articles, while opening the way and feeding a rising interest in the Soviet Far East, did little to provide the necessary The Western United States, Hawaii, and the Soviet Union 105 institutionalization of the relationship. Indeed, they could only identify the common interests from which to establish a relationship. Because of the way the former Soviet society operated, the surest way for any relationship to succeed was for the American side to get to know the local Soviet officials and leaders. That is why it is so important to have some formal structure. This formal structure is the third type, and its be• ginning came with the "Roundtable on Problems of Economic Coopera• tion in the North Pacific" (30 July-3 August). It took place in conjunction with the Goodwill Games in Seattle. Participants included officials from Khabarovsk and Primorskii Krays, Amur, Magadan, Kamchatka Oblasts, the Yakut ASSR, and the Jewish Autonomous Oblast. American and Cana• dian participants included legislators from Alaska, Alberta, British Colum• bia, Idaho, Montana, Oregon, and Washington, as well as senior executives from 12 enterprises located throughout the Pacific Northwest Legislative Leadership Forum. The roundtable concluded that enough potential ex• isted for both sides to actively explore a formal mechanism to continue and expand relationships between the two countries. Priority topics iden• tified by the roundtable include telecommunications, transportation, in• formation needs, banking and finance, timber, fisheries, agriculture, mining, and tourism. The Soviet side agreed to host a second meeting of the round- table in the Far East in 1991.103 The final way Americans have sought out Russians to do business with has been the broad-spectrum business delegation. It may be the single most effective way of reaching a large number of Soviet officials and business• men at once. A large Washington state delegation made a three-city tour of the Far East in November 1990. The group was a strange mix. It in• cluded representatives from Boeing, Louisiana Paper, GTE and GTE Space- net, the Port of Seattle, the Port of Tacoma, NC Machinery, Portland State University, a fertilizer company, law firms from Seattle and San Francisco, some fishermen from Washington and Alaska, a Seattle investment ad• viser and sometimes concert promoter, and others. Their motives for go• ing were mixed. The Boeing representative was along only for fact-finding. The man from NC Machinery was looking for new business. His com• pany was already supplying gold-mining equipment to Bering Straits Trad• ing Co., a partner in SVZAL, a joint venture with Severovostokzoloto. The man from the Port of Seattle was interested in doing business with Fesco in Vladivostok. So was the representative from the Port of Tacoma. The fertilizer-company employee was looking for zinc sulfate. As Americans and Russians grope for business opportunities, the fields that have generated the most interest so far on the U.S. West Coast are fishing, forestry, and tourism. They can provide immediate results, and there is demand on both sides for products. But each economic venture is beset with its own problems. 106 Robert Valliant

Fishing West Coast and Alaska firms have led the interest in agreements with the Soviet Union at all levels for fishing. The State Department, after consult• ing industry representatives, held two rounds of talks with the Soviet govern• ment in August 1987 and January 1988; these led to an interim agreement that provided U.S. fishermen access to Soviet waters. Foreign Minister Eduard Shevardnadze and Secretary of State George Shultz signed the in• terim agreement on 21 February 1988, and Shultz and Soviet Fisheries Minister Nikolai lsaakovich Kotlyar signed the comprehensive government- to-government agreement on 31 May, which was designed to replace the U.S.-Soviet Governing International Fisheries Agreement of November 1976 and the February interim agreement. US/USSR Marine Resources Inc. was one of the first joint ventures set up between firms on the U.S. Pacific coast. It was organized in 1978 between Sovrybflot and a Bellingham, Washington, firm, Marine Resources Co. International. Its headquarters is in Seattle, and it has offices in Moscow, Nakhodka, and Dutch Harbor. The year it was formed, U.S. fishermen delivered 1,000 tons of fish to Soviet processors, but by 1986 deliveries had increased to 300,000 tons. The company bought several spe• cies from U.S. fishermen, gave them to a Soviet company for processing, and then sold the finished products on the international market. In 1987 five U.S. ships delivered 200,000 tons of fish to the Soviet processor. US/USSR Marine Resources is using its fishing base to examine other opportunities. Its president, Jim Talbot, has suggested possible areas might be U.S. flag vessels operating in Soviet waters and the construction of cold storage and fish processing facilities in the Soviet Far East.104 It has signed an agreement to establish the Kamchatka Pacific Co., a joint-venture crab• bing company, and spun off Sovam, a subsidiary to help American busi• nesses gain access to the Soviet market.101 Sovam may now also be considering a new group of proposals for joint projects in housing, agricul• ture, timber processing, and furniture manufacturing.106 Oceantrawl Inc., a Seattle-based fish processing firm, is negotiating for access to the Soviet market and fishing resources that were opened up by the U.S.-Soviet fishing agreement signed in Khabarovsk in 1988. That agreement was supposed to open three more Soviet ports to U.S. fisher• men. Negotiations are proceeding slowly because of the lack of experience on both sides.107 Another Seattle-based fishing firm, the Alaska Far East Co., has been successful at joint crabbing in the northern Bering Sea.108 Arctic Alaska Fisheries Corp. and its subsidiary Bridport Pacific Inc., both of Seattle, are talking with the Korsakov Base Ocean Fishery on Sakhalin about a joint venture.109 The Western United States, Hawaii, and the Soviet Union 107

