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Foreign direct investment in the forest resource development in the Russian Far East and its implications… Tak, Kwang-Il 1994

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FOREIGN DIRECT INVESTMENT IN THE FOREST RESOURCE DEVELOPMENT IN THE RUSSIAN FAR EAST AND ITS IMPLICATIONS FOR JAPANESE AND KOREAN LOG MARKETS Case Study: South Korean-Russian Forestry Joint Venture, Svetlaya BY KWANG-IL TAK B. Agr., Korea University, 1977 M.Sc. F., Lakehead University, 1988 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES FACULTY OF FORESTRY (Department of Forest Resources Management) We accept this thesis as conforming to the required standard  THE UNIVERSITY OF BRITISH COLUMBIA October 1994 © Kwang-I1 Tak 1994  in presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department  or  by  his  or  her  representatives.  it  is  understood  that  copying  or  publication of this thesis for financial gain shall not be allowed without my written permission.  (Signature)  Department  of  The University of British Columbia Vancouver, Canada Date  DE-6 (2/88)  L. 1 OcrtI3R i’c_, ,?‘L  il  ABSTRACT  Located in one of the world’s most resource-rich regions, the Russian Far East suggests major potential interactions with one of the world’s fastest growing economies in Northeast Asia, namely, Japan, Korea and China. Russian economic reform and the allowance of foreign direct investment have increased the chance of realizing such potential. The primary purpose of this dissertation is to investigate the role of South Korean investment  in  developing the forest resources of the Russian Far  East and exporting the raw materials produced to Japan and South Korea. The secondary purpose is to investigate the opportunities for and constraints on the realization of the potential economic complementarity present among the three countries. The Russian Far East could help Japan and South Korea to increase the security of resource supply for the two countries’ economies, whereas the Russian Far East could take advantage of these countries’ capital and technology to speed up regional economic development and the region’s integration into the Asia-Pacific economy. An analytical framework is developed to analyze the foreign direct investment, or transnational corporate activities,  in  forest development  projects in the Russian Far East. This study has used a case study approach for the analysis. The South Korean-Russian forestry joint venture Svetlaya was selected for the purpose. The case study reviewed the joint venture’s three year operation through interviews both on site and in the head office of the Korean investor, and the interviews were further supported by a field visit to the joint venture’s project site in Svetlaya, Primorskiy Kray.  in This dissertation has demonstrated that foreign direct investment still poses many problems to realize the forest resource potential in the Russian Far East and consequent increase in exports to the Pacific Rim countries. Nevertheless, this dissertation suggests that joint venture as an alternative means to, for example, KS agreements, will be preferably employed to increase exports of forest products from the region.  This study also  suggests that the future foreign investment should be directed towards more processing-oriented activities than logging which aggravates the region’s negative attitudes towards foreign investment as exhibited in the case study. This study also concludes that a definite interest in forestry investment exists in the Russian Far East, though political and economic instability becomes the largest barrier to attracting foreign investments in the short term and to integrating them into the Asia-Pacific economy in the long term. A longer-term vision, rather than seeking short-term financial gain, is required for future forestry investments in the region. This dissertation attempts to provide implications of the global pattern of the interactions between forest regions and world core markets through an analysis of the same interactions in Northeast Asia.  iv TABLE OF CONTENTS PAGE ABSTRACT  ii  LIST OF TABLES  ix  LIST OF FIGURES  xiii  LIST OF MAPS  ix  LIST OF PHOTOGRAPHS  xv  ABBREVIATION  xvi  RUSSIAN  TRANSLITERATION  TABLE  xvii  ACKNOWLEDGMENTS  xviii  CHAPTER I  1  INTRODUCTION  1.1.  INTERACTIONS BEIWEEN FOREST RESOURCE AND MARKET REGIONS  1  1.2.  NEW CURRENTS AROUND THE RUSSIAN FAR EAST  3  1.3.  INTERNATIONALIZATION OF KOREA’S FOREST INDUSTRY  6  1.4.  GLOBALIZATION OF ECONOMIC ACTIVITIES  8  1.5.  PROBLEMS OFTHE STUDY  8  1.6.  PURPOSES OFTHE STUDY  11  1.7.  SCOPE OF THE STUDY  13  1.8.  STRUCTURE OF THE DISSERTATION  13  1.9.  LIMITATIONS OF THE STUDY  14  1.10. SIGNIFICANCE OF THE CURRENT STUDY  CHAPTER 11  LITERATURE  REVIEW  15 17  2.1.  MODELS OF ECONOMIC ACTIVITIES  17  2.2.  THE REF AND REGIONAL DEVELOPMENT  21  2.3.  FOREST SECTOR IN THE RFE  23  2.4.  EXTERNAL FORCES AND REGIONAL DEVELOPMENT IN THE RFE  25  2.5.  TRANSNATIONAL CORPORATION AND THE RFE  28  V  CHAPTER  III  CHAPTER IV 4.1.  4.2.  4.3.  4.4.  MHOD- 32 HOME COUNTRY ENVIRONMENT  -  SOUTH KOREA  NATIONAL ECONOMIC CONDITIONS  39 39  4.1.1. The National Economy  39  4.1.2. Forest Resources in Korea  43  4.1.3. DemandandSupply  47  4.1.4. Log Imports  50  4.1.5. WoodUse  53  4.1.6. Structural Changes in the Forest Products Industry  56  GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT  59  4.2.1. Korea’s Outward Foreign Direct Investment  59  4.2.2. Government Policy Toward Overseas Investment  61  4.2.3. Overseas Investments in Forestry  64  PERCEPTION OF HOST COUNTRY-THE RUSSIAN FAR EAST  70  4.3.1. Northern Policy  70  4.3.2. Economic Relations Between Korea and Russia  73 Economic Aid  73 Trade  74 Investments  75 Other Economic Cooperation  78  Corporate Interests in the RFE  79  4.4.1. Trade with the RFE  79  4.4.2. Investments in the RFE  82  4.4.3. Korean Industrial Park in Primorskiy Kray  85  4.4.4. Joint Mineral and Energy Resource Development  86  4.4.5. Fisheries  Cooperation  88  4.4,6. Science and Technology Transfer  88  4.4.7. Korean Minority in the RFE  89  vi 4.5.  SUMMARY AND DISCUSSION  -91  CHAPTER V HOST COUNTRY ENVIRONMENT -THE RUSSIAN FAR EAST- --93 93  5.1.  REGIONAL ECONOMIC CONDITIONS  5.2.  REGIONAL ECONOMIC POLICY  101  5.3.  INTERACTIONS WITH NEIGHBOURING COUNTRIES  103  5.4.  5.3.1. Foreign Trade  104  5.3.2. Foreign Investment  109  5.3.3. Problems of Foreign Investment in the RFE  114  FOREST RESOURCE CONDITIONS 5.4.1. Land Classification in the Russian Far East  117  5.4.2. Forest Classification in the Russian Far East  121  5.4.3. Species, Volume and Distribution  124  5.4.4. Annual  5.5.  Increment  130  5.4.5. Rehabilitation of Damaged Areas  134  5.4.6. Accessibility  136  5.4.6. Cut Control System  138 142  FOREST ADMINISTRATION 5.5.1. Before the  5.6.  116  1988  Reform  143  5.5.2. The l988Reform  144  5.5.3. The 1991 Reform  145  5.5.4. Post USSR Reform  146  5.5.5. Resource Allocation System  146  5.5.6. Rights to Managing the Forest Resources  147  FOREST INDUSTRY  149  5.6.1. AAC and Annual Harvest  149  5.6.2. Production  151  5.6.3. Exports of Forest Products  157  5.6.4. Export Control Mechanisms  161  vii  5.7.  5.6.5. Foreign Investment in Forestry  163  5.6.6. Recent Developments in the Industrial Organizations  166  SUMMARY AND DISCUSSION  CHAPTER VI  JAPAN: THE FIRST COMER, MAJOR EXPORT MARKET AND COMPETITOR  169 171  6.1.  RUSSIAN LOGS IN THE JAPANESE MARKET  171  6.2.  FOREST PRODUCTS TRADE WITH THE USSR  175  6.2.1. KS  178  Agreements  6.2.2. First KS Agreement  179  6.2.3. Second KS Agreement  180  6.2.4. Third KS Agreement  181  6.2.5. Fourth  Agreement  KS  6.2.6. Industrial Chips and Hardwood Pulpwood Projects 6.3.  182 183  INCENTIVES AND CONSTRAINTS INVOLVED IN THE TRADE WITH USSR- -185 6.3.1. Incentives  186  6.3.2. Constraints  189  6.4.  JAPANESE FORESTRY INVESTMENT IN THE RFE  192  6.5.  COMPETITION IN THE RFE  195  6.6.  SUMMARY AND DISCUSSION  197  CHAPTER VII CASE STUDY  KOREAN-RUSSIAN FORESTRY SVETLAYA JOINT VENTURE -  198  7.1.  THE JOINT VENTURE  198  7.2.  FOREST RESOURCE  200  7.3.  REFORESTATION AND RESEARCH  204  7.4.  REGIONAL EFFECTS OF THE JOINT VENTURE  210  7.4.1. Production and Exports 7.4.2. Regional 7.5.  Development  INTERACTION WITH THE INVESTMENT ENVIRONMENT 7.5.1. Environmental Problems  210 212 216 217  viii -219  7.5.2. Institutional Instability 7.5.3. Labour  221  7.5.4. Infrastructure  223 224  7.6. SUMMARY AND DISCUSSION CHAPTER VIII FOREIGN DIRECT INVESTMENT AND RESOURCE AND MARKET INTERACTIONS IN NORTHEAST ASIA  230  8.1.  LESSONS FROM THE JV SVEI’LAYA  230  8.2.  FOREIGN DIRECT INVESTMENT AS COMPARED TO COMPENSATION AGREEMENT  232  8.3.  INTERACTIONS BETWEEN RESOURCE AND MARKET REGIONS IN NORTHEAST ASIA  234 238  CHAPTER IX CONCLUSIONS 9.1.  IMPLICATIONS FOR EXPORT GROWTH BY FDI  238  9.2.  IMPLICATIONS FOR REGIONAL DEVELOPMENT IN THE RFE  239  9.3.  POLICY IMPLICATIONS FOR FDI IN THE RFE  241  9.4.  IMPLICATIONS FOR THE INTERACTIONS BETWEEN RESOURCE AND MARKET REGIONS  245 247  BIBLIOGRAPHY  266  APPENDIX  I  :  SUMMARY OF THE JOINT VENTURE SVETLAYA  APPENDIX  II  :  ORGANIZATIONS  APPENDIX  III:  INDIVIDUALS  INTERVIEWED  269  APPENDIX  IV :  LAND CLASSIFICATION OF THE FOREST FUND IN THE RFE  273  NAMES OF POPULAR TREE SPECIES IN THE RFE  274  RUSSO-JAPANESE FORESTRY JV’S  276  APPENDIX V APPENDIX  :  VI :  INTERVIEWED  267  ix  LIST OF TABLES 3.1.  Relationship Between the Analytical Framework and the Organization of the Dissertation  37  4.1.  Major Korean Economic Indicators  41  4.2.  Share of GNP by Industry  42  4.3.  Land Classification in Korea in 1990  44  4.4.  Forest Types in  1990  44  4.5.  Forest Ownership in 1990  45  4.6.  Growing Stock Volume per hectare in Various Countries  45  4.7.  Age Class Structure in 1990  47  4.8.  Wood Consumption and  4.9.  Log  4.10.  Hardwood Log Imports by Source  52  4.11.  Softwood Log Imports by Source  53  4.12.  Trend of Wood Use  54  4.13.  Rates of Housing Starts in Korea and Other Countries  55  4.14.  Shares in Total Exports  57  4.15.  Share of the Use of Imported Logs  59  4.16.  Korea’s Overseas Investment  60  4.17.  Logs Imported through Overseas Investment  65  4.18.  Korea’s Overseas Investments in Forestry  66  4.19.  Overseas Forestry Investments by Country  67  4.20.  Overseas Forestry Investments by Ownership in 1992  68  4.21.  Korea’s Trade with Russia  75  4.22.  Korean Investment in the Former Soviet Union  76  4.23.  Investment by Region and Industry (approved amount)  77  4.24.  RFE’s Trading Partners  80  4.25.  Korea’s Trade with the RFE  80  Supply  Imports  48 51  x 4.26.  Korea’s Trade with the RFE by Sub-region in 1992  82  4.27.  Korea’s Investments in the RFE (Nov. 1992)  83  4.28.  Geographic Distribution of the Investments (Nov. 1992)  83  4.29.  Korea’s Participation in the Resource Development in the RFE  87  5.1.  Area and Population of the RFE  94  5.2.  National Share of Industrial Output by Region in 1990  96  5.3.  Geographic Distribution of Regional Economy in the RFE, 1 990---------- 98  5.4.  Geographic Distribution of Industrial Output in the RFE, 1990  5.5.  Composition of Industry within Territory in 1992  100  5.6.  Foreign Trade in the RFE in 1992  105  5.7.  Composition of Exports from the RFE  106  5.8.  Composition of Imports to the RFE  106  5.9.  Orientation of the RFE’s Trade  107  5.10.  Trading Partners of the RFE in 1992  108  5.11.  Number of Joint Ventures Registered in the RFE  110  5.12. Joint Ventures in Operation in the RFE  99  111  5.13.  Geographic Distribution of the Joint Venture by Country of Origin  111  5.14.  RFE’s Trade by Firms with Foreign Capital Participation in 1992  112  5.15.  Foreign Trade and Domestic Sales by Joint Venture  113  5.16.  Forested Area in the RFE  117  5.17.  Basic Indices of the Forests in the RFE  118  5.18.  Land Classification of Forest Fund in the RFE  119  5.19.  Changes in Land Classification from 1966 to 1988  120  5.20.  Forest Fund under Control of Forest Authority Classified by Group  122  5.21.  Changes in Forested Area by Group in the RFE (1 million ha)  123  5.22.  Species Composition in the RFE  125  5.23.  Coniferous Species  126  5.24.  Deciduous Species  128  xi 5.25.  Growing Stock Volume per hectare between Canada and the RFE  129  5.26.  Changes in Species Composition Over Time  130  5.27.  Annual Increment in the RFE  131  5.28.  Six Age Classes of Russian Forests  132  5.29.  Maturity of Stocked Forests under Control of State Forest Management 133  5.30. Trend of Changes in Forested Area and Volume in the RFE  133  5.31.  Reported Area Damaged by Forest Fires in a Year between 1978 and 1987  134  5.32.  Forest Fire Statistics in 1992  135  5.33.  Reforestation in the RFE (1988)  136  5.34.  Areas Controlled by Different Organizations in the RFE  136  5.35.  Area and Volume of Stocked Forests, Exploitable under Control of Forest Authority  137 149  5.36. AAC in the RFE  150  5.37.  AAC and Actual Harvest Volume in 1992  5.38.  Annual Principal Harvest Volume, 1965  5.39.  Production of Main Forest Products in 1991  153  5.40.  Production Trend of Wood Products between 1965 and 1991  154  5.41.  Exports of Forest Products from the RFE  158  5.42.  Forest Products Exports from the RFE in 1991  159  5.43.  Exports of Forest Products to Japan  160  5.44.  Composition of the Imports by Product Category (1983  5.45.  Species Composition of the Softwood Logs and Lumber 1992) Imported from the USSR (1983  161  5.46.  Tax Amount for Forest Products  162  5.47.  Subregional Distribution of FDI in Forestry (October, 1992)  164  6.1.  Wood Demand and Supply in Japan  172  6.2.  Logs and Lumber Imports by Japan  174  6.3.  Japan’s General Commodity Trade with USSR  176  6.4.  Composition of the Imports by Product Category (1983  -  151  1990  -  1992)  -  -  1992)  160  176  xli  Species Composition of the Softwood Logs and Lumber Imported from the USSR(1983 1992)  177  6.6.  Summary of the 4 KS Agreements  183  6.7.  Summary of the Industrial Chips and Pulpwood Agreements  184  6.8.  Changes in Industrial Structure in Japan  191  6.9.  Share of Wood Products in the Imports from the USSR  191  7.1.  The areas and Growing Stock Volume to cut in the first 5 years (1991-1996)  202  7.2.  Reforestation by the JV  207  8.1.  Value-Adding Points by FDI and KS Agreement  233  8.2.  Endowment Conditions in Northeast Asia  236  6.5.  -  xnl  LIST OF FIGURES 34A  3.1.  Framework of the Dissertation  5.1.  Forestry Administration System of the USSR before the 1988 Reform ---144  xiv  LIST OF MAPS 4  1.1.  Korea and its Surroundings  5.1.  The Russian Far East  5.2.  Basic Infrastructure in the RFE  152  7.1.  Location of JV Svetlaya  199  7.2.  Neighbouring Districts of the Project Site  215  -  95  xv LIST OF PHOTOGRAPHS 1.  Finnish Feller-Buncher at Work  201  2.  An Example of Poor Soil Condition of the Project Site  203  3.  An Example of Diseased Forests on the Project Site  203  4.  Spruce Sawlogs Graded before Trucking  205  5.  Puiplogs (Mainly Spruce)  205  6.  Greenhouse Nursery on the Project Site  206  7.  Spruce Seedlings in the Greenhouse  206  &  Spruce Seedlings from Direct Seeding  208  9.  Spruce Seedlings Planted after Grown in the Greenhouse Nursery  208  10.  A Seedling Failed to Survive  209  11.  Quality Logs for Exports  211  12.  Street Scene of Svetlaya  213  xvi ABBREVIATIONS  CDSP FRI FDI JAWIC  : : : :  Jffli{O JV KOTRA NRC RFE RCYOBO  : : : : :  TNC  :  The Current Digest of the Soviet Press Economic Research Institute Foreign Direct Investment Japan Wood-Products Information and Research Center Japan External Trade Organization Joint Venture Korea Trade Promotion Corporation Northern Regions Center, Sapporo Russian Far Fast Rosia Touou Boeki Kai (Japan Association for Trade with Russia & Central-Eastern Europe) Transnational Corporation or Transnational Corporate  xvii RUSSIAN TRANSLITERATION TABLE  Russian A 6 B F 21 F  B  r e  3 I’l P1 K Ji  3  M  M H  H 0 fl  H K  o n  English a b v g d e zh z i y k 1 m fl  o p  Russian  English  P C T Y  p  r  T  X L  x  t u f kh tS ch sh shch  c y  14 q  W  w  b  b  b 3  bI b 3 0  s  3’  e yu ya  xviii ACKNOWLEDGMENTS First and foremost, I would like to thank my research supervisor, Dr. Robert North, who accepted me as his student and supported my efforts to bring together the divergent disciplines related to this study, and who gave me geographic insights into my forestry problems. I would like to thank my former supervisor and retired Professor Mr. F. L. C. Reed, who gave me the freedom to explore the wide variety disciplines in forestry. I greatly appreciate his encouragement and guidance in the early stage of my program. I also would like to express my appreciation to each member of my supervisory committee for his special assistance: to Forestry Dean Dr. Clark Binkley for his knowledge and experience on the Russian Far East; to Dr. David Cohen for his expertise in forest products marketing; to Dr. David Haley for his thorough comments from forest economic perspectives. I also appreciate the practical comments on my early work by Mr. David Cartwright, former Product Manager of COFI. I also would like to thank Dr. David Edgington, Geography Department, and Dr. Leonid Polishchuk, Economics Department, who at my personal request, willingly read the draft of my thesis and gave constructive comments. In the final period of my study at UBC, I had a luck to spend 3 months at IJASA in Laxenburg, Austria and had an opportunity to improve my study. I thank for Dr. Charles A. Backman for his special and critical comments on my thesis research and supervision during my stay at HASA. I appreciate the information and data available through him. Without him the updated and consistent data on the forest sector in the Russian Far East would not have been obtained. I thank him for his help for me to visit the institute, which allowed me the rare opportunity to interact with scientists from Russia. I also thank the Canadian Committee for IIASA and Mr. Paul Dufor, Office of the Chief Scientist, Industry Canada, for the generous funding for my research venture at IIASA. There are also numerous individuals who were generous with their time and encouragement during my field studies in Japan and the Russian Far East. Among them I would especially like to thank Drs. Hiroaki Kaldzawa, Yutaka Ishii, and Kiichi Mochizuki from Hokkaido University, Mr. Akihiko Araya from JAWIC and Mr. Kazuo Ogawa from ROTOBO in Tokyo. Professor Kakizawa and Mr. Araya’s helps were invaluable for collecting Japanese materials and interviews in Sapporo and Tokyo. I would like to thank Professors Pavel Minarkir, Alexander Sheingauz, and Alexander Ivanchikov from the Economic Research Institute in Khabarovsk for allowing me to interview them and helps for finding Russian materials. I  xix would like to express my appreciation to Korean managers of iv Svetlaya for their allowing me to interview them from the early stage of this study and to visit the project site, and providing me all comforts during my stay on the site. Special thanks are due to Mr. Dae Sik Kim, Senior Manager of Administrative Department, Mr. Kang-Soo Choo, Senior Executive Vice President of Hyundai Resource Development Co., Ltd., and Mr. Jong-Young Won, Managing Director of Hyundai Wood Industries Co., Ltd. Numerous people helped to make my first trip to the Russian Far East comfortable and productive. Among others, I would like to thank Mr. Alexander Karp, the University of Washington, his wife Vicky, and Dr. Charles Backman at IIASA. I received three Graduate Fellowships during the period of my graduate program: Donald McPhee Fellowship, Flectcher Challenge Forest Resource Management Fellowship and Asa Johal Graduate Fellowship in Forestry. These awards were the major source of funding for this thesis research and field studies in Japan and the Russian Far East. Dr. Elisa Miller, the editor and publisher of the Russian Far East Update, for which I have been working as a correspondent, and Mr. Eiichi Tsutsumi also provided me with some financial support for my research trip to the Russian Far East. I would also like to thank both Dr. Donald Baker and Ms. Insun Lee for their financial support by allowing me teaching assistantship in Asian Studies Department for the last three years of my graduate program at UBC. I would like to express my sincere thanks to a group of my old high school classmates for their emotional and financial support for my study in Canada, particularly to Mr. Bong-Kwan Chung and Mr. Bok-Suk Ryu whose generosity and friendship I would never forget. Woodland and Culture Study Group in Seoul was also a great emotional supporter for my study, particularly, Dr. Young Woo Chun, Professor of Kukniin University, for his encouragement and financial support for my study trips, and Dr. Chun Yong Lee, Korea Forest Research Institute, for his helps for gathering Korean forestry materials. I enjoyed the interactions with fellow graduate students throughout the graduate program at UBC. Among others, I appreciate the time shared with Gary Bull, Dong-Ho Shin and Paul Wood. My final and most deeply felt appreciation goes to my family: my old parents, who allowed me this venture in Canada while sacrificing all hardships in Korea. I am deeply indebted to them for their never-ending emotional and financial supports during my study in Canada; my daughter and son Jee-Hae and Jee-Hoon for their love and for all the time I was not able to share with them; my wife Sung-Yun for her sacrifice, patience and love.  CHAPTER I  1  INTRODUCTION 1.1. INTERACTION BETWEEN WORLD’S FOREST RESOURCE REGIONS AND MARKET REGIONS Forest resources are unevenly distributed across the globe: some countries are richly forested and others not. The current uneven conditions are mainly attributable to artificial reasons rather than to nature. The current conditions have been long established by agriculture, population growth, urbanization, and industrial activities which have taken place unevenly over time and space in human history. Both Thirgood (1981) and Perlin (1989) illustrate historically how humans interacted with forests in past times. Human impacts and dependence on forests in ancient times re sulted in early forest depletion in the Levant and old Greece (Thirgood, 1981). The depletion of forests spread over Europe and to the American continents as human history continued (Perlin, 1989). Security of timber for shipbuilding was sought by ancient Greek nations to control the sea, which led to economic and military supremacy (Perlin, 1989). Perlin re marks that fortunate Greek nations gained timber from nearby forests, but deforested nations had to secure their timber from remote regions through diplomatic efforts or military alliances with well wooded countries. He also mentioned that security of timber was one of the main motivations of many military activities and conquests at the time. The use of wood in naval shipbuilding has virtually disappeared, but it is still important for other uses in modern industry, so the interaction between humans and forests continues. The only difference now is the scale of the interaction, which has changed from local or regional in past  2 times to transnational at present. Many modern cities get their wood not from local forests but from other countries. Every year an increased volume of forest products is traded, and the trend seems likely to continue in the years to come. The distribution of forest resources has a very important influence on patterns of international economic activity and development. Despite an ever-growing volume of trade, the world’s forest products trade in the northern hemisphere is dominated by a few major importing and export ing regions. Major importing regions are the core regions of the world economy, namely, the European Community (EC), the United States, and Japan, a triad to use Ohmae’s (1986) term, and major exporting regions are peripheral resource regions close to the cores, namely, the Nordic countries  and Canada. Now the Russian Far East, its regional role within Russia be coming more economic than strategic since the break-up of the old Soviet Union, can be added to the aforementioned two resource regions because of its potential role as a peripheral resource region to the emerging new economic powers in Northeast Asia, namely, Japan, Korea and China. Each of the three resource regions in the northern hemisphere is located close to one of the triad of the world economy. However, Nordic-EC and Canada-U.S. relationships have long been established and have reached a mature state of resource-market relationships, but the RFE has not yet fully formed such a relationship with its Northeast Asian neighbours. How these two regions do and will interact with each other is the main topic to discuss in this dissertation.  1.2. NEW CURRENTS AROUND THE RUSSIAN FAR EAST  3  The RFE is a few hours’ flight away from Seoul. Nevertheless it was an un approachable region for South Korea (Korea hereafter) until formal diplo matic links with the then USSR were set up in 1990. See Map 1.1. The new relationship with the former USSR was a fruit of the Korean govern ment’s challenging diplomatic policy, known as the “Northern Policy”, which can be defined as Korea’s efforts to improve relations with commu nist countries with the ultimate goal of improving inter-Korean relations (Armstrong, 1990).  Now the RFE has become one of Korea’s new neigh  bours. The end of the Cold War brought gradual reform to China beginning in the 1970s. The reform movement in the former USSR under Gorbachev’s lead ership in the late 1980s, known as perestroyka and glasnost, triggered the collapse of communist regimes in Eastern Europe and ended in the dis integration of the Soviet Union. The surge of reform and openness extended to the RFE, once one of the most overlooked regions in Russia, and forced the region to open up to the outside world. The RFE is widely recognized as Russia’s resource-rich win dow on the Pacific Rim. Thus, for this richness, the RFE holds particular attractions for its resource-poor neighbours, such as Korea, Japan and Taiwan. In fact, these are the countries that would be most interested in gaining access to the region’s various kinds of natural resources. In other words, the Asian neighbours could contribute in varying degrees to re gional development in the RFE.  4  Kanichatka  RUSSIA  of  Okhotsk  D  —  ‘-..!  G/  B1agoveshcheflSk  People’s Republic of China Harbin, Yanbiãn Korean I Autonomous Prefecture  Nakhodka  Donghae (Sea of Japan)  Scale: 1: 160,900  Map. 1.1. Korea and its Surroundings Source: Chew (1970)  5 Gorbachev, the former president of the Soviet Union, promoted changes in the old view that the development in the RFE depended on trade with European Russia. He admitted that the RFE was part of Asia and expressed the intention that the region would take a fuller part in the Pacific Rim economy in his Vladivostok speech in 1986 (CDSP, 1986). In other words, this speech implicitly acknowledged the importance of the Asian neigh bours, particularly the thriving economies of these countries, for the devel opment of the RFE. Seen from a geo-economic point of view, Northeast Asia features a dispar ity in the endowment of productive resources among the nations. The RFE possesses abundant natural resources but lacks other resources. China and North Korea have a plentiful supply of inexpensive labour. Korea and Japan are considered capable of providing capital and technology. In other words, economic complementarity exists among these countries. Scholars from all the above nations believe that each country in the region could take advantage of this complementarity to improve their mutual well-be ing (Toma, 1991). Such views have been increasingly expressed through various recent at tempts at economic cooperation.  For example, a feasibility study for a  multinational joint development project for the lower Tumen River area is being conducted under the auspices of the United Nations Development Program (UNDP) (Kim, 1992). Tumen River is the area where the borders of North Korea, China and Russia meet. Besides these bordering countries, Japan, Korea and Mongolia are participating in the project. Following the designation of Nakhodka as a Free Economic Zone, a number of Korean  6 companies plan to move into a large industrial park established near that city. With the foregoing geo-economic dynamics in the background, Korea has emerged as one of the countries that have shown a swift response to the new currents in the region. No sooner had Russia and Korea established formal diplomatic ties than Korea began to develop, not surprisingly, forests, one of the most prevalent natural resources in the RFE. Hyundai, one of the largest conglomerates in Korea, and Primorsklesprom, the Forest Manufacturers Association of Primorskiy Kray (Maritime Province in the RFE: see Map 1) formed the joint venture Svetlaya’ to exploit the forests in the northeastern corner of the province. This was the first joint venture (JV hereafter) between the two countries and remains the largest since the new diplomatic ties were set up in 1990. 1.3. INTERNATIONALIZATION OF KOREA’S FOREST INDUSTRY Korea has been one of the fastest growing economies in the world for the last three decades. Due to its rapid economic growth, Korea is now one of the four leading Newly Industrialized Economies (NIEs) in Asia together with Hong Kong, Singapore, and Taiwan. Korea, however, is poorly en dowed with natural resources. Naturally, a labour-intensive and export oriented industrial structure was established in the early stages of devel opment. Interestingly, the forest industry in Korea, which is poorly endowed with forests, has greatly contributed to the country’s export industry and in 1 For more details of the project see Appendix I.  7 turn the country’s economic development. The dominant pattern of the forest industry in the 1960s and 1970s was importing hardwood logs from South East Asia and exporting mainly to North American markets after processing them into a low-value bulk product such as plywood. The for est industry and exports of forest products continued to grow throughout the 1970s. The trend, however, was halted in 1980 by a log export ban in Indonesia, the major supplier of hardwood logs by then.  Although ex  ports of forest products have sharply declined since 1980, Korea has con tinued to import a large amount of logs for its growing economy, now mainly for domestic use. In the Korean forest industry’s development during the last three decades, one consistent pattern has been the industry’s various efforts to secure a timber supply through a continuous search for new supply sources. Simple imports from local suppliers were the main means of getting the raw ma terial. However, some imports have resulted from Korean logging invest ment in the supplying countries (Office of Forestry, 1992). In other words, Korea’s forest industry was involved in production activities across na tional boundaries early in its development. Korea also used the imported natural resources for hard-currency-earning exports.  This is how and  why Korea’s forest industry became internationalized well ahead of other Korean industhes. In fact, Korea’s first outward foreign direct investment happened to be a forestry venture in Indonesia in 1968 (Euh and Mm, 1986). Now the Russian Far East has emerged as a new wood supply source to Korea since direct investment was made in the region in the form of a JV by Hyundai. The foreign direct investment (FDI hereafter) made by Korea,  8 an inward FDI from the RFE viewpoint, could have a significant impact on the export potential of the forest industry and the economic growth of the RFE—a region desperate for foreign capital to boost its sagging economy. This is the background to the present study. 1.4. GLOBALIZATION OF ECONOMIC ACT1VITIES  One of the most conspicuous trends of the modern world economy is the transnational nature of economic activities. Globalization, internationaliza tion, and borderless economy are already buzz words in much economic literature. Global economic activities are extremely complex, and the term “globalization” is still not clearly defined in the literature. Nevertheless, it recognizes the interconnected and interdependent nature of the world economy and suggests at least the increased intensity of international trade and freedom of movement of productive resources across national boundaries (Dicken, 1992). FDI and transnational corporate (TNC) activi ties are the manifestation of such global economic activities. Given the nature of the study, this dissertation will look into the resource-market interactions from global and transnational perspectives. 1.5. PROBLEMS OF THE STUDY The problem under investigation in this study is “what role can FDI play in realizing the forest resource potential in the RFE for the production and export of raw material for the two immediate neighbours, Korea and Japan?” How can the TNC’s activities in Northeast Asia be viewed from the perspective of resource-market interaction? The research problem has the following subordinate questions:  9 1. How does Korea perceive the RFE? 2. What is the natural resource and investment potential in the RFE? 3. How does the RFE, isolated from the mainstream global economy for many years, respond to FDI? 4. What lessons can be learned from the Japanese experience in the RFE, that would be relevant in the new circumstances of FDI? 5. How can the FDI contribute to the RFE’s regional development and its efforts to integrate into the Asia-Pacific economy? 6. How do the resource regions and market regions interact with each other in Northeast Asia and in the global context? The assessment of the potential export growth in the RFE is particularly important and timely when considering it in the context of timber demand and supply on the Pacific Rim.  The statistics in the 1990 Forestry  Yearbook (FAO, 1990) show that in recent years timber production and ex ports have not grown as quickly as in the past in major traditional supply sources in North America and Southeast Asia. Rather, they have shrunk because of mounting environmental pressure and the depletion of highquality timber resources. At the same time, the statistics show that pro duction and exports from relatively new supply sources like New Zealand and Chile are not growing quickly enough to offset the shrinkage. This particular situation on the Pacific Rim brings more attention to the RFE, which is believed to have a big potential for export growth (Cardellichio, Binkley and Zausaev, 1989; Backman and Waggener, 1990 and 1991). Since the dissolution of the former USSR, the RFE itself has re  10 vealed its own interest in expanding exports to the Pacific Rim (Minakir and Sheingauz, 1991).  In fact, the RFE has long been regarded as a potential threat to the leading forest product exporters on the Pacific Rim (Solecki, 1985), although the potential never substantially materialized under the former Soviet gov ernment. Now that the region has opened up to FDI, the threat needs to be carefully reassessed in the new context. There are two kinds of forces to consider for the potential production and export of forest products in a region. One is tangible productive resources such as natural resources, labour, capital and technology. The other is in tangible managerial and entrepreneurial skills used to organize the first group to achieve actual production and exports. The former are analogous with computer hardware and the latter with software. As in a computer, both are essential in productive activities.  In other words, production is  an outcome of the interaction between these two forces. The actual pro duction and exports, however, tend to be affected more strongly by the latter than by the mere availability of the former. The interaction of the two forces is further governed by the political, regu latory, and legal regimes of the country where productive activities are taldng place. The interaction usually becomes more complicated when FDI is involved.  All these factors suggest either opportunities for or con  straints on multinational corporate activities, including the export of com modities produced by the multinational corporations in the host country.  11 There have been several previous studies related to forestry and regional development in the RFE. Most of them provide overviews of the RFE as a whole. The RFE, however, is a huge area with sufficient internal variations to cast doubt on the value of generalizations. For example, the infrastruc ture is poorly developed across the RFE in general. However, some specific areas like the southern part of Primorsldy Kray, are exceptions. Forest re sources also differ widely in volume, density and quality across the region. Location seems to have an important influence upon the activities of multinational corporations. This study will demonstrate through a case study how difficult it is to op erate a iv in the RFE despite the great potential suggested by an immense stock of natural resources. This study will also demonstrate that despite the difficulties the RFE will remain important to serve the neighbouring market regions in the south as a resource supply source. This study wifi suggest that the RFE will be one of the three maj or forest regions in the northern hemisphere and the region’s interaction with contiguous market regions in the south will follow the pattern of the other two regions. 1.6. PURPOSES OF THE STUDY The ultimate purpose of this study is to help the resource-poor neighbours of the RFE be as well prepared as possible for the recently opened re source-rich RFE to increase their countries’ long-term security of timber supply. Related purposes are as follows: 1. This study is to contribute to an assessment of the potential growth of forest products exports from the RFE by explaining the role of TNC ac  12 tivities for such exports. This study does not attempt numerical projec tions of forest products exports from the region. It rather seeks the op portunities for and constraints on FDI in the forestry sector in the RFE. 2. This study also intends to increase the knowledge of FDI and TNC activi ties in the RFE for the benefit of future foreign investments in forestry projects in the region. It also tries to explain how FDI is undertaken in the RFE and how the region reacts to FDI. Since the iv Svetlaya, (set up after the former Soviet Union allowed foreign direct investment), is re 2 in the RFE, the results of the study garded as a flag-ship forestry JV will carry policy implications for the countries which have vested interests in importing forest products from the RFE as well as for competitors in traditional wood supply sources on the Pacific Rim. 3. Since the results of this study will have implications for potential eco nomic cooperation between the RFE and its neighbours in a broad sense, this study also purposes to suggest policy implications for realizing the economic cooperation among Northeast Asian countries, conceptualized in recent years as, for example, the Japan Sea Rim Economic Bloc. In other words, this study attempts to suggest opportunities and con straints for the RFE’s integration into the Asia-Pacific economy. 