Welcome To Russia's Wild, Wild East

Racing up and down the hilly streets of Vladivostok in his Toyota Mark II sedan, Sergei Batchurin approaches a red light. Instead of putting on the brakes, he steps on the gas, scattering pedestrians left and right. As director of Vladivostok's open-air Chinese Market and one of the Russian Far East's powerful new biznezmen, Batchurin drives as if he owns the city.

In a way, he does. Batchurin, 30, is a symbol of the new economic muscle in Russia's Far East. Once run like a vast military camp as home base of the Soviet Pacific Fleet, Vladivostok was beholden for everything to Moscow, seven time zones to the west. Foreigners were forbidden to visit, and trade with the rest of the world was severely limited.

But today, that yoke is off, and the hilly city of 700,000 with views of the water at every turn has fast become the center of a thriving trade in food, raw materials, and consumer goods. Instead of looking to the capital in the west, it focuses on Seoul and Shanghai.

HUGE JUMP. Indeed, the Vladivostok region is on its way to becoming Russia's window to the east. Each week, express trains carry hundreds of containers full of Asian-made televisions, VCRs, and compact-disk players the 9,000 km to Moscow. Every day, Batchurin's market is packed with hundreds of Chinese traders hawking Chinese-made shoes, clothes, and video games, while Russian sailors supplement their meager paychecks by importing and reselling used Japanese cars. Local stores and kiosks stock New Zealand butter and Australian beef, while ships send off Russian seafood to Japan and the U.S.

From 1990 to 1993, the volume of export and import cargo moving through Russia's Far Eastern ports jumped by 70%. And the region's economic potential is vast. Rich in oil, gas, and timber, it could one day supply the powerhouse economies of Japan and South Korea, displacing their dependence on Persian Gulf imports.

Achieving that will be difficult, however. Cut free from the grip of central planners and with the old Soviet defense Establishment in disarray, the Far East's underlying economy is undergoing a tough structural adjustment. Factories are shuttered, and many workers haven't been paid for several months. As the old manufacturing base stagnates, the new trading mentality is taking its place. Inevitably, that's helping Russia's Far East forge economic ties with Asia, replacing old connections with Soviet-era partners. "Whether officials in Moscow want it or not, there is a process of separation," says Valentin Knapp, economist for the Vladivostok newspaper Utro Rossii.

Distance and economics are the forces driving that separation. It used to be that the Far East shipped metals and raw materials to western parts of the Soviet empire in exchange for food, fuel, and finished goods. Transportation and energy costs were subsidized. But those days are over. In the past year, fuel prices have soared, and rail rates have tripled. Nor does the region get much financial help from the capital, though Moscow still controls most of the Far East's precious metals and timber.

LITTLE CHOICE. So far, the push for autonomy has been economic, not political. Officials in the forthern regions of Chukotka and Magadan, for example, want more freedom to do business with their Alaskan neighbors across the Bering Strait than Moscow might want. "We don't want sovereignty, but we want more economic independence," says Veniamin S. Turetsky, an economist at the Pacific Center of Economic Development & Cooperation in Vladivostok.

Yet if the doors to the east open too much, say some, there's a chance that the region could lose control of the economy to its new trading partners, such as the Chinese. Although the Far East Russians recognize that they have little choice but to open up, that is leading to some tension now that Chinese construction crews and traders have swarmed in.

Facing mounting joblessness from defense rollbacks, Moscow recently made it more expensive and difficult for Chinese workers to get Russian visas. And officials are cracking down on illegal residents: Since May, more than 370 Chinese citizens have been deported for violating immigration rules. "They fear a Chinese invasion," says Victor Larin, a specialist in Russian-Chinese relations at Vladivostok's Institute of History & Archaeology.

The region's long-term challenge is to move up the economic ladder beyond the sudden burst of trading of raw materials for cheap Asian consumer goods. That will require more fixed Western investment. Problem is, the region's wild, wild east atmosphere scares off most foreign investors. Moscow, meanwhile, has been slow in putting together a comprehensive legal framework to protect foreign investment and streamline trade regulations, including high import taxes on finished goods and licenses to export raw materials.

If the government approves a batch of new decrees proposed in late May, however, the Far East's economy could make steady progress. Russian President Boris Yeltsin, who visited Vladivostok in mid-June, has proposed slashing import taxes and eliminating most trade quotas. "Yeltsin's decrees will generate more economic activity, especially by the smaller players," says Kevin Block, the first American lawyer to practice in Vladivostok. His business is picking up enough to hire three more lawyers. U.S. companies that are setting up shop in the region include Coca-Cola, IBM, and Master Foods. Weyerhaeuser and Alaska Airlines are already well-entrenched.

The Vladivostok area is also a major staging ground for the biggest project so far in the Russian Far East--a $9 billion oil find off the island of Sakhalin. There, Marathon, Shell, McDermott, Mitsui, and Mitsubishi plan to tap offshore oil-and-gas reserves, which could give Japan a big new source of energy. The Koreans are also looking into the feasibility of a gas pipeline running from the Lena River basin in Yakutia to Korea. That field is one of the last unexplored but potentially great oil-and-gas deposits in the world.

Foreigners are helping to give the regional capital a facelift as well. Today, Vladivostok is filled with crumbling, Soviet-style buildings. But Koreans are building a $10 million business center in the city center. And Italian developer Tegola has renovated the marine passenger terminal and is refurbishing the rail station and airport. Richard Schindler, former president of the Gristede's grocery chain in New York, is starting American-style grocery stores in Vladivostok and nearby Nakhodka for Seattle-based TPC Foods Inc. And nearly all of the local fishing and shipbuilding companies are partly owned by foreigners.

"NATURAL FIT." Even in remote corners near the Arctic Circle, where Moscow keeps a tight grip on precious natural resources, one U.S. company has managed to elbow in. Denver's Cyprus Amax Minerals Co. is investing $150 million in a gold- and silver-mining joint venture in the province of Magadan. The project has the blessing of the U.S. Overseas Private Investment Corp., which is providing $55 million in guarantees and $150 million in political risk insurance.

"There is a natural fit between the Far East and industries in the northwestern part of the U.S., such as mining, seafood, and timber," says OPIC President Ruth Harkin, after leading a group of 21 U.S. companies on an investment mission to the Far East. Small wonder that Vladivostok, just 600 km from Seoul, 1,000 km from Tokyo, and across the straits from Alaska, sees itself as a natural fit in the booming economy of the Pacific Rim.

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