Forestry Forestry appears to be one of the prime areas for U.S. businesses, given increasing restrictions on the industry on the West Coast and the growing demand in Asia for timber. According to Dmitrii Efremov, director of the Far East Forestry Research Institute, the USSR is looking to the U.S. for help in automating its sawmills, introducing sophisticated forest manage• ment practices, particularly technology for cutting and replanting, fire con• trol, disease and insect control, seed production and planting, and help in reducing pollution!10 In return, the USSR is offering the right to export spruce and fir lumber, wood chips, and perhaps logs. But the development of forestry ventures has proved difficult. Several large U.S. paper companies are interested in the forests of the Soviet Far East. Louisiana Pacific Corp., a Portland, Oregon-based forest products company, took a sample of larch and pine from the Soviet Far East in the summer of 1990 to test the timber!" Weyerhaeuser Co., the Ta• coma wood-products giant, has been talking with officials in Khabarovsk for several years about the transfer of Weyerhaeuser's tree-farming tech• nology to Soviet logging operations. Ted Nelson, Weyerhaeuser vice presi• dent of timberlands and external affairs, noted that the talks remained theoretical!12 Washington's smaller, independent sawmills, have about given up. Bob Spence, president of Pacific Lumber & Shipping of Seattle, visited the USSR twice in 1990 and invested $50,000 to $60,000 in trying to negotiate a profita• ble deal, but came up empty handed. A group of six western Washington mills associated with the Northwest Independent Forest Manufacturers has also given up the idea of importing a test shipment of Soviet logs. They feel larger companies like Louisiana Pacific will have to take the lead.'13

The most common obstacles cited by the timber firms are: • A political upheaval and a growing sovereignty movement among regional and local governments that have made it difficult to deter• mine what agency would hold the power to issue harvesting rights. • High costs and logistical problems that with the combined cost of logging, stumpage, and shipping made the independent saw mills back out. • Foreign insects imported with Soviet logs that pose a hazard to U.S. forests and imported logs that may have to be fumigated. • Lumber that can't be marketed in the U.S. without being graded for quality indicating Soviet species would have to undergo rigorous test• ing before they could be accepted commercially!14 108 Robert Valliant

Tourism Tourism is a possibility that is often thought of as a natural for the Soviet Far East. The area has vast tracts of taiga, unspoiled streams and rivers, wild game—in short everything that should attract the outdoor sportsper- son. Several U.S. firms have begun offering adventure tourism. A Califor• nia resident made an arrangement with Far East Hunting and Fishing Tours of Khabarovsk to offer a trip for about $3,500 per person. Several Alaska firms advertise similar tours!13 The problem is that this type of tourism only attracts a limited num• ber of persons and is not a major revenue earner. The alternative is entic• ing large numbers of middle-class and older tourists—those with a less hardy lifestyle—and this places greater demands on the infrastructure. The dilemma is that there is almost no infrastructure to support mass tourism in the Russian Far East. Troika Inc. of Seattle, a spin off of Sovam, plans to offer both adven• ture tours and business tours. Kaye Ostgard, the head, signed a contract for 10 adventure tours on BAM!16 Eastco, an Alaska firm, recently opened an office in Seattle and plans to expand to Seattle and Portland, if it can stay in business. It has already sponsored several business delegations to the Far East. Robert Lee, president of Portland's World Class Products Ltd., was also interested in tourism at one time, but he was looking at lux• ury hunting lodges for foreigners with unlimited budgets!17 About 40,000 foreigners visited Khabarovsk, the only city with an in• ternational airport, in 1990. However, there are only two or three hotels that can accommodate foreigners, and they are always full. Some business- people stay in a business center that doubles as a hotel at $240 to $250 a night!" The situation in Vladivostok, the largest city, is no better. About 60 percent of all available hotel rooms are at the disposal of enterprises and organizations. Theoretically, visitors have access to the remaining 40 percent of rooms, but this is often reduced to 15 percent and 20 percent. So the city is not prepared to service a large influx of foreigners and things are no better and perhaps worse in other cities where foreigners may have to go without hot water in hotel rooms!19