4. This study is also purposed to contribute to the search for a global pat tern of interaction between resource regions and neighbouring markets.  2 Besides Svetlaya, Weyerhaeuser and the Norwegian firm FMT are also involved in three forestry joint ventures in the RFE (Russian Far East Update, May 1993). Other companies in negotiation with Russia in early 1993 were Canada’s Noranda and Abitibi, Japan’s C. Itoh, and Louisiana Pacific and Georgia Pacific of the U.S. (Globe and Mail, 8 January 1993).  13 1.7. SCOPE OF THE STUDY This study inevitably covers three geographic areas—Korea, the RFE and Japan—which might appear too large to handle in one study. All these countries, however, are involved to varying degrees in the international production and marketing activities being investigated. Therefore, each country will be dealt with from the perspective of its own role in FDI based forestry production in the RFE. Korea will be looked at as the home country which has invested in the RFE and the RFE as the host country for the investment. Japan will be looked at as having multiple roles of com petitor to Korea, provider of surrogate experience, and major export market for Korea. The impacts of TNC activities on a region range from environmental degra dation to contributions to the growth of the local economy and exports. It may be difficult to separate exports from the whole picture of the impacts, but the focus of analysis in this study will remain largely on export ex pansion. The export markets to consider in this study will be restricted to Korea and Japan. The main forest products to be considered in this study will be logs, since logs are by far the largest export item in the RFF.  In  1989 the share of logs in total forest product exports from the RFE by vol ume was 84% (Sheingauz, 1990). 1.8. STRUCTURE OF THE DISSERTATION Chapter II reviews relevant literature, and chapter III describes the ana lytical methods used in the study. Chapter lV explains the motivation for Korea’s FDI in forestry in the RFE. Korea’s economic situation and wood  14 supply situation are reviewed, as well as its motivation for and interest in FDI in the RFE.  Chapter V examines the investment environment for  forestry in the RFE. A survey of the external economic policy, forest re source potential, and forest industry organization of the RFE is based upon the findings of a field study. Chapter VI focuses on the Japanese RFE ex perience with log imports and Japan’s role as the largest export market for Russian logs. Chapter VII analyzes the experience of the three year op eration of the iv Svetlaya from the Korean partner’s point of view. It also discusses the various responses of the RFE to the JV Svetlaya. Chapter VIII discusses the lessons learned from the IV Svetlaya and implications for resource and market interactions in Northeast Asia.  Chapter XI  concludes the dissertation with the implications of this study for future FDI and the log exports potential through FDI. 1.9. LIMITATIONS OF THE STUDY There are several limitations to this study. First of all, the author’s limited ability to use the Russian language constricted the range of materials that could be used. Secondly, the availability of Russian materials was almost as constraining as the language problem. For example, separate statistics for the RFE be gan to appear only in 1993. The RFE had been dealt with as one of the planning regions in national statistics and no breakdown of the statistics by subregion appeared in the national statistics. This has resulted in heavy reliance on a small number of sources for certain parts of the study. In addition to the lack of relevant materials, those which are available are largely incomplete, imprecise, or mutually inconsistent. The lack of mate-  15 rials and the language problem were partly overcome by using Japanese materials. Since Japan has a long history of research on the RFE, a good deal of relevant material was found. Thirdly, it proved very difficult, expensive, and time-consuming to track down current information on the RFE  -  an essential component of the  study. Elements of the situation in the RFE which were relevant to the study were constantly changing. Fourthly, Russian terms and definitions often are not only different from those of the western world but also are loosely defined. The interpretation of these definitions and terms also caused problems in the application of western analytical methods. Fifthly, companies interviewed during the field study were reluctant to release information sensitive to their interests. 1.10. SIGNifICANCE OF THE CURRENT STUDY Because of the multi-disciplinary nature of this study, it is not easy to specify a clear cut contribution to a certain discipline. Nevertheless, the following contributions can be mentioned. The Russian forest sector has evolved over time as the country’s economic system changes.  As national and global political and economic  environments change, we need to look at the same problem with fresh eyes. This study looks at the potential of the Russian forest sector from the perspective of interactions with neighbouring countries through FDI,  16 rather than physical potential based upon forest inventory or infrastructure conditions. Also, while most previous studies on the Russian forest sector tended to cover all areas in Russia or the former Soviet Union, this study, reflecting the trend of decentralization in Russia, is geographically restricted to the RFE. Another contribution of this study is related to its guiding paradigm. Paradigms are ways of thinking about a particular question. They proceed from different assumptions and give rise to different conclusions. Because of the author’s background, this study is, to a large extent, a Korean interpretation of the forest sector in the RFE. This interpretation may differ from other studies approached through different paradigms.  17 CHAPTER II LITERATURE REVIEW Studying the interaction between resource regions and market regions in Northeast Asia is a manifold task. It relates to a wide variety of disciplines and study areas: forestry, economic geography, regional development, for eign trade, and foreign direct investment. This chapter reviews only a se lection of the literature and demonstrates how these different study areas are interconnected and could serve the purpose of this study. However, no attempt is made to review and discuss each of them in great detail. Rather the study tries to review each with a broad brush to extract the points of interest. Since the RFE has been viewed differently by outsiders over time, according to changes in the geopolitical situation in Northeast Asia, it may be worth tracing shifts of focus in research related to the RFE. This chapter will also provide a basis for the selection of research methods as well as demonstrate the appropriateness of the research direction cho sen. 2.1. MODELS OF ECONOMIC ACTIVITIES A model is a simplified representation of reality and purports to explain it. The main use of models is heuristic in the process of developing theories about the real world (Knox and Agnew, 1994). Numerous models have at tempted to explain patterns of economic development and the distribution of industrial activities. Some have identified processes of relevance to this study.  There follows a brief review of some of them, following the  schemes presented by Knox and Agnew (1994) and focusing primarily on more recent models, since they seem to be the most relevant.  18 Most of the models under review have been developed to explain the eco nomic landscape at a given time. Few have been able to explain change in economic landscapes over time. According to Knox and Agnew, models can be largely grouped into two: static and dynamic. Static models, developed in the early period of model-building, are mostly locational and based upon the impact of distance, or space. On the other hand, dynamic models have been developed to explain the complex economic activities of more recent time. The static models are further grouped by Knox and Agnew into sectoral  and regional. Sectoral models are intended to explain the spatial distribu tion of economic activities of various industrial sectors. Von Thunen (1783-1850) developed a conception of location and differential rents to explain agricultural land use patterns (Hurst, 1972). His model was elabo rated by later theorists like Chisholm (1962) and Alonso (1964). Several models were also developed for describing the location of manufacturing industhes and the relationships among the factors affecting location. Knox and Agnew (1994) grouped them into three categories: least-cost models, market-analysis models, and decision-making models. The second type of static model is the regional model, which is concerned with the economic condition of regions rather than industrial sectors. These models include export-base models (North, 1955 and Perloff and Wingo, 1964), income-inequality models (Myrdal, 1957 and Hirschman, 1958), growth-pole models (Perroux, 1955), and centre-periphery models (Friedmann, 1956).  19 These regional models assume that regional inequality originates from a short-run imbalance of demand and supply but will achieve balance in the long run by trickle-down from the more developed to the less developed regions (Knox and Agnew, 1994). The nature and efficiency of trickledown mechanisms is a point of dispute among the model-builders. Developed as critiques of these models, structuralist models suggest that regional inequality is created not by a short run imbalance but by an in herent or structural feature of the market. These models predict a perma nent imbalance between regions in levels of economic growth as in the de pendency theory ( Frank, 1967 and Slater, 1975). These static models have limited utility for explaining the global economy which has become increasingly complex in recent time. The industrial ac tivities in the more developed economies have shifted from mass produc tion supported by standardization, specialization and centralization (Fordism) to flexible production characterized by individualization, diver sification, and decentralization (Toffler, 1980). Another important and related characteristic related is a shift of industrial activities from being nationally based to being transnational. Not only commodities, but also technology and capital move more freely across na tional boundaries. There still remain limitations in the transnational movement of labour. However, less expensive labour now becomes acces sible by relocating production facilities in more competitive labour mar kets. The force behind all these changes is technological development, es pecially the space-shrinking technologies in the field of transportation and telecommunication (Dicken, 1992). Technological development has made distance unimportant and created new perceptions of space and time.  20 Dynamic models seem more suited to explaining the complex global econ omy. The new international division of labour (NIDL) theorized by Hymer (1976) and Frobel (1980) explains that firms gain an access to less expen sive and more controllable labour at a global scale by shifting industrial production from the industrialized core to the global periphery. Dunning (1980) explains in his ‘eclectic approach’ how firms are engaged in inter national production. He argues that foreign direct investments in interna tional production may be undertaken to gain ownership and location ad vantages and to internalize markets. Another popular description of the internalization of production is product life-cycle theory by Vernon (1966). This theory says that when a product reaches a phase of standardized pro duction it is more profitable to move production to less developed coun tries where cheaper labour can be found. Most of the dynamic models well represent the interdependence, intercon nectedness and transnational nature of industrial activities in the modern global economy. As seen in the case of Korea, manufacturing industry usually leads industrialization. As more countries are industrialized, the global economy become more oriented to manufacturing and also shows a domination of the global industries by a few core economies. Many of the global economic models are well equipped to explain the distribution of manufacturing industry. They rather seem less well equipped to describe natural resource industries. In fact, natural resources have been increas ingly dealt with as less important factors in the models. As intangible val ues of natural resources are increasingly appreciated with the growth of environmental problems, however, it is necessary in analyzing the global economy to take a fresh look at natural resources.  21 2.2. THE RFE AND REGIONAL DEVELOPMENT Although the RFE was referred to as the most ignored region in the former Soviet Union earlier in this discussion, the region has not been neglected in national planning (Gosplan). In fact, numerous initiatives for intensive development were taken in the late 1960s through the 1970s.  The  Baykal-Amur Mainline (BAM) railway construction and the incentive pay ment system to encourage immigrant labourers to make a long-term commitment to the region are among these (North, 1978). Also, attempts were made to improve economic relations with neighbouring countries, particularly Japan, which was regarded as the most effective partner for Far East development. North (1978) described the initiatives taken by the Soviet Union in the 1960s and 1970s, discussed the reasons for taking the initiatives, and fore cast their impacts on the RFE and on Pacific trade. One of his forecasts con cerned the important role of Japan and other Pacific Rim economies.  In  fact, Japan has been the most important trading partner on the Pacific Rim during recent decades (Bradshaw, 1988a and 1988b). Japan also has been the largest log importer from the USSR since 1968 (FAQ, 1990). The developments suggested for the RFE have been related mainly to ex tractive industries based upon the rich natural resource endowment in the region. It may not be necessary to reiterate that natural resources are one of four essential production factors along with capital, labour and technol ogy. Regional economists also acknowledge the importance of the role of natural resource endowment for a region’s growth, especially in the early  22 stages of development (Perloff and Wingo, 1964). North (1964), for ex ample, is one of the most notable proponents of the idea that developing staples and a consequent establishment of export bases are the determin ing factor in a region’s growth. In other words, a region can develop by exporting natural resources richly found in the region. The positive role of external trade in early stages of development in regions where extractive industries are concentrated was well illustrated with the example of the U.S. Pacific Northwest by Pfister (1964). The problem of the spatial imbalance between resource regions in the RFE  and Siberia and markets in European Russia has been frequently referred to as a Russian geographic dilemma (Barr and Braden, 1988).  This  dilemma was particularly strong when the Soviet Union was under a more closed economic system and self-sufficiency was the norm. However, a logical consequence of the regional imbalance is the idea that resources from the RFE should be exported to markets on the Pacific Rim rather than being shipped thousands of kilometres to western Russia (Mieczkowski, 1968). More recently, Minakir and Sheingauz (1991) shared the same view. Despite its potential, the region has remained largely undeveloped for the last several decades. The region can best be characterized in Bradshaw’s (1988a) terms: “a highly truncated regional economy, dependent on exter nal sources of capital and equipment, specializing in the production of a limited number of natural resources, with the bulk of economic activity concentrated in urban settlements in the southern parts of the region.”  23 2.3. FOREST SECTOR IN THE RFE Most early literature on Russian forestry dealt with the entire Soviet Union, focusing on the heartland of western Russia rather than the remote Far East and Siberia. However, it may not be a good idea to look at the na tional picture when dealing with a region and its interaction with neigh bouring countries. Solecki (1965 and 1967) contributed early introductory treatments of Soviet forestry in English. Barr (1970) studied the role of transportation costs in location and flow patterns of the Soviet wood-processing industry. In his study he attempted to draw a national picture of the forest industry with little consideration of foreign trade in forest products. Reflecting the time of the study, i.e. the 1960s, much of the discussion was focused on European Russia where most industrial activities related to wood-process ing were concentrated.  Braden (1983) examined the role of foreign  technology to increase the export potential of the Soviet forest products sector. She concluded that the foreign technology had a higher marginal productivity than the domestic one, but its contribution to the actual exports needed an examination within the context of the total USSR production system. Barr and Braden (1988) predicted a more intensive development of forest industry in western Russia and a continuation of underdevelopment in the RFE. Their prediction was grounded on the economic rationale that more investment would be directed to western regions accessible to major processing locations and markets rather than to the remote RFE and Siberia. This probably would be true only if the Russian economy were to maintain its inward orientation and avoid the influence of external forces.  24 North and Solecki (1977) assessed the export potential of the Soviet Union based upon its previous export performance from 1950 to 1975. The study concluded that westward exports would not be substantially in creased unless a heavy capital investment were made to improve the uti lization of forest resources and access to remote forest regions. Blandon (1983) studied the performance of the forest industry by looking into its productivity. The role of foreign trade was not discussed in the study. Reflecting the reform mood of the time, Backman and Waggener (1990) reviewed the overall forestry conditions and forest industry of the USSR, and forecast the changes likely to come as a result of perestroyka  and glasnost. A considerable portion of the study was assigned to foreign trade and the possibility of joint ventures.  Backman and Waggener  (1991) also interpreted the current condition of forest resources and in dustry based upon the 1988 national inventory and estimated potential harvest levels across the nation. Barr, Braden, Blandon, and Backman and Waggener all drew nation-wide pictures of the forest sector in the former Soviet Union.  RFE-specific  studies appeared only in more recent years, in Fenton and Maplesden (1986), Cardellichio, Binkley, and Zausaev (1989), and Barr (1989b and 1990). Fenton and Maplesden, in addition to evaluating the forest resource base in the RFE, analyzed the commercial acceptance of the most dominant and prevalent species in the RFE, larch, in the Japanese market. They related a successful growth in exports from the RFE to the increased utilization of  25 these species. They viewed the Japanese market as a testing-ground for a potential penetration of the species into other Asian markets. The re search found that larch was increasingly gaining acceptance in the Japanese market. Cardellichio et al. (1989) to a large extent intended to look into what Fenton and Maplesden (1986) sought in their study, a potential expansion of log exports from the RFE. They concluded that the possibility of a sub stantial increase in log exports from the RFE would be limited due to eco nomic conditions, environmental restrictions, and institutional factors. Barr (1990) looked at the forest sector in the context of regional develop ment. He concluded with a near-term forecast that the forestry and woodprocessing industries in the RFE would remain undeveloped and insignifi cant except in regard to roundwood exports. The current forest resources and industry situation in the RFE are pre sented in greater detail in Chapter V. 2.4. EXTERNAL FORCES AND REGIONAL DEVELOPMENT IN THE RFE Regional development is referred to as an interaction between internal and external forces by Dienes (1987).  Although ever-globalizing world  economies and the increased mobility of productive resources beyond a nation’s boundaries make it difficult to draw a clear demarcation line be tween these two forces, one can be distinguished from the other roughly by the origin of the forces.  26 For example, natural resources endowment, manpower, physical infras tructure, and the policies of the regional government largely tend to be internal forces, whereas the central government’s regional policies, foreign trade, inward foreign direct investment, and foreign countries’ attitudes towards the region are external forces. This section will emphasize the role of external forces in the development of the RFE, which has emerged as a new centre of attention in Northeast Asia, as discussed at the beginning of the dissertation. As mentioned earlier, the former Soviet Union maintained an inwardlooking economy and participated in foreign trade reluctantly, especially 1 Under such a closed centrally with western countries, until recently. planned economy, the main external force in any region was central gov ernment policy, with very limited freedom for the region’s own foreign trade opportunities. In the case of forest products trade, Exportles, a timber export organization under the Ministry of Foreign Trade, held control of all large scale trade. In fact, a large part of the log imports to Japan, either by direct imports or , came through Exportles (Nomura, 1988). There 2 through KS agreements was a channel for the RFE to trade directly with bordering countries through DaPintorg, known as border trade (Miller, 1981). The amount of such trade, however, was largely insignificant because of the monopoly of large-scale trade by Exportles.  1 The Soviet Union became an observer in the General Agreement on Tariffs and Trade (GATI’) only on May 16, 1990 (The New York Times, May 17, 1990) 2 See Footnote 1 in Section 6.2.1.  27 The role of Soviet foreign trade in regional development was discussed by North (1983), Dienes (1985), and Bradshaw (1988a and 1988b). Bradshaw  and Dienes focused on the regional development of the RFE and the role of foreign trade, particularly with Japan. Dienes pointed out that the geo graphic proximity of the two countries and the complementarity of their economies were misleading and did not help to promote trade. Bradshaw also noted that trade between the RFE and Japan stagnated in the 1980s; as well, he cast doubt on the potential for an export-led development strategy for the RFE. Both authors unequivocally held the view that the RFE must continue to rely overwhelmingly on internal efforts for its developmenteven for capital and technology. Since Japan has been the most important Pacific Rim trading partner to the RFE, numerous studies on the subject have appeared in the Japanese litera ture, too. Kimura (1981 and 1983) stated that the passive posture taken by Japan reflected the international attitude towards the Soviet Union af ter the Soviet invasion of Afghanistan in 1979. He also revealed a negative view of the possibility of Japan taking a greater role in the RFE develop ment, referring to the small share of Japan-USSR trade in total Japanese trade and the rather weak position of the RFE as a resource supply source in competition with others on the Pacific Rim. One of the most crucial problems related to an export-led strategy for de velopment in the RFE seems to have derived from the centralized eco nomic system of the Soviet Union, under which export earnings went to the central authority before they were redistributed according to national pri orities. Long-term compensation agreements, which dominated Soviet large-scale trade, were a product of the centralized economic system.  28 Under this form of trade, export earnings were often reinvested into the development of other regions than into where they had originated. In sum, foreign trade, as implied in the export base model and as demon strated in the study of regional development in the Pacific Northwest (Pfister, 1964), is no doubt an effective agent to the growth of a region. However, under the old central planning system of the Soviet Union, the role of foreign trade in regional development was largely truncated. Perestroyka brought numerous reform policies. Although the announce  ment of perestroyka itself did not cause actual changes in the old system, it was a clear manifestation of a political will to change. Allowing foreign direct investment is clearly a consequence of such political will. 2.5. TRANSNATIONAL CORPORATION AND THE RFE By resolution of the USSR Council of Ministers on 13 January 1987, foreign direct investment or foreign ownership of Soviet equity became possible in Russia. Subsequently, the joint venture Svetlaya project was formed as a FDI. Foreign direct investment, by definition, is “an investment made outside the home country of the investing company, but inside the investing com pany. Control over the use of the resources transferred remains with the investor” (Dunning, 1993). A joint venture is a form of FDI in this sense. An enterprise that engages in FDI and owns or controls value-adding ac tivities in more than one country is a TNC, more popularly known as a multinational corporation (Dicken, 1992). In other words, a TNC is a multi-  29 activity firm which internalizes a cross-border intermediate product mar ket (Dunning, 1993). By forming the joint venture, the Hyundai Resource Development Co., Ltd. became a TNC. However, the parent company was al ready a Korean TNC for other business activities. Dicken (1992) remarked that TNC activity is becoming an increasingly popular means of adding value. In fact an increasing proportion of world trade is being made through TNC activities rather than through traditional international trade (Dunning, 1993) Such transnational corporate activity is known as intra-firm trade, which takes place between parts of the same firm but across national boundaries. There are a variety of motivations for TNC activities.  Among others,  Dunning (1993) pointed out in his “eclectic paradigm” that TNC activity takes place whenever each of the following three conditions exists: 1. Ownership-specific-advantages: when a firm possesses certain specific advantages not possessed by competing firms of other nationalities. 2. Internalization: when such advantages are most suitably exploited by a firm itself rather than by selling or leasing them to other firms. In other words, the firm internalizes the use of its ownership-specific-ad vantages to maximize its profit. 3. Locational advantages: when it is more profitable for a firm to exploit its assets in overseas, rather than in domestic, locations. FDI is a way of strengthening international links with the rest of the world economy, and a way for a country and a region to survive and succeed in the increasing globalization of the world economy and ever-changing in-  30 ternational economic environment. From the above viewpoints, FDI chan neled through transnational corporations is likely to be one of the most powerful external agents to reshape the industries and the regional econ omy of the RFE. A typical form of TNC activity is a multinational corporation investing overseas to expand its market. The corporation is traditionally from a de veloped country possessing the ownership advantages of technology, qual ity and managerial skills. Japanese foreign investments in the 1960s and 1970s were made to relocate its “sunset” industries to locations where competitive advantages were still viable.  This type of investment has a  different effect from that of the market seeker. It promotes trade be tween home and host countries, or between host and third countries (Kojima, 1990). Some resource-poor countries invest abroad to gain access to natural resources unavailable at home. This is known as resourceseeker investment (Euh and Mm, 1986). Foreign investment can also be undertaken in search of technology transfers. The primary motivation for Hyundai’s investment in the RFE is understood as resource-seeking investment, but it can also seen as trade-promoting investment since Hyundai plans to export the produced logs to Korea and Japan. FDI has a location- and situation-specific nature. Therefore, it sometimes fails despite the investment being strongly motivated by the advantages described in the “eclectic paradigm”. These advantages may attract an initial flow of investment but do not guarantee the longevity of the investment and eventual long term economic relationship between home and host countries. This study will explore other advantages and motivations, and their role in promoting long term economic relationships  31 between Korea and the RFE while confirming the role of the advantages described by the eclectic paradigm.  32  CHAPTER III METHOD This chapter describes the analytical framework around which the dissertation is constructed.  The dissertation consists of two parts; a  general analysis and a case study. As mentioned in Chapter II, there is a small number of previous studies on the potential export growth of forest products from the RFE (Fenton and Maplesden, 1986; Cardellichio et al., 1989; Backman and Waggener, 1990  and 1991). When approaching the problems of estimating the potential export growth, these studies focused on the availability of physical pro ductive resources such as the volume of annual allowable cut, infrastruc ture, and manpower rather than on any others. Physical resources are no doubt important for the estimation of forest potential in this relatively un known region. An approach different from those of the previous studies is employed in  this study. It focuses on the interactions among the forces that control and organize physical resources for production and export. Related to the dy namics of TNC activities, these are largely intangible forces such as economic conditions, government policies on FDI in both the home and the host countries, corporate interests, and local reactions to TNC activities. The context of these intangible forces has significantly changed in transitional Russia and thus deserves close scrutiny. Assessing the complex activities of TNCs is not an easy task. Moreover, it is difficult to generalize about TNC activities. Therefore, research on TNC  33 activities is often highly situation-specific (Edgington, 1988). The case under investigation in this study also involves several unique consid erations as far as TNC activities are concerned. For example, the invest  ments are from a small developing country, and the destination of the investment is a frontier-like area barely known to the outside world. The host region is surrounded by countries with varying degrees of economic development. A strong complementary economic relationship is believed to exist among the countries. Since it is only a few years since the host  country first allowed FDI, insufficient records have accumulated to assess statistically how the study area generally responds to FDI. In short, Russia is a completely new country to Korea in cultural, political, and economic terms. With such a unique situation, the dissertation is constructed around the organizing framework shown in Figure 3.1. In the framework a TNC is viewed as a system that responds to various opportunities and constraints in the home and host countries, and engages in productive activities across national boundaries. Both the physical resources and the intangible forces mentioned above are the components of the framework, which is designed to explain TNC activities in forestry in the RFE. The framework in this sense can be used as a model to trace the motivations, operations and outputs of FDI in forest development in the RFE. The relationship between Figure 3.1 and the chapters of the dissertation is shown in Table 3.1. The first part of the framework focuses on the motivation for Korean FDI in the RFE and on the influence of the home and host countries’ environments on TNC activities. The second part is the centrepiece of the framework and focuses on actual TNC activities and problems. This part  34 reflects the efforts of the TNC to combine the various productive resources within the RFE, taking into account various components of the home and host countries’ environments, in order to generate positive outcomes for the local economy and overseas markets. The case study bears on this part of the framework. The third and last part focuses on the impacts of TNC activities on the local economy and on exports to Korea and Japan. The components of the first two parts of the framework are modified from Edgington’s (1988) model of TNC location and behaviour.  _____________  —  .2 V  o o  .2  — -  I  .?  P.  —  r. 0  .9 0.  e  LD  Li  —  o  *  0  ..  .  0.  .2  o  V  a  4  0  I  P.  fI kI  Iw.,I II  101  II  II  II II  II  101  lol  II  I  Home Country Environment (IV)  .9  o) U  0  .  II  ft1 o i0  Ff1 0  .  III.Ii  H  Host Country Environment (V)  I  __—j  IeeObacK  Japan’s Experience in the RFE (VI)  Resource  ‘I  TNC Activities in Host Country (VII)  (  0  talo  Feedback  I  I  I  I I I  Output (VII &VIII)  [oYment  Unkage Effects  Exports  Heduction  I  I I  I  I Environmen  IDe5dation1  Regional  I  Development  Country  Illoine  ‘  I I  Exports  Third Country  Figure 3.1. Analytical Framework of the Dissertation Notes: 1. Numbers in brackets represent corresponding chapters and sections in the dissertation. 2. ‘Feedback’ has been depicted in simplified fashion. In fact, it can take place throughout the system. E.g. ‘Third Country’ changes in demand can affect ‘Exports’ and ‘TNC Activities in Host Country’.  35 Because of its significance, the framework deserves a description in greater detail as follows: This study assumes TNC motives for FDI have emerged from both the home and host countries’ environments—in particular, national or regional economic conditions, policy on economic development and FDI, the home country’s perception of the host country, and corporate interests and strategies. The lack of past records on Korean TNC activities in the RFE precludes a search for consistent patterns and behaviour, which would make it possi ble to forecast the future behaviour of Korean TNCs in the region as well as to assess the potential impact of TNC5 on export growth. In order to over come such limitations, this study “borrows” Japan’s relations with the for mer Soviet Union as a surrogate experience for Korea. Japanese experience in the RFE is particularly valuable in comparing the approaches taken by Korea in importing forest products from the RFE. Japan also functions as a major market for Russian logs and other forest products to be exported from joint ventures in the RFE. As the world’s largest timber importer, Japan has a vested interest in increasing its imports by investing in the forest industry in the neighbouring RFE. The state of the Japanese market  and its attitude towards Russian logs are analyzed in terms of competition with Korea in the RFE. The focus of the framework is forest resource potential and its interaction with the various forces of FDI and TNC activities. Since so many reforms are now taking place in the RFE, an attempt was made to elucidate recent administrative and legislative reforms related to foreign investment, forest products exports, and the organization of the forest industry in the RFE. The implications of such recent developments for the investing countries are also discussed in this part of the framework.  36 Although figure 3.1 shows a hierarchical order of organization, each level  can interact with every other—that is to say, as well, that the influences could act in either direction. For example, once a corporation encounters a strong incentive for EDT, then a rough corporate strategy is established and refined by filtering through the various policies and regulations of the home country government, which could suggest either opportunities or constraints to the corporation. Corporate strategy usually needs to be further filtered through the various policies and regulations in the host country environment. The middle part of the figure shows the TNC engaging in value-added activities after the actual EDT has been undertaken. The activities involved here are organizing the available physical resources for actual production  and export. For this part of the study, the Korean-Russian forestry joint venture in Svetlaya was selected as a case study.  The joint venture’s  performance since its formation, as well as obstacles and opportunities for operating the JV in the RFE, were analyzed. The analysis was facilitated by a visit to the joint venture site and interviews with top management both on the site and at Hyundal’s head office in Seoul. Major outputs of TNC activities include production, local linkage effects, employment, exports and externalities such as environmental degradation. These outputs have impacts on the local economy in that they either promote or hinder regional development and exports. The perception of the TNC activities on the part of the host country and the overseas markets is fed back to the overall environment of the home and host countries, and this in due course modifies the activities and behaviour of the TNCs.  37 Each part and component of the framework can be referred to the  corresponding chapters and sections of the dissertation as in Table 3.1. Table 3.1.  Relationship Between the Analytical Framework and the Organization of the Dissertation  Parts & Components in the Framework  Chapters & Sections in the Dissertation  • Home Country Environment National Economic Conditions Government Policy on FDI Perception of Host Country Corporate Interests in the RFE  •  Chapter IV Section 4.1 Section 4.2 Section 4.3 Section 4.4  • Host Country Environment Regional Economic Conditions Regional Economic Policy Interactions with neighbouring countries Forest Resource Conditions Forest Administration Forest Industry  •  Chapter V Section 5.1 Section 5.2 Section 5.3 Section 5.4 Section 5.5 Section 5.6  • Japan’s Experience in the RFE  •  Chapter VI  • TNC Activities in Host Country (Case Study)  •  Chapter VII  • Output  •  Chapters VII & VIII  Based upon the above framework, visiting the three study countries and interviewing the organizations and people involved became the main means of gathering information and data on the dynamics of the interactions among the various components in the framework. The organi zations and persons visited and interviewed during the study trip, from 15 July to 9 October, 1993, are listed in Appendix II and III. In addition to Svetlaya, the field study covered trips to major cities in the RFE, Japan, and Korea to interview the people involved in related organi zations to find out how the above framework works in reality. The organizations visited included government offices, research organizations,  38 industry organizations, and corporations. See Appendices III and IV for a list of these organizations. The visit to Japan facilitated access to valuable information on recent developments in forest resources, industries, and trade in the RFE as well as the situation in the region’s forest industry. Although the field study was mainly aimed at confirming whether the reality works as the framework suggested, considerable effort also went into gathering recent information on FDI in the three countries involved in this study since FDI is a recent development in the RFE. For most of the organizations interviewed in the three countries, the interviews did not use ready-made questionnaires. Instead, the interviews used questions derived from the above framework. The questions were first categorized on the basis of the framework, then modified to meet the circumstances of the organizations to be interviewed. Most of the questions used during the interviews focused on information not readily available from the literature.  The categories of the questions are listed in Appendix II  together with the names of the organizations interviewed.  39 CHAPTER IV THE HOME COUNTRY ENVIRONMENT  -  SOUTH KOREA  4.1. NATIONAL ECONOMIC CONDITIONS 4.1.1. The National Economy Korea’s economy is in a critical condition now, as the country stands on the threshold of becoming a major world economic power.  While a wide gap  still exists between it and a country like Japan, Korea is being chased by China and the NIEs from Southeast Asia. momentum.  Growth seems to have lost  Social unrest has emerged as the price to be paid for  remarkably rapid economic success in the past and for its continuation in the future. The purpose of this section, then, is to overview the current state of the country’s economy. Korea is a small country with a poor endowment of natural resources. A small land area and a large population have been additional constraints on the development of its economy. The fragile economy which existed after independence from Japan in 1945 was completely dismantled by the Korean War from 1950 to 1953 and had to be rebuilt from the ashes of the war. However, the economy has grown very rapidly under the control of the strong authoritarian government and its outward-looking economic policy since the early 1960s. The average annual growth rate was nearly 9% for the period from 1962 to 1991. Per capita income grew 80 times in this period. Trade volume was US$153.4 billion in 1991, up from US$477 million in 1962. Average annual growth in exports was about 40% from 1962 to 1979. Average annual growth in trade was the world’s highest,  40 22.5%, for the period from 1970 to 1987 (Kim, 1990). Korea became the world’s 14th largest economy and 10th largest trading nation in 1991. Korea ranks among the 4 leading MEs. One index showing how quickly Korea has been industrialized is the Hoffman index. The index is, roughly, the ratio of light industry to heavy industry. Ught industry here is defined as those manufacturing industries which produce consumer goods, whereas heavy industries produce capital goods. Among the former are food, textile and wood product industries, while the latter produce chemicals, metals, and fabricated metal and machinery. When the ratio is less than one, the country can be called industrialized. A highly industrialized country has a ratio of less than 0.5 (Oh, 1993). Korea reached a ratio of 1.0 in 1977. It took over 100 years for England, Germany and U.S.A to reach this ratio, 30 or 40 years for Japan, and only 14 years for Korea (Watanabe, 1982). Korean industry reached a ratio of 0.5 in 1991 (Oh, 1993). Besides these statistics, there are symbolic examples illustrating the success of the country’s economy. Hosting the 1988 summer Olympic Games and exporting brand-name cars and high-technology consumer electronic products to the world’s major markets are among these. In addition, joining the OECD (Organization for Economic Cooperation and Development) by the mid 1990s is being seriously considered by the government.’  1 Reported on Hankuk Ilbo dated April 19 and 20, 1991, published in the Korean language in Canada.  41 Table 4.1. shows that the climax of Korea’s march to success was the three year period from 1986 to 1988, when the growth in GNP continuously was over 10%. For the first time since 1977, the trade balance shifted to surplus, pealdng at US$11.4 billion in 1988.  The economy grew 6.8% that year, the slowest since  slowed in 1989. 1981.  However, growth suddenly  Subsequently, export growth continued to decline from 1989  onwards; indeed, the trade balance turned back to deficit in 1990. Table 4.1. Maj or Korean Economic Indicators Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992  GNP Growth (%) 5.9 7.2 12.6 9.3 7.0 12.9 13.0 12.4 6.8 9.3 8.4 4.7  GNP per capita (US$) 1,734 1,824 2,002 2,158 2,194 2,505 3,110 4,127 4,994 5,659 6,518 6,749  Trade Export Import (US$ billion) 20.7 20.9 23.2 26.3 26.4 33.9 46.2 59.6 61.4 63.1 69.6 75.1  24.3 23.5 25.0 27.4 26.5 29.7 38.6 48.2 56.8 65.1 76.6 77.3  Trade Balance (US$ billion) -3.6 -2.6 -1.8 -1.1 -0.1 4.2 7.6 11.4 4.6 -2.0 -7.0 -2.2  Source: Bank of Korea (1993b)  During the three year period from 1986 to 1988, a favourable external economic environment enabled Korea to keep its economy growing at a high rate. Especially important were the low international interest rates, low oil prices, and low ratio of the US dollar to the Japanese yen, known as the three lows.  The low oil price and international interest rates boosted  the world economy, which helped Korea increase its exports.  The  appreciation of the Japanese yen also contributed to the growth in Korean exports.  42 As Koo (1993) pointed out, the 1986-1988 boom did not originate from a solid competitive advantage of the nation in the world market. External conditions became favourable and Korea simply benefited from them. Once external conditions went into recession, the bubble of economic growth soon burst. Table 4.2 shows that as Korea has become more industrialized, there has been a shift from primary to secondary and tertiary industry. In 1960 Korea was still an agrarian society with agriculture, forestry and fishery accounting for as much as 3 6.8% of total GNP. That share had gone down to 8.4% by 1992. On the other hand, secondary industry rose to 49.3% in 1992 from 20% in 1960. The tertiary industry remained almost same, from 43.2% in 1960 to 42.3% in 1992.  A similar shift took place in  employment in each of these industries, which means that a large number of farmers migrated to manufacturing or service industries. Table 4.2. Share of GNP by Industry (%) Year 1960 1970 1980 1985 1990 1991 1992  Primary 36.8 26.0 14.9 12.9 10.0 8.7 8.4  Secondary 20.0 29.2 41.4 41.8 49.5 50.7 49.3  Tertiary 43.2 44.9 43.8 45.4 40.5 40.6 42.3  Note: Primary Industry: Agriculture, forestry and fisheries. Secondary Industry: Mining, Processing and Manufacturing industries. Tertiary Industry: Transportation, construction and service industries. Source:  Bank of Korea (1993a)  Now, high labour cost has made Korea unable to compete with China and the new NIEs in export markets. In other words, Korea’s competitive edge based upon labour intensive industry has largely been lost. The relocation  43 of domestic production facilities to other countries where inexpensive labour is available has been taking place rapidly for several years. In addition, Korea’s market share in North America and Europe has been eroded by competitors armed with inexpensive labour. Furthermore, the level of Korean technology is not high enough to compete in highly indus trialized markets. Raw material sources also need to be diversified to provide a stable supply of raw materials required to feed the evergrowing domestic economy. Currently, there are five major goals for the Korean economy, if it is to continue to grow. These include expanding existing trade markets, developing technology, ensuring a stable supply of raw materials, restructuring industry, and diversifying trade partners (Kim, 1991). The former USSR, China, and the East European countries have emerged as countries which could help Korea achieve part of these goals. 4.1.2. Forest Resources in Korea Korea is a small country: merely 99,270 square ldlometres, or about one tenth of the size of British Columbia, or three times the size of Vancouver Island. But the country is highly populated. The estimated population as of 1990 is 42.9 million. Population density is 431.8 persons per square kilometre. With Korea, located between 34 and 38 degrees in latitude, most of it belongs to the temperate zone except for some subtropical areas in the southern coastal region and Cheju Island in the southernmost part of the country. About 64% of the land is mountains, where most of the country’s trees are found. The total forested area is 6.48 million hectares,  44 or 65% of the total land area (Forestry Administration, 1991). See the land classification in Korea in Table 4.3. Table 4.3. Land Classification in Korea in 1990 Land Classification Forested Land stocked unstocked unsurveyed Farm Land rice paddies upland fields Others  Area (1,000 ha) 6,476 (6,285) (174) (16) 2,109 (1,345) ( 764) 1,342  Total  9,927  Share (%) 65% (97%) ( 3%) ( 0%) 21% (64%) (3 6%) 14% 100%  Source: Forestry Administration (1991) Table 4.4. Forest Types in 1990 Forest Type Coniferous Forests Non-coniferous Forests Mixed Forests Bamboo Total  Area (ha) 3,078,827 (47.5%) 1,389,215 (21.5%) 1,809,717 (27.9%) 7,997 (0.1%) 6,476,030  Growing Stock Volume (m ) 3 113,868,995 (45.8%) 64,509,236 (26.0%) 70,048,061 (28.2%) -  -  248,426,292  Source: Forestry Administration (1991)  Table 4.4. shows forested area and volume by forest type.  Coniferous  forest is the major type of forest covering 3.08 million hectares, or 49% of the stocked forested area. Non-coniferous forest accounts for 1.39 million hectares, or 22% of the stocked area. Mixed forests occupy 1.81 million hectares, or 29% of the stocked area, and the remaining 7,997 hectares are covered with bamboo stands. Total growing stock volume of the forests in Korea is 248.43 million cubic metres. Coniferous forests have the largest share, 113.89 million cubic metres (45.8% of total), followed by mixed  45  forests, 70.05 million cubic metres (28.2%) and non-coniferous forests, 64.51 million cubic metres (26.0%). The forested land is classified into three types of ownership: national government, local governments at the provincial and district levels, and private ownership. As in Table 4.5, national forests account for 20.8%. Over two thirds of the forested area is under private ownership. Public forest land accounts for only 7.6% of the total. However, the growing stock volume is not proportional to the share of forested area. Whereas the national forests have a larger stocking (volume to area ratio), the private forests have a smaller stocking. Table 4.5. Forest Ownership in 1990 Ownership National Forests Public Forests Private Forests Total  Area (ha) 1,345,954 (20.8%)  Growing Stock Volume (m ) 3 85,159,972 (34.3%)  489,012 (7.6%)  18,111,120 (7.3%)  4,625,228 (71.4%) 6,476,030  145,155,200 (58.4%) 248,426,292  Source: Forestry Administration (1991)  Table 4.6. Growing Stock Volume per hectare in Various Countries Countries Korea Japan United States Canada (British Columbia) Russian Far East (Primorskiy Kray)  Growing Stock Volume per ha (m ) 3 ‘40 113 78 183 (241) 75 (157)  Source: Compiled from Forestry Administration (1991), Noorin Tookei Kyookai (1993), Forestry Canada (1990), Sheingauz et al. (1989)  46 Although 65% of the total land is forested, the growing stock volume per hectare is very low compared to those of other countries as in Table 4.6. Many reasons can be attributed to such a low growing stock volume of the forests in Korea. The climate and soil conditions of Korea, for example, are not very hospitable to the growth of forests. The climate is characterized by a hot and moist monsoon summer and a cold and dry continental winter. Granite and gneiss comprise more than 70% of all the parent material.  Due to the changeable continental climate and especially  torrential rains in summer, the soil is susceptible to rapid erosion. Most of the forest soil is acidic sandy loam (Forestry Administration, 1992a). However, the most important reason is the poor age class structure as shown in Table 4.7. The majority of the present forests were established through a massive reforestation effort launched in the early 1960s. Korean forests had been heavily exploited to supply the war economy during the Japanese colonial period.  Again, the forests were almost  completely destroyed during the Korean War from 1950 to 1953. By 1952, total growing stock volume had been reduced to 36 million cubic metres and the average growing stock volume per hectare plummeted to as low as 5.6 cubic metres per hectare (Forestry Research Institute, 1985). The fact that the growing stock has now recovered to 40 cubic metres per hectare is mainly due to the reforestation of the last 30 years. However, the age class structure is skewed towards young and immature forests. The age class under 20 years accounts for 68% of the forested area and 43% of the volume. Forests under 40 years represent 98% of the area and 92% of the volume.  47 Table 4.7. Age Class Structure in 1990 Age Class (years old)  Area (1,000 ha)  Under 20 Under 40 Over 41 Total  Share (%)  4,403 1,914 159 6,476  68 30 2 100  Volume (mu. m ) 3 106 123 19 248  Share (%) 43 49 8 100  Source: Forestry Administration (1991)  A poor ownership structure also helps explain the low growing stock volume of the forests in Korea. The 4.63 million hectares of private forests, or 7 1.4% of total forest land, is owned by 3.03 million owners (Forestry Administration, 1991). The average forest area per owner is only 1.52 hectares.  Many of these small woodlots are owned for other  purposes than productive forest management such as for keeping ancestral tombs. 96% of private owners own less than 10 hectares of forest. This ownership structure prevents the forests from being managed to achieve scale economies. 4.1.3. Demand and Supply As in other countries, wood is one of the indispensable basic materials for economic activities in Korea. Wood demand in Korea has grown rapidly  with the Korean economy during the last three decades. Table 4.8 shows that consumption had risen to 9.42 million cubic metres by 1990 from 2.81 million cubic metres in 1968, i.e. at an average rate of 6.5% a year. More than half of the wood demand was derived from booming plywood exports between the late 1960s and the late 1970s. The share of demand derived from exports peaked at 65% in 1976. The export-oriented wood consump  48 lion pattern changed to a more domestic-oriented pattern as the domestic economy grew. Therefore, the internalization of wood consumption went up from 43% in 1969 to 97% in 1990. At present, then, virtually all wood demand is derived from domestic consumption. Table 4.8. Wood Consumption and Supply Supply Domestic Import Self-Supply Balance Total ) 3 (%) (1,000 m ) 3 --------(1,000 m  Year  Consumption Total Domestic Export ) 3 (1,000 m  RDC* (%)  1968 1969 1970  2,810 3,534 4,000  1,550 1,510 1,713  1,260 2,024 2,287  55 43 43  2,810 3,534 4,000  800 884 845  2,010 2,650 3,155  28 25 21  0 0 0  1971 1972 1973 1974 1975  5,060 5,348 6,412 6,356 6,465  2,192 2,293 2,782 2,873 8,889  2,868 3,055 3,630 3,483 3,576  43 43 43 45 45  4,772 4,949 5,945 5,799 6,015  1,016 782 943 969 896  3,756 4,167 5,002 4,830 5,119  21 16 16 17 15  -288 -399 -467 -557 -450  1976 7,825 1977 9,817 1978 11,611 1979 10,940 1980 7,750  2,700 4,406 6,346 6,616 5,785  5,125 5,411 5,265 4,324 1,965  35 45 55 60 75  7,266 8,834 10,423 10,038 7,149  943 1,027 996 952 1,008  6,323 7,807 9,427 9,086 6,141  12 10 9 9 13  -599 -983 -1,188 -902 -601  1981 1982 1983 1984 1985  7,265 7,417 8,302 7,472 7,321  4,585 5,661 6,340 6,727 6,792  2,680 1,756 962 745 529  63 76 76 90 93  6,688 6,772 7,625 6,891 6,766  1,130 1,157 1,101 1,118 1,188  5,558 5,615 6,524 5,773 5,578  16 16 13 15 16  -577 -645 -677 -581 -545  1986 1987 1988 1989 1990  7,582 8,532 8,565 9,014 9,423  6,996 7,816 8,153 8,448 9,121  586 116 412 566 302  92 92 95 94 97  7,014 7,850 8,565 9,014 9,423  1,242 1,388 1,246 1,227 1,138  5,772 6,462 7,319 7,787 8,285  16 17 15 14 12  -568 -682 0 0 0  RDC represents the ratio of domestic consumption and indicates the importance of domestic market. **Balance: The difference between total demand and supply from 1971 to 1988 is caused by the omission of recycled wood from the total supply.  *  Source: Forestry Administration (1991)  49 On the supply side, the limited land base and growing stock in Korea could not meet the soaring wood demand boosted by the economic growth of the country.  Indeed, the average annual share of domestic wood supply  between 1968 and 1990 was only 16% of total timber demand. Domestic wood supply has increased by only 70% from 0.8 million cubic metres to 1.14 million cubic metres for the period from 1968 to 1990. For the same period, total demand has gone up by 3.4 times from 2.81 million cubic metres to 9.42 miffion cubic metres. The consequent gap has been filled by imports, and the self-sufficiency ratio thus declined to 12% from 28% during the same period (Table 4.8). As alluded to earlier, domestically produced timber has a small diameter and low quality and is therefore suitable only for mine-props and pulping.  This limited use even more  restricts the contribution of domestic timber. This situation has forced Korea to remain an absolute timber deficit country. The government has an ambitious plan to increase the self-sufficiency ratio from the current 12% to 51% in 2030 and 60% in 2080 (Forestry Research Institute, 1991). However, considering the movement of the self sufficiency ratio over the last 20 years, it is doubtful whether the plan can be realized. The average annual growth rate of timber demand for the period from 1968 to 1990 was 6.5%. This rate far exceeds the growth rate of domestic timber supply for the same period, 2.1%. If this situation continues, which is most likely, the self-sufficiency ratio will fall further, despite the government plan.  Japan has already gone through the same experience. Its self-sufficiency level has gone down to 25.0% in 1991 from 86.7% in 1960 (Noorin Tookei Kyookai, 1993). It is expected that Korea will have to continue expanding its imports to meet increasing timber demand as its economy grows.  50  4.1.4. Log Imports  Every year, Korea imports about 85% of its total timber supply. In 1978 and 1979, the share of imports reached 91%.  See Table 4.8.  After  petroleum, logs were the most important raw materials imported to Korea in the 1960s and 1970s (Korea Foreign Trade Association, 1986 and 1989). Its share in total imports was generally around 10% in that period. When importing wood products, Korea preferred logs to sawn timber or other forms of processed products. Since then, Korea has been either the second or third largest roundwood importer in Asia after Japan and China, depending upon Chinese imports each year. Korea has traditionally imported from few major sources—for example, hardwood from Indonesia and Malaysia, and softwood from the United States. No diversification of supply source existed until Indonesia banned log exports in 1980. It was only after 1980 that Papua New Guinea and the Solomon Islands, and Chile and New Zealand emerged as new supply sources to Korea for hardwood and softwood logs respectively. In the late 1980s, when Korea and the former USSR were paving the way for formal diplomatic ties, the Russian Far East was added to the new supply sources of softwood. Generally, hardwood logs took a larger share of total imports in the 1970s. However, from the early 1980s, the hardwood imports have gradually decreased due to the Indonesian log export ban. This has resulted in the decline of the plywood export industry, which was the major user of tropical logs. In 1986 the volume of softwood log imports surpassed that  51 of hardwood logs. In 1991 the share of hardwood logs was 41% of total log imports and the share of softwood was 59%. See Table 4.9. Table 4.9. Log Imports Total Year Qty Value ) (US$1,000) 3 (1,000 m  Hardwood Softwood Qty Value Share* Qty Value Share* (1,000 m ) (US$1,000) (%) 3 (1,000 m ) (US$1,000) (%) 3  1970  3,155  125,451  2,852  112,532  90.4  303  12,919  9.6  1971 1972 1973 1974 1975  3,756 4,167 5,002 4,830 5,119  160,995 131,233 283,590 312,572 269,190  3,296 3,834 4,411 4,042 4,661  142,068 117,602 246,745 258,432 236,401  87.8 92.0 88.2 83.7 91.1  460 333 591 788 458  18,927 13,631 36,845 54,140 32,789  12.3 8.0 11.8 16.3 9.0  1976 1977 1978 1979 1980  6,323 7,807 9,427 9,086 6,141  415,298 524,195 642,737 1,008,531 858,228  5,450 6,584 6,863 6,670 4,486  351,687 425,305 461,438 781,302 660,613  86.2 84.3 72.8 73.4 73.1  873 63,611 1,223 98,890 2,564 181,299 2,416 227,229 1,655 198,215  13.8 15.7 27.2 26.6 27.0  1981 1982 1983 1984 1985  5,558 5,615 6,524 5,773 5,578  634,635 607,687 587,840 566,625 479,356  4,324 3,998 4,139 3,310 3,228  495,647 451,171 338,552 351,827 280,997  77.8 71.2 63.4 57.3 57.9  1,234 1,617 2,385 2,463 2,350  138,988 156,516 199,288 214,798 198,359  22.2 28.8 36.6 42.7 42.1  1986 1987 1988 1989 1990  5,772 6,462 7,319 7,787 8,285  484,123 655,454 900,256 960,023 990,474  3,051 3,204 3,502 3,538 3,483  269,106 363,517 457,820 454,791 418,350  52.9 49.6 47.9 45.4 42.0  2,721 3,258 3,817 4,249 4,802  215,017 291,937 442,436 505,232 572,024  47.1 50.2 52.2 54.6 58.0  5,206 574,258  58.8  1,040,754 8,861 3,655 466,496 41.3 1991 *Note: Share refers to the share of total quantity. Source: Forestry Administration (1991 and 1 992b)  Indonesia was the major hardwood log supply source in the 1970s. However, after its 1980 log export ban, Malaysia became the largest supplier. Its share of hardwood log imports rose from 37% in the 1970s to 73% in the early 1980s.  Papua New Guinea provided Korea with the  remaining 17% annual average of total hardwood logs in the early 1980s. The Solomon Islands, which became a new source of supply only after  52 1985, presently accounts for about 3% of total hardwood imports. The Philippines was one of the major log suppliers in the 1960s, but it played a minor role in the 1970s because of its own log export ban and resource depletion. Overall, the hardwood supply system in Korea has a fragile structure, with heavy reliance on Malaysia. Indeed, in 1990 and 1991 that country’s share reached over 80% of total hardwood log imports. However, a reduction of logging in Sarawak, Malaysia, has been suggested by the International Tropical Timber Organization (ITfO), one of the inter governmental agencies addressing the issue of tropical deforestation (Linsan Gyoosei Kenkyukai, 1992). Unless new sources are developed, fewer hardwood logs will be imported to Korea in the future. Table 4.10 shows hardwood log imports from various sources from 1970 to 1991. Table 4.10. Hardwood Log Imports by Source  Year  Qty  Total Value  Qty  Indonesia Value  Malaysia Qty Value  Philippines P.N.G. Qty Value Qty Value  (1,000 3 m ) , (US$1,000) 1970 1975 1980 1985 1990 1991  2,852 4,661 4,486 3,228 3,483 3,655  112,532 236,401 660,613 280,997 418,350 466,496  477 2,769 1,817 12 (159) (76)  19,457 142,253 284,462 1,312 (14,875) (7,658)  1,487 1,628 2,474 2,308 2,912 3,086  59,923 81,561 351,178 203,988 361,860 409,872  888 33,152 264 12,587 82 11,087 67 6,622 -  -  -  5  -  -  133 841 412 493  -  -  13,286 69,076 56,490 48,961  Note: The figures in 0 are for the Solomon Islands. Source: Forestry Administration (1991, and 1 992b)  The absolute volume of hardwood imports has showed a downturn since 1979.  The shortage caused by declining hardwood imports has been  gradually made up for with increased softwood imports, which have increased by 17% every year from 1980 to 1991. The United States has  53 been by far the largest softwood log supplier to Korea, supplying an average of about 70% of all softwood logs imported to Korea for the last  twenty years. New Zealand and Chile each account for about 10% each year, and the remaining 10% of total annual softwood log imports are from various other sources, including Russia. However, imports from the United States will drop because of the Clinton government’s log export ban from the national forests. On the other hand, the shares of other sources are likely to increase in the future (Forestry Research Institute, 1991). Naturally, the role of the Russian Far East has become important as a potential new source of softwood log supply to Korea. Table 4.11 shows log imports by source. Table 4.11. Softwood Log Imports by Source  Year  1970 1975 1980 1985 1990 1991  Total Value Qty  303 458 1,655 2,350 4,802 5,206  12,919 32,789 198,215 198,359 542,606 574,258  U. S. A. Qty Value  236 448 1,043 1,494 2,971 2,687  9,549 30,624 134,085 141,907 416,029 366,400  New Zealand Qty Value  Qty  (1,000 3 m (US$1,000) ) 2,227 56 -  -  185 19,556 99 6,096 1,290 102,601 1,786 139,683  Chile Value  -  -  -  -  280 514 289 425  24,583 28,564 23,976 34,390  Others Qty Value  11 10 147 241 252 308  1,143 2,165 19,991 21,792 29,518 33,785  Source: Forestry Administration (1991, and 1992b)  4.1.5. Wood Use Wood use in Korea is broadly grouped in four categories, namely, mine props, pulpwood, plywood, and others, the share of which in total wood use between 1968 to 1980 averaged 7.8%, 5.1%, 40.4.% and 46.7% respectively. as in Table 4.12. The trend in wood use, however, shows a somewhat  54 different picture. Fewer and fewer logs have been used for mine-props during the past twenty years. The share of pulpwood has stabilized at about 5% over the period. Plywood production was the dominant use of logs up until 1980, over 50% of logs were used for this before 1980. However, plywood’s share has shrunk to 20% since 1980. The share of other wood uses grew from 26.9% in 1970 to 69.4% in 1990. “Other” here represents mainly sawnwood, furniture and musical instrument produc tion. This illustrates the fact that the forest industry has become more highly structured than it was 20 years ago. Table 4.12. Trend of Wood Use (%) Year  Mine-prop Pulpwood  Plywood  Others  Total  1970 1975 1980 1985 1990 Average*  11.3 8.4 6.7 9.8 5.4  5.2 2.9 7.1 8.0 5.1  56.8 49.9 43.4 30.1 20.0  26.9 38.8 43.1 52.1 69.4  100 100 100 100 100  5.1  40.4  46.7  100  7.8  *Average of 23 years from 1968 to 1990. Source: Forestry Administration (1991)  Since 100% of mine-props have been supplied domestically, as has most pulpwood, virtually all imported logs have been used for plywood and other products including sawnwood, which now account for most of the forest products produced in Korea. Indeed, imported logs have played a key role in the development and structuring of the forest products industry in Korea. A large part of the demand for wood is derived from housing construction. The number of housing starts has been a significant indicator of wood consumption in Korea (as in North America), although Korea uses signifi  55 cantly less wood for its housing construction than North America and Japan do. Over 95% of all Korean residential units are in concrete high-rise apart ment building complexes. Only a handful of vacation homes are of woodframe construction. Wood is also used as a disposable material in making concrete forms and other temporary items on the construction site. This is why Korea has a relatively small amount of wood consumption in relation to its world’s highest rate of housing starts per capita. Table 4.13 shows that housing starts numbered 750,378 units in 1990 and 613,083 units in 1991. With 42.8 million and 43.3 million people in Korea in 1990 and 1991, the rates per 100,000 people are 1,757 and 1,416 respectively. These figures are much higher than 477 and 401 in the United States, 683  and 572 in Canada and 1,381 and 1,105 in Japan in the same years. Table 4.13. Rates of Housing Starts in Korea and Other Countries Country Korea  Japan Canada U.S.A.  1989 Population 42,474 (1,000 persons) Housing Starts 462 (1,000 housing units) Units/100,000 1,087 Population 123,200 Housing Starts 1,662 Units/100,000 1,350 Population 26,369 Housing Starts 215 Units/100,000 814 Population 247,342 Housing Starts 1,376 Units/100,000 556  1990 42,869  1991 43,327  1992 43,717  750  613  N.A.  1,757 123,610 1,707 1,381 26,610 182 683 249,900 1,193 477  1,416 124,040 1,370 1,105 27,297 156 572 252,671 1,014 401  N.A.  124,450 1,403 1,105 27,409 158 578 255,462 1,200 470  Source: Compiled from Korea Statistical Association (1992), Economic Planning Board (1988), National Board of Statistics and Economic Planning Board (1990), Japan Statistics Bureau (1993), Statistics Canada (1993b), and US Dept. of Commerce (1993)  56 However, since wood is also used for wooden furniture, cabinets, doors and windows, fixtures, paneling and interior decoration, there is still a strong demand for wood in Korea, despite the relatively low use of wood in housing construction itself. Traditionally, Koreans have had a strong desire to own their own houses, for several reasons. Culturally, having one’s own house suggests success in one’s life.  The house is used as a means of investment for financial  security. Therefore, a house has been one of the most important things to own for the average Korean. However, a concentration of population and skyrocketing land prices have created a severe shortage of housing, especially in the big cities. In response, the government has conducted a massive housing construction program since the mid-1970s. Indeed, the new government is planning to build 2.9 million new residential units in the next five years. The main part of the plan is to build five new cities on the outskirts of Seoul with approximately 340,000 units per city. This means there will be 5 50,00  -  600,000 new housing units every year for  the next five years, and wood demand in Korea is thus expected to grow continuously. 4.1.6.  Structural Changes in the Forest Products Industry  With an 85% reliance on imports, the industry has experienced many structural changes arising from the situations in log-supplying countries. Rapid growth of the domestic economy has also contributed to such changes. This section briefly discusses the development of the industry and its structural changes over the last 25 years.  57 It is not an exaggeration to say that the forest products industry was led by plywood manufacturing beginning in the mid 1960s. Plywood manu facturing was one of the strategic industries for earning foreign currency. In addition, it was a well chosen labour-intensive industry in a country, which had plentiful inexpensive labour at the time. The share of plywood exports in total exports of the country was over 10% between 1964 and 1972, and plywood was the country’s largest export earner from 1968 to 1970. Table 4.14 illustrates that the importance of the industry has gone through a dramatic change since the log export ban was imposed by Indonesia in 1980. In particular, the share of plywood in total exports has sharply dropped from 11% in 1965 to 3.6% in 1980 and further to 0.05% in 1990. The share of plywood in total exports of forest products has also plunged from as high as 90.5% in 1965 and 56% in 1980 to 6.2% in 1990. This shows the dramatic shrinkage of the importance of plywood as an export item. Table 4.14. Shares in Total Exports Year 1%5 1970 1975 1980 1985 1990  Total Exports (A) 175 835 5,081 17,505 30,283 65,016  Exports of Forest Products (B)  (US$1 million)  21 110 294 629  264  610  Source: Forestry Administration (1992b)  Share (C=B/A)  (%)  12.0 13.2 5.8 3.6 1.7 1.8  Export of Plywood (D) (US$1 million) 19 102 229 352 40 38  Share  Share  (D/A)  (D/B)  10.9 12.2 4.5 3.6 0.87 0.05  (%)  90.5 92.7 77.9 56.0 15.2 6.22  58 Likewise, the share of forest products in total exports fell during the same period, from 12.0% in 1965 to 1.8% in 1990. Korean forestry statistics include totals for such non-wood products as nuts, mushrooms and even stone products.  The share of these minor-forest products surpassed that  of wood-products since 1984. If they are excluded, the share of forest products in total exports become even smaller than appeared in Table 4.14. The forest products industry experienced a structural change in the 1980s because of a shortage of logs, increased labour costs, and the growth of the domestic economy. This caused the industry to change from being an export-oriented, labour-intensive, low-value-high-volume-producer to being a domestic market-oriented, capital-intensive, high-value-added producer. As a result, plywood manufacturing no longer takes a leading role in the forest products industry, nor in exports. After the Indonesian log export ban, the shortage of logs hit the industry particularly hard. In attempting to build its own industry, Indonesia used logs as weapons against major plywood manufacturing countries like Korea, Japan, and Taiwan. The resulting scarcity of logs made the Korean plywood industry not only stop exporting its products but also deliver an inadequate supply to the domestic market.  Increased labour costs made it unable to stay in  operation domestically and to remain competitive internationally. With the help of the rapidly growing home economy, the domestic market grew large enough to divert the attention of the forest industry into domestic markets, which previously had attracted little attention from the  59 industry. The ensuing housing construction boom and heightened living standard contributed to an increase in domestic consumption of wood products. As well, the industry shifted towards the production of more value-added products such as furniture and musical instruments. Table 4.15 shows how imported logs have been used recently (Forestry Research Institute, 1991). Table 4.15. Share of the Use of Imported Logs (%) Origin  of logs  U.S.A. Chile N.Z.* S.E.A.*  Sawn wood 46 80 80 -  Plywood -  -  -  15  Construction Packaging Fixtures 1 10 20 20 5 28 -  -  Musical  Furniture Instrument  14 -  -  27  25  Others  4  -  -  -  -  25  -  Total  100 100 100 100  N.Z.: New Zealand, S.EA.: Southeast Asia Source: Forestry Research Institute (1991)  4.2. GOVERNMENT POLICY  ON FOREIGN DIRECT INVESTMENT  4.2.1. Korea’s Outward Foreign Direct Investment It was only after the mid 1980s that Korea became active in overseas investment. Before then, Korea’s outward foreign direct investment was under the strict control of the government. The country lacked capital resources and suffered from a chronic balance of payments deficit. In the late 1980s, for the first time in its history, the Korean economy achieved a surplus in the balance of payments thanks to the three lows mentioned in section 4.1.1 above. At the same time, the Korean economy was being challenged by emerging trends towards globalism and regionalism in international markets. Moreover, Korea had to cope with the disappear ance of its industrial competitive advantage due to rising labour costs.  60 Such an international and domestic economic environment forced the Korean government in 1986 to relax its control over overseas investment, resulting in a rush of foreign investment. In 1985, US$220 million was invested overseas in 44 projects and the cumulative outflow by that year, since 1968, had amounted to US$484 million.  Table 4.16 shows that by 1992, these figures had risen to  US$1,210.41 million for 632 projects and cumulative outflows of US$4,421.90 million. Table 4.16. Year 1968-1985 1986 1987 1988 1989 1990 1991 1992 *:  Korea’s Overseas Investment Permitted Projects Amount 691 875,962 74 364,912 110 371,061 253 479,349 943,346 368 517 1,624,792 539 1,605,634 632 1,210,407  Realized (A) Projects Amount 603 52 92 176 269 339 453 497  Outstandin* Withdrawn (B) Projects Amount Projects Amount  (no.) (US$1,000) 570,646 160 86,715 183,877 19 22,693 410,508 32 89,611 223,761 32 59,665 569,590 23 177,203 959,326 22 146,141 1,125,364 23 88,140 1,218,395 34 121,114  443 476 536 680 926 1,243 1,673 2,609  483,931 645,115 966,012 1,130,108 1,522,495 2,335,680 3,372,904 4,421,895  Outstanding represents cumulative outflows since 1968 based on the realization of investment (A) less capital withdrawn (B).  Source: Bank of Korea (1993a)  Most investment has been of small and medium size. Investment of less  than US$1 million represents 72% of total investment, the average invest ment being US$2.02 million in 1991. (This represented an increase over the 1986 average of US$1.36 million). In terms of equity share, 100% wholly owned investment is the most preferred type of ownership accounting for 55% of the total projects and 60% of the total amount in 1991 (Kim, Mm and Yoo,1992).  61 Before 1986, nearly 50% of overseas investment was in natural resource development such as mining, forestry and fishing. However, investment in natural resources has declined since 1986, whereas manufacturing invest ment has risen since then. The manufacturing sector has the largest share of total investment, followed by the trade and mining sectors, based upon the amount of conthwing investment in 1991 (Kim eta!., 1992). Korea’s foreign direct investment has not been diversified by region. Specifically, it has a large concentration in Southeast Asia and North America, accounting for 3 3.8% and 46.4% respectively based upon the amount of continuing investment at the end of 1991.  Investment in  Southeast Asia, taking advantage of low wages, tends to be small in scale and mainly in labour-intensive industries such as textiles, toys, and footwear. On the other hand, investment in North America is in larger scale and more capital-intensive industries such as automobile manufac turing, iron and steel, and consumer electronics (Kwon, 1993). 4.2.2. Government Policy Towards Overseas Investment The legal basis for Korea’s overseas investment policy can be found in the Foreign Exchange Control Act, its Enforcement Decree, and associated regulations. Before 1986, overseas investment was highly regulated by the Foreign Exchange Control Act for the sake of effective management of scarce foreign exchange reserves. In principle, under the Act no overseas investment was permitted except for that which could bring domestically unavailable raw materials into Korea or promote overseas markets.  62 However, when Korea achieved its first surplus in the balance of payments in 1986, the Act went through a major revision in an effort to vitalize overseas investment. The approval procedure was streamlined. Notification to the government became the only requirement for a small investment of less than US$5 million. The definition of overseas invest ment was broadened to give investors greater freedom in foreign opera tion. Less than 20% of the equity share of joint ventures was treated as overseas investment, provided that the investment contributed to the security of raw materials supply to Korea and the transfer of technology. The control mechanism under the revised overseas investment policy classifies investments into three categories: encouraged, restricted, and others. Encouraged investments are those that could increase the security of raw material supply, promote overseas markets, or help restructure domestic industry which is losing its competitive advantage in overseas markets.  