Small Investors Large U.S. businesses have not committed any resources to the Russian Far East. This has left the field wide open for small businesspeople who are doing their best to make a go of it. At one time or another Bob Lee's name has been associated with the import of clothing from a manufac• turer in KomsomoIsk-na-Amure, a business center in cooperation with the Institute of National Economy in Khabarovsk, and a Soviet Far East busi• ness directory in cooperation with the Ministry of Foreign Economic Re• lations. The Western United States, Hawaii, and the Soviet Union 109

Lee is also a partner with Elisa Miller in Soviet Market Information Services, a firm that offers commercial information on Soviet markets and specific economic information on projects. Miller also publishes a monthly newsletter, Russian Far East Update, that seeks to reach a wider market of business people interested in the Soviet Far East!" Jon Jolly, a Seattle businessman, set up a joint venture with the Soviet Academy of Sciences to assemble personal computer components and sell the products in the Soviet Union!11

BUILDING A NEW BUSINESS INFRASTRUCTURE While these are encouraging attempts to do business in the Soviet Union, they are hardly the type of investment that the Soviet officials are looking for. Yet the problems facing Western businesspeople in the Soviet Union are staggering. A simple list shows the broad spectrum of these problems: • A Soviet bureaucracy that knows nothing about Western business prac• tices and, in any case, is in a state of turmoil. • A general uncertainty of just who is in control of what as local, provin• cial, and central authorities struggle to assert their authority over every• thing from fishing and mineral rights to hotel rooms. • Increasing economic chaos that affects all sectors of the economy. Soviet payments to major Western creditors are months in arrears and this does not bode well for future investors. • Soviet business practices that can only be seen as bizarre by Western capitalists. • The lack of ruble convertibility that means that it is difficult if not impossible to repatriate profits for foreigners. • A lack of investment guarantees for foreign investors. • A confusing series of tax incentives for foreign investment. • A poor infrastructure in the Far East that affects everything from hotel rooms, roads, railroads, and airports. There is only one ICAO certi• fied airport in the Far East—in Khabarovsk. • An obsolete industrial plant in the Far East that is a high-cost producer in comparison with its Asian neighbors. • An almost total lack of communications with the outside world. It can take from two hours to two days to complete an international phone call. This is improving, but is still primitive by Western busi• ness standards. • A small market in the Far East. There are only about 8 million peo• ple in the Far East in an area equivalent to about 80 percent of the land mass containing the U.S. contiguous 48 states. 110 Robert Valliant

To be fair, all the problems do not lie on the Russian side. The United States was not eager to welcome new economic relations with the former Soviet Union. • The lack of most-favored-nation status has hampered the import of what goods there are in the Russian Far East. These are mostly han• dicrafts now, but it can double prices. • In the former USSR, there were restrictions on how many Soviets could live and work in the United States. This restriction was only removed in January 1991. • The U.S. still observes restrictions at some of its ports and has re• quired long prior notification for visits by Soviet ships. What then is the future? On the whole it is promising, but promising only in the long term. The.list of problems above will take years to over• come. However, realistic goals would seem to caution against over-inflated optimism, and encourage a long-term view of the relationship, striving to build personal relations and acting on a mutually beneficial basis. NOTES