These investments are provided with financial support and tax  benefits from the government. Restricted investments are those that could damage the competitiveness of other Korean firms. Other investments are those neither encouraged or restricted. They are approved in principle, but financial support and tax benefits are provided on a selective basis  (Kim et aL, 1992). The Foreign Exchange Control Act was further revised in 1991. The under lying principle of the revision was a change from a “regulate in principle, approve the exceptions” agenda to an “approve in principle, regulate the exceptions” one.  This provided a basic framework for a complete  liberalization of overseas investment (Kim et al., 1992).  63 The stable supply of energy resources and raw materials from overseas is one of the most critical factors for a resource-poor economy like Korea to continue to grow successfully. This has been very well reflected in Korea’s overseas investment policy. Investments in overseas natural resource development are encouraged and provided with financial support. These include long-term loans at below-market interest rates, insurance, and tax subsidies. Among the encouraged investments, those related to energy and resource development receive even more support through the incentive system. For example, overseas mineral development is financed up to 80% by a special fund set aside to encourage such investment.  Up to 60% of  investment in overseas oil and gas exploration projects can also be financed through the Oil Development Fund. Financing is provided at a 6% interest rate for up to 15 and 18 years respectively (Kim et aL, 1992). Overseas forestry development projects are also entitled to receive government loans at a low annual interest rate from the Forest Development Fund. A major tax subsidy allows overseas investment companies to set up reserves for overseas investment losses amounting, at maximum, to 20% of the total amount of overseas investment and to deduct such losses for tax purposes (Kim et al., 1992). Another tax incentive is that dividends from an overseas resource development project are exempt from income tax if dividends are not taxable in the country where the project is carried out. The tax incentive also protects the investors from double taxation. Korea’s overseas investment is still at an infant stage, in that it accounts for a very small share of GNP.  Indeed, in 1990, overseas investment  64 accounted for only 0.3 4% of GNP. This figure is much lower than the comparable ones for Japan and Taiwan, which respectively spent 1.6% and 3.6% of GNP on overseas investment in the same year (Kim et aL, 1992). In addition, Korea’s overseas investors are often criticized for their lack of experience in managing overseas ventures, their lack of information on host countries, and their insufficient capital resources (Kwon, 1993). Nevertheless, Korea’s overseas investment in resource development has a longer history than does other investment, and the extreme dependence on foreign natural resources and raw materials has made the government’s incentive measures particularly favorable to such investment. Forestry ventures have been one of the most important Korean overseas investments in natural resource development since the first investment in Indonesia in 1968. 4.2.3. Overseas Investments in Forestry Although logs normally have been purchased on the international log market, a small portion is imported through direct investment every year. According to Korean forestry statistics (Forestry Administration, 1992b), for more than twenty years, about 5% of total log imports has been brought in through overseas forest development as shown in Table 4.17. As noted earlier, Korean overseas forestry investment began in Indonesia in 1968 (Forestry Administration, 1992b). That investment happened to be the first Korean outward foreign direct investment (Euh and Mm, 1986),  65 Table 4.17.  Logs Imported through Overseas Investment  Year  No. of Firms  1969-79 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991  5 5 6 9 9 8 7 2 2 4 5 5 6  Qty Amount Share in Total Imports ) (US$1,000) 3 (%) (1,000 m 3,511 244 312 297 387 563 263 65 90 121 162 224 297  249,003 35,517 43,157 29,343 33,017 47,868 21,289 4,571 7,285 13,868 19,061 26,335 38,066  5.72 3.97 5.61 5.28 5.93 9.75 4.71 1.12 1.46 1.65 2.08 2.70 3.35  Source: Forestry Administration (1992b)  Table 4.18 shows the number and amount of forestry project by overseas investment and the distribution by industry. A total of US$172.38 million has been invested in 32 forestry projects, 39 by project, since 1968. That constitutes 3.9% of the cumulative oufflow and 6.4% of the projects as of 1992. In the early period, from 1968 to 1980, the average amount of each investment was about US$2 million.  Investment was mainly in small-  scale logging ventures. After the Indonesian log export ban in 1980, large-scale investment integrated with logging and plywood manufacturing was made in new sources such as the Solomon Islands and Papua New Guinea. The average investment between 1981 and 1987 was approxi mately US$10 million. For the most recent period from 1988 to 1992, the scale of the average investment has gone down to US$4.5 million per project. By industry, logging accounts for haff of total investment projects, followed by wood processing, plywood manufacturing and chip processing. Several  66 projects involve investment in multiple industries. For example, logging investment in 1970 was linked to plywood manufacturing or vice versa. Early investments were mainly in logging and plywood manufacturing. However, investments in wood processing have shown a noticeable growth since 1988. Wood processing investment is intended to supply raw or processed materials to the furniture industry and musical instrument industry in Korea. Table 4.18. Korea’s Overseas Investments in Forestry Total Investment Year project Amount (no.)(US$1,000) 1968 1970 1973 1978 1980 1981 1982 1983 1987 1988 1989 1990 1991 1992  1 1 1 1 1 2 1 3 1 2 4 6 5 3  2,940 5,237 735 800 235 40,700 1,050 30,718 450  5,640  2,610 50,226 10,470 20,565  Total 32(39) 172,376  Logging 1 (1) 1 1 (1) 1 2 1 1 1 1,(2)  Industry Plywood Chip (no. of project)  Wood Processing  (1) 1 1  (1)  1  (2)  (2)  1 2 (1)  1 3 2 3 1,(2)  16  8  3  12  Note: The numbers inside 0 represent investments in integrated forestry ventures. Each of the industries in the venture is counted separately in the bracket. For example, total investments in 1990 numbered six. Two investments were in both logging and chip production. In 1992 one investment was in wood processing, the second in logging, plywood, and wood processing, and the third for logging and wood processing. Source: Forestry Administration (1992b)  Table 4.19 shows the forestry investment by country.  Since the first  forestry investment in 1968 forestry investment has been heavily concen trated in Malaysia and Indonesia. Perhaps as a consequence of log export bans in Southeast Asia, however, recent investments show a diversifica  tion of investment direction.  67 Whereas investment in Indonesia and  Malaysia has been small in scale, other investment has tended to be large. Table 4.19. Overseas Forestry Investments by Country Country  Investments Projects Amount (no.) (US$1,000)  Indonesia 44,085 8 Malaysia 10 12,042 Solomon Is. 2 7,164 P.N.G. 2 43,500 Fiji 2 950 Myanmar 1 4,034 U.S.A. 4 20,960 Russia 1 26,876 Guyana 1 10,800 Cambodia 1 1,965 Total 32(39) 172,396  Logging 32,613(5) 7,164(2) 43,500(2) 950(2) 5,260(3) 26,876(1) 10,800(1) 127,163(16)  Industry Plywood Chip Wood Processing US$1,000 (No. of projects) 10,472(3) 4,791(3)  1,000(1) 7,251(7) -  4,034(1) -  (1)*  19,297(8)  (1)*  13,000(1) (1)* -  (1)*  -  2,700(1) (1)* 1,965(1) 12,916(12) -  13,000(3)  Notes: 1. P.N.G.: Papua New Guinea. 2. Entries with * marks are part of integrated forestry ventures and are not separated by amount. Investment in specific projects are included in the amount of main investment. For example, among the investment in Russia, one has its investment in chip production too. 3. The amount invested in Russia represents JV Svetlaya. Source: Forestry Administration (1992b)  As the scale of investment becomes larger, investing companies tend to be from a large business group, Chaebol in Korean, which usually can mobilize the capital resources necessary for the investments better than small and medium-sized firms can. Recent investments in Russia, Myanmar and Guyana were made respectively by companies from Hyundai, Sunkyung  and Daewoo: Sunkyung’s investment in an integrated forestry venture in Guyana, Daewoo’s investment in a plywood mill in Myanmar, as well as Hyundai’s logging investment in Russia. Each of them is among the 10 largest Korean Chaebols. As for ownership of the investment, Korean forestry ventures tend to prefer a larger share as in Table 4.20. Much forestry investment is under taken by Korean companies without foreign participation.  Overseas  68 investments wholly owned by domestic firms represent 3 8.5% of the total projects and those with equity share of 50 to 99% account for 33.3% of the total (Table 4.20).  Recent investments tend to be larger in equity share.  The Korean preference for a larger equity share exists in most industries, except plywood manufacturing. However, the distribution of the various levels of equity share depends upon the rules and regulations of foreign investment in the host country. For example, no wholly owned investment is allowed in Indonesia, where a strict rule applies to the share of foreign participation. A wholly-owned investment is more frequent in the U.S., where there is no regulation of the equity-share of foreign investment. Table 4.20.  Overseas Forestry Investments by Ownership in 1992  Classification  100%  50%-99%  20%-49%  Less than 20%  (No. of Project) 3 2 5 10  1968-1980 1981-1986 1987-1992 Total  3 12 15  3 1 9 13  (Industry) Logging Plywood Chip Wood processing Total  6 1 2 6 15  6 2 1 4 13  4 4  1  2 10  1  4 2  5 2  1  ( Country) Indonesia Malaysia Solomon Is. P.N.G. Fiji Myanmar U.S.A. Russia Guyana Cambodia Total  5 4 2 3 1 15  2 1 2 2 13  1 1  3 10  1  Note: 1. Integrated forestry ventures are counted separately by industry. 2. It is not clear whether the 50% ownership has its control or not. Source: Forestry Administration (1992b)  Total 6 7 26 39 16 8 3 12 39 9 10 4 2 2 1 5 2 3 1 39  69 In summary, Korea’s overseas forestry investment began with small scale logging ventures in Indonesia and Malaysia to supply plywood logs to Korea when plywood manufacturing was a strategic industry in the Korean economy. From 1980, investment has been directed to more countries to increase the security of log supply after the damaging experience of the Indonesian log export ban. Investment in the early period was mainly of a resource-seeking type, and the motivation was also simply to achieve a security of raw material supply. The diversification of host countries continued in the late 1980s, as did the motivation for investment. The security of the log supply has remained as one of the most important motivations for overseas forestry investment; however, there has been a rising amount of investment for the purpose of relocating the “sunset” plywood industry from Korea to where inexpensive labour was available, as well as for trade promotion. As the scale of the investment increases, larger business groups become involved in overseas forestry investment. As the Korean government further liberalizes foreign direct investment  and the Korean economy demands more wood, overseas forestry invest ment by Korean firms will continue to grow. The scale of such investment is likely to be larger than before, and the host countries and the invest ment motivations to be more diversified. This trend was exemplified by a development in 1993. The Hansol Paper Co., recently separated from Samsung (one of the largest business groups in Korea), invested US$32 million in a reforestation project in western Australia. The investment has secured a 10,000-hectare tract of land for planting trees for the next 30  70 2 This is the first investment in a reforestation project in Korea’s years. overseas investment history. Similar reforestation investments are being planned in Vietnam, New Zealand, and Indonesia. In order to encourage such investments, the Korean government is to provide a 787 million won (about US$1 million) loan at a low annual interest rate of 3% to selected investors—in addition to a government subsidy of 30% of the cost involved 3 This new pattern of investment in in surveying the area to be developed. forestry is perhaps the only way for a country like Korea to increase the security of its overseas timber supply under mounting environmental pressure in the old timber exporting countries. 4.3. PERCEPTION OF RUSSIA AND THE RUSSIAN FAR EAST A two-fold inquiry is made in this section, focusing on government and corporate levels of organization. Korea’s perception of the RFE is probably best reflected in government policy towards the region and the country. “Northern Policy” is Korea’s policy towards former communist countries including the Soviet Union. This policy toward the Soviet Union is well reflected in Korea’s economic aid allocated to the country. Korea’s interests in and strategies for the RFE are translated into Korean firms’ activities in the region. Since it is hard to discuss the RFE separate from the whole country, the discussion must first focus on Korea’s relations with Russia and then on those with the RFE. 4.3.1. Northern Policy Despite the geographic proximity, there were, until recently, very few contacts between Korea and the USSR mainly due to Korea’s strong anti 2 Seoul Economic Daily, 17 July 1993. 3 Korea Economic Daily, 24 December 1992.  71 communist stance stubbornly maintained since the Korean War. However, after the mid-1980s, changes in the international political environment have reduced Korean isolation from the USSR and the other communist countries. Under Gorbachev, the USSR was brought into a new era of reform, popularly known as perestroyka (restructuring) and glasnost (openness). One of the most important aspects of the reform policy was a new emphasis on the Asia-Pacific region, well spelled out in his speech in Vladivostok in July 1986. The speech stressed the redirection of the Soviet economy to link it to the Pacific Rim economy, focusing particularly on the economic dynamism of the East Asian NIEs and Japan (CDSP, 1986). The  integration of the Russian Far East into the Pacific Rim economy was further amplified with more concrete plans in his speech in Krasnoyarsk, a Siberian city, in September 1988. The establishment of special economic zones in the RFE and the introduction of a preferential benefit system in international trade was suggested by the Russian leader (CDSP, 1988). In the late 1980s, Korea had more contacts than ever with other countries due to its hosting two international sporting events in Seoul; the Asian Games in 1986 and the Summer Olympic Games in 1988. These two events provided Korea with an opportunity to have numerous cultural and academic exchanges with the Soviet Union, China, and Eastern Europe. These exchanges laid the ground for formal diplomatic ties. The 1988 changes in leadership pushed Korea more aggressively towards improvement of relations with then communist countries. The resultant formal diplomatic policy was called the “Northern Policy”. A rush of new  72 diplomatic ties with East European countries followed a few years after the Olympic Games. The USSR was one of the major countries the policy targeted. Indeed, the initial success of the “Northern Policy” reached its climax when new diplomatic ties were established with the Soviet Union in  1990.  On one level, the apparent motivation of the “Northern Policy” is  political. The ultimate goal of the policy is to achieve the reunification of the two Koreas, i.e. peace and security on the Korean peninsula.  In  addition, however, the “Northern Policy” was very strongly motivated by economic incentives. Now that formal diplomatic relations with most of the countries the “Northern Policy” had targeted have been achieved, the political meaning of the policy to a large extent has vanished and the economic reality has overtaken the political justification. As mentioned in section 4.1.1, the Korean economy has been challenged both by protectionism in the main export markets of the U.S. and the EC and rapidly growing competition of China and new NIEs from ASEAN (Association of Southeast Asian Nations) countries.  A diversification of  export markets and the security of raw material supply have emerged as the most crucial for the Korean economy to continue to grow.  The  economic motivation behind the “Northern Policy” was to cope with these challenges from both sides and at the same time to utilize the new diplomatic ties with former communist countries to secure new export markets and resource supply sources (Park, 1990). The Soviet Union was regarded as one of the best countries to serve this purpose, with a new potential market in European Russia and a potential raw material supply source in the RFE.  73 4.3.2. Economic Relations between Korea and Russia Economic Aid After diplomatic ties were established, Korea granted a total US$3 billion worth of economic aid to the USSR over the three year period from 1991 to 1993. The aid package consists of a US$1 billion bank loan, US$1.5 billion trade credit to help Russian imports of Korean consumer goods and US$500 million for importing plants from Korea (Kim, 1991). The share of the tied loan in the total amount of the aid well represents the main motivation of the economic aid, i.e. trade promotion. The US$1 billion bank loan was provided in two installments in May and November 1991. The trade credit was granted in the form of a tied loan, by which the USSR should exclusively purchase Korean consumer goods. The US$500 million loan allocated for purchasing Korean plants has not been implemented since its approval. The loan payment was temporarily suspended in response to the political instability after the August 1991 coup and the failure to pay back principal and interest in 1992. However, the payment resumed after Yeltsin’s visit to Seoul in November 1992. The Korean government, after the February 1993 leadership change, had established the revitalization of the domestic economy as the highest priority, announced on 30 August 1993 that it would be canceling the economic aid allocated to Russia, and would submit a rescheduled loan 4 Russia’s failure to pay the owed principal and payment plan to Moscow. interest on time was referred to as the main cause of the decision. There was a widely shared perception that the US$3 billion aid package was the Korea Economic Daily, 30 August 1993.  74  cost for stabilizing security and peace on the Korean peninsula, which 5 However, such justifi ultimately would help the two Koreas be reunited. cation seems no longer viable in the harsh economic reality that Korea itseff is still one of the world’s largest debtor countries—indeed, the loan granted to the former Soviet Union was borrowed from foreign banks. Trade Trade between the two countries began several years before formal diplomatic relations, though it was often one-sided. A small amount of highly demanded raw materials was imported from the USSR.  One  shipment of pulp and 5,700 cubic metres of pulpwood were exported from the USSR to Korea in 1980 (Bank of Korea, 1981). The imports were often arranged by a third country. For example, Japan’s Mitsui & Co., Ltd. arranged a shipment of 3,800 cubic metres of Russian logs from Nakhodka to Inchon in 1982 (Japan Lumber Journal, 1982). Official trade records began to appear in statistics publications only from 1985. Trade between the two countries began to grow rapidly after the Olympic Games in 1988, and the Korea Trade Promotion Corporation (KOTRA) office was opened in Moscow in 1989. Table 4.21 shows that the trade volume between the two countries quadrupled from US$290 million to US$1,202 million between 1988 and 1991. In the first two years of this period, the trade showed a Korean import surplus, but this turned to an export surplus in the last two years as the result of exports tied to the economic aid. However, the trade between the two countries accounts for only 1.5% of Korea’s total trade volume and is 3.2% or 3.6% of that for the major trading partners of Korea, the U.S. and Japan. 5 Korea Economic Daily, 18 November 1992.  75 Table 4.21. Korea’s Trade with Russia Year  (USSR) 1985 1986 1987 1988 1989 1990 1991  ( Russia)  1992 1993 (Sept.)  (RFE) 1992  Export to Russia  Total Import from Russia (US$1 million)  Balance  60 65 67 112 208 519 625  42 68 133 178 392 370 577  102 133 200 290 600 889 1,202  18 -3 -66 -66 -84 149 48  753 386  204 689  957 1,075  549 -303  92.5  136.4  228.9  -44.9  Source: Korea Foreign Trade Association (1992) and ERI (1993)  In order to circumvent the lack of foreign reserves in Russia, barter trade was often used. For example, Korea received aluminum ingot, steel, and fish products in payment for exports of textiles, consumer electronics, and 6 However, the march of trade expansion between the two footwear. countries was brought to a halt by the political instability that attended both the coup in August 1991 and the final collapse of the USSR. Korean exports to Russia after 1991 were largely based upon the credit extended to Russia for its purchase of Korean consumer goods. Trade also declined due to the difficult economic situation in Russia. Investments Korean direct investment in the former USSR and Russia had been approved for 28 projects and US$30.02 million as of November 1992 since 6 Korea Economic Daily, 18 Nov. 1992.  76 the first investment in Moscow in 1989 (Korea Economic Daily, 18 Nov.1992). However, Table 4.22 shows that only US$22.34 million, or 74% of the approved investment was undertaken. This figure represents less than 1% of Korea’s total outward foreign investment of US$4.4 billion. Table 4.22.  Korean Investment in the Former Soviet Union (Nov. 1992)  Region  No. of Project  Amount (US$1,000) Approved Invested  Moscow St. Petersburg Alma Ata Kazakstan Khabarovskiy Kray Primorskiy Kray Vladivostok Sakhalinskaya Oblast’ Nakhodka Amurskaya Oblast’  10 1 2 2 3 1 2 5 1 1  5,867 1,912 738 398 537 16,000 1,550 2,007 714 300  Total  28  30,023  4,067 0 678 50 156 16,000 250 987 0 151 22,339  Source: Korea Economic Daily (11 Nov. 1992)  By region, Korea’s investment in the former Soviet Union shows a heavy concentration in the Far East.  The region accounts for 70% of the total  amount, or US$21.11 million representing 47% of all projects. European Russia accounts for US$7.78 million or 26% of the total amount, represent ing 39% of all projects. The Central Asian region accounts for the smallest share, US$1.14 million (4 projects), only 4% of the total amount and 14% of the projects as in Table 4.22. However, the concentration in the RFE can be attributed to the single largest investment in forestry, which represents more than 50% of the total investment. The average amount per single investment project is US$1.07 million. The second largest project, however, amounts only US$519,000.  77 Table 4.23. Investment by Region and Industry (approved amount)  Industry Forestry Fishing Heavy Machinery Textile & Footwear Medicine Food Chopsticks Imports &Exports Hotel & Restaurant Telecommunication Aerophoto Service Ship Repair Total  European Russia  1,912(1) 175(2) 300(1)  Central Asia  Nov. 1992 Far East  US$1,000 (No. of Project) 16,000(1) 1,964(2) 738(2) 143(1)  530(3) 3,362(3) 1,500(1)  255(1)  7,779(11)  1,136(4)  Total  70(1) 1,782(3)  16,000(1) 1,964(2) 1,912(1) 913(4) 143(1) 861(3) 300(1) 941(5) 3,637(5) 1,500(1) 70(1) 1,782(3)  21,108(13)  30,023(28)  561(2) 300(1) 156(1) 275(2)  Source: Korea Economic Daily (11 Nov. 1992)  By industry, the largest share of investment is found in primary industries such as forestry and fishing, followed by service industries such as hotels and restaurants, and ship repair (Table 4.23). Primary and secondary industries account for 60% and 26% respectively. Manufacturing industries account for only 14% of total investment. In sum, Korean investment in the former Soviet Union is directed to a variety of industries, but the amount of each individual investment tends to be small, except for the large forestry investment in the Far East. Motivations for investment in the former Soviet Union are well reflected in the geographic pattern of the investments. European Russia is perceived by Korean firms as a market to promote whereas the Russian Far East is seen as a resource supply source. Investment in Central Asia is largely motivated by the presence of the Korean ethnic minority in the region.  78 Other Economic Cooperation Economic cooperation between the two countries has increased since Russian President Yeltsin’s visit to Seoul in November 1992. The visit resulted in the signing of a Korean-Russian treaty, as well as inter governmental agreements setting up cooperative committees on economic matters, science, and technology. Joint Korean-Russian committees for fisheries and the exploration of energy and mineral resources in Russia were also established.  Details of these are discussed in the following  sections. During Yeltsin’s visit to Korea, 23 major projects with a total value of US$20  -  30 billion were proposed by Russia as avenues for potential  economic cooperation between the two countries. These include tin and gold production, petro-chemical processing, and gas production in Khabarovskiy Kray; coal mining, wood processing, and modern fish processing plants on Sakhalin Island and Kamchatskaya Oblast’; and a 7 More than seaport, an airport, highways and railways on Sakhalin Island. two thirds of these are in the RFE. Science and technology transfer from Russia has emerged as an attractive area for investment by Korean firms. Currently, 19 Korean firms are involved in transferring 25 technology items including industrial gas turbine engines, helicopters, light and medium size passenger airplanes, 8 Korea gains access to some of this and pharmaceutical technology. technology by taking part in defense conversion projects. 7 Korea Economic Daily, 20 Nov. 1992. 8 Korea Economic Daily, 19 Feb. 1993.  79  Technology development is one of the ways the Korean economy can survive in the face of future international competition.  However,  technology development is an expensive investment. Setting its expensive price aside, western technology is hard to acquire because of western countries’ reluctance to sell it. By contrast, Russian technology in some areas is highly comparable to that of the west but inexpensive and easy to 9 acquire. 4.4. Corporate Interests in the RFE For many reasons, the RFE is perceived as a very important region for Korea. Indeed, most Korean investment in Russia is directed here. This is the region where Korea could establish a supply source for raw materials necessary for Korean industries. Moreover, the presence of a large Korean minority in the region presents an emotional attraction. Finally, the region brings a lot of international attention to its potential economic cooperation through developments such as the Japan Sea (East Sea in Korea) Rim Economic Zone (Ogawa, 1993). Thus, how the RFE is perceived by Korean firms and the implications of such perception for Korean investment in this region are the main areas of discussion in this section. 4.4.1. Trade with the RFE Despite the shrinldng Russian foreign trade over the last several years, trade with Asia-Pacific countries has expanded. The share of the trade with Asia-Pacific countries in Russia’s total foreign trade has risen from 12% in 1991 to 20% in 1992 (JETRO, 1993a). The RFE’s trade with Asia9 Korea Economic Daily, 19 Feb. 1993.  80 Pacific countries also has risen from 78% in 1985 to 88.4% in 1992. Prior to perestroyka and glasnost the RFE’s trade with Asia-Pacific was domi nated by Japan. Other countries’ shares have risen greatly in recent years. Japan’s share has declined from 79.5% in 1985 to 50.2% in 1992 (Table 4.24). These facts indicate a fast integration of the RFE into the Pacific-Rim economy. Table 4.24. RFE’s Trading Partners (%)  Total Exports Asia-Pacific countries Japan China Others Others  1985 100.0 78.0 (100) 62.0 (79.5) 10.0 (13) (8) 6.0 22.0  1990 100.0 85.0 (100) 65.0 (76.5) 17.0 (20) 3.0 (3.5) 15.0  1992 100.0 88.4 (100) 34.4 (38.9) 37.9 (42.9) 16.1 (18.2) 11.6  Source: JETRO (1993a)  It was only in 1993 that separate trade statistics for the RFE became available in a formal publication. According to the FRI (1993), Korea exported US$92.5 million worth merchandise to the RFE and imported US$145.80 million of raw materials from the RFE in 1992 (Table 4.25). Table 4.25. Korea’s Trade with the RFE Year  Export to  Import from  Total  Balance  US$1 million (USSR, Russia) 1991 1992 1993 (Sep.) (RFE) 1992  625 753 386 92.5  577 204 689 136.4  1,202 957 1,075 228.9  48 549 -303 -43.9  Source: Korea Foreign Trade Association (1992), Korea Economic Daily (6.11.1993), ERI (1993) and JEfRO (1993a)  81 They account for 6.6% and 12.2% of the RFE’s total exports and imports respectively. By total volume of trade of the RFE, Korea accounts for 9.1%. Korea is the third largest trading partner of the RFE after China and Japan which respectively represent 38.6% and 35.4% of the RFE’s total trade. Korea imports from this region mainly steel and metal products (35% of imports from the RFE by value), coal and petroleum (20%), and fishery products (15%), and exports machinery (55%), textiles and garments (25%), food products and other consumer goods (Manezhev, 1993). In recent years, Korea shows an surplus imports of US$53.3 million. However, there usually exist more exports that are not recorded by official statistics. A large amount of consumer goods are being brought into the RFE by sailors and travelers returning from the Korean port city of Pusan. If these unofficial exports are taken into account, Korea’s exports to the RFE could be double the official figure (Lee, B.S., 1993).  Korea has  experienced a rapid expansion of trade with the RFE for the last few years 10 despite the fact that the overall trade with Russia began to slow down. This reflects the recent trend that Korea’s exports directed to the Moscow region declined while the ones to the RFF rose. Korea’s trade with the RFE has a geographic concentration on the southern part of the RFE. Primorskiy Kray shares the largest portion of Korea’s trade with the RFE, nearly 60%, followed by Sakhalinskaya Oblast’ and Khabarovskiy Kray (Table 4.26).  10 Korea Economic Daily, 7 Sept. 1992.  82 Table 4.26.  Korea’s Trade with the RFE by Sub-region in 1992 Export to  Sub-region  Import from  Total  Share of total province trade  US$lmillion Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Yakutia  114.6 5.3 N.A. N.A. 5.0 9.8 1.7  21.7 19.5 N.A. N.A. 5.1 45.4 0.8  136.3 24.8 N.A. N.A. 10.1 55.2 2.5  14.6 24.8 N.A. 4.3 7.1 17.8 1.2  Source: JETRO (1993a)  It is interesting to see that more than half of Korea’s exports to the RFE are directed to Primorskiy Kray. This is explained by the presence of major ports there.  It is suspected that the exports which arrive at the  Primorskiy ports are redistributed to the other subregions in the RFE. Sakhalinskaya Oblast’ also shows a high proportion of trade mainly because of the presence of about 36 thousand Koreans on the island. The RFE represented only 0.15% of Korea’s total foreign trade in 1992. This region, however, is a market which has grown rapidly over the last few years and has the potential to grow in the near future.  Korean  products, in particular consumer electronics, take advantage of good quality and a relatively inexpensive price which is more affordable for the local inhabitants than high priced Japanese products (Ito, 1993). 4.4.2. Investments in the RFE Korean investment in the RFE was US$21.1 million for 13 projects as of November 1992. A large portion of the investment was directed to the region’s major industries such as forestry, fisheries and ship repair. These  83 three account for 94% of the total Korean investment in the region (Table 4.27). Table 4.27. Korea’s Investments in the RFE (Nov. 1992) Industry Forestry Fishing Food Chopsticks Trade Hotel & Restaurant Aerial photo Ship repair Total  No. of Projects 1 2 2 1 1 2 1 3 13  Approved Amount (US$1,000) 16,000 1,964 561 300 156 275 70 1,782 21,108  Source: Korea Economic Daily (11 Nov. 1992)  Compared to other parts of Russia, the scale of the investments is large in the RFE. The average amount of investment is US$1.6 million in the RFE, US$0.7 million in European Russia and US$1.1 million in the former Soviet Union. The location of the investment is concentrated in southern sub regions of the RFE. All the investments are located in Primorskiy Kray, Khabarovskiy Kray and Sakhalinskaya Oblast’ except one in Amurskaya Oblast’ (Table 4.28). Table 4.28. Geographic Distribution of the Investments (Nov. 1992) Location Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Sakhalinskaya Oblast’ Total  No. of Project 4 3 1 5 13  Approved Amount (US$1,000) 18,264 537  300 2,007  21,108  Source: Korea Economic Daily (11 Nov. 1992)  84  Korea’s investment in the RFE, reflecting the RFE’s regional characteristics and Korea’s demand for raw materials, is largely resource-oriented. A large proportion of the investments is directed to forestry and fisheryrelated industries which are regarded as industries demanding less capital investment than manufacturing industries. In general, however, Korea’s investment in the RFE still remains small in scale and inactive.  The  following problems are often pointed out as the most immediate stumbling blocks for the expansion of foreign investments in this region. First is the political and social instability in Russia. Russia in transition to a market economy has experienced reduced industrial production, high inflation, and unemployment. These adjustments have caused shrinkage of overall industrial activities and have changed economic relations with foreign countries. Second is the instability of the legal system. Too much new legislation, including presidential decrees, is being introduced to the transitional economy.  Decrees have been promulgated too frequently, only to be  amended shortly thereafter. Some of them contradict each other and without detailed regulations they only increase confusion (Kim and Park, 1993). The unclear division of power between the central and regional governments also contributes to the instability of the legal system. A good example is the ownership and control over natural resources and the 11 access to them.  As new presidential decrees are promulgated, new  organizations and regulatory agencies are formed to administer them. Lastly, as is widely known, the inferior infrastructure in the region is frequently pointed out as a factor hindering foreign investment. 11 See Section 5.5.6 for details.  85 Korea has its own obstacles to increasing investment in this region. Korea and Russia entered into economic partnership for the development of Siberia and the Russian Far East after formal diplomatic ties were established in 1990. Korea was the preferred partner to Japan with which Russia has a long-standing territorial problem.  A variety of joint  development projects are being proposed to Korea. Recently 23 projects were proposed by the Russian government during the president’s visit to Seoul in 1992.  The majority of the projects are related to resource  development, large in scale, and involve the RFE.  Korea, however, is less  able to satisfy the capital and technological demands of the proposed projects, compared to Japan and other developed countries. This means that Korea might eventually rely on Japanese or other western capital and technology in order to implement the proposed projects. 4.4.3. Korean Industrial Park in Primorskiy Kray In order to promote active Korean investments in the RFE, a large industrial park is being established in the city of Partizansk near Nakhodka. An estate of about 330 hectares was rented to the Korean government for 70 years.’ 2 The Korean government plans to rent it to Korean companies which are interested in investment in the region. Lowlevel processing and export-oriented light industries, such as textile, agricultural and fishery products processing, and wood processing industries, will get a high priority in moving into the park. Korea Land Development Corporation is building the infrastructure by 1995 on behalf of the Korean government. 12 Korea Economic Daily, 19 June 1992.  86 In addition to the geographic proximity of the industrial park, Korea can take advantage of the Korean population in the region for labour in the park. In fact, the presence of Koreans in the region acted as one of the  main motivations to establish the park. Once the Korean industrial park is completed, it will be one of the most attractive places for Korean firms to invest in the RFE.  The industrial park will help Korea relocate its  uncompetitive industries and will be a strong foothold for Korea to penetrate into the local markets in the region in the long term. 4.4.4. Joint Mineral and Energy Resource Development Natural resource exploration seems to be one of the most important areas of interest in the economic cooperation between the two counthes. Russia, which suffers severe lack of capital and technological resources, expects Korean investments in the development of mineral, gas and oil exploration in Siberia and the RFE. In addition to Korea’s high demand for these raw material and energy resources, Korea would like to relate the resource development to the outstanding export payment resulting from Russia’s shortage of foreign exchange. Korea would like to import the mineral and energy resources after joint development, or export them to third countries as a return for unpaid exports. For this purpose a Korea-Russia Resource Cooperative Committee was set up in May 1992 between the two governments. This committee acts as a  formal negotiating representative for the government and encourages Korean firms’ participation in resource exploration projects mainly located in Siberia and the RFE. Since most of the projects within the scope of this committee are large in scale and require a heavy capital investment, a  87 considerable amount of time is required for feasibffity studies before any actual investment. For example, the two countries signed an agreement to set up a joint committee in 1992 for a feasibility study on gas exploration in Yakutia and a related construction project for a gas pipe line from 3 Nine Korean firms includ Yakutia to South Korea, crossing North Korea.’ ing Daewoo, Hyundai and Samsung formed a consortium for the project. Currently, the unclear negotiating authority on the Russian side and a potential high investment risk limit the level of Korea’s participation in the resource development projects to carrying out the related feasibility studies. Table 4.29 shows the Korean firms’ participation in the coopera tive resource development projects in the RFE. Table 4.29. Korea’s Participation in Resource Development in the RFE Project Gas Exploration  Location Near Yakut in Sakha Republic  Off shore gas field Lunskoye in LNG Development North East Sakhalin  July 1992  Korean Firms Involved Consortium of 9 firms  Status Negotiating on Feasibility study  Palmco & Samsung  Being reviewed by Russia Participated in joint exploration  Ground Oil Field Exploration  Sakhalin ground oil fields  Dongwon Coal Mine  Tin mining  Prouvouurmi in Khabarovskiy Kray  Signed for joint tin Hyundai, exploration Daewoo Samsung, Dongbu  Coal mining  Elgynsk near Neryungri, Yakutia  Hyundai  Feasibility Study  Coal mining  Urgal, near Chegdomyn, Khabarovskiy Kray  Hyundai  Feasibility Study  Source: Kim and Park (1993)  13 Dong-Ah Ilbo, 7 Sept. 1992.  88 4.4.5. Fisheries Cooperation By signing the fisheries pact in September 1991, Korea and Russia estab lished a cooperative relationship. 14 A 430,000 ton a year fishing quota was allocated to Korea in 1992 and Korea gained access to direct fishing in Russian waters for up to 70,000 tons a year. Even the fishing grounds near the disputed Japanese Northern Islands are accessible to Korean fishing boats following a trilateral fisheries meeting among Korea, Russia and Japan. By the help of the fisheries pact, Korea’s imports of fish products from Russia have increased from US$68 million in 1989 to US$125 million in 1991. Most of this was from Russian waters in the RFE (Kim and Park, 1993). Three fisheries joint ventures are currently being operated in the RFE. In the joint venture, Korea provides fishing operation, ship repair service, and fishing supplies and markets the catch and Russia is responsible for secur ing fishing quotas, rights to access fish resources, and land for the joint venture. 4.4.6. Science and Technology Transfer The two countries signed a pact for science and technology cooperation in 1990. The Korea-Russia Science and Technology Cooperation Centre was set up to link the two countries. Also, the Korea Institute of Science and Technology (KIST) signed agreements with 37 former Soviet research institutes by June 1992 (Kim and Park, 1993).  The two governments  agreed to transfer 74 highly technological items to Korean industries, 20 of 14 Korea Economic Daily. 17 Sept. 1991.  89 which had already begun the transfer as of August 1992. Korean research institutes, universities and private companies plan to employ Russian scientists. In 1992, 73 Russian scientists were to be invited to Korean research organizations. Many of the technology transfers involve European Russia rather than the RFE. Since the Russian Far East has a well developed military industry, however, Korea has recently become interested in participating in the 15 conversion of the industry to a civilian one. 4.4.7. Korean Minority in the RFE  Although the Yalu and Tumen Rivers served as a natural border between Korea and China for many centuries, Korean territory extended to what is now Primorskiy Kray and southern parts of Chinese Jirin and Liaoning provinces between the fourth and seventh centuries (Lee, 1986). In more recent history, Koreans have migrated to Russia, for both economic and political reasons, since the latter half of the 19th century (Suh, 1987). In modem times, about 200,000 Koreans lived in the RFE before they were relocated by force to the Central Asian Republics in 1937 under the Stalin regime (Suh, 1987). They and their descendants represent the majority of a 439,000 Korean population currently living in the Republics of the former Soviet Union (Kim and Park, 1993). About 57,000 Koreans reside in the RFE (Lee, C. J., 1993). Sakhalin Island is the place where the largest Korean population resides in the RFE. About 36,000 Koreans live there and with 5% of the Island’s total population they account for the third largest 15 Korea Economic Daily reported on 19 Feb. 1993.  90 ethnic group in the Island (Lee, C. J., 1993). They comprise people sent to Sakhalin Island to serve forced labour under the Japanese colonial government, or their descendants. They were abandoned on the island after Japan surrendered to the United States in 1945.  About 9,000  Koreans live in each of Primorskiy and Khabarovsk Krays (Lee, C. J., 1993). Many of them moved from Sakhalin Island seeking economic betterment. A growing number of people fleeing the civil war are also returning to this region from the former Central Asian Republics. The presence of a Korean population and Korea’s historical background in the RFE largely represent Korea’s emotional attachment to this region. The Partizansk industrial park was first discussed in relation to bringing the Koreans in Central Asia back to the RFE (Kim and Park, 1993). Once Korean industries start moving into the industrial park after 1995 as planned, a large number of Koreans in the region is expected to be able to serve as a workforce in Korean firms operating in the park. They are already visible in Korean offices in Vladivostok and Khabarovsk. Furthermore, over two million Koreans live in the neighbouring three Northeastern Chinese provinces, i.e. Heilongjiang, Jirin and Liaoning provinces (Lee, 1986). Over 800,000 Koreans reside in the nearby Yanbian Korean autonomous prefecture in Chinese Jirin province (See Map 1.1). If necessary, these Koreans could also be a labour source for Korea’s industrial activities in the RFE. This idea has already been experimented with in Korea’s logging investment. About 350 Koreans from China were employed for the iv Svetlaya.  91 4.5. SUMMARY AND DISCUSSION One of the most important conditions for Korea to maintain its growth momentum in the future is the security of raw materials supply. Wood was once used as an important raw material to support the country’s export industry. Korea is now no longer able to get an easy access to over seas forest resources to feed the export industry. Wood, however, still remains important for domestic use. Without a revolutionary change in the domestic wood supply system, Korea is expected to continue to rely heavily on overseas supply sources. Foreign investment will increasingly play an important role in gaining access to the overseas resources. The Russian Far East has emerged as a potential new supply source while resource depletion and environmental problems severely cut down the supply capability in the traditional timber supply regions. The Russian Far East offers a number of advantages to Korea; plentiful resources, geographical proximity, a complementary economic relation ship, and the presence of a Korean population. For these reasons, the RFE has been recognized as being very important to the resource-seeking Korea ever since the two countries established formal diplomatic relations. Korea showed a great deal of enthusiasm toward the region in various aspects of trade, investment, establishing its own industrial park, opening govern mental and corporate offices, setting up a new air route and so on. The enthusiasm was somewhat amplified by the “Northern Policy” but has no doubt demonstrated Korea’s vested interest in the region. While Korea appreciates the importance of the region, it lacks a clearly defined strategy  92 towards it and has no long-term vision of its relation with this region. Trade structure and investment patterns have not really been undertaken in a way to appreciate the complementary economic relationship between the two countries. In order to take full advantage of the relationship between Korea and the RFE, a long-term vision is required at both government and corporate levels, especially when dealing with the various resource development projects. So far Korea has been a passive partner  and has not begun to take advantage of the potential economic benefits in the RFE.  93 CHAPTER V HOST-COUNTRY ENVIRONMENT-THE RUSSIAN FAR EAST Until recently, the RFE has been largely dealt with within the context of the  former Soviet Union or Russian Republic rather than in separation from them. It was only in 1990 that a comprehensive analysis of the region segregated from the rest of Russia first appeared (Rodgers, 1990). The information on this region is still scarce. Especially, the rapidlydeveloping recent changes in regulations and policies related to the regional economic situation are difficult to secure. Some of them constitute important parts of the investment environment of host country (in this study, host region). For this reason, a significant part of this chapter is devoted to describing the general condition of the RFE, its economy, forest resources, and forest sector as well as the recent developments in them. Collectively this information helps describe the host-country investment environment in the forestry sector as presented in the analytical framework in Figure 3.1. 5.1. REGIONAL ECONOMIC CONDITIONS Several terms are used to refer to the uniqueness of the geo-economic features of the RFE. Among them,  ‘one of the most remote regions’  (Manezhev, 1993), ‘one of the most overlooked’ (Miller, 1992a), and ‘world’s last new frontier’ (Ogawa, 1993) have appeared in recent literature.  As these terms imply, the RFE is an isolated  underdeveloped region but has plenty of natural resources.  and  94 Among the 4 planning areas in Russia, the RFE is the largest one covering over 6.2 million square kilometres, nearly 6.6 times the area of British Columbia. This vast area is inhabited by only 8 million people in 7 administrative units (See Map 5.1). The RFE occupies 36.4% of the area of Russia but is inhabited by only 5.3% of the population of Russia. This region is the most sparsely inhabited in Russia with a population density of 1.3 person per square kilometre (Table 5.1). Table 5.1. Area and Population of the RFE Administrative units  Area ) 2 (1,000 km  Population (1,000 persons)  Population Density ) 2 (person/km  Primorskiy Kray 1 Khabarovskiy Kray 2 Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Yakutia  165.9 824.6 363.7 472.3 1,199.1 87.1 3,103.2  2,299 1,851 1,074 473 534 717 1,109  13.9 2.2 3.0 1.0 0.4 8.2 0.4  The REF British Columbia Canada Japan Korea  6,215.9 947.8 9,970.6 377.8 99.3  8,057 3,282 27,409 124,450 43,717  1.3 3.5 2.8 329.4 440.3  Source: ERI (1991), Statistics Canada (1 993b), Korea Statistical Association (1992), Japan Statistics Bureau (1993), and Statistics Canada (1994, 1993a)  The region can be divided into four zones on the basis of vegetation form; southern taiga, central taiga, northern taiga, and tundra and arctic. 60% of the population inhabits the southern taiga zone along the Trans-Siberian Railway, an area occupying 7% of the total territory. The region also shows a high proportion of urban population. 75% of the regional population resides in urban areas. 1 Kray is an administrative unit higher than oblast’ and translated into ‘territory’ in English literature. However, kray and oblast’ are both directly responsible to a union Republic (Lydoiph, 1990). 2 Oblast’ is a lower administrative unit than kray and translated into ‘region’ or ‘province’ in English literature.  95  CIiukotskaia AO  _f  (  (S Oblast  Republic at Saitha (‘Yakutlia) YwtSk  East Sibeiia  Bunatfia Republic Lake Baikal UUde  Mongolia -  ®  Admmistrahve Captlal AOk Autonomous Okrug AO Autonomous Obtest  Amursiaia Oblast Chitinskaa Oblast  Ba  Khabarovskii Krai Khabaro •  0  Yevreyskaia (J AC) Aginsku-Bunatskii Peoples Republic of China  Map. 5.1. The Russian Far East Source: RFEIJ (1 993a), reproduced with permission  96 Despite being the largest planning area in Russia, the RFE has played a lowprofile role in the national economy, largely as a province which supplies raw materials to the western part of the country. The RFE accounted for only 4.7% of the total industrial output of Russia in 1990, which is still lower than the comparable regions of Western Siberia and Eastern Siberia (Table 5.2). Table 5.2. National Share of Industrial Output by Region in 1990 Industry  W. Siberia  F. Siberia  Far East  (%) Total Industry Mineral Processing Electric Power Fuel Ferrous Metal Non-Ferrous Metal Chemical and Petrochemical Machine Building & Metal Working Forest Products Construction Material Light Industry Food Processing  10.8 35.9 8.2 12.8 45.8 10.1 3.8 11.8 7.7 7.4 11.1 5.9 7.5  6.0 12.0 5.4 12.6 7.7 1.2 23.1 3.4 2.7 15.8 6.9 5.5 3.8  4.7 15.0 3.6 5.0 3.4 0.8 12.7 1.3 2.8 7.4 8.8 1.6 11.4  Source: FRI (1991)  Industry in the RFE is structured heavily in favor of extractive industries, which account for 28.5% of the total commodity production in the region. Even in the extractive industries, a small number of specialized industries such as fishing, non-ferrous metals industry and forestry represent over 50% of total regional production. The non-ferrous metals industry and forestry account for 12.7% and 7.4% of total Russian production in their respective industries (ERI, 1991). Among the RFE’s industries, the fisheries has the highest profile in the national economy. The region’s share of fish and seafood production is 58.7% (ERI, 1991).  97 The processing industry in the RFE is the least developed in Russia and highly dependent upon help from outside the region. For example, 80% of the products of the machine building industry is exported to other regions and 80% of the consumer commodities are imported from outside the region (Kim and Park, 1993). Despite their great potential, forestry and the forest products industry remain at a low-profile. The RFE’s forest product industry represents only 7.4% of the total national output for this sector (ERI, 1991). This is largely attributable to high production cost, a lack of modern technology and competition with Siberian regions that are geographically better suited to serve markets in European Russia. The RFE, however, has a higher national share (9.7%) in the logging industry, in which the region is more special ized than others. The region’s economy is dominated by two southern territories; Primorskiy Kray and Khabarovskiy Kray. These two territories account for 52% of the regional population, 42% of regional product, 54% of regional industrial output and 40% of capital investment (ERI, 1993). The northern part of the region, occupied by Yakutia and Kamchatskaya and Magadanskaya Oblasts, is sparsely inhabited. This part of the region is largely covered with vast areas of mountain taiga, tundra, and the arctic. Harsh weather conditions and the seasonal availability of surface transportation hamper the economic development of the region. The economy of the northern region is largely based upon a few special industries specific to the region such as non-ferrous metals industries in Magadanskaya Oblast’ and Yakutia.  98 Being surrounded by sea, the eastern parts of the region--Kamchatskaya and Sakhalinskaya Oblast’--specialize in fishing and fish processing industries. However, Sakhalin Island shows a more diversified structure of industry than Kamchatskaya Oblast’ because of its endowment of varied natural resources and the old mills and industries established during the Japanese colonization of the southern part of the island. In addition to fisheries, the island has an established paper making industry and an oil and gas industry.  Agriculture also shows a southern concentration.  Amurskaya Oblast’ accounts for 2 8.6% of the regional agricultural output followed by Primorskiy Kray and Khabarovskiy Kray.  These three  territories represents 71% of the regional agricultural output. (Table 5.3). Table 5.3. Geographic Distribution of Regional Economy in the RFE, 1990 Basic Indicators  Subregions Primorsk Khabarovsk Amur Kamchatka Magadan Sakhalin Yakutia  2.7 Area 28.5 Population Net Regional product 25.0 27.0 Employment output 28.9 Industrial output 25.5 Agricultural 24.2 Crops 26.1 Livestock 22.4 Investment Capital 24.9 Capital Assets 21.9 Construction  13.3 23.0 20.0 22.8 25.2 17.1 18.1 16.7 17.7 18.9 19.4  5.8 13.3 11.1 12.5 7.2 28.6 44.0 21.2 12.4 13.2 13.2  (%) 7.6 5.9 7.7 5.4 7.2 4.5 2.8 5.3 5.5 5.7 5.8  19.3 6.6 10.5 7.7 9.2 4.9 1.4 6.6 10.2 9.6 10.4  1.4 8.9 8.7 9.4 9.6 8.4 4.9 10.0 10.5 11.6 6.6  49.9 13.8 17.0 15.2 12.7 11.0 4.6 14.0 21.3 16.1 22.7  Source: FRI (1991)  Table 5.4 shows the industrial output by subregion. Industrial output also shows a concentration among the subregions similar to the overall economic activities shown in Table 5.3.  Most of the industries are  concentrated in the southern territories of Prhnorskiy and Khabarovskiy  99 Krays. The two territories account for 96% of the RFE’s regional ferrous metal industry, 97% of the chemical and petro-chemical industries, 79% of the machine building industry, 67% of light industry, and 51% of the food processing industry. The non-ferrous metal industry is concentrated in Yakutia and Magadanskaya Oblast’, the regional share being 45% and 33.7% respectively.  Yakutia has the second highest share in the fuel and  construction-material industries, with 28.9% and 20.9% respectively.  Sakhalin Island has well developed fuel, forest product and food process ing industries.  Their regional shares are 13.4%, 22.0% and 17.5%  respectively (Table 5.4). Table 5.4. Geographic Distribution of Industrial Output in the RFE, 1990  Industry  Subregions Primorsk Khabarovsk Amur Kamchatka Magadan Sakhalin Yakutia  (%) Electric Power Fuel Ferrous Metal Non-Ferrous Metal Chemical & Petrochemical Machine Building Forest Products Construction Material Light Industry Food Processing (mci. Fish products)  20.5 16.4 2.7 6.9 40.0 35.1 17.3 26.7  24.7 30.3 92.8 7.8 57.0 44.2 34.5 18.9  14.4 7.8 1.8 6.2 0.3 7.5 12.2 9.5  4.9 0.3 0.3 0.2 3.7 2.9 6.3  38.7  12.1  4.8  20.1  12.0 3.2 1.7 33.7  7.5 13.4  3.8 2.9 9.0  0.1 2.4 3.1 22.0 8.7  3.9  17.5  5.6 12.2 52.3 -  3.8 -  5.3 10.6 2.5  Source: FRI (1991)  With respect to industrial output, each territory presents a varied concen tration and specialization. The industrial output in Primorskiy Kray is concentrated in the food processing industry, 45.2% of the territorial industrial output, followed by machine building industry, 21%, and construction material industry, 7.7%. In Khabarovsldy Kray, 28.7% of the  100 industrial output comes from the machine building industry, 18.9% from food processing and 11.7% from the forest products industry. The industry in Amurskaya Oblast’ shows a less concentrated structure than others. The top four industries of the territory are the food-processing, machine building, non-ferrous metals and forest products industries. Their shares range from 33.3% to 10.5%. Kamchatskaya Oblast’ has a heavy concentra don of food-processing industry, 73.3%.  This reflects the territory’s  dependence upon fishing and the fish processing industry.  Both  Magadanskaya Oblast’ and Yakutia are specialized in non-ferrous metals industries, which account for 59.4% and 63.2% of the industrial output in their respective territories. The industry on Sakhalin Island is also most heavily concentrated in food-processing and forest products, whose shares in the island’s total industrial output are 47.7% and 28.8% respectively (Table 5.5). Table 5.5. Composition of Industry within Subregions in 1992 Industry  Subregions Primorsk Khabarovsk Amur Kamchatka Magadan Sakhalin Yakutia (%)  2.5 Electric Power 1.0 Fuel 0.1 Metal Ferrous 4.0 Non-Ferrous Metal l Petrochemica 3.0 Chemical & 21.0 Building Machine 6.4 Forest Products 7.7 Construction Material 0.4 Glass & pottery 4.6 Light Industry 45.2 Food Processing products) sea (mci. 2.5 Milling 1.6 Others 100.0 Total Source: NRC (1993)  3.1 6.6 4.1 5.0 4.0 28.7 11.7 6.2 0.1 7.5 18.9  6.1 3.3 0.1 13.5 0.1 13.6 10.5 7.2 1.1 5.1 33.3  4.8 0.0 0.0 0.6 0.0 8.5 3.1 5.6 0.0 2.0 73.3  6.0 1.2 0.1 59.4 0.0 6.1 2.0 4.8 0.4 2.6 16.4  2.2 5.4 0.0 0.2 0.4 4.6 28.8 5.4 0.0 1.8 47.7  3.2 6.1 0.0 63.2 0.0 2.2 3.7 7.2 0.0 1.3 12.5  2.5 1.6  5.4 0.7  0.6 1.5  0.0 1.0  2.0 1.6  0.0 0.6  100.0  100.0  100.0  100.0  100.0  100.0  101 A continuous decline of industrial output over recent years was observed. This reflects the difficult situation of the Russian economy in transition. Industrial output in the RFE first declined in 1990, fell 9.8% in 1991, and further declined by 17.3% in the first half of 1993 (ERI, 1993). To summarize, though it is the largest planning area in Russia, the RFE takes the smallest role among the 4 planning areas in the national eco nomic scene. Due to the long distance from the power centre, the RFE has long remained peripheral to the core in the European region. Industry is heavily concentrated in primary and extractive industries, and the region serves to supply raw materials to the European region. It has a low selfsufficiency rate in many industries.  Except for a few specialized projects,  industries in the region are largely under-developed due to high production cost, labour shortage, and an under-developed transportation network. Population, transportation facffities and economic activities are all concentrated in the southern region. In general, industry in the RFE is largely extractive-oriented, narrowly structured and highly dependent on outside influences. Under the transitional Russian economy, industrial output in the RFE has been continuously declining over the last few years. 5.2. REGIONAL ECONOMIC POLICY Traditionally, economic development in the former Soviet Union was planned almost in isolation from foreign economic relations. The sheer size of the country supported a nearly self-sufficient economy.  Economic  cooperation with other countries, if any, was largely for political reasons. The economy of the RFE was not an exception in this respect. Under the centrally planned economy, the role of the RFE as a raw material supply  102 source was directed towards the hearthnd in Europe. In relations with the Asia-Pacific region, the RFE was only appreciated for its military and strategic value. It was only after the mid 1980s that the closed economy began to join the world economy. The RFE became strongly motivated to integrate into the neighbouring Pacific-Rim economy. The desire for the reorientation of the RFE’s economy was well spelled out in two speeches given by the former Soviet president Gorbachev in Vladivostok and Krasnoyarsk. In his Vladivostok speech, Gorbachev declared that the Soviet Union is an Asian nation and indicated the country’s willingness to participate in the Pacific Rim economy. For this, he also expressed the idea of multi-lateral economic cooperation mainly with China and Japan and potential coopera tion with other Asia-Pacific countries through the international division of labour (CDSP, 1986).  His speech implied an economic and political  significance to relations with Asia-Pacific countries. The speech helped to ease the political tension in Asia and resulted in normalization with China. The new direction expressed in the speech was further spelled out in 1987 in the ‘Long Term State Program of Comprehensive Economic and Social Development of the RFE until the year 2000’. Even though the program clearly stated the direction of change in the RFE’s development, it was not implemented, however, due to a budget deficit in the years following its adoption,. The main goals stated in the program were (1) to raise the RFE’s social and economic indicators up to the level of the USSR average by the year 2000, (ii) to restructure RFE industry and (iii) to integrate the RFE into the Asia-Pacific economy (ERI, 1991).  103 In 1988, Gorbachev made another speech in the Siberian city of Krasnoyarsk and proposed various preferential conditions in order to stimulate the RFE’s economic cooperation with foreign countries (CDSP, 1988). Direct contact with foreign firms by RFE enterprises, free import of consumer goods and free disposal of foreign currency earnings, and the establishment of a special economic zone were suggested. In the speech, he also indicated that trilateral economic co-operation among China, USSR,  and Japan would be mutually beneficial for economic relations. By hinting at possible economic cooperation with South Korea for the first time, the speech also contributed to easing the political tension lingering over the Korean Peninsula, which could hamper full economic cooperation with Korea.  These two speeches laid the groundwork for redirecting the  economy of the RFF from a domestic-oriented to an outward-looking one. Despite a strong desire to change, the Soviet economy was not really moving along the direction set forth. Without the market system in place domestically, the economy was not able to take full advantages of the foreign economic cooperation that could come about (ERI, 1991). The government realized that more reform should be undertaken internally in all aspects of the economic system before the external forces could help the country develop. 5.3. INTERACTIONS WITH NEIGHBOURING COUNTRIES During the Soviet period, several forms of economic cooperation developed between the Soviet Union and its partners in Asia-Pacific countries. Compensation agreements were used for log exports to Japan. Border  104 trade was introduced to promote direct trade with neighbouring countries. With North Korea the Soviet Union maintained a complementary relation ship. A good example is the USSR North Korean Forestry Accord dating -  from 1966. Under the treaty, North Korea has been supplying manpower and the Soviet Union provided logging equipment and machinery to share the logs produced (Kim and Park, 1993).  Barter trade is commonly  practiced in trade with China to circumvent the problems of foreign exchange shortage. Normal direct trade and trade through FDI, however, are gradually replacing these old forms of economic cooperation under the transitional Russian economy in which the demand on foreign exchange is even higher. Before the collapse of the Soviet Union, foreign trade was dominated by the central Ministry of Foreign Trade.  This dominance has changed  completely in recent years. In 1988 local governments and enterprises represented only 5.6% of total exports from the RFE. Four years later, their share had risen to 80.7%, while the central government’s share had gone down to 19.3% (Ivanchikov, 1993a). This illustrates the fast decentraliza tion of control over the foreign trade. More interestingly, 52.7% of total RFE exports in 1992 was undertaken through direct trade by local initiative, up from 3.0% in 1988, and exports by foreign investment rose from zero in 1988 to 24.3% (Ivanchikov, 1993a). 5.3.1. FOREIGN TRADE The RFE was traditionally a more trade-oriented part of the USSR than others. For example, the RFE’s share in the country’s exports in the latter half of the 1980s was 4.4% while the region’s share in the country’s industrial output during the same period did not exceed 2.9% (ERI, 1991).  105 The RFE’s export orientation can also be observed from its share of exports of industrial products. Exports accounted for only 4.9% of the USSR’s industrial output in 1990 when the exports reached a peak, a modest increase from 3.6% in 1985 (JETRO, 1993a). The share went down to about 4% in Russia in 1992 but climbed as high as 8.5% in the RFE (JETRO, 1993 a). In 1992 the foreign trade in the RFE was US$2.722 billion with US$1.532 billion exports and US$1.190 billion imports. The largest trading territory in the region is Primorskiy Kray followed by Khabarovskiy Kray and Amurskaya and Sakhallnskaya Oblasts. Their shares in regional trade are 34.3%, 18.2%, 15.5% and 11.4% respectively (Table 5.6). Table 5.6. Foreign Trade in the RFE in 1992 Subregion  Total  Share  Export  Share  Import  Share  (US$1 million), (%) RFE  Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Yakutia  2,722.3  100.0  1,532.8  100.0  1,189.5  100.0  933.1 496.8 421.9 206.6 141.4 309.9 212.6  34.3 18.2 15.5 7.6 5.2 11.4 7.8  352.0 371.1 231.3 137.2 81.0  22.9 24.2 15.1 9.0 5.3 13.5 10.0  581.1 125.7 190.6 69.4 60.4 103.0 59.3  48.8 10.6 16.0 5.8 5.1 8.7 5.0  206.9 153.3  Source: JETRO( 1993a)  The exports from the RFE were composed mainly of the products from extractive industries. Exports from the RFE in 1992 were led by fish and fish products, followed by the commodity group of fuels, minerals and metals and by the machinery, equipment and transportation groups. Traditionally, wood products were by far the most important export item in the RFE. However, the export of wood products has been reduced  106 because of high export taxes. Table 5.7 shows recent changes in the composition of exports from the RFE. Table 5.7. Composition of Exports from the RFE Item  1988  Share  Machinery, Equipment 1.9 22.8 and Transportation Fuel, Minerals and Metals 301.0 24.6 224.1 20.0 Coal 3.1 38.1 Oil & Oil Products Ferrous & 1.5 18.8 Non-ferrous Metals 1.0 12.4 Fertilizer 0.3 3.3 Non-Chemical 0.1 0.8 Construction Material 346.0 28.4 Wood Materials 0.0 0.1 Consumer Goods 418.5 34.3 Fish & Fish Products 9.5 115.3 Others 100.0 1,216.9 Total  1991  Share  1992  Share  197.8 308.5 142.2 98.0  16.9 26.3 12.1 8.4  (US$1 million), (%) 36.9 312.1 252.4 28.9  2.2 18.4 14.9 1.7  5.8 68.3 4.4 51.8 3.4 39.4 0.1 1.2 169.8 14.5 3.1 0.3 381.3 32.6 4.9 57.85 1,171.33 100.0  1.8 30.8 140.6 8.3 49.4 2.9 1.0 0.1 290.6 17.1 0.0 0.6 777.7 45.9 136.5 8.0 1,696.0 100.0  Source: JEFRO (1993a)  The RFE imports consist mainly of consumer goods and food products which are in short supply across the region. In 1992, products in the two categories accounted for over 64% of total imports in the RFE (Table 5.8), Table 5.8. Composition of Imports to the RFE Item Machinery, Equipment and Transportation Fuel, Minerals and Metals Food Materials Food Products Consumer Goods Construction Material Others Total Source: JETRO (1993a)  1989 Share  (1 million rubles), (%) 156.8 24.4 0.3 1.9 161.1 25.1 95.0 14.8 193.1 30.1 2.8 17.7 2.5 16.7 642.3 100.0  1992 Share  1990 Share ---  322.4 49.6 1.5 9.9 138.6 21.4 24.1 3.7 18.3 118.3 1.8 11.8 3.7 23.7 648.8 100.0  -  -(US$ lmillion),(%) 214.5 16.3 -  21.9 1.7 -  245.2 25.0 385.9 39.4 8.9 0.9 107.9 11.1 978.7 100.0  -  -  107  Traditionally the RFE is oriented towards the Asia-Pacific trade. This orientation has tended to intensify recently not only in the RFE but also in Russia as a whole. The share of the Asia-Pacific region in Russia’s trade increased from 12% in 1991 to 20% in 1992. The Asia-Pacific market is more significant to the RFE than elsewhere in the country. The region’s share in the RFE’s trade was 78% in 1985 and it went up to 88% in 1992. The RFE’s trade shows a high concentration in these three most immediate neighbours; China, Japan and Korea. The three countries account for 82% of total RFE trade (Table 5.9). Table 5.9. Orientation of the RFE’s Trade (%) Region  1985  1990  1992  (%) Asia-Pacific Countries China Japan Korea Others Others  78.0 10.0 62.0 -  6.0 22.0  85.0 17.0 65.0 -  3.0 15.0  88.4 37.9 34.4 9.3 6.8 11.6  Source: JETRO( 1993 a)  Japan has been by far the most important trading partner to the RFE, though the position has been surpassed by China recently. Japan has been the partner in long-term compensation agreements since 1968, as well as in coastal trade and other forms of economic cooperation.  The main  imports of Japan from the RFE have been logs and other wood products, coal, and fish. Japan has exported to the RFE machinery and equipment for logging and other extractive industries. Japan’s domination of the RFE’s foreign trade has now been eroded by the emergence of other Pacific countries, mainly China and Korea.  108 After the dissolution of the USSR and the following trade liberalization, China and Korea quickly moved into the RFE and have captured the market which is experiencing an acute shortage of consumer goods and food products after the breakdown of the centralized distribution system. The main products being supplied by China and Korea are consumer goods and food products. Looking at the trade structure by trading partner, the RFE recorded an export surplus with Japan in 1992, while it showed an import surplus with both China and Korea. To Japan, the RFE is important as a source of raw materials but insignificant for exporting goods. The trade with China and Korea also shows a lopsided structure. The trade with these two countries records import surplus, which mainly stems from the short supply of This import surplus,  consumer goods and foodstuffs in the region.  however, appears transient for the current transitional state of the Russian economy. Judging from the main export items of Korea, the RFE is likely to appeal to Korea more as a source of raw materials than an export market in the long run (Table 5.10). Table 5.10. Trading Partners of the RFE in 1992 Trade  Countries Japan China Korea U.S. Others Total  889.8 971.3 228.9 68.9 356.8  35.4 38.6 9.1 2.7 14.2  2,515.7 100.0  Source: ERI (1993)  Import  Export  (%) 231.7 558.9 136.4 25.5 167.6  20.7 49.9 12.2 2.3 14.9  426.4 -146.5 -43.9 17.9 21.6  1,120.1  100.0  275.5  US$1 million), 658.1 47.2 412.4 29.6 92.5 6.6 3.1 43.4 189.2 13.5 1,395.6 100.0  Balance  109 5.3.2. FOREIGN INVESTMENT While the RFE plays a minor role in the national product, it hosts one fifth of the total number of joint ventures in Russia. One of the difficulties the Russian economy faces in the process of market reform is mobilizing capital required for such reform. With a US$60 billion foreign debt, Russia is not in a position to expect more loans from foreign governments. Attracting foreign investment is being used as an alternative.  Since  foreign investment brings in capital together with technology and other productive resources, Russia has made every effort to attract foreign investment.  In the RFE, foreign investment is a short cut to moving  towards regional development by attracting the necessary capital and technology, and hence towards integration into the Asia-Pacific economy. The legal foundation of the FDI in Russia dates back to 1987, when the former USSR first introduced a regulation relating to joint ventures. After the collapse of the USSR, a new legislation was required by each republic to control foreign economic activities.  Russia legislated its own Foreign  Investment Act in September 1991 (JETRO, 1993b). The new legislation protects foreign investors’ participation in a whole range of business activities within Russia. The law also ensures equal treatment of foreign investors and Russian enterprises. Many of the foreign investments in Russia have been undertaken in the form of iv. A handful of JV’s were registered in the RFE in the early period of the legislation, but from 1991 a rush of foreign investment arrived in the region.  In 1992 alone, 578 JV’s registered in the RFE and by the end of  1992, there were a total 916 iv’s registered in the region.  In 1989, the  RFE accounted for only 2% of total foreign investment in the former USSR.  110 The share rose up to as much as 9% in 1991. Several reasons explain the phenomenal growth. In 1990 the regional government established special economic zones in the RFE and allowed foreign access to the natural resources of the region (JETRO, 1993b). Liberalization of foreign economic activity and the progress of decentralization in Russia also contributed to the foreign investment rush (JETRO, 1993b). By region, 40% of the total foreign investment in the RFE, or 366 projects, was registered in Primorskiy Kray, followed by 23%, or 207 projects in Khabarovskiy Kray, and 18%, or 168 projects, in Sakhalinskaya Oblast’. Most of the projects are small in scale. The average amount of the invest ment is less than US$0.5 million (Table 5.11). Table 5.11. Number of Joint Ventures Registered in the RFE Subregion  1988  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Total (RFE)  -  -  1  -  -  -  -  1  1989 3 23 8 -  2 2 3 41  1991 1990 (no. of project) 9 4 80 28 5 38 20 3 19 2 8 5 59 8 233 55  1992  Total  16 235 155 26 27 29 90 578  32 366 207 49 50 44 168 916  Invested Amount (US$1 million) (16) 163.1 60.2 (1,580) 4.2 0.87 (502.5) -  Note: The figures inside the 0 are 1 million rules. Source: JETRO( 1 993b)  The major activity of the iv’s in the RFE is the export of natural resources. Among the registered 916, only 172 iv’s, or 18.8% of those registered, were actually in operation in 1992. By industry, 72 out of the 172 fall in the service category, followed by 32 in fisheries and 13 in manufacturing, including wood processing. The FDI in the RFE shows a heavy concentra tion in the service industry such as hotel, restaurant, and other businesses targeting businessmen and tourists (Table 5.12). The majority of iv’s are  111 involved in foreign trade, since it is easy to make profits from selling imported consumer goods to a region with an acute shortage of basic necessities. Table 5.12. Joint Ventures in Operation in the RFE in 1992 Subregion  Fishery Manufacturing Construction Service Others Total (No. of Project)  Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Yakutia Total (RFE)  -  6 2 14  -  -  -  2 2 6  2 4 13  -  32  28 21 7 3 4 5 6 72  4 1 1  2 3 1 3  6 4  6 8 4 3 6 3 11 39  ‘46 37 13 15 12 26 23 172  Source: JETRO( 1 993b) Table 5.13. Geographic Distribution of Joint Ventures by Country of Origin Subregion  China  119 Primorskiy Kray 73 Khabarovskiy Kray 36 Amurskaya Oblast’ 2 Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ 6 Yakutia 236 Total (RFE) -  -  Japan 64 45 2 15 2 66 -  194  USA  Korea  Others  (No. of Joint Venture) 114 18 51 44 14 31 8 1 2 18 1 14 2 2 6 47 20 29 25 4 3 258 137 59  Total 366 207 49 50 12* 168 32 884  Note: *oflly those in operation are counted in for Magadanskaya Oblast’. Source: JETRO(1993b)  Foreign investment, like economic activity in general, shows a high geographical concentration in the southern part of the region, i.e. in Primorskiy Kray, Khabarovskiy Kray and Sakhalinskaya Oblast’. The countries investing most actively in the RFE are the same as those trading most actively with the region, namely the most immediate neighbours.  112 Table 5.13 shows that China shares the largest number of JV’s, followed by Japan, the United States and Korea. Primorskiy Kray is the region where the largest proportion of FDI is directed. To Japan and Korea, however, Sakhalinskaya Oblast’ appeals more than Primorskiy Kray does. Foreign investment plays a very important role in promoting foreign trade in the RFE, since the companies with more than 30% of foreign capital are not subject to the export licensing requirements. In other words, trade is an important part of the activities of JV’s in the RFE. About 24% of total RFE trade, or US$602.7 million is undertaken by firms with foreign capital participation, i.e., FDI. Japan accounts for 43.8% of such trade, followed by Korea 28.1% and the United States 7.5% in 1992. Korea represents the highest share in imports through such trade with US$119.2 million, or 55.2%, followed by Japan, US$51.1 million, or 23.7%. In the case of exports, the two countries show a relationship the other way around. Japan shares 55.1% and Korea 12.9% of the RFE’s exports through foreign investment. From this it can be said that contrary to the overall trade picture presented earlier, the Korea’s investment in the RFE is largely motivated by export promotion whereas Japan’s is for imports (Table 5.14). Table 5.14. RFE’s Trade by Firms with Foreign Capital Participation in 1992 Export to  Import from  Total  US$1 million, (%) Japan S. Korea China United States Vietnam Others  213.0 (55.1) 50.0 (12.9) 17.1 (4.4) 37.2 (9.6) 34.0 (5.7) 35.7 (9.2)  51.1 (23.7) 119.2 (55.2) 15.0 (7.0) 8.3 (3.9) 0.0 (0.0) 22.2 (10.3)  264.1 (43.8) 169.1 (28.1) 32.1 (5.3) 45.5 (7.5) 34.0 (8.8) 57.8 (9.6)  All  386.9 (100)  215.8 (100)  602.7 (100)  Source: FRI (1993)  113 The main items imported to the RFE by JV’s are those that have a high demand in domestic markets in the RFE, for example, consumer goods, food products, computers, passenger vehicles etc. Consumer goods and food products share nearly 70% of total imports (JETRO, 1993b). Fish and forest products are the items usually exported by the JV’s in the RFE. Thus, exports of the region’s special products become a major source of hard currency. By contrast, selling imported goods to domestic markets in convertible currency is the main business of the JV’s in the European region of Russia (JETRO, 1993b). Reflecting such emphasis of the activities by iv’s, Russia recorded US$338 million import surplus in the trade by iv’s in 1992 whereas the same trade in the RFE showed an export surplus (Table 5.15). Table 5.15. Foreign Trade and Domestic Sales by Joint Venture Russian Far East 1992 1991 Total Trade Exports Imports Domestic Sales by rubles hard currency  Russia 1992 1991  RFEJRussia(%) 1991 1992  405.8 221.8 184.0  564.5 361.1 203.8  2,200 1,100 1,100  3,112 1,387 1,725  19.0 20.0 18.0  18.1 26.0 11.8  570.1 11.4  6.55 24.55  7,800 860  139 516  7.7 1.3  4.7 4.7  Note: The unit of the figures in columns under 1991 is one million rubles and the ones under 1992 is US$ one million. Source: JEII{O( 1 993b)  The share of the RFE in total Russian exports by JV has increased from 13.5% in 1989 to 26% in 1992 (Table 5.15). The potential export growth from this region is referred to as the prime motivation to invest in the RFE by a recent survey on Japanese JV’s in the RFE (JETRO, 1993b). Actually, the exports by Iv’s in the RFE grew ten-fold between 1989 and 1991, whereas the ones by domestic enterprises recorded only a two-fold increase (JETRO, 1993b).  114 In summary, foreign investment has provided a noticeable contribution to the exports and openness in the RFE since the region emerged as a new host for foreign investments in Russia. One of the main functions of the foreign investment in the RFE is the export of natural resources.  In  particular, the RFE shares a significant part of Russia’s exports by JV’s, and iv’s have significantly contributed to the positive foreign trade balance in the RFE since 1989.  The region’s share of industrial output exported  almost doubled between 1990 and 1992, reaching 9% in 1992 (Karp, 1993b). The investment is directed to a limited range of industries, especially resource-extraction industries, and the scale of the investment tends to be small. 5.3.3. PROBLEMS OF FOREIGN INVESTMENT IN THE REF From the RFE’s viewpoint, the main motivation behind opening up for foreign direct investment was to relate it to the long-term development of the region. The investments that can meet this goal are those related to large resource-development projects or manufacturing industries for consumer goods and food products.  Foreign investments in natural  resources could provide Russia with an opportunity to enhance its interna tional competitiveness through the modern technology brought in by the investment.  Import-substituting industries and those producing basic  necessities are also areas to which foreign investment should be directed for restructuring the regional economy and stabilizing the local population. Currently, however, few investments serve such purposes in the RFE. The scale of investments is small, most of them less than 2 million rubles  115 (JETRO, 1993b). The area where most of the investments are undertaken is weakly committed to regional growth. The majority of the JV’s in the RFE tend to be export-oriented and for primary processing of natural resources. Technology has been imported to the RFE mainly for such purposes. Little has been imported for value-added processing or longterm regional growth. From the foreign investors’ point of view, the biggest obstacle to invest ment in the region is the instability of political, social and legal systems in Russia (JETRO, 1993b). The inconsistency of investment laws and lack of protective measures for foreign investments are also pointed out as obstacles for attracting more active foreign investments. Russian foreign investment laws clearly state that foreign investments are protected from forcible expropriation or unlawful measures by government (Chapter 2, Section 7 in Russia’s Foreign Investment Act, 7.14. 1991).  The Act also  ensures compensation for loss caused by such unlawful actions if they happen (Chapter 2, Section 8 in the same Act, 7. 14. 1991). Despite these clauses in the Act, political instability still imperils the stability of the country’s legal system including the Foreign Investment Act, and foreign investment in Russia is not perceived as being 100% protected. An additional protective clause, which appeared in the foreign investment Act of the former USSR, would be required for guaranteeing the protection of foreign investment within Russia. One other reason for the inactive foreign investment in the RFE is that preferential measures for foreign investors have become less attractive than those in the Soviet period. The large tax benefits offered by the  116 former Soviet Union are not provided in the Russian foreign investment  laws. Under the Soviet Foreign Investment Act, JV’s of foreign ownership exceeding 30% were entitled to a tax exemption for two years after making an initial profit from the investment. After two years, the JV was to be taxed less than domestic enterprises. These benefits are not offered in the Russian Foreign Investment Act, which only indicates some preferential benefits for investments in strategic sectors of the economy or in remote regions within Russia (Yoon, 1992).  The five year tax holiday or tax reduction offered to foreign  investments in a priority industry are not provided in the Russian Foreign Investment Act. Currently, no regional government offers preferential benefits except for Khabarovsldy Kray (JETRO, 1993b). Inconsistent application of export duties and their rates, and forcible selling of hard currency earnings are also attributed to making foreign investment less attractive in the RFE. In these conditions the RFE is a less attractive region for foreign investors than other countries. The Russian government plans to legislate for trade-related foreign investment. 5.4. FOREST RESOURCE CONDITIONS The RFE comprises 621.6 million hectares, and the forested area accounts for 80.4% or 499.5 million hectares (Zausaev, Sheingauz and Runik, 1984). Compared to Canada, the RFE has a smaller total area but a little larger forested area. The total area of the RFE and its Forest Fund by subregion are presented in Table 5.16.  117 Table 5.16. Forested Area in the RFE Subregions  Total Area (%) ) 2 (1,000 km  Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Yakutia  166 825 364 472 1,199 87 3,103  Total  6,216 100.0  2.7 13.3 5.9 7.6 19.3 1.4 49.9  Ratio of Forest Fund (%)  Forest Fund (1,000 km ) (%) 2 2.7 15.4 6.3 8.9 14.5 1.5 50.8  81.9 94.4 87.1 95.8 61.1 87.4 83.1  5,072 100.0  81.6  136 779 317 452 733 76 2,579  Source: Finansi i Statistika (1992)  5.4.1. Land Classification in the Russian Far East The Forest Fund is a unique Russian term in the country’s land classifica tion system. Forest Fund is a much wider concept than forests or forested land. Besides forested area, it includes non-forested areas such as farm lands and grass lands, and even water surface. A large part of the land in the RFE, 80%, is classified as Forest Fund (Table 5.16). Within the Forest Fund, forested land comprises the largest share. The ratio of forested area ranges from 60% to 75% in most subregions except Yakutia, and Kamchatskaya and Magadanskaya Oblasts, where the ratios run below 50%. Because of the low forested rate in Magadan, the average ratio of forested area in the RFE is only 45% (Table 5.17). Most of the forests in the region are found in mountains.  Nearly 100% of the  forests are mountain forests in the RFE, except for Yakutia. Table 5.17 shows that because of the variety of climate conditions in this vast region the volume and species distribution vary among the  118 subregions. The RFE is divided into southern and northern regions. The southern region comprises Khabarovskiy Kray, Amurskaya Oblast’, Primorskiy Kray and Sakhalinskaya Oblast’.  Yakutia, Magadanskaya  Oblast’ and Kamchatskaya Oblast’ comprise the northern region. The forests in the southern region provide, higher average volume per unit area, and higher annual increment than those in the northern regions. Table 5.17. Basic Indices of the Forests in the RFE  Subregions  Ratio Forested Land (96)  Average Stocking Density Overmature All Forests Forests /ha) 3 (m /ha) 3 (m  Mean Annual Increment /ha/yr) 3 (m  Share of Mountain Forest (%)  ( North) Yakutia Kamchatskaya Oblast’ Magadanskaya Oblast’ Average  48 42 19 36  64 63 23 53  83 81 34 66  0.6 0.8 0.4 0.6  34 98 100 77  (South) Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Sakhalinskaya Oblast’ Average  75 () 62 64 65  157 109 91 125 121  184  145 131 185 161  1.5 1.3 1.4 1.4 1.4  100 98 100 100 100  RFE Average  45  75  99  0.9  65  Source: Minakir and Sheingauz (1991), and Goskomles (1990 and 1991)  The Forest Fund in the RFE is classified into forested and non-forested  areas (Table 5.18). The former accounts for 70.8% and the latter 29.2% of the Forest Fund. The forested area is further divided into closed (stocked) and open (unstocked) forests. Nearly 78% of the forested area in the RFE, or 55.1% of the Forest Fund, is closed forests. Open forests make up only 22% of the forested area, or 15.6% of the Forest Fund. Appendix VT shows a more detailed breakdown of the above classification.  119  The forests in the RFE is further grouped by organization responsible for managing the forests: State Forest Management which includes forest authority, long term uses, other ministries, collective farm, and forest industry. Forest authority controls 82% of forested areas in the RFE, thus the discussions in the following focus on the stocked forest areas under control of either this organization or State Forest Management depending upon data availabffity. The reforestation in this region largely relies on natural regeneration. The area artificially regenerated is extremely low, composing less than 0.3% of the total Forest Fund. The ratio goes no higher than 3% even on Sakhalin Island, which has the largest artificial forests in the RFE and where artifi  cial regeneration has been practiced since the Japanese colonial period. Table 5.18. Classification of Forest Fund under Control of Russian Federal Forestry 3 Office  -  Subregion  Forested Area Open Closed Forests Total Artificial Forests Forests - -  Total  (1,000 Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’  146,734 11,160 48,837 21,777 19,053 22,121 5,327  Total  275,007 (55.1)  (%)  3 38  106 50 26 3 138 364 (0.1)  46,081 426 10,833 3,180  1,868 14,856 930 78,174 (15.6)  Non-Forested Area  Grand Total  ha)  192,814 11,595 59,789 24,992 20,962  37,000 6,315  353,467 (70.8)  64,224 336 17,274 5,750 22,945 34,772  779  257,038 11,931 77,063 30,742 43,907 71,772 7,094  146,080 (29.2)  499,547 (100)  Source: Sheingauz, A. S. et al. (1989)  3 This is new name of Goskomles (State Committee of Forestry) after former Soviet Union borke up.  120 The forests artificially opened including cutover areas account for 3.6% of the total Forest Fund in the RFE, and the area burned by forest fire accounts for 3.9%. This high percentage of open forests reflects the fact that forest management is not in place to maintain the areas damaged by fire or artificial causes. The relatively high proportion of farmland (Table 5.19) results from the large reindeer-herding areas in Kamchatskaya Oblast’ and Yakutia which are classified as farm land together with agricultural land.  Wetland  including tundra accounts for a substantial part of the non-forested Forest Fund, 27.5%, and a significant part of the total forested areas, 8%. The trend over time seems to indicate an improvement of overall forest conditions in the region, i.e. an increase of closed forests and a decrease of open forests. Nearly 32 million hectares of closed forest were added in the period from 1968 to 1988. The area of open forests was reduced by about 20 million hectares over the same period (Table 5.19). Table 5.19. Changes in Land Classification from 1966 to 1988 ——-------Forested Area —----—--Open Forests —-Closed Forests Sub Total Artificial Non-closed Burned Denuded Total Forests Artificial by Forest but not Fires etc. Regenerated Forests —  --  Year  1966 1973 1978 1983 1988 Change (%)  Grand Total*  503.4 500.1 501.7 500.8 499.5 -3.9 -1  243.1 253.8 257.3 266.0 275.0  0.02 0.1 0.1 0.2 0.4  0.4 31.9 13 1,900  0.1 0.1 0.2 0.3 0.3  (1 38.3 29.7 17.1 22.0 19.6  0.2 200  -18.7 -49  Total  Farm, Grass, Water  Non-Forested Area Sub Wetland. Total eroded land etc.  million ha) 98.0 341.2 59.7 86.6 340.5 56.9 83.8 341.3 66.7 57.4 79.4 345.7 78.2 353.5 58.6  27.3 23.1 23.8 24.2 21.4  134.9 136.5 136.6 130.9 124.6  162.2 159.6 160.4 155.1 146.0  -19.8 +12.3 -20 4  -5.9 -22  -10.3 -8  -16.2 -10  -1.1 -2  Source: Sheingauz, A. S. et al. (1989) This area refers to only the areas under control of forest authorities.  *  121 About half of this improvement, however, is attributed to the forests in Yakutia, where remoteness and inaccessibility have prevented intensive forest development. Also it is pointed out that a tendency to exaggerate forest potential has caused a bias in forestry inventory and related statis tics. Most noticeable is the case of Yakutia where overestimation of closed forests and underestimation of open forests have been commonly used to exaggerate the forest potential in the region (Fujiwara, Kaldzawa and Ishli, 1992). 5.4.2. Forest Classification  in  the Russian Far East  Russian forests are classified into three groups, Group I, Group II, and Group III, according to their economic and environmental uses. Group I  and Group II forests are mainly for natural resource conservation and environmental protection, whereas Group III are mainly for industrial uses. More detail of this classification scheme is found in Backman and Waggener (1991) as follows: “Group I forests. These forests have the greatest restrictions on use and are allocated mainly for protection of the environment. The uses include protec tion of streams and spawning areas, prevention of soil erosion, protection strips along main vehicular arteries, forests in little forested regions designed to provide general protection of the surrounding environment, forests around cities and industrial areas designed to improve air quality, forests for the general use of the urban population, forests set aside for national parks, production of nuts and berries, as well as pre tundra forests. A limited amount of harvesting is permitted in this category of forests, solely to facilitate the protection aspect of their use. Group II forests. These forests have both protection and industrial importance, are located in densely populated areas with a well developed transportation network. A greater degree of management is necessary in these forests to guarantee the continued supply of both industrial products and environmental protection functions than is the case in Group III forests below. Collective farm forests are located in Groups I and II. It is believed that government farm forests are located in Group I and Group II forests as well.  122 Group III forests. These forests are generally located in the well forested regions and are chiefly designated to provide a flow of wood to support the forest industry of Russia without causing damage to the makeup of those forests. One category within Group III forests is classified as reserve forests. Reserve forests have not yet been assigned to an industrial enterprise and are not expected to be economically developed for the next 15 to 20 years. The second category of Group III forests is called special zoned forests. It is not known for what reasons these forests have been set aside however. Probably, though not necessarily, the reasons stem from environmental factors. The balance of forests within Group III are considered to be operating forests presently developed or area expected to be developed within the course of the next two decades. Thus, reserve forests represent a store of wood volume which has yet to be allocated to any particular enterprise, and ceteris paribus, could be available for exploitation in the future. But the volume of timber from such reserve forest lands could be more a mirage than reality.”  The distribution of these three groups of forests is broken down by subregion in Table 5.20. Table 5.20. Forest Fund under Control of Forest Authority Classified by Group Subregion  All Groups  I  Groups II  III  Within Group III Others Exploitable Reserved  (1,000ha) 225,844 254,998 29,284 Yakutia 8,455 703 11,935 2,777 Primorskiy Kray 31,129 1,708 1,358 28,063 Amurskaya Oblast’ 35,115 Kamchatskaya Oblast’ 43,942 8,827 583 69,435 77,583 7,565 Khabarovskiy Kray 58,457 Magadanskaya Oblast’ 72,653 14,196 5,131 986 Sakhalinskaya Oblast’ 7,260 1,143 Total* 499,630 65,500 3,630 430,500 -  -  -  18,421 7,892 22,049 5,635 25,568 8,096 4,139  131,191  91,800  183,400  -  3,221 11,400 37,588 -  -  76,232 563 2,793 18,080 6,279 50,361 992 155,300  Source: Goskomles (1990 and 1991)  Group III is the dominant forest group in the RFE as it is elsewhere in Russia. The Group III forests are designated mainly for industrial uses, but most of the Group III forests are reserved or inaccessible. The exploitable forests are only a fifth of the Group III forests. Compared to the other regions in Russia, the RFE presents a higher propor tion of Group III forests and a relatively low proportion of Group II  123 forests.  The region’s vastness is reflected in a large share of Group III  forests.  The low proportion of Group II forests reflects the absence of  urban areas, compared to the rest of Russia. The proportion of Group I forests is about the same as the national average. A large share of the underdeveloped forests in the permafrost zone, however, is classified as economic forests in Group III. The trend of changes in these groupings is presented in Table 5.21. Table 5.21. Changes in Forested Area by Group in the RFE (1 million ha) GROUP 1  YEAR Preserved Pmtectlve Forests Forests  Green Eelt  Nuts Collecting  Others  Total  ROUP II  GROUP III Exploitable Reserved Forests Forests  Others  TOTAL Total  1966 31.9  31.8  1.5  0.2  1.7  67.1  3.8  168.1  254.8  9.6 432.5  503.4  1988 37.9  1.5  1.5  1.0  23.6  65.5  3.5  91.8  183.4  155.3 430.5  499.5  Source: Sheingauz, A. S. et al. (1989)  The above table shows no major changes in areas designated for each group between 1966  and 1988, but significant changes have taken place in  the composition within groups.  In Group I, the ratio of protected forests  was adjusted downwards after the 1988 national forest inventory.  In  Group III, both the forests classified as commercial and reserved have been significantly reduced, and as a result, more forests have been excluded from being exploited by productive activities. The inaccessible and low valued forests previously classified as productive forests in Group  III are now excluded from productive forests.  These changes were  designed to regulate the uncontrolled expansion of productive forests at the expense of reserved forests (Fujiwara et al, 1992)  124 In Russia, privatization of agricultural land is taking place but most of the forested land is still owned by the state. In 1988, 98.6% of the forests were owned and controlled by the Russian Republic State Coniniittee on Forest Resources (Goskomles). In the Far East, its subregional offices, called silvicukural territorial production agencies take the responsibility on behalf of the state organization (Minaldr and Sheingauz, 1991). 5.4.3. Species, Volume and Distribution Because of the vastness of the RFE and the variety of climatic conditions, species and volume of the forests in the RFE vary across the subregions. Table 5.22 shows the area, volume and volume per unit area of the major species of closed forests in the RFE. An overall look at the area from the table shows that coniferous species account for 72.6% of the total area and 84.6% of the total growing stock volume, whereas hardwood species represent 9.7% of the area and 10.4% of the volume. The deciduous species here are divided into hardwood and softwood according to the wood properties. The deciduous species, however, are classified by several other names. For example, oak, ash and mountain birch are also classified as shade tolerant, hardwooded broadleaf, broadleaved hardwoods and hardleaved. Birch and aspen and alder are classified as shade intolerant, softwooded broadleaf, broadleaved softwoods and softleaved (Fenton and Maplesden, 1986).  There are 5  coniferous species and 13 hardwood species commonly found across the RFE. Their scientific names and other names are presented in Appendix V.  125 Table 5.22. Species Composition in the RFE Subregion  Coniferous  Shrubs D e c i d u o u s Hardwood Softwood (Area) lOOha  Total  146,732 17,019 1,301 11,160 39 48,837 4,559 5,863 4,720 1,952 21,777 10,871 1,309 19,053 12,355 22,121 313 319 301 5,327 893 14,486 48,418 275,007 12,376 (17.6) (5.2) (100) (4.5) (Volume of growing stock) 1 million m 3 190.0 9,051.4 9,324.9 Yakutia 83.5 1.6 127.0 1,749.0 380.4 1,240.0 Primorskiy Kray 5,324.0 187.8 328.0 Khabarovskiy Kray 226.4 4,581.8 298.7 48.6 1,986.0 1,616.6 22.1 Amurskaya Oblast’ 463.8 101.0 1,194.8 483.9 146.1 Kamchatskaya Oblast’ 140.4 514.8 Magadanskaya Oblast’ 33.5 340.9 17.7 17.7 667.8 50.1 582.3 Sakhalinskaya Oblast’ 1,049.9 989.4 2,0761.3 Total 1,162.9 17,559.1 (5.1) (100) (4.8) (84.6) (5.6) (%) /ha 3 (Average volume per unit area) m 64 42 11 71 Yakutia 41 157 114 191 Primorskiy Kray 98 32 72 109 117 Khabarovskiy Kray 126 25 111 43 91 63 Amurskaya Oblast’ 77 43 126 63 Kamchatskaya Oblast’ 85 107 11 Oblast’ 23 Magadanskaya 36 153 125 55 Sakhalinskaya Oblast’ 56 59 22 75 68 94 Average 88 Yakutia 127,730 Primorskiy Kray 6,497 Khabarovskiy Kray 36,483 Amurskaya Oblast’ 14,589 Kamchatskaya Oblast’ 1,161 Magadanskaya Oblast’ 9,453 Sakhalinskaya Oblast’ 3,814 199,727 Total (%) (72.6)  3,223 1,932 516 5,712  -  -  Source: Sheingauz, A. S. et al. (1989) Note: Data presented here is based upon principal species of forest stands.  The climatic condition in a subregion is well reflected in the average volume per unit area. Table 5.22 explains that southern subregions have higher volumes per hectare than northern ones. The southernmost region, Primorskiy Kray, has the highest volume per hectare in the RFE. The average volume per hectare in Primorsldy Kray is higher than Canada’s 163 cubic metres per hectare, and reaches the level of British Columbia’s 197 cubic metres per hectare (Forestry Canada, 1990).  126 Table 5.23 shows coniferous species composition in the RFE. From the table, it can be understood that by far the most dominant species in this region is dahurian larch (Larix gmelini). It accounts for 84.5% of the area and 73.3% of the growing stock volume of the coniferous forests.  Table 5.23. Coniferous Species Korean Pine  Spruce  397 Yakutia 2,244 Primorskiy Kray 803 Khabarovskiy Kray 6 Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ 0  380 2,817 8,559 416 213  Subregion  -  -  Total (%)  3,450 (1.7)  74.2 Yakutia 503.4 Primorskiy Kray Khabarovskiy Kray 173.6 1.1 Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ 0.0 752.3 Total (4.3 (%) -  -  Yakutia Primorskiy Kray Khabarovskiy Kray Amur Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’  187 224 216 183  Average  218  -  -  -  1,271  Larch  Fir  (Area) lOOha 21 116,880 1,137 295 25,366 605 52 13,389 940 9,453 1,636 838 -  -  European Red Pine  Total  10,052 4 1,150 726 8 0 69  127,730 6,497 36,483 14,589 1,161 9,453 3,814  12,009 168,801 1,811 13,656 (6.0) (84.5) (0.9) (6.8) 3 (Volume of growing stock) 1 million m 1,043.8 7,881.6 3.8 48.0 0.2 176.8 44.6 515.0 130.9 2,701.3 83.5 1,492.5 1,473.1 62.4 71.2 8.8 0.1 100.2 45.8 0.0 340.9 0.8 149.8 192.7 239.0 1,238.2 290.5 12,866.6 2,411.5 (7.1) (73.3) (1.7) (13.7) /ha 3 (Average volume per unit area ) m 104 67 181 126 50 155 151 183 114 138 106 174 86 169 110 171 12 107 215 36 12 179 118 188 -  -  -  -  177  160  76  103  199,727 (100) 9,051.4 1,240.0 4,581.8 1,616.6 146.1 340.9 582.3 17,559.1 (100) 71 191 126 111 126 36 153 88  Source: Sheingauz, A. S. et aL (1989)  In order of importance larch is followed by spruce (Picea jezonensis), European red pine (Pinus sylvestris), Korean pine (Pinus koraiensis), and  fir (Abies sibirica).  127 Most of the larch in the RFE, nearly 69%, is  concentrated in Yakutia, where it comprises 91.5% of the coniferous forests. The prevalence of larch is not restricted to Yakutia, but is common in most of the RFE. Larch accounts for 9 1.7% and 100% of the coniferous species in Kamchatskaya and Magadanskaya Oblasts. Larch is scarcest in Primorskiy Kray, where it accounts for only 17.5% of the coniferous species. The highly valued species, Korean pine and spruce, exist most densely in the southern subregions, especially in Primorskiy Kray. Korean pine forest has as high as 218 cubic metres per hectare of growing stock volume per unit area. Spruce, fir and European red pine follow Korean pine in terms of volume per hectare with 177, 160 and 103 cubic metres per hectare respectively. Larch has the least volume per hectare, 67 cubic metres. Table 5.24 shows the deciduous species composition.  The deciduous  species growing in Russia are further grouped into hardwood and softwood . The tree species 4 according to the wood stress point expressed in MPa  with the point greater than 40 MPa are called hardwood deciduous and the ones less than 40 MPa are softwood deciduous (Backman and Waggener, 1991). Most of the deciduous forests are concentrated in the southern subregions and Kamchatskaya Oblast’.  Each of Primorskiy and  Khabarovskiy Krays, and Amurskaya and Kamchatskaya Oblasts has between 17% and 26% of the total deciduous forests in the RFE.  MPa is an abbreviation for megapascals. MPa is a unit of measure common in the International System of Units to denote stress. One pound per square inch (psi) equals approximately 0.007 MPa.  128 Deciduous forests are the most prominent in Primorskiy Kray, where they comprise 40.5% of total forests, followed by Kamchatskaya Oblast’ (3 6.8%), Amurskaya Oblast’ (24.0%), and Salthalinskaya Oblast’ (22.4%). Yakutia is recorded as having no deciduous forests. Deciduous forests are signfficant only in Primorskiy Kray. Table 5.24. Deciduous Species Subregion  Ash  Yakutia 309 Primorskiy Kray Khabarovskiy Kray 107 Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ 416 Total (3.4) (%) -  -  -  -  Yakutia 39.8 Primorskiy Kray Kray 14.0 Khabarovskiy 0.0 Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ -  -  -  -  Total  (%)  53.8 (4.6)  Yakutia 129 Primorskiy Kray Khabarovskiy Kray 131 Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ 129 Average -  -  -  -  -  Softwood Hardwood White Poplar Others SubSubOak Bass- Others Total Total Birch wood (Area) lOOha 113 1,983 1,817 53 1,301 990 63 248 677 3,223 1,947 390 4,559 195 3,458 1,932 906 826 656 343 30 185 4,720 516 4,505 61 19 436 173 1,309 657 479 5,712 5,712 210 91 313 12 146 139 16 301 893 868 25 740 2,168 14,486 11,578 8,144 12,376 3,064 752 (100) (79.9) (5.1) (15.0) (100) (24.8) (6.1) (65.8) 3 (Volume of growing stock) 1 million m 64.7 6.4 12.5 83.5 91.0 10.5 25.5 127.0 97.7 380.4 183.3 59.6 328.0 214.0 35.6 78.4 226.4 101.8 59.0 51.6 5.7 17.2 298.7 22.1 275.8 2.3 3.8 16.0 101.0 51.3 21.0 28.7 483.9 483.9 0.4 26.1 33.5 7.0 2.1 8.1 17.7 7.5 48.1 50.1 2.0 705.3 107.4 176.7 989.4 753.3 1,162.9 260.3 113.5 (100) (100) (71.3) (10.9) (17.9) (22.4) (9.8) (64.8) /ha 3 (Average volume per unit area ) m 121 110 42 36 92 167 103 114 144 98 94 153 183 62 87 72 117 123 150 90 190 43 61 62 63 93 121 37 78 121 77 85 85 124 107 77 33 131 51 58 59 5 55 145 61 82 94 68 90 151 85 -  -  -  -  -  -  -  -  -  Source: Sheingauz, A. S. et al. (1989)  -  129 The RFE represents a vast forest area but the forest conditions differ among subregions as seen above. For example, more than half of the forest in the RFE is in the northern subregions, but the quality of the forests is inferior to the other subregions because of the harsher climate, smaller trees, lower stocking, and the dominance of less-valued larch. The average volume per hectare in Yakutia is less than 1/2 of that of Primorskiy Kray, which has the highest volume per hectare of the RFE. In Magadan the same figure goes down to as low as 1/4 of that of Primorskiy Kray. However, in the south, the average volume per hectare is compara ble to the Canadian national average (Table 5.25). Average volumes per hectare of certain species in Primorskiy Kray are close to the level of British Columbia’s. Table 5.25. Growing Stock Volume per hectare between Canada and the RFE Hardwood Softwood Deciduous Deciduous Coniferous Pine Spruce Fir Larch Aspen W. Birch Average Average Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Average(RFE) Canada B. C.  71 191 126 111 126 36 153 103  187 224 216 183 -  -  -  218  126 183 174 171 215 -  188 177  181 151 138 169 -  -  179 160  ha) (m / 3 67 155 106 110 107 36 118 76  203.6 198.9 170.3 195.0 155.1 258.2 209.5 249.3 233.4 227.4  56 94  121 167 183 190 121 124 131 145  136.0 N.A.  188.1 225.6  -  114 117 43 85 -  36 153 150 61 78 33 -  61  90.7 159.2  Note: 1. Hardwood deciduous species, also known as shade-tolerant hardwood species and “hard” hardwood, include oak, ash, beech, and stone birch. 2. Softwood deciduous species, also known as shade-intolerant hardwood species and “soft” hardwood, include aspen, white birch, alder, lime, and basswood. 3. Maple alone is used for Canada in the comparison of hardwood deciduous average. Source: Compiled from Sheingauz, A.S. et al. (1989), Forestry Canada (1990) and Fenton and Maplesden (1986)  130 Table 5.26 shows that the total forest area in the RFE has been increasing over time. However, a large part of the increase is attributed to the larch in Yakutia. The areas of the high valued Korean pine show a decline over time. Table 5.26. Changes in Species Composition Over Time Year 1966 1973 1978 1983 1988  Softwood Hardwood Korean Spruce Larch European Total Oak Ash White Others Total Shrubs Grand Total Birch Red Pine Pine /Fir (1 million ha) 4.0 3.7 3.4 3.2 3.4  15.5 15.6 16.0 16.0 15.5  155.1 162.9 164.2 167.9 168.8  9.4 10.5 10.9 11.5 12.0  184.0 192.7 194.5 198.6 199.7  2.7 3.0 2.9 3.0 3.1  0.5 0.5 0.4 0.4 0.4  9.0 9.8 10.5 10.6 11.6  11.2 11.7 11.7 12.2 11.8  23.4 25.0 25.5 26.2 26.9  243.2 253.8 257.2 266.0 48.4 275.0 35.8 36.1 37.2 41.2  Source: Sheingauz, A. S. et al. (1989)  5.4.4. Annual Increment The annual increment of the forests in the RFE is 202 million cubic metres (Table 5.27). This seems overestimated compared to 84.5 million cubic metres exclusive of Yakutia estimated by Cardellichio, et al. (1989). About 82% of the increment is attributed to coniferous species. Yakutia accounts for 40% of the increment.  Yakutia and three southern subregions,  Primorskly Kray, Khabarovskiy Kray and Amurskaya Oblast’, account for over 90% of total annual increment in the RFE. The annual increment in Canada is 338 million cubic metres. The standing forest contributes 335 million cubic metres and natural regeneration is responsible for an additional three million cubic metres (Honer and Bickerstaff, 1985). Among them, the province of British Columbia (B.C.) represents 103.6 million cubic metres, just about half of the RFE’s.  131 However, the annual increment in B.C. is from a land base less than one fourth of the RFE’s. The inventoried forest land in BC. is 60.31 million hectares (Forestry Canada, 1990) against 275 million hectares of closed forests in the RFE (Sheingauz et at., 1989). The average annual growth rate (mean annual increment, or MAT) per hec tare in Primorskiy Kray, Khabarovskiy Kray, Amurskaya Oblast’ and Sakhalin Island is between 1.3 and 1.5 cubic metres per hectare, higher than that of the average of the  RFE, 0.9 cubic metres per hectare. The MAT is 1.15 cubic metres per hectare exclusive of Yakutia (Cardeffichio et al., 1989). The MAT in the RFE is much lower than the one in Canada and B.C. The MAT in Canada is 1.7 cubic metres per hectare. The MAT in B.C. and Nova Scotia is estimated to In the case of managed stands on  be 2.3 cubic metres per hectare.  medium-to-good sites, it could be 10 cubic metres per hectare on the coast and 4 cubic metres per hectare in the interior of B.C. (Cardellichio, et al.,  1989). This comparison suggests a significantly slower growth rate of the forests and lack of forest management in the RFE (Table 5.27). Table 5.27. Annual Increment in the RFE Subregions  Annual Increment Coniferous Species  Hardwood Deciduous  Softwood Deciduous  Mean Annual Increment/ha Total  Coniferous Species  (1 mu. m /yr) 3 Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’  80.0 10.1 46.4 18.7 0.9 3.0 5.9  0.8  82.3 17.2 57.7 27.5 6.5 3.6 72  0.6 1.6 1.3 1.3 0.8 0.3 1.5  10.7  26.3  202.0 338.0 103.6  0.8  -  Average  /yr) 3 (m  2.3 3.4 9.4 8.3 1.8 0.6 0.5  -  3.7 1.9 0.5 3.8  Hardwood Softwood Deciduous Deciduous  0.9  1.2 2.6 2.1 1.8 1.4 1.9 1.7  0.6 1.5 1.3 1.4 0.8 0.4 1.4  0.9  1.8  0.9 1.7 2.3  -  1.1 1.0 1.0 0.7 -  (Averages) RFE Canada B.C.  165.0  Note: Total annual increment in B.C. is based upon 45.05 mu, ha. of the inventoried, stocked, productive and non reserved forest in B.C. Source: Minakir and Sheingauz (1991) and loner and Bickerstaff( 1985)  132  Table 5.28 shows the age classes of the forests in the region. There are six age classes of forested land as in the table. According to Backman and Waggener (1991), overmaturity is reached at age between 100 and 140 in coniferous species and between 50 and 70 in softwood deciduous species, while maturity is at age between 80 and 100 in the former, and 40 and 50 in the latter. Immature age class occurs at an age between 80 and 100 years for conifers and hardwood deciduous tree species and between 50  and 60 years for softwood deciduous species. Middle aged class occurs at age between 40 and 60 for coniferous and hardwood deciduous tree species, and 20 and 30 for softwood deciduous species. The age class of young stand I ranges from 10 to 25 years and young stand II from 25 to 40 years depending on the species. The division between age classes is not clear in softwood deciduous species as seen in Table 5.28. Table 5.28. Six Age Classes of Russian Forests Age Class Young I Young II Middle Aged Approaching Mature Mature Overmature  Coniferous Species 1O-25yrs. 25 40 yrs. 40-60 yrs. 60- 80 yrs. 80- 100 yrs. 100 + yrs. -  Deciduous Species Hardwood Softwood 10-25yrs. 1O-25yrs. 25 40 yrs. 40-60 yrs. 20- 30 yrs. 60- 80 yrs. 50- 60 yrs. 80- 100 yrs. 100+ yrs. 50- 70 yrs. - - - -  - - - -  -  -  -  Source: Backman and Waggener (1991)  Table 5.29 shows the age class distribution of closed forests, or stocked forests in the region, which constitutes 55.1% of total forested area as in Table 5.18. Overmature forests in the RFE comprise 19% of the total, while mature and overmature forests combined comprise 48%. Therefore, the maturity of the forests in the region is not very high.  133 Table 5.29. Maturity of Stocked Forests under Control of State Forest Management Young I  Total  Subregions  Stands II  Middle Aged Immature Mature Overmature Forests  (1,000 4,254 2,826 197 2,225 636  35,726 2,861 12,817 6,937 5,375 5,699 1,516  9,718 1,920 4,612 2,186 2,694 3,424 454  39,894 4,113 15,259 4,818 8,568 5,679 1,015  31,861 1,326 8,336 2,716 2,163 4,111 1,196  24,587 (8.9)  70,933 (25.8)  25,008 (9.1)  79,343 (28.9)  51,709 (18.8)  146,732 Yakutia 11,160 Primorskiy Kray 48,837 Khabarovskiy Kray 21,777 Amurskaya Oblast’ Kamchatskaya Oblast’ 19,053 Magadanskaya Oblast’ 22,121 5,327 Sakhalinskaya Oblast’  15,689 335 3,559 2,292 56 983 513  13,844  275,007 (100.0)  23,427 (8.5)  Total (%)  ha)  605  Source: Sheingauz, et a!. (1989)  Table 5.30 shows the trend of changes in age-class structure and volume between 1966 and 1988. First, it shows the change in age-class structure in that the areas of young and, middle-aged forests are increasing whereas the ones of mature and overmature forests are decreasing. Every five years, about 5 million to 10 million hectares of mature and overmature forests disappear in the RFE by artificial or natural causes (Sheingauz, et a!., 1989). Table 5.30. Trend of Changes in Forested Area and Volume in the RFE  Immature  Mature & Overmature  Volume Mature & Overmature Total  1 million ha 23.0 34.4 21.9 38.3 22.9 45.8 24.8 55.2 25.0 70.9  164.0 159.1 149.3 141.2 131.1  3 ----lmillionm 15,714.9 22,419.5 16,409.2 22,098.6 21,964.1 20,163.4 21.702.3 14,761.8 19,686.3 12,982.1  +2.0  -32.9  Area Year  Young  1966 1973 1978 1983 1988  21.8 34.4 39.2 42.8 48.0  1966-1988  (%)  +26.2 +120  Middle  +36.5  ÷106  Source: Sheingauz et al. (1989)  +9  -20  -2,733.2 -12  -2732.8 -17  134 Second, the growing stock volume shows a fluctuation over time. The fluctuation appeared in Table 5.30 suggests an unreliability of the statistics. Nevertheless, one obvious trend in the forest volume in the RFE is downward, as with the forested areas. 5.4.5. Rehabilitation of Damaged Areas Several factors limit the growth of the resource base and the utilization of resources. Among others, fire damage and lack of reforestation are major ones. In fact, they are the primary issues related to the growth of timber volume in the RFE. Statistically the average area damaged by forest fire in a year between 1978 and 1987 was 308,500 hectares, which is 0.006% of total forest area in the RFE (Table 5. 