1. The Soviet Far East comprises the Khabarovsk and Primor regions, the states of Amur, Sakhalin, Kamchatka, and Magadan, the Yakut Autonomous Republic and the Chita territory (see map). It has 27 percent of the former Soviet Union's area but only 7.2 million population. 2. This refers to lands along the Amur River, broadly the Amur Basin. 3. Also known as the Maritime Region, this area is the southernmost extension of the Far East, along the Sea of Japan. 4. The Washington Post, 21 August 1989; Far Eastern Economic Review, 16 Novem• ber 1989, p. 32. 5. Region [Khabarovsk], December 1990, p. 1. 6. The Japan Times, 17-18 April 1991. 7. In September 1989 Khabarovsk ispolkom chairman Nikolai Danilyuk brought up the Far Eastern Republic on local television. Two months later in the Supreme Soviet, however, Danilyuk voted against.economic autonomy for the Baltic.repub• lics. From a lecture by Dr. Boris Rumer, University of Hawaii, 2 November 1989; SUPAR Report, No. 8, January 1990, p. 84; Region, April 1990, p. 2. 8. Vechernii Vladivostok, 19 May 1990, cited in SUPAR Report, No. 9, July 1990, p. 126. 9. Krasnoe znamia, 11 September 1990; Krasnaia zvezda, 22 September 1990, Ac• cording to an article in Krasnaia zvezda, 25 November 1990, Zabolotnokov told the local press that communists would be shot when the FERFP came to power. SUPAR Report, No. 10, January 1991, p. 201. Other regionalists feel that the FERFP program goes too far and prefer a Far Eastern Association. G. Stroev in Priamur- skie vedomosti, 21 February 1991.

10. Boris Resnik in Izvestiia, 8 February 1990, p. 2. 11. SUPAR Report, No. 10, January 1991, p. 160. 12. Agenstvo Dalpress, Region, published in Khabarovsk. 13. Phamurskie vedomosti, 20 February 1991, p. 8. 14. According to Boris Rumer, each district executive committee set up its own international relations bureau. From a lecture at University of Hawaii, 2 Novem• ber 1989. 15. Report on the USSR, Vol. 2, No. 41, 12 October 1990, p. 28; No. 42, 9 October 1990, p. 42. Conversation with John Tichotsky, 2 December 1990. Elisabeth Rubin- fien, The Wall Street Journal, 26 December 1990. 16. Region, December 1990, p. 2. 17. Both are reproduced in SUPAR Report, No. 10, January 1991, pp. 12-13.