31). The actual figure, however, could have been 7 or 8 times higher than provided in the official statistics (Sheingauz, 1990). This could be about 0.4% of the total forest area in a year, which is quite a significant area and delays the improvement of forest conditions in the region. The fire protection efforts usually suffer from lack of manpower and equipment and budget (ERI, 1991). Table 5.31. Reported Area Damaged by Forest Fires per Year between 1978 and 1987 Subregions  Area damaged by forest fire(1,000 ha)  Share in total forest area (%)  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast Magadanskaya Oblast’ Sakhalinskaya Oblast’  131.0 13.7 51.9 85.8 5.8 16.9 3.4  0.05 0.11 0.07 0.28 0.01 0.02 0.05  Total (RFE)  308.5  0.06  Source: (Sheingauz, 1990)  135 Table 5.32 shows the area and volume damaged by forest fires from the official statistics of 1992. Table 5.32. Forest Fire Statistics in 1992 No. of Forest Fire (Occurrence)  Damaged Area (ha)  Damaged Volume (1,000 m ) 3  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast Magadanskaya Oblast’ Sakhalinskaya Oblast’  1,040 243 377 404 107 171 26  215,135 8,854 20,224 55,681 10,074 26,658 104  5,104.2 135.3 147.5 279.0 175.4 360.6 5.4  Total (RFE)  2,368  336,730  6,207.4  Subregions  Source:Statisticheskiy Sbornik, (1993)  Reforestation is practiced to improve the areas damaged by logging and forest fires in the RFE. The results are modest. According to Russian regulation, at least 30% of cut areas are supposed to be regenerated, but the actual replenishment lags far behind. Between 1986 and 1988, an average of 400,000 hectares were logged every year while only 14% of them, or 56,000 hectares, were replanted (Sheingauz, 1991). During that period, an average 714,000 hectares was damaged by forest fires per year. If the areas damaged by fires are included in areas to be reforested, the rehabilitation rate goes down to 5% of the total damaged areas (Sheingauz, 1991). Table 5.33 shows that as of January 1988, 1.2 million hectares had been replanted and only 53% were successfully regenerated. The forested areas artificially established account for only about 2% of the total forested area.  136  Table 5.33. Reforestation in the REF (1988) Subregion  Total Reforested Area (1,000 ha)  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast Magadanskaya Oblast’ Sakhalinskaya Oblast’ Total (RFE)  6 243 400 173 101 35 262 1,220  Successfully Regenerated (1,000 ha) 4 47 225 85 67 26 196 650  Survival Rate (%)  Share of Artificial Forest Closed Forests (%) Total(%)  67 19 56 49 66 74 75  0.002 0.3 0.2 0.2 0.1 0.01 2.6  0.002 0.4 0.4 0.3 0.3 0.07 3.1  53  0.1  0.2  Source: (Sheingauz, 1990)  5.4.6. Accessibility The forest resources in the RFE allow limited access: physically by modestly developed transportation network, and administratively by groupings for specific uses as discussed earlier and by organizations responsible for managing forest lands. The organizations include forest authority, other ministries, government farms, and collective farms, and timber industry.  Table 5.34 shows the areas controlled by these organizations. The forest lands allocated for forest industry is negligible  and not presented in the Table. Table 5.34. Areas Controlled by Different Organizations in the REF Organization  Total Area  Forest Fund  Forest Land  (million ha) (thousand ha) State Forest Management 499,546.0 353,467.5 Forest Authority 417,360.0 314,467.8 (Share of total) (82.0) (86.9) Long Term Use 82,186 38,999.7 Other Ministries 7,489.2 6,246.3 Kolkhoses 146.6 146.6 Total 621.6 507,181.8 359,860.4 Source: Goskoniles (1990 and 1991)  Stocked Forests 275,006.0 247,858.7 (87.8) 27,147.3 5,447.5 97.9 280,551.4  Growing Stock Vol. (million 3 m ) 20,761.6 19,166.7 (72.9) 1,594.9 493.2 1,813.2 23,068  137  As in the table, forest authority has the largest share of each classification. 88% of total forested area and 73% of total growing stock volume are under control of the authority. These are probably the areas where most of the initial forestry investments would be directed in the future. Table 5.35. Area and Volume of Stocked Forests, Exploitable under Control of Forest Authority Subregion  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast Magadanskaya Oblast’ Sakhalinskaya Oblast’ Total Exploitable Forests Total Stocked Forests  Coniferous Deciduous Total Total Ratio of Species Species Exploitable Stocked Exploitable Forests Forests Forests (1,000ha) (%) 45,820 1,336 47,156 139,485 34 5,202 3,793 8,995 11,157 81 18,477 5,211 23,689 39,277 60 12,705 4,855 17,560 21,777 81 621 2,128 2,748 8,787 31 2,312 132 2,443 22,052 11 3,436 893 4,329 5,326 81 88,572 18,347 106,919 247,859 43 188,237 59,623 247,859  Ratio of Exploitable Forests(%)  47  31 43 (million 3 m ) 58 4,082 397 1,359 437 3,107 288 1,695 196 307 12 88 52 568  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast Magadanskaya Oblast’ Sakhalinskaya Oblast’  4,023 962 2,670 1,407 111 76 516  Total (RFE)  9,766  1,440  11,206  16,634  2,532  19,167  59  57  58  Total Stocked Forests Ratio of Exploitable Forests(%)  9,009 1,749 4,621 1,986 621 513 668 19,167  (%) 45 78 67 85 49 17 85 58  Source: Goskomles (1990 and 1991)  Table 5.35 shows the areas and volume under control of the forest authority and exploitable based upon the transportation network to be developed within the next 20 years. Out of total stocked forests under the control of forest authority, 47% of coniferous, or 88.6 million hectares and 31% of deciduous forest areas, or 18.3 million hectares, fall on the category  138 of exploitable in the next 20 years. In terms of volume, 59%, or 9.7 biffion 3 of coniferous forests, and 57%, or 1.4 billion m m 3 of deciduous forests, are classified as exploitable within the next 20 years.  By subregion,  Sakhalinskaya and Amurskaya Oblasts, Primorskiy and Khabarovskiy Krays show higher ratio of exploitable forests than other regions. 5.4.7. Cut-Control System Several means to control the volume harvested are being practiced in the RFE: a prohibition of an area or species from logging, using a special system to determine annual allowable cut, regulating diameter and stock volume for logging, and applying user fees. How such means would affect the actual logging in the RFE is the main purpose of the discussion in this section, which heavily draws on the report by Arai (1992). As described in section 5.4.2, Russian forests are classified into three groups according to their uses and need for protection. The classification affects the determination of cut volume and cutting method for logging. Normally, the strictest regulation applies to the Group I forests and the most lenient rules to the Group III. However, the forests in Group I can be logged unless the forests belong to the following special protection areas where logging is banned: 1. 2. 3. 4. 5. 6. 7. 8.  A belt 100 m in width surrounding a forest. 100 to 300 m riparian zone. An area within the radius of 100 300 m from a water source. An area within the radius of one km from a mineral water spring and resort facilities. A forest inhabited by rare and indigenous animal and plant species. An area within 200 m from a tree line. A forest within 3 5 km from Tundra An area sloping more than 30 degrees. -  -  139 The area where logging is prohibited for reasons 1 to 6 above constitutes less than 1% of the total forested area and has virtually no impact on  deciding annual cut volume. The forested area near a tundra region accounts for only about 3% of the total Forest Fund. All such areas are located in Yakutia, Kamchatskaya Oblast’ and Magadanskaya Oblast’. Needless to say, the forest industry could not profitably log and has never logged in such areas. The area sloping more than 30 degrees accounts for 5% of the total forested area in the RFE. The share of such areas varies regionally from 1% in Yakutia to 10% in Sakhalin Island.  Despite the  prohibition of logging in such areas, new technology has made it possible to log in these regions for many years. Therefore, the prohibition of logging in certain areas has had no significant impact on annual allowable cut volume. It is not likely to be a major constraint to increasing cut volume in the future either. In Russia, the annual allowable cut volume is controlled by an assessed cut volume system, in which the annual cut volume is determined at regional or territorial levels subject to final approval by the central government. The volume cut in the RFE has always exceeded this assessed cut volume and the future cut volume in the RFE is not likely to be decreased by the system (Aral, 1992). There are 10 tree species which are prohibited from logging across the RFE including Korean pine (Pinus koraensis). In addition to the 10 species, 5 rare species in Sakhalin Island and one in Magadanskaya Oblast’ are banned from cutting. The rare species account for a small volume and present no significant obstacle to increasing the cut volume in the RFE  140 except two species, European red pine, or Scots pine (Pinus sylvestris) and basswood (Tiia amurensis). volumes in the RFE.  These two species have good stocking  Especially, the former represents 7.1% of total  softwood volume and the latter 9.8% of total hardwood volume (Sheingauz, et al., 1989). Logging the basswood is banned in Primorskiy Kray and Khabarovsldy Kray, where beekeeping is an important industry. Although the European red pine (Pinus sylvestris) is banned from logging across the RFE, a small amount of this tree has been constantly logged in Primorskiy  Kray. The trees with less than a certain diameter are prohibited from logging in the RFE.  The minimum diameter to cut varies from 12 cm to 48 cm  according to the species, logging area and logging method. In case of selective logging, the logging density and frequency are determined by the stocking density of the forest. In recent years, many forest areas have been designated for priority use by native people. The amount of logging in such areas requires consultation with native groups. Another means to control the cut volume is by applying resource user fees. The user fee imposed on logging was too low to effectively control the cut volume before the end of 1991. On average, a one to two rubles stumpage fee was imposed on one cubic metre logged volume, which constituted only 3 to 5 % of total logging cost.  In 1992 a new stumpage system was  introduced and the fee was based on species, quality and diameter regardless of logging region and hauling distance, criteria which had been applied previously. The new stumpage price was raised to 100 to 150 rubles per one cubic metre and had no effect due to high inflation. The share of the new stumpage fee in total logging cost remains largely  141 unchanged. At present, a new stumpage system reflecting the price index is being considered. In addition, a new land tax has begun to be imposed on the forest land being used by forestry enterprises. The tax rate is 5% of appraised value of total growing stock volume in the forest land. Currently a forest production enterprise should enter into a lease contract with the regional forestry office to use the forest resources in the leased land. A more specific regulation with regards to the lease contract, however, has not been developed yet. To summarize the resource condition and its potential in the RFE, the forests in the RFE cover a vast area and offer an abundance of potential timber resources. However, the stock volume of the forests is significantly lower than that of other comparable countries due to slow growth rate, low stocking density, and different management practices (Cardeffichio et a!., 1989). In addition, the forests in the RFE are largely deteriorating, especially in the southern regions where geographic advantage for foreign investment is high and the high-valued species are concentrated. In the north, where the forests have been relatively protected from development by remoteness and inaccessibility, the quality, species composition and volume per hectare are inferior to the other regions because of the harsher climatic conditions. The forests in the north are mostly in the permafrost zone, and any small changes to the forests could cause irrevocable damage to the regional environment. These vulnerable environmental conditions become major constraints to intensive forest development in the RFE, especially in the north. Despite these problems, the potential of the forest resources in the region is well appreciated by foreign investors, especially those from neighbouring resource-poor countries. Most of the Korean and Japanese companies interviewed in the RFE recognized the potential and  142 expressed their views that what matters for the potential is not the resource per se but how to materialize the potential through appropriate investment (Ichii, 1993; Ito, 1993; Nakazawa, 1993; and Yamada, 1993). This view is quite contrasting to the one held by Russians who normally underestimate the resource potential in the REF (Minakir, 1993; Ivanchikov, 1993b; and Sheingauz, 1993). Given the growing stock and infrastructure conditions, the four southern subregions of the RFE, i.e., Primorskiy  Kray, Khabarovskiy Kray, Amurskaya Oblast’  and  Sakhalinskaya Oblast’, have most of the economic resource base and suggest the highest potential for forest development in future.  The  exploitation of the forest resources in the RFE in the future is going to be affected by various cut control regulations. The current user fee system  and the lease agreement system should be developed in a more detailed manner before they become effective as a controlling mechanism. 5.5. FOREST ADMINISTRATION After the USSR collapsed, the forestry administration experienced a series of changes.  Decentralization caused confusion and conflicts over the  ownership and control of natural resources. Production and distribution systems also needed to be changed to accommodate the reform across whole sectors of the country’s economy. Forestry administration and production is no exception. This section is devoted to exploring how much  perestroyka and glasnost took place in the field of forestry administration and production systems, what the latest developments are, and finally what the implications of such reforms are for foreign investment in forestry.  143 In order to understand the current reforms, it is necessary to look back and refer to a series of reforms in forestry administration in recent years. There were three major reforms in the forestry administration system, one in 1988, another in 1991 and the last in 1992 after the USSR was dissolved. 5.5.1. Before the 1988 Reform As in Figure 5.1 traditionally two systems coexisted in the Soviet forest administration: a forest resource management system and a forest production system. The former was largely responsible for silvicultural missions such as forest management, protection, regeneration, and thinning.  This administration was headed by a State Committee of  Forestry (Goskomles) and had line offices at regional and district levels. At the lowest level is leskhoz, an enterprise responsible for managing designated unit forest areas. Small-scale logging and saw milling were also undertaken under this system. The latter system was responsible for the production of various forest products.  It was headed by the Ministry of Forest Industries  (Minlesprom), and various lower level offices were organized under the ministry. At the lowest level of the organization is lespromkhoz, a forest production enterprise involved mainly in logging and related processing. A district association like Urgalles or Terneiles consists of a number of lespromkbozes in the respective district. Several district associations form a regional or territorial association like Primorsklesprom or DaTlesprom. At the regional or territorial level, the association includes not only the lespronikhoz but also various other related enterprises.  144 Council of Ministers of the USSR  State Committee of Forestry (Goskoniles)  Ministry of Forest [f.Mi.rLj  Ministry of Forests at Republic level  I  Regional and Territorial Forestry Office  Examples: Regional Association of Forest Industries  District Forestry Office  District Association of Forest Industries  Forestry Management Enterprise (Leskhoz)  Forestry Production Enterprise (lespromklioz)  Primorsklesprom Dalilesprom  Tern eiies Urgalles  Figure 5.1. Forestry Administration System of the USSR before the 1988 Reform Source: compiled from Barr (1989a) and Petrov (1989)  For example, the Dal1esprom in Khabarovsk Kray is formed of a integrated forest production kombinat, several North Korean forestry enterprises, saw mills, maintenance shops, port facilities, a research institute, and a technical school in addition to lespromkliozes (Kakizawa, 1992b). 5.5.2. The 1988 Reform Since an integrated control over forest management and production was not expected under the previous system, a reform was undertaken to increase the level of efficiency in management and production in 1988.  145 The main point sought by the reform was the expansion of the role of the lespromklioz. The reform granted the lespromkhoz the right to manage the forest areas allocated to itself in addition to logging in the area. The regional Forestry Office had been responsible for such activities before then. Thus, lespromkhoz turned into an integrated forest management and production enterprise, while the Regional Forestry Office was reduced to managing the areas not allocated for production and management by lespromkhoz. Lower-level forestry offices were closed. By the reform the exclusive right to use forest resources was granted to the lespromlthoz. The regional forestry administration was restructured as intended by the  reform in Primorskiy Kray, Khabarovskiy Kray, Amurskaya Oblast’ and Sakhalin Oblast’. In the other subregions, in the face of opposition from the regional forestry offices, the old system of forestry administration  continued to exist. 5.5.3. The 1991 Reform A new reform intending to revive the function of the former regional offices was announced in 1991 by a resolution in a ministerial meeting. In Khabarovskiy Kray the regional forestry office was resurrected as the result of the resolution. It was, however, opposed in the other three subregions of Primorskiy Kray, Amurskaya Kray and Saithalin Oblast’. The conifict between central and regional governments over the issue is being arbitrated by the Court of the Russian Chamber of Commerce. Meantime a compromise system of forestry administration is being established in the RFE, in which the Regional Forestry Office takes the responsibility for overall management of forest resources while management for specific uses is undertaken by the lespromkhozes (Mai, 1992).  146 5.5.4. Post USSR Reform After the collapse of the USSR, the State Committee of Forestry was abolished and absorbed into the newly created Ministry of Natural Environment.  The former Ministry of Forests turned into a forestry  department under the new ministry. The forestry department was again  detached from the ministry by presidential Decree in 1992 and renamed as the Russian Federal Forestry Office, mainly responsible for the manage ment of forest uses and allocation of forest resources. On the other hand, the right to control the forest product industry has been transferred to the Ministry of Economy, and the Russian Ministry of Forest Industries was  turned  into  the  All  Russia  (Rossiskielespromishylenniki  Forest  Industry  Corporation  ), which is formed of 60 corporations and  organizations including 21 corporations, 15 regional concerns, 6 associations, 5 survey and research corporations and 8 research institutes across the country (Arai, 1992).  All regional or territorial forest  production associations across the RFE participate in the corporation. Although these regional production associations are administered by the  All Russia Forestry Industry Corporation they are largely autonomous in their operation. More recently, in December 1992, Rosslesprom, a national forest-industry corporation, was established to attract investment, science and technology transfer, and foreign economic activities for the forestry, wood processing and pulp and paper industries (Arai, 1992). 5.5.5. Resource Allocation System The reform has also brought a significant change in the mode of resource allocation, and more changes are expected in the future. In order to obtain  147 license, the logging enterprise, lespromlthoz, should enter into a contract with the local government. The regional forestry office is responsible for  allocating logging areas to the licensed enterprise, based upon the cut volume granted in the contract. Meanwhile the license granting system is being changed towards relying more on a competitive bidding process, though a stable bidding system has not been yet established. A logging license, almost guaranteed under the old system, can be withheld from an enterprise under the competitive system. Once the related institutional arrangements are in place, all allocation of forest resources will be under taken by competitive bidding. As the country’s economy is in the process of transforming to a market economy, market-oriented changes are also expected to take place in the resource allocation system. Two possible alternatives are the ‘contest’ system and the ‘investment contest’ system (Arai, 1992). The former grants resource use rights to a successful contestant who offers more favorable conditions than others. The latter system allows access to the resources only to those who have actually invested in the enterprise holding a logging license. 5.5.6. Rights to Managing the Forest Resources Regional forestry offices from all subregions argue that the management of forest resources should be under their exclusive control. They claim that the office should also take control of the long-term and strategic utilization of forest resources. However, according to the Russian constitution and related regulations, the territorial or regional council of peoples deputies is held responsible for the long-term and strategic utilization of forest  148 resources. At the same time, the regional forestry office is under direct control of the Federal Ministry of Forests and has no constitutional relationship with the local council. This lack of constitutional ground on the rights to managing forest resources poses a conflict for the future (Arai, 1992). Another problem along this line is the incessant reforms and changes in the forestry administration, which could further weaken the supervisory function of regional forestry offices and result in misuse of the forest resources. At present the ownership of most of the forest resources is held by the federal government, and the decentralization issue is restricted only to the rights to managing and utilization, not the ownership. A variety of ownership issues and issues related to the tenure system, however, is expected to emerge especially from the lower level of the administration system as the privatization progresses. In summary, much formerly centralized forestry administration has been decentralized through a series of reforms.  A positive implication of the  reform for the FDI is the fact that the reform has been undertaken so that the industrial aspects of forestry are emphasized.  More active and  autonomous industrial activities are expected at regional and subregional levels. The new administration system, however, stays unstable due to the unclear distribution of power over resource rights between the local and central administration and the incessant reforms across whole sectors of the country. Unclear responsibility for the use of resources will negatively affect TNC activities in forestry investment as experienced in the JV Svetlaya (See Chapter VI).  149 5.6. FOREST INDUSTRY 5.6.1. AAC and Annual Harvest Table 5.36 shows the AAC volume since 1980. The AAC in the RFE has sustained at around 100 million m , though it has dropped slightly every 3 year since 1987. Each of Yakutia and Khabarovskiy Kray accounts for one third of total AAC in the RFE. Next major portion of the AAC originates from Primorskiy Kray and Amurskaya Oblast’. Two subregions combined account for over 25% of total AAC. Table 5.36. AAC in the RFE Subregion  1980  Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’  (1 million m ) 3 33.0 33.0 33.0 32.0 33.0 33.1 14.5 12.2 15.0 15.0 15.2 11.5 37.0 37.0 37.0 36.7 32.5 32.3 10.9 10.9 10.9 11.0 16.1 16.1 1.9 2.2 2.2 2.2 2.2 1.9 0.4 1.2 0.4 0.4 0.4 0.4 4.7 8.1 4.6 6.0 6.0 6.0 106.5 107.2 107.2 107.2 104.5 104.5 103.5 100.0 100.7  Total  33.0 14.5 35.1 10.9 2.5 3.9 6.6  1985 33.0 14.5 37.0 10.9 2.5 1.2 8.1  1986  1987  1988  1989  1990  1991  1992  33.0 14.5 37.0 10.9 2.5 1.2 8.1  Source: 1. GoskomstatSSSR (1990) 2. GoskomstatRossil (1991) 3. Statisticheskiy Sbornik (1993)  There are three sources of harvest in Russia: principal harvest, intermediate harvest, and other harvest. According to Backman and Waggener (1991), principal harvest is conducted largely in mature stands, primarily in Group III forests with some occurring in Group II forests. Intermediate harvest occurs in all groups of forests and includes stand improvement, thinning, and sanitation feffings. Other utilization is thought to occur in Groups I, II, and III forests mainly in response to industrial development.  150 Table 5.37 shows the AAC in 1992 and the actual harvest from the above three sources in each subregion.  Only 24% of total AAC is actually  harvested in the RFE. Sakhalinskaya Oblast’ shows the highest proportion of actual harvest by 55.3% of AAC and Yakutia shows the lowest proportion by 11.5% of AAC. In general southern subregions present higher actual harvest compared to the northern subregions. Yakutia, while contributing the greatest proportion to the resource potential in the RFE, offers a very limited contribution to the actual harvest. Table 5.37. AAC and Actual Harvest Volume in 1992 Subregion Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Total  Area Harvested (thous. ha)  (mu m ) 3  Actual Harvest ) 3 (mu m  Actual Harvest /ha) 3 (m  Actual Harvest (%)  62.1 50.4 89.7 46.8 5.0 1.6 14.9  33.1 12.2 32.3 16.1 1.9 0.4 4.7  3.8 3.8 9.8 3.9 0.4 0.1 2.6  61.2 75.4 109.3 83.3 80.0 62.5 174.5  11.5 31.2 30.3 24.2 21.1 25.0 55.3  270.5  100.7  24.4  90.2  24.2  AAC  Source: Statisticheskiy Sbornik (1993)  The annual principal harvest in the RFE showed a steady increase until 1980 and stagnated thereafter (Table 5.38). The annual harvest is about one third of the allowable cut--107.2 million cubic metres in 1988-allocated for the RFE by the central government under the former USSR (Sheingauz, 1991).  In 1988, only 10% of the AAC was actually logged in  Yakutia and 38% in Khabarovskiy Kray where the utilization rate was the second highest after Sakhalinskaya Oblast’ in the RFE (Sheingauz, 1991). Since the annual harvest volume is based upon the logs produced, the actual volume logged is usually higher. There exists a significant amount  151 of losses during the logging in the RFE, ranging from 5% to 35% depending upon the region (Cardeffichio, et al., 1989). 5.6.2. Production Table 5.38 shows principal harvest volume from 1965 to 1990. It explains that three quarters of the annual principal harvest originates from the three southern subregions, Khabarovskiy Kray, Amurskaya Oblast’ and Primorskiy Kray. This reflects the high productivity and quality of the forests, and a relatively well developed infrastructure, especially the railway network in these subregions as shown in Map 5.2. Table 5.38. Annual Principal Harvest Volume, 1965 Subregion Yakutia Primorskiy Kray Khabarovskiy Kray AmurskayaOblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Total  1965 3.3(13) 5.4(22) 7.7(31) 3.4(14) 0.7 (3) 0.6 (3) 3.5(14) 24.6(100)  1975  -  1990 1985  1990  (1 million m ), (%) 3 3.8(11) 4.1(11.7) 4.3(12) 6.5(19) 6.4(18.2) 6.3(18) 15.4(44) 15.4(43.9) 13.8(40) 3.9(11) 4.8(13.7) 5.7(16) 0.8 (2.3) 0.9 (3) 1.0 (3) 0.4 (1) 0.4 (1.1) 0.3 (1) 3.9(11) 3.2 (9.1) 3.5(10)  4.8(14.6) 4.9(14.9) 13.2(40.1) 6.1(18.5) 0.7 (2) 0.2 (0.6) 3.0 (9.1)  34.9(100)  1980  35.1(100)  34.8(100)  32.9(100)  Source: Compiled from Sheingauz (1990 and 1991) and Minakir et al. (1991)  It can also be noted that the relative importance of Khabarovskiy and Primorskiy Krays has slightly diminished as the harvest volume in these territories has been reduced since 1980. The continuous logging and the consequent deterioration of productivity of economic forests in these regions are to blame for the reduction. In addition, the logging areas have gradually moved into northern and remote areas, as highly productive regions are exhausted in the south. As a result, low grade and less-valued logs have become more prevalent.  152  Map 5.2. Basic Infrastructure in the RFE Source: RFEIJ (1993b), reproduced with permission  153 It can also be noted that the relative importance of Khabarovskiy and Primorskiy Krays has slightly diminished as the harvest in these territories has been reduced since 1980. The continuous logging and the consequent deterioration of productivity of economic forests in these regions are to blame for the reduction (Fujiwara, et al., 1992). In addition, the logging areas have gradually moved into northern and remote areas, as highly productive regions are exhausted in the south. As a result, low grade and less-valued logs have become more prevalent. The industrial activities in the other sectors show a similar subregional distribution in proportion to the subregional harvest. Overall Khabarov -skiy Kray shows the most active production in all sectors. Primorskiy Kray leads in plywood and chipboard production, while fibreboard production is heavily concentrated in Khabarovskiy Kray (Table 5.39). Table 5.39. Production of Main Forest Products in 1991 Subregion Yakutia Khabarovsldy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’ Total (RFE)  Sawn Logs* Timber Plywood mm 3 m 2.8 0.6 10.4 1.7 4.9 0.7 0.7 0.2 0.2 0.1 2.7 0.4 4.5 25.6  Chipbd Fibrebd  1,000 m 3 -  7.5 0.7 -  -  -  -  92.0 -  0.6  -mm m 3 -  19.0 -  -  -  -  -  -  186.8  -  -  -  20.1  Paperb  1,000 ton----Primorskiy Kray 4.9 143.2 2.9  -  -  15.1  Paper  200.0 207.8  -  -  77.3 220.5  Source: Zausaev (1993) Note: * Logs are from principal harvest.  Paper and paper products are produced mainly in Sakhalinskaya Oblast’ and Khabarovskiy Kray. Sakhalin accounts for over 90% of the total paper production in the RFE. The paper production on Saithalin Island largely relies on the old paper production facilities built by Japan after 1905.  154 Let us examine the changes in production over time. Log production steadily increased to a peak in 1987. It has since dropped sharply to 25.6 million cubic metres in 1991 (Table 5.40). The production of sawn timber reached its peak in 1970 and declined thereafter. In 1991, the production plummeted to less than 4.5 million cubic metres, which is less than the level of 1965. The low quality of timber and the chaotic economic and political situations in Russia can be blamed for the decline (Kakizawa, 1992b). Paper production has also stagnated and indeed decreased continuously since 1975 as shown in Table 5.40.  The outdated production facilities in  Sakhalin Island are the main cause of the stagnation. Plywood production  also shows a decline after reaching its peak in 1970.  In 1991, the  production dropped to as low as 30% of peak production. On the other hand, fibreboard, chipboard and paperboard production have increased steadily since 1965. They are, however, still too small to meet the regional demand (Sheingauz, 1990). Table 5.40. Production Trend of Wood Products between 1965 and 1991 Products Logs Sawn Timber Plywood Chipboard Fibreboard Paper Paperboard  Units 1mm m 3 1mm m 3 1 mm m 3 1mm m 3 1mm m 3 1000 t 1000 t  1965 24.6 5.5 36 2 5 167 107  1970 29.5 6.7 50 34 7  196 121  1975 34.9 6.6 46 N.A. N.A. 229 134  1980 35.1 6.3 36  100  19 232 169  1985 34.8 6.2 36 117 23 228 192  Source: Compiled from Sheingauz (1990) and Zausaev (1993)  1987 35.2 6.5 40 159 24 227 262  1991 25.6 4.5 15.1 186.8 20.1 207.8 220.5  155 In general, the forest industries in the RFE have stagnated since the 1970s, and processing has continued to produce a lower level of products, logging and saw-milling. Reasons for such stagnation are discussed in the following: The first is an inefficient use of forest resources, or low productivity in the logging and wood processing industries. The forest industry in the RFE has long been based upon a small number of high-quality exportable conifer ous species. This accelerates the shift of logging into even more remote and northern regions in search of the preferred species. Even the modernization of logging equipment has not helped to increase productivity. For example, the average yearly ruble cost for one cubic metre of roundwood production in Khabarovskiy Kray has risen by 2.9%, 3.0%, 3.8% and 4.9% in each successive 5-year periods between 1966 and 1985 (Fujiwara, et al., 1992). In addition to the advance of logging into northern and remote regions, the large amount of waste produced during production contributes to low productivity. Secondly, low log prices contribute to the stagnation of the industry. Under the central planning system, the log price was set rather uniformly, regardless market preferences. Log prices failed to reflect market prices and were kept unrealistically low. The stumpage price was also set without reference to the costs involved in managing the forests. For example, the stumpage price for pine saw logs from Khabarovskiy Kray takes only 3% of the log price (Fujiwara et aL, 1992). The forest management cost in Khabarovskiy Kray in the late 1980s was between about 24 and 25 million rubles a year, but the annual stumpage revenue was only 11.5 million rubles (Fujiwara et al, 1992). In addition, the  156 distribution of capital investment has been strictly controlled by the central government and the forest management situation has gradually deteriorated over time. Thirdly, there has been a lack of investment in processing facilities. The investment for all industries in the RFE has gradually shrunk from 752.2 million rubles in 1971 to 485.7 million rubles in 1981 (Fujiwara, et al., 1992). No fund has been available for capital investment since 1988. Normally decisions on the important capital investment are made in European Russia, where the centre of power is located.  The RFE has  normally been treated as a lower priority region for investment. As the economic crisis continues and available funds for investment have been used up in Russia, investments for new production facffities have stopped and the aging of existing production facilities has continued. The logging sector requires less capital investment and less labour per unit of production than other sectors in forestry. So far in the RFE, investments have been concentrated in the logging sector. As a result, the structure of the forest industry has become extremely unbalanced. Since the capabil ity for expanding production capacity is notably lower in the RFE than in the other Russian regions for the region’s lower investment priority, the imbalance is expected to continue. Fourthly, the forest industry in the RFE was developed in order to expand the log export capability of the former Soviet Union. Log exports from the RFE increased in the 1960s and 1970s. However, the aging processing facilities and deteriorating quality of logs forced the industry to continue to search for a small number of high quality coniferous log species. As a  157 result, upgrading and retooling the industry has been largely disregarded, although logging technology was imported from Japan to supply mainly logs for KS agreement. Lastly, a labour shortage has also contributed to the stagnation of the industry. In the RFF, labour shortage is common across all sectors of industry. It is more acute, however, in the forest industry where the working environment is much harsher than other sectors. The forest industry also tends to have a higher labour mobility, so there is a poor build-up of technical expertise. Imported labour from neighbouring North Korea, China, Cuba and Vietnam is widely used in the RFE. Some 10% of the total labour employed in the forestry sector was foreign in the late 1980s (Cardellichio et al., 1989). Judging from the above, it will be difficult to maintain the current level of production for the next few years. In order to increase the production, however, the logging operation inevitably needs to move into remote or new areas, which, in turn, will require a large amount of new investment. 5.6.3. Exports of Forest Products About 25% of the total forest products produced in the RFE over the last 20 years has been exported. Traditionally, forest products are the most important export commodity in the RFE. Forest products accounted for 61% of total exports in the RFE in 1975. Although their share went down to 43.2% in 1990, it is still the largest among total exports in the region (ERI, 1991).  158 The RFE is the most important region in Russia for log exports. More than half of the country’s log exports originate from the RFE (Barr and Braden, 1988). As the production of the forest industry stagnated in the 1980s, so did the exports of forest products. The largest share of the RFE’s export by value is logs, 75.4%, followed by sawn timber, 14%, pulp, 5.6%, and chip 2.6% in 1988 (Sheingauz, 1990). 81% of the logs are saw logs, 79% of which are softwood logs. The remain ing 19% of the exported logs are pulp logs. Fibreboard, plywood and paper share less than 1% of total exports. From the composition of the exports, the export structure is oriented to unprocessed or primary processed products (Table 5.41). 5 Table 5.41. Exports of Forest Products from the RFE  Year  Logs Saw Log  Total  Pulp Log  Sawn Timber  Chip  ) 3 (1,000m 1965 1970 1975 1980 1985 1988 1989  3,545.9 6,116.4 7,113.0 5,595.6 7,259.2 8,203.8 6,388.0  N.A. 4,094.1 5,016.2 3,755.6 5,427.3 6,811.0 5,132.0  N.A. 734.6 768.0 837.0 1,163.8 1,369.5 1,244.0  121.3 184.5 235.5 291.5 378.4 539.8 514.0  -  -  461.9 526.0  405.0  669.5 697.0  Source: Sheingauz (1990)  5 A recent report from JETRO (1993a) shows an inconsistency with the figures presented here and a dramatic decrease in the export figures. According to the report, the RFE exported 2,619.7 cubic metres of logs in 1989, 3,067.7 cubic metres in 1990, 1,961.8 cubic metres in 1991, and 1,882.6 cubic metres in 1992. The JETRO figures are again inconsistent with another Japanese source by Aral (1992). It seems to the author that a different way of tallying the figures or a different definition of export or individual item was adopted in each of the above sources. The following discussion is based upon the data available and disregards the inconsistency between the sources.  159 Table 5.42 shows that the largest share of log exports originates from Khabarovskiy Kray, followed by Amurskaya Oblast’, Primorskiy Kray, and Sakhalinskaya Oblast’ in 1991. Their respective shares were 5 2.3%, 25.3%, 13.8% and 4.7% (Arai, 1992). The exports of other products are largely dominated by one or two subregions. For example, 73.4% of the export of sawn timber originates from Khabarovskiy Kray and 58% of chip from Primorskiy Kray. Pulp exports are dominated by Khabarovskiy Kray and Sakhalinskaya Oblast’, and paperboard exports are also monopolized by Khabarovskiy Kray. Table 5.42. Forest Products Exports from the RFE in 1991 Logs  Subregion  Sawn Timber  1,000 m 3 (%) Yakutia 62.1 (2.4) Primorskiy Kray 354.5(13.8) Khabarovskiy Kray 1,338.5(52.3) 107.3(73.4) Amurskaya Oblast’ 646.6(25.3) 0.4 (0.3) Kamchatskaya Oblast’ 38.0 (1.5) 3.5 (2.4) Magadanskaya Oblast’ Sakhalinskaya Oblast’ 120.2 (4.7) 35.0(23.9) -  -  -  Total(RFE) Source: Aral (1992)  2,560.0(100)  -  146.2(100)  Chip  Pulp  Paperboard  1,000 ton (%) -  255.2(58.0) 83.6(19.0) 87.7(20.0) 13.8 (3.1) -  -  440.3(100)  -  6.1(67.8)  -  1.9(100) -  -  2.9(32.2) 9.0(100)  -  -  1.9(100)  Table 5.43 explains that traditionally Japan is the major importer of Russian forest products, accounting for over 80% of total log exports from the RFE in the 1970s and about 60% in the 1980s (Sheingauz, 1990). The log volume exported to Japan was 3.56 million cubic metres in 1991 and 3.66 million cubic metres in 1992 (JAWIC, 1993). Japan has also monopo lized all the chip produced in the RFE through the two industrial chip and pulpwood agreements.  