Ill 112 Notes

18. In more detail, except for Japan, the area covered is contiguous—the Korean peninsula and portions of Northeast China: Liaoning, Jilin, and Heilangjiang, and the Russian Far East: Maritime Kray, Amur Oblast, Khabarosk Kray, Sakhalin Ob• last, Yakut ASSR, Magadan Oblast, Kamchata Oblast. 19. By now the population should be well over 300 million. 20. This estimate is unadjusted for the portion of exports and of imports that are intraregional. Any regional surpluses would be subtracted from and regional deficits added to the total of the reported GDPs. 21. These are rough estimates from World Bank, World Development Report 1987; U.S. State Department, Country Bulletins (various numbers, 1987-90); and John J. Stephan and V.P. Chichkanov, eds., Soviet-American Horizons on the Pacific, Honolulu: University of Hawaii Press, 1986. 22. One important job that badly needs doing if regional economic cooperation is to proceed is to clearly inventory the basic resource and infrastructure situation in the region and the level of technical efficiency of existing productive capacity and to evaluate the minimum changes needed, if any, for success. Until this is done, what I or others have to say about the region must be largely conjecture. 23. It is not likely that Japan would ever become a full member of any arrange• ment calling for preferential treatment of regional goods and services. 24. With Japan and South Korea in the group, that is likely since many of the capital goods needed will come from Japan and South Korea but the end-products are likely to move outside the region. 25. This project was discussed at the International Conferences on the Economic Development of Northeast Asia at Changchun, China, July 1990 and August 1991. See Mark J. Valencia, "The Golden Delta? China's proposed lumen River Project," Pacific Review in press. 26. From Almanac of China's Foreign Economic Relations and Trade 1988, Bei• jing, 1988. 27. See, e.g., Robert G. Jensen, Theodore Shabad, and Arthur W. Wright, eds., Soviet Natural Resources in the World Economy, Chicago: University of Chicago Press, 1983. See also note 21. 28. According to the Japan Economic Research Centre, the share of flows of for• eign investment into iron and other metals will be halved in 1993 compared to 1986 and the share of flows into intermediate inputs will be cut to 40 percent of its 1986 level. Further reductions in shares of these sectors are predicted by the year 2000. In terms of cumulated direct foreign investment, by 1988 mining accounted for just 9 percent of the total outstanding and metal manufacturing for only 5 per• cent, according to Japan's Ministry of Finance. This compares with the 21 percent share of banking, finance, and insurance and the 46 percent share of all services including banking, finance, and insurance. 29. One benefit of being prepared to participate in the changing world technol• ogy is that large amounts of physical capital are not required for many of the new Notes 113 activities, an advantage for those countries with large populations and very low physical capital/labor ratios. Even with a relatively low per capita and higher educa• tional effort, China, for example, has the opportunity of acquiring the critical mass of trained people necessary for the new products. 30. The Great World Atlas, American Map Corporation, West Germany: RV Reise- und Verkehrsverlag GmbH, 1986. A similar result is obtained from the tables on minerals production in World Resources 1988, World Resources Institute and The International Institute for Environment and Development, New York: Basic Books, 1986. 31. Michael J. Bradshaw, "Soviet Asian-Pacific Trade and Regional Development of the Soviet Far East," Soviet Geography, Vol. 29, 1988, pp. 367-393; Chon Soo- hyun, "South Korea-Soviet Trade Relations," Asian Survey, Vol. 29, 1989, pp. 1177-1187; Robert E. Rehbein, "The Japan-Soviet Far East Trade Relationship: a Case of the Cautious Buyer and the Overconfident Seller," Journal of Northeast Asian Studies, Vol. 8, 1989, pp. 38-64. 32. Gaye Christofferen, "Economic Reforms in Northeast China," Asian Survey, Vol. 28, 1988, pp. 1245-1263; Leslie Dienes, "A Comment on the New Develop• ment Program for the Far East Economic Region," Soviet Geography, Vol. 29, 1988, pp. 420-422; Alexander Granburg, "The Restructuring of the Soviet Economy and Prospects for Siberia's Development," International Regional Science Review, Vol. 12, 1989, pp. 291-304; Theodore Shabad, "Siberian Development under Gorba• chev," International Regional Science Review, Vol. 12, 1989, pp. 281-289. 33. Far Eastern Economic Review, 3 May 1990. 34. Sueo Sekiguchi, "Direct Foreign Investment and the Yellow Sea Rim." Paper presented at International Conference on Regional Development in the Yellow Sea Rim, 18-21 February 1991, Seoul, Korea. 35. Sung-Woong Hong and Chang Ho Yim, "Foreign Investment and Economic Development: the Case of Korea." Paper presented at the International Confer• ence on Regional Development in the Yellow Sea Rim, 18-21 February 1991, Seoul, Korea. 36. Won Bae Kim, "Yellow Sea Economic Zone: Vision or Reality!' Paper presented at International Conference on Regional Development in the Yellow Sea Rim" 18-21 February 1991, Seoul, Korea. 37. Leslie Dienes, "A Comment on the New Development for the Far East Eco• nomic Region," Soviet Geography, Vol. 29, 1988, pp. 420-422. 38. Christopher Findley, and Alaster Edwards, "Assessing Economic Opportuni• ties in the Soviet Far East," The Pacific Review, Vol. 3, 1990, pp. 207-213; Mar• shall 1. Goldman, "Joint Ventures Return to Communist China and the Soviet Union," Business in the Contemporary World, Vol. 1, 1989, pp. 84-92. 39. Hankuk Ilbo, 14 April 1991. 40. Malcolm Makintosh, "The Super Powers in Pacific Asia: the Outlook for the Soviet Armed Forces." Paper presented at Security and Prosperity in Pacific Asia 114 Notes

Beyond the Cold War, International Workshop, 29-31 July 1990, Chiang Mai, Thailand, p. 12. 41. Li Ming, "Trade with USSR, E. Europe Thrives," Beijing Review, Vol. 33, No. 37, 10-16 September 1990, pp. 27-29. 42. Elizabeth Cheng, "Power to the Center: China Removes Export Subsidies to Curb Regional Privileges," Far Eastern Economic Review, 24 January 1991, pp. 34-35. 43. This section draws from Gaye Chris to ffersen, "Economic reforms in North• east China," Asian Survey, Vol. 28, 1988, pp. 1245-1263. 44. Gaye Christoffersen, "Energy Reform in China: The Professionalization of Energy Policymaking" Ph.D. diss., University of Hawaii, 1987. 45. Song Kui, "Sulian bianjing maoyi pouxi" [An analysis of Soviet border trade], Guoji Maoyi Wenti [International Trade Journal], No. 3, 1985. 46. Hiroko Kawai, "China-Soviet Trade: The Present Situation and Outlook," China Newsletter, No. 60, January-February 1986, p. 22. 47. Louise de Rosario, "Recovering Lost Time: The Growth of Soviet-Sino Trade Has Resumed in Earnest," Far Eastern Economic Review, 1 January 1987, pp. 46-47. 48. National Research Center for Science and Technology Development and China Energy Research Society, "Xin xingshi xia de neng yuan wenti he duice" [Energy problems and policies under the new situation), report to the State Planning Com• mission, Beijing, November 1986. 49. Heilongjiang Academy of Social Sciences, "International Factors and the Eco• nomic Development Strategies of China's Northeast," Weilai yu fazhan [Future and Development], No. 6, 1985, pp. 28-32. 50. Wu Xin, Dongbei diqu jingji fazhan wenti shang de zhanlue taishi [Strategy considerations in the problems of the Northeast Region's economic development], Sino-Japanese Economic Training Technology Exchange Conference, Beijing, Sep• tember 1985. 51. de Rosario, pp. 46-47. 52. Trade statistics are from China's Ministry of Foreign Economic Relations and Trade, Almanac of China's Foreign Economic Relations and Trade 1986, pp. 667-68, 670, 707-708, 712. 53. From notes provided by Canadian External Affairs. 54. The Toronto Star, 30 November 1990. 55. Lou Naumovski, "A Message from the Canada-USSR Business Council." 56. Lou Naumovski, "A Message from the Canada-USSR Business Council." 57. San Francisco Chronicle, 11 January 1980, 2; 19 January 1980, 4. 58. San Francisco Examiner & Chronicle, 10 January 1982, A2. 59. AFP, 8 April 1980 in FBIS APA, 80/77, 18 April 1980, C14. Notes 115

60. San Francisco Chronicle, 17 May 1980, 5. 61. San Francisco Chronicle, 19 October 1983, 29, 31. 62. San Francisco Chronicle, 15 January 1980, 52. 63. San Francisco Chronicle, 29 December 1982, 2. 64. San Francisco Chronicle, 16 November 1983, 4. 65. San Francisco Chronicle, 30 November 1983, 1, 20. 66. San Francisco Chronicle, 6 December 1983, 2. 67. San Francisco Chronicle, 19 October 1983, 4. 68: San Francisco Chronicle, 18 October 1983, 1, 4; 19 October 1983, 1, 20; 20 October 1983, 1, 28, 29, 30; 21 October 1983, 1, 6. 69. San Francisco Chronicle, 21 November 1983, 2. 70. San Francisco Chronicle, 15 January 1980, 11. 71. San Francisco Examiner & Chronicle, 21 August 1983, Al, A18. 72. San Francisco Chronicle, 25 March 1984, A2. 73. San Francisco Chronicle, 3 September 1981, 10; Honolulu Advertiser, 10 Sep• tember 198i; All. 74. San Francisco Chronicle, 4 October 1982, 10. 75. San Francisco Chronicle, 23 November 1987, A16. 76. .TASS, 24 November 1987, in FB/S Sov 87/230, 1 December 1987, 31-32. 77. Honolulu Advertiser, 2 October 1987, Al, A4, A5. 78. Los Angeles Times, 27 May 1989, 1, 26. 79. Surviving Together, 4, (October 1984), 47. 80. TASS, 28 April 1990. 81. San Francisco Chronicle, 12 December 1984, 1, 19. 82. San Francisco Chronicle, 7 December 1984, 8. 83. TASS, 9 November 1989. 84. TASS, 18 June 1990. 85. San Diego Union, 19 April 1989, Dl, 4. 86. SUPAR Report no. 9 (July 1990), 144. 87. SUPAR Report no. 10 (January 1991), 237. 88. SUPAR Report no. 10 (January 1991), 238. 89. TASS, 12 April 1990. 90. SUPAR Report no. 5 (July 1988), 3. 91. SUPAR Report no. 7 (July 1989), 81. 92. SUPAR Report no. 6 (January 1989), 46. 116 Notes

93. TASS, 11 September 1988 in FBIS Sov 88/176, 12 September 1988, 18. 94. Tundra Times, 9 July 1990, 5. 95. SUPAR Report no. 7 (July 1989), 3, 9. 96. SUPAR Report no. 9 (July 1990), 3. 97. San Diego Union, 5 October 1989, A4. 98. San Diego Union, 29 July 1990, Bl, B4; 31 July 1990, Bl; 1 August 1990, Al, A6, Bl, B4; 2 August 1990, Bl, B4, Dl, D3; 3 August 1990, Bl, B3. 99. San Diego Union, 8 September 1990, A17, A18; 10 September 1990, A16; 11 September 1990, Al, A10; TASS, 9 August 1990, in FBIS Sov, 90/155, 10 August 1990, 7. 100. SUPAR Report no. 4 (February 1988), 2. 101. SUPAR Report no. 7 (July 1989), 4. 102. SUPAR Report no. 7 (July 1989), 94-95. 103. SUPAR Report no. 10 (January 1991), 3. 104. Seattle Post Intelligencer, 17 August 1989, Al, A4; 18 August 1989, Al, A5. 105. Seattle Post Intelligencer, 17 August 1989, Al, A4. 106. Anchorage Daily News, 24 August 1990, CIO. 107. Seattle Post Intelligencer, 18 August 1989, A\, A5. 108. Seattle Post Intelligencer, 18 August 1989, Al, A5. 109. Seattle Times/Post Intelligencer, 25 November 1990, Kl, K6-K8. 110. San Francisco Chronicle, 22 September 1989, CI, C4; Seattle Post Intelligencer, 23 November 1990, C2. 111. SUPAR Report no. 10 (January 1991), 172. 112. Seattle Post Intelligencer, 23 November 1990, C2. 113. Tacoma Morning News TYibune, 29 November 1990, Dl. 114. Tacoma Morning News Tribune, 12 December 1990, E10, E13. 115. Anchorage Daily News, 15 April 1990, Dl, D3. 116. Seattle Post Intelligencer, 23 November 1990, CI, C2; Anchorage Daily News, 24 August 1990, CIO. 117. Seattle Post Intelligencer, 16 August 1989, Al, A5. 118. Asahi, 27 December 1990, 17 in SUPAR Report no. 10 (January 1991), 164. 119. Vladivostok, 3 November 1990, 3 in SUPAR Report no. 10(January 1991), 165. 120. SUPAR Report no. 9 (July 1990), 4; no. 11 (July 1991), 3. 121. SUPAR Report no. 10 (January 1991), 163. CONTRIBUTORS

Dr.-Yutaka AKINO, Associate Professor of Tsukuba University.

Dr. Robert E. BEDESKI, Department of Political Science, University of Victoria, British Columbia.

Dr. Burnham O. CAMPBELL, Professor Emeritus, Department of Eco• nomics, University of Hawaii.

Dr. Leslie DIENES, Professor of Department of Geography, University of Kansas.

Mr. Victor FISCHER, Director of Office of Soviet Relations, University of Alaska.

Dr. Vladimir I. IVANOV, Institute of World Economy and International Relations, Moscow.

Dr. Won Bae KIM, Research Associate in the Population Institute, East- West Center.

Dr. Vasily V. MIKHEEV, Institute for Economics of the World Socialist Systems, Moscow.

Dr. Pavel A. MINAKIR, Institute for Regional Systems Studies, Kha• barovsk.

Dr. Sh. SANDAG, Center for North-East Asian Studies, Mongolian Acad• emy of Sciences, Ulan Bator.

Dr. John J. STEPHAN, Department of History, University of Hawaii.

Dr. Ivan S. TSELICHTCHEV, Institute of World Economy and Interna• tional Relations, Moscow.

Dr. Mark J. VALENCIA, Research Associate in the International Rela• tions Program, East-West Center.

Dr. Robert VALLIANT, Research Associate, School of Hawaiian, Asian, and Pacific Studies, University of Hawaii.

Dr. John Quansheng ZHAO, Peace Fellow, United States Institute of Peace, Washington, D.C.

117