160 Table 5.43. Exports of Forest Products to Japan Logs  Year  Sawn Timber  Industrial Chip  3 1,000m 1965 1970 1975 1980 1985 1988 1989 1990 1991 1992  2,198.7 4,879.5 5,813.5 4,597.2 4,354.2 4,899.5 5,242.0 4,841.0 4,303.0 4,268.0  n.a. n.a. 461.9 526.6 405.6 669.5 n.a. n.a. 486.8 303.1  35.8 47.9 96.6 117.2 81.8 116.8 262.0 264.0 250.0 222.0  Source: Sheingauz (1990), Linsan Gyoosei Kenkyukai (1992), Dal’lesprom (1993)  Forest products have been a flag-ship item in Japanese imports from the USSR. They accounted for 41.1% of total Japanese imports from that country in 1970. Their share decreased to 21.8% in 1988 and 20.7% in 1989 but continued to be the largest share among Japanese imports from the USSR (Ogawa and Murakami, 1991). Forest product imports from Russia were dominated by logs. Processed products including lumber comprised only 5% of total forest product imports. Of total imports for the 10 years between 1983 and 1992, softwood sawlogs accounted for 74.2%, followed by hardwood sawlogs 13.6%, pulpwood logs 7.2%, lumber 4.9%  and others 0.196 (Table 5.44). Table 5.44. Composition of the Imports by Product Category (1983 Sawlos 742  Softwood (%) Lumber Puinwood 7.2  4.9  Others 0.1  -  1992)  Hardwood Logs (%) 13.6  Total 100  Source: JAWIC (1993)  The major species imported to Japan are spruce, fir, larch, European pine and Korean pine. Spruce and fir account for 48% and 45% respectively of the imports of softwood sawlogs and pulpwood logs. Larch is the second  161 most important species in the sawlog imports, and represents 45.1% of pulpwood log imports. In the case of lumber imports, spruce and fir are dominant with 41.8% and European pine and larch take 25.4% and 18.1% respectively (Table 5.45). Table 5.45. Species Composition of the Softwood Logs and Lumber Imported from the USSR( 1983 1992) -  Species  Sawlogs  Pulpwood  Lumber  (%) spruce/fir 48.0 larch 33.0 E. red pine 14.1 Korean pine 4.9 Others  45.0 45.1 3.0 6.9  100  100  -  Total  -  41.8 18.1 25.4 0.7 14.0 100  Source: JAWIC (1993)  5.6.4. Export Control Mechanisms Several mechanisms have been introduced to control the exports of forest products since direct trade by individual enterprises was first allowed in 1987. They are related to export taxation, export quota and the license granting system, and disposal of foreign currency earnings. Many of them have served as barriers to the growth of exports. The recent develop ments related to these mechanisms are discussed below. First, a Presidential Decree in 1992 imposed tariff barriers on exported forest products. A few products such as chip and hardwood pulp logs are exempt from export tax.  The export taxation system set forth a tax  amount in ECU (European Currency Unit) for the export of a ton of individual forest products (Table 5.46). 30% of the tax amount is imposed as export tax and the rate was supposed to increase to 50% beginning in 1993 (Aral, 1992).  162 Table 5.46. Tax Amount for Forest Products Forest Products Logs (Softwood) Logs (Hardwood) Sawn Timber (Primary Product) Sawn Timber (End Product) Chipboard Fibreboard Plywood Wood Pulp Newsprint Kraft Paper and Paperboard  Tax Amount (ECU/ton)  12 10 20 50 5 25 50 50 74 53  Source: Aral (1992)  This export tax system, which is supposed to control exports, does little to inhibit them due to a very low ruble to dollar exchange rate. Secondly, a compulsory sale of foreign currency earnings has been imposed on all exporters by the same Presidential Decree because of a severe shortage of foreign reserves in Russia. The Russian Central Bank’s Order No. 7 on 29 June 1992 and Supplementary Order No. 17 on 15 September 1992 ruled that 50% of foreign currency earnings should be sold to the Russian Central Bank (Yoon, 1992). 30% of them could be sold directly to the Central Bank and 20% to the domestic foreign currency market. Only 50% of the earning remains at the disposal of the exporters. A growing need to secure more foreign reserves may force the Russian government to raise the rate from 50% to 100% (Arai, 1992). This makes it very difficult to increase exports from the RFE. This compulsory selling means a significant loss to exporters by selling and purchasing foreign currency at different exchange rates in the domestic market.  If the  handling fees charged by banks and the high inflation rate are considered, the loss to exporters becomes larger and the exporting enterprises will be inhibited from exporting.  163 Thirdly, another non-tariff barrier is the export quota and export license system. Export licenses are issued to regional production associations based upon the quotas granted to them by the central government. The quota is distributed among the enterprises under the production association. JV enterprises can freely export their own production without an export license or quota. This licensing and quota granting system, however, also becomes a barrier to streamlining the exporting process, since the export enterprises have no way to ensure, when entering into an export contract, whether a license will be granted and for the quantity stated in the contract. Forest products, classified as a strategic material, require an additional permit for export.  Only a small number of  specialized organizations can export the items designated as strategic materials. Currently, three organizations including Dal’les, and DaPintorg are designated for the export of forest products in the RFE (Arai, 1992). This strategic material code applies to even JV exporters. Lastly, the exchange rate usually affects the trade behaviour. The falling ruble to dollar exchange rate is observed as a measure taken deliberately by the Russian government in order to increase exports while inhibiting imports. The export promotion effect which could have been obtained under a normal situation, however, is largely offset by the high inflation and the instability prevailing in the transitional Russia. 5.6.5. Foreign Investment in Forestry According to ROTOBO (1993), out of a total of 445 iv’s registered in the RFE by the end of 1992, 30 were related to forestry investment. The forestry sector represents 7% of total foreign investment in the RFE. This is the  164 fourth largest sector where the foreign direct investment is involved after service, fishery and construction sectors. The investments have been distributed fairly evenly across the RFE except Magadanskaya Oblast’ and Kamchatskaya Oblast’, where only one investment is registered in each. Nearly 50% of the total forestry investment in the RFE is concentrated in both Primorskiy Kray and Khabarovskiy Kray. In terms of the share of forestry in all subregional investments, Yakutia and Amurskaya Oblast’ show the highest figures (Table 5. 47). Table 5.47. Subregional Distribution of FDI in Forestry (October, 1992)  Subregion Yakutia Primorskiy Kray Khabarovskiy Kray Amurskaya Oblast’ Kamchatskaya Oblast’ Magadanskaya Oblast’ Sakhalinskaya Oblast’  No. of P1’s in the REF All Sectors Forestry Sector(%) 24 5 (16.7) 168 8 (26.7) 102 6 (20.0) 29 5 (16.7) 1 34 (3.3) 1 24 (3.3) 4 (13.3) 64 445  Total(RFE)  30  Share of Forestry Sector(%) 21 5 6 17 3 4 6  (100)  7  Source: ROTOBO (1993)  Several countries are involved in forestry JV’s in the RFE. Among others,  Korea has invested in a logging operation in Svetlaya in Primorskiy Kray. Japan has formed 7 JV’s in the RFE and Siberia since 1987. three of them located  in  Except for  Irkutskaya Oblast’, all of them are in the RFE. All  of the Japanese forestry investments are related to sawmilling and are small in size. Japanese JV’s are discussed in more detail in Chapter VI. Following the JV Svetlaya, other logging JV’s have been unsuccessfully proposed in Khabarovskiy Kray. For example, the American Weyerhaeuser Company has been negotiating since 1990 to set up a JV with Koppinskiy  165 Lesokombinat (Timber Complex) along the Japan Sea coast of Khabarovskiy Kray near Vanino port (RFEU, 1991).  The negotiations have been  unsuccessful so far despite the company’s experimental planting of about 1 million seedlings grown in Tacoma for regeneration in Khabarovskiy Kray (Bill, 1993).  Several other foreign companies, many of them from  Scandinavian countries, have been involved in establishing logging JV’s in the RFE. To list a few proposals, Forest-Starma (Norway), Rowin-TOKO (UK), Archlog (Sweden), Tehdaspoo (Finland) are examples (Olsson, 1993). Like the  iv Svetlaya and Weyerhaeuser, most of these companies plan to  export production from the iv’s, especially to the nearby Japanese market. The JV operation in the RFE involves a lot of difficulties as discussed early in this chapter. Forestry JV’s, in particular, involving a substantial area of logging, face additional opposition from the local community. For example, the Weyerhaeuser and Forest-Starma projects in Khabarovskiy Kray (Karp, 1993a), came under attack by local groups for various reasons even at the project proposal stage. Opposition by local groups against logging forest resources by foreign iv’s seems to be one of the most difficult barriers for foreign investors to overcome.  The root of the opposition is related to Russia’s perception of  foreign investment from capitalist countries.  Russians traditionally  perceive foreign businessmen as coming to Russia to take profits and leave the country. This xenophobic view of foreign investment is more deeply rooted in natural resource industries like logging, since natural resources are one of the few productive resources under full control by Russia competing with foreigners (Sheingauz, 1993).  166 In addition to the negative views on foreign investment, the local forest industry, which has been in operation for many years in the RFE, offers potential competition to the JV’s. An industry with vested interests in controlling forest resources is reluctant to allow foreigners to make profits by exploiting the same resources. Exporting forest products to a third country is viewed as a job to be done not by a iv but by themselves (Ivanovich, B., 1993).  From the above, it is easy to understand why  Weyerhaeuser’s plan to export their production to Japan would be opposed by both local and regional communities. This xenophobic attitude towards foreign investment are largely related to the natural resource illusion, which is a belief that an ample stock of natural resources is what makes a country rich and its products competitive (Ohmae, 1990). Such an idea only supports economic nationalism and helps keep the country’s economy more isolated from the global economy. 5.6.6. Recent Developments in the Industrial Organizations Since the break-up of the former Soviet Union, the forest industry in the RFE has been restructured toward exercising more autonomous power on exports and investment decisions than ever.  The emergence of  Dal’exportles and DaPles is a good example. These new organizations have  replaced the monopolistic role that the Exportles of the former central government played for exporting forest products. Now the regional and local organizations participate in forming iv’s. Primorsklesprom at the territorial level and Tern eiles at the district level take part in the IV Svetlaya as Russian partners. Recent developments in these organizations are discussed in the following.  167 There were about 160 enterprises in the RFE which were under the direct control of the former Soviet Federal Ministry of Forest Industry. Included in the enterprises were lespromkhozes, sawmills, furniture factories, plywood mills, pulp & paper mills, machinery shops, construction enterprises, maintenance shops and so on. These enterprises constituted the main part of the forest industry in the RFE. In the middle of the administrative reform process, most of these enterprises joined in the newly created Dal’exportles and DaFles. These two organizations coordinate raw material supplies and products sales on behalf of the enterprises, which participate in actual production activities. Dal ‘exportles was formed as an association of 11 regional and district forest products exporters in the RFE and Siberia, including Dal’lesprom and Urgalies in Khabarovskiy Kray and Primorsklesprom and Terneiles in Primorskiy Kray. Dal’exportles is involved in importing and exporting goods and services, international market research, and coordinating the participating enterprises to produce a uniform action plan. DaPexportles deals with about 20 items of forest products such as logs, lumber, panels, plywood, pulp, paper and other intermediate wood products. 6 and has a greater DaPles has been established as a joint-stock company  variety of participating companies than does Dal’exportles. The participat ing enterprises under this organization include not only forest enterprises 6 A joint stock company is a company formed to buy out the large scale state-owned enterprises in the privatization process. The terms of the buy-out are negotiated between the enterprise’s privatization committee and the Committee for the Management of State Property. The price is negotiated, as well as the percent ownership split between the labor collective, its management, the government’s property fund, and the general public. In certain sectors of industry, the government will retain the majority share of the enterprise. In some cases, the property fund will hold all the shares of a “newly privatized enterprise,” then offer these shares to management and labour, then to the general public by auction. Privatization vouchers can be used to buy shares of enterprises (Karp, 1992).  168 such as lespromkhoz but also shipbuilding enterprises, river-shipping enterprises, and even Exportles, the exporting arm under the former Soviet Federal Ministry of Forest Industry. This organization undertakes a whole variety of businesses: exporting forest products; importing machinery, equipment, farm machinery, and consumer goods; investment in iv’s; technology transfer; construction contracts; and even tourism.  Dal1es accounted for 62% of total log exports from the RFE in 1991, 55% of sawn timber and 44% of chip exports (Arai, 1992). The current privatization process is bringing more changes in the organi zation of the industry.  The main feature of the privatization is the  transformation of the former national enterprise into joint-stock company. Dal’lesprom and Primorsklesprom are now joint-stock companies and the enterprises under the associations have turned into shareholders. Many of the enterprises previously under the association have withdrawn from it and become independent joint-stock companies, too.  For example,  Terneiles withdrew from Primorsklesprom and formed a separate joint-  stock company with the same name. Terneiles participates in Dai’èxpordes and invested in DaPles to be a share holder of the company. Many enterprises formerly connected loosely to the associations, for example, furniture mills and vehicle maintenance shops under Primorsklesprom, have separated from the association and formed their  own joint-stock companies.  Some open joint-stock companies have  accepted investment by other companies which had no relations with the company.  For example, Dal ‘lesprom keeps most of the participating  enterprises as share holders of the joint-stock company but accepted non participating enterprises as shareholders too. For example, Dal’exportles and Dal’les invested in it. Sister companies or subsidiary companies are  169 also formed by the investment of existing companies. As another example, both DaPlesprom and Dal’exportles established the joint-stock company Lesnoi-auction, which sells hardwood deciduous species 7 by auction. Primorsklesprom has 4 sister companies. According to the USSR-North  Korea Forestry Agreement, the nine lespromkhozes in Urgalles are exempted from privatization. Numerous joint-stock companies have been created in the process of privatization. One thing to note in the process is the response to privatiza tion. Two kinds of response seem to appear: one tends to be strongly independent, while the other does not. The first is initiated either by the separation from the previous connection or by groups of employees of the enterprise. It is also motivated by the benefits from privatization such as autonomous use of profits including foreign currency earnings. The second kind of response reflects a preference to stay within an umbrella organization such as DaPexportles and Dal1es. Such a reaction is largely motivated by a fear of losing connections with the umbrella organizations, which still own the experience, personnel, administrative power, and know-how of the business with western countries (Arai, 1992). 5.7. SUMMARY AND DISCUSSION The resources in the RFE offer a great opportunity for foreign investors in forestry. Although there are modest views on the potential of the forest resources in the RFE, the RFE is undoubtedly has a great potential for forestry from the point of view of foreign investors, especially those from resource poor countries. To them it is a matter of realization of the potential through investment. So far the RFE is the most isolated region in 7 Included in this species are ash, oak, and stone birch.  170 Russia but is opening up to the outside in an effort to become integrated into the Asia-Pacific economy and has increased external economic activities with neighbouring countries. Foreign investment was allowed to promote regional development through capital and technology brought in  with the investment.  For this, the government has legislated some  preferential measures to attract foreign investment.  The preferential  benefits, however, are not attractive compared to those offered by other countries, and even the existing ones have been offset by the worsening domestic economic conditions. Overall, the environment has not been fully prepared for foreign investors to actively engage in productive activities in the RFE. The political and institutional instability adds to the unattractive investment environment. Forestry investments have continued in this environment with a common motivation to export the production. This export motivation has invited opposition from various local groups and competition from the indigenous forest industry, which has been long established in the region. This opposition and the competition from the local community is considered to be one of the hardest barriers for forestry investors to overcome.  171 CHAPTER VI JAPAN: THE FIRST COMER, MAJOR EXPORT MARKET AND COMPETITOR 6.1. RUSSIAN LOGS IN THE JAPANESE MARKET The wood supply structure in Japan is somewhat similar to the one in Korea. There is a heavy reliance on imports, the same import sources, a similar distribution of import shares among the major supply sources, and a similar trend of changes in their shares. Japan, however, has a much larger domestic forest resource base than Korea, and the consumption rate is much greater than that of Korea, mainly because of the different wood use patterns in the two countries. About half of Japanese houses are built by wood whereas almost all houses are constructed of concrete and bricks in Korea. 3 in 1991. The average The wood supply in Japan was about 114 million m annual wood supply in Japan first reached 100 million cubic metres in 1970 and was maintained at over 100 million cubic metres throughout the 1970s, except for 1975. The demand for wood dropped to 90 million cubic metres from 1981 to 1987 mainly because of the log export ban by Indonesia in 1980. But the supply returned to the 1970s level after 1987 mainly because of the appreciation of the yen. Imports have been the main source of timber supply in Japan since 1968. The share of imports rose from 46.7% in 1968 to 75% in 1991. This increasing import share resulted mainly from diminishing domestic production which was due to a shortage of forest workers, poor ownership structure of forest land and low level of mechanization in forest operations (Forestry Agency, 1993).  172 The share of domestic wood supply has dropped gradually over time (Table 6.1). This is quite a contrast to the government efforts to increase the self-sufficiency rate. The Japanese government planned to increase the rate from 37% in 1984 to between 40% and 43% by 1994, and to between 43% to 48% by 2004 (Ministry of Agriculture, Forestry and Fishery, 1987). The wood supply pattern in Japan, however, is likely to continue in favor of imports for a while, unless the wood price in international markets rises to a level comparable to the high domestic production cost (Araya, 1993). Table 6.1. Wood Demand and Supply in Japan  Year  Demand  Supply Imports Domestic  (%)  3 million m 1968 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991  91.8 102.7 96.4 109.0 92.9 94.5 103.1 106.3 113.9 111.2 112.2  49.0 46.2 34.6 34.6 33.1 31.6 31.0 31.0 30.6 29.4 28.0  Self Sufficiency Rate  42.8 56.4 61.8 74.4 59.8 62.9 72.2 75.3 83.3 81.8 84.2  53.3 45.0 35.9 31.7 35.6 33.5 30.0 29.2 26.9 26.4 25.0  Source: (Linsan Gyoosei Kenkyukai, 1992)  A large part of the wood demand in Japan is derived from lumber and plywood production for housing construction. Every year for the last 10 years there were about one million new housing starts, and about half of them used the traditional Japanese style of wooden housing (Ministry of Construction, 1992). This situation has made Japan the world’s largest wood importing nation. Japan’s share in world imports was 26% in logs and lumber and 43% in logs in 1988 (Linsan Gyoosei Kenkyukai, 1989).  173 Japan has had a well established forest product industry in itself and developed its own dimensional system for cutting timber.  For such  reasons, Japan always preferred to import logs to be processed into lumber  in order to cut them to their own traditional sizes for housing construction. Japan has imported from all available sources from both sides of the Pacific. The importing sources can be divided into 5 groups: Southeast Asia, North America, USSR, New Zealand, and Chile. For the last 10 years, about 80% of the total imports of logs and lumber have come from two major sources: Southeast Asia and North America. Logs from Southeast Asia have gradually decreased in this period while North American log imports have increased, but they showed a downward trend in recent years. In the case of lumber, North America has been the major supplier. North America’s share in total lumber imports was maintained at over 70% for the last 10 years while the absolute volume of imports has increased. An increasing share of logs from New Zealand has been observed in recent years. Chile also has exported more lumber than logs and has become the second largest softwood lumber supply source. Russia is the second most important softwood log import source for Japan. It accounted for about 20% of the total log imports, or 34% of softwood logs imported to Japan in the last 10 years. Both Russian logs and lumber have been supplied to Japan in a very stable manner compared to the other sources. Russian logs show the least fluctuation in supply among the import sources. Its share in total logs and lumber imports has been almost fixed at 19% and 3% respectively.  Russian logs play the greatest role in  terms of their contribution to stabilizing the softwood log supply (Table 6.2). Although the import of Russian logs showed a downward trend in  174 recent years, the imports for the first 5 months in 1993 showed a 30% increase compared to the same period in 1992 (Nikkan Mokuzai Shinbun, 1993). Table 6.2. Logs and Lumber Imports by Japan Year  SoutheastAsia  North America  USSR  New Zealand  Chile  Total  , (%) 3 1,000m (Logs) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992  13,879(47.7) 12,943(47.1) 13,001 (46.1) 12,131(42.2) 13,688(42.9) 11,655(41.1) 12,560(41.3) 11,102(39.8) 10,115(39.9) 9,969(39.8)  8,244(28.4) 8,149(29.6) 8,993(31.9) 9,632(33.5) 11,466(35.9) 10,246(36.1) 11,827(38.8) 10,548(37.8) 9,319(36.8) 8,977(35.9)  6,410(22.0) 5,750(20.9) 5,550(19.7) 6,432(22.4) 6,114(19.1) 5,820(20.5) 5,242(17.2) 4,841(17.4) 4,303(17.0) 4,268(17.0)  318(1.1) 290(1.1) 288(1.0) 264(0.9) 411(1.3) 555(2.0) 725(2.4) 1,341(4.8) 1,604(6.3) 1,812(7.2)  220(0.8) 353(1.3) 379(0.9) 270(0.8) 251(0.4) 110(0.3) 90(0.3) 70(0.3) 8(0.03) 10(0.04)  29,071(100) 27,485(100) 28,211(100) 28,729(100) 31,930(100) 28,386(100). 30,444(100) 27,902(100) 25,350(100) 25,036(100)  (Lumber) 1983 613(15.3) 596(16.1) 1984 922(20.9) 1985 849(18.5) 1986 1987 1,274(20.4) 1,522(21.3) 1988 1989 1,736(20.9) 1,274(16.2) 1990 1,203(14.8) 1991 1,197(14.9) 1992  2,966(74.3) 2,750(74.1) 3,116(70.5) 3,331(72.4) 4,441(71.2) 4,949(69.4) 5,874(70.9) 5,722(72.7) 6,025(74.2) 6,142(76.3)  124(3.1) 142(3.8) 154(3.5) 151(3.3) 177(2.8) 228(3.2) 262(3.2) 264(3.4) 250(3.1) 222(2.8)  264(6.6) 159(4.3) 125(2.8) 118(2.6) 135(2.2) 112(1.6) 113(1.4) 205(2.6) 241(3.0) 234(2.9)  26(0.7) 62(1.7) 101(2.3) 151(3.3) 207(3.3) 318(4.5) 304(3.7) 409(5.2) 401(4.9) 258(3.2)  3,994(100) 3,709(100) 4,417(100) 4,600(100) 6,233(100) 7,129(100) 8,289(100) 7,875(100) 8,120(100) 8,052(100)  Source: Linsan Gyoosei Kenkyukai (1992).  Although their share is small, the role of Russian logs in the Japanese soft wood market is likely to grow, because a substantial decrease in log imports from the United States is expected due to environmental problems. When log imports begin under the 4th KS agreement (see below) the role of Russian logs will be even greater in the softwood log market in Japan. F,  /  /  I  175 6.2. FOREST PRODUCTS TRADE WITH THE USSR  Japan is the only capitalist country in the Asian-Pacific region which was a major trading partner to the former Soviet Union. Japan’s experience is particularly important to Korea, which has been following along a similar economic development path as Japan. Early Japanese trade with the RFE dates back to the 18th century (Mochizuki, Chichkanov and Minaldr, 1988). The trade largely remained modest and on a private level, however, until the post-war restoration of diplomatic relations in 1956. The groundwork for large scale and longterm cooperative projects between the two countries was laid when the Japanese-Soviet Economic Committee was established in 1965. After this, Japan increased its trade with the former USSR and became the most important trading partner to the country in the Asian-Pacific region. One of the strong motivations for Japanese industries to become interested in the RFE at that time was to secure energy and raw materials supplies that were required for the rapidly growing post-war Japanese economy. The structure of the trade was naturally characterized by Japanese imports of raw materials from the RFE and exports of machinery and equipment needed for resource development in the RFE and Siberia. Table 6.3 shows general commodity trade with USSR since 1960. Forest products have been a flag-ship item in Japanese imports from the USSR. They accounted for 4 1.1% of total Japanese imports from that country in 1970.  176 Table 6.3. Japan’s General Commodity Trade with USSR Total  Year (USSR) 1960 1965 1970 1975 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (RFE) 1992  Exports  Imports  Balance  (US$1,000) 147,001 408,556 821,970 2,795,818 4,638,099 5,280,121 5,580,858 4,277,250 3,912,301 4,179,838 5,121,580 4,915,138 5,895,660 6,086,203 5,917,859 5,430,542  59,976 168,358 340,932 1,626,200 2,778,233 3,259,415 3,898,841 2,821,249 2,518,314 2,750,583 3,149,547 2,563,284 3,129,901 3,081,067 2,563,677 2,113,711  87,025 240,198 481,038 1,169,618 1,859,866 2,020,706 1,682,017 1,456,001 1,393,987 1,429,255 1,972,033 2,351,854 2,765,759 3,004,527 3,354,182 3,316,831  -27,049 -71,840 -140,106 456,582 918,367 1,238,709 2,216,824 1,365,248 1,124,327 1,321,328 1,177,514 211,430 364,142 76,540 -790,505 -1,203,120  885,800 (16.3%)  227,600 (10.7%)  658,200 (19.8%)  -430,600 (35.8%)  Note: The figures in the 0 are the share of national total. Source: Compiled from Ministry of Finance (1992) and JETRO(1 993a)  Their share decreased to 21.8% in 1988 and 20.7% in 1989 but conUnued to be the largest share among Japanese imports from the USSR (Ogawa and Murakaint, 1991). Forest product imports from Russia were dominated by logs.  Processed products comprised only 5% of total forest product  imports.  Of total imports for the 10 years between 1983 and 1992,  softwood sawlogs accounted for 74.2%, followed by hardwood sawlogs 13.6%, pulpwood logs 7.2%, lumber 4.9% and others 0.1% (Table 6.4). Table 6.4. Composition of the Imports by Product Category (1983 Sawlogs 74.2  Softwood (96) Lumber Pulpwood 7.2  Source: JAWIC (1993)  4.9  Others 0.1  -  1992)  Hardwood Logs (%) 13.6  Total 100  177  The major species imported to Japan are spruce, fir, larch, European pine  and Korean pine. Spruce and fir account for 48% and 45% respectively of the imports of softwood sawlogs and pulpwood logs. Larch is the second most important species in the sawlog imports, and represents 45.1% of pulpwood log imports. In the case of lumber imports, spruce and fir are dominant with 41.8% and European pine and larch take 25.4% and 18.1% respectively (Table 6.5). Table 6.5. Species Composition of the Softwood Logs and Lumber Imported from the USSR( 1983 1992) -  Species  Sawlogs  Pulpwood  Lumber  (%) spruce/fir larch E. red pine Korean pine Others Total  48.0 33.0 14.1 4.9  45.0 45.1 3.0 6.9  -  100  100  41.8 18.1 25.4 0.7 14.0 100  Source: JAWIC (1993)  As mentioned in Chapter V, the forest product trade was monopolized by Exportles during the Soviet period. Three different forms of trade were conducted with Japan under Exportles. The first is normal trade based upon Trade and Payment Contracts as in other commodity trading. The second is a compensatory arrangement known as the KS agreement. The third is border trade carried out by Dal’intorg (literally Far Eastern Trading) in Nakhodka. The shares of these three forms of trade have varied over the years, but in 1980 they were 57%, 29% and 9% of total timber imports to Japan (Nomura, 1988). Since the KS agreements have been one of the most typical forms of trade in forest products between  178 Japan and the USSR and constitute a centerpiece of Japanese experience of forest product trade with the USSR, they merit an extended discussion. 1 Agreements 6.2.1. KS KS agreements are compensatory trade arrangements, an advanced form of barter trade in which the investor provides machinery and equipment for a project and shares the project output with the resource owner. This form of trade arrangement is most commonly found in the natural resource industry, where a large amount of capital investment is required to develop natural resources but the resource owner is not in a position to afford the capital required.  Besides the KS agreements, two other  compensatory agreements were signed to import industrial chip and hardwood pulpwood from the Soviet Union in 1971 and 1985. There have been four KS agreements, the first in 1968 and the most recent in 1991. Despite the successful completion of the first KS agreement, many problems arose during successive agreements. Forest products imports from the USSR stagnated in the 1980s. Imports fell below the contracted amounts. Since forest products were the major component of trade, the overall trade with the USSR similarly stagnated. Disillusionment with the USSR also began to spread among Japanese industrial circles. The rest of this chapter will be spent on discussing the changes in Japanese trade relations with Russia over the last two decades with an emphasis on forest products trade with the RFE. The discussion first explores the major  1 The KS agreements were named after the initials of the two principal negotiators, Kawal from Japan and Sedov from the USSR  179 terms and conditions of the four KS agreements and then examines the problems revealed during successive KS agreements. Finally, incentives and constraints which have promoted and hindered Japanese-Soviet trade relations are discussed. This latter part of the discussion includes not only factors affecting the forest products trade, but also those affecting trade relations between the two countries in general. 6.2.2. First KS Agreement The first KS agreement was signed on 29 July 1968 between Exportles of the USSR and KS Industry Limited Company, which was specially formed to represent 12 Japanese trading companies involved in the barter trade. The 12 companies are Mitsui, Mitsubishi, Marubeni, Itochu, Tomen, Nichimen, Nissho Iwai, Sumitomo, Komatsu, Kenmatsu Koosho, and Chyoori (Anon., 1992). According to the agreement, Japan was to provide the USSR with a US$133 miffion bank credit with 20% advance payment and a 5.8% interest rate, for the 5-year period from 1968 to 1973. An additional US$30 million of bank credit would be provided for the purchase of consumer goods one year later. Japan would export US$133 million worth of plants and machinery for exploiting forest resources along the Amur River, and in  return it would import 7.6 million cubic metres of logs and 420,000 cubic metres of lumber from the USSR. Actually, more than 95% of the contracted plants and machinery were exported to the USSR. Nearly all the logs contracted were imported during  180 the contract period, but only 60,000 cubic metres out of the intended 420,000 cubic metres of lumber were imported during the period. All the imported logs were exclusively distributed among the companies participating in the KS Industry Company Limited. Exports of plants and machinery, however, were open to other companies with the consent of the KS Industry Company Limited. 6.2.3. Second KS Agreement As the success of the first KS agreement was confirmed, the general agreement for the second KS agreement solidified. Although differing views on credit arrangements and the procedures for setting log prices caused some delays in the finalization of the agreement, it was signed on 30 July 1974, within a relatively short period of time after the first agreement ended. According to the agreement, between 1974 and 1978 Japan was to provide the Soviet Union with a 162.6 billion Japanese yen (US$500 million dollars) bank loan for purchasing plants, machinery and log transporting vessels necessary for forest development.  Of this, 14.8 billion Japanese yen  (US$50 million) was for purchasing consumer goods. In return, the Soviet Union was to supply Japan with 17.5 million cubic metres of logs and 0.9 million cubic metres of lumber for the period between 1975 and 1979. Although the second KS agreement was in most respects the same as the first, one noticeable difference was in the loan arrangements. For the first KS agreement, suppliers provided the loans in cooperation with Japanese  banks, including the Export-Import Bank.  181 This system is known as a  supplier’s loan. For the second agreement, bank loans were arranged. During the second KS agreement period, plant and machinery exports to the Soviet Union went up, but Japanese imports of Soviet logs declined, compared to the first period. Only 83% of the contracted logs were delivered (Ogawa and Murakami, 1991). The demand for Soviet logs in the Japanese market had not grown, and the Soviet capability to supply logs to Japan also reached its limits during this period. As a result, the second KS agreement led to an increase in Japanese machinery exports to the Soviet Union, but did not help to increase timber imports. 6.2.4. Third KS Agreement The economic sanctions in the wake of the Soviet invasion of Afghanistan caused delays in opening negotiations for the third KS agreement. It was almost two years after the second agreement term ended in 1981 that the third KS agreement was signed. Under the third KS agreement, Japan was to provide the Soviet Union with 200 billion Japanese yen, or US$550 million, worth of bank loans for the purchase of plants and machinery required for forest developments in the Soviet Far East and along the BAM railway for the period from 1981 to 1985. In return the Soviet Union would provide Japan with 12 million cubic metres of logs and 124,000 cubic metres of lumber between 1981 and 1988.  182 In this period log imports from the Soviet Union decreased and stagnated. Only 74% of the contracted logs, 8.92 million out of 12 million cubic metres, were actually imported and only 16% of the contracted lumber was shipped to Japan during the period. 6.2.5. Fourth KS Agreement The fourth KS agreement was finally signed on 11 October 1991 after many unsuccessful negotiations.  Under the agreement Russia will be  provided with US$700 million worth of machinery in return for 6 million cubic metres of logs for the five year period from 1992 to 1996. The logs will be exported at the rate of 1.2 million cubic metres a year, and 5% is to be pulpwood. In addition, 0.4 million cubic metres of lumber, 50,000 cubic metres of furniture parts and 10 million square metres of veneer will be exported to Japan during the same period. One noticeable difference in the 4th KS agreement from the previous three agreements is the export of a high proportion of non-forestry machinery by Japan. Among the Japanese machinery exports, logging machinery accounts for only 50%, wood processing plants including furniture manufacturing machinery for 30%, and medical and office equipment for 20% (Kakizawa, 1992a). The main contractor of Russia has changed from Exportles to Dal’exportles. Despite the signing of the general agreement in  1991, details of the agreement have not yet been settled at the time of writing this dissertation. No imports to Japan have been carried out by the agreement for more than two years since it was signed. A summary of the four KS agreements is presented in Table 6.6.  183 Table 6.6. Summary of the 4 KS Agreements Major Terms, Conditions When signed Contract Period  First  1968.7 1969-1973 (5 yrs.) Loan Amount (US$ 1 million) 163 Machinery & Plants contracted 155 (US$ 1 million) Machinery & Plants Exported 149 (US$ 1 million) Logs Contracted (mu m ) 3 7.60 Logs imported (mu m ) 3 7.57 % of the contracted (%) 99.6 Lumber Contracted (000 m ) 3 420 Supply period (1971-73) Lumber imported (000 m ) 3 60 % of the contracted (%) 14  Second  Third  Fourth  1974.7 1975-1979 (5 yrs.) 500 507  1981.3 1981-1986 (6 yrs.) 1,000 1,100  1991.10 1992-1996 (5 yrs.) 700  507  1,100  17.5 14.58 83 90 (1975-79) 0 0  12 8.92 74 1,240 (1982-86) 200 16  -  -  6 -  -  400 -  -  -  Source: Compiled from Kakizawa (1 992a), Ogawa and Murakami (1991), and Stolyarov and Pevzner(1986)  6.2.6. Industrial Chip and Hardwood Pulpwood Projects Besides the KS agreements, two other compensatory agreements were signed for Japan to import industrial chip and hardwood pulpwood logs in 1971 and 1985 respectively. According to the first agreement, Japan was to provide the Soviet Union with US$45 million worth of loans, at 6% interest with a 12% advance payment. This would finance the purchase of machinery and equipment to the same value, needed for processing chip  and logging pulpwood. In return the Soviet Union would provide 3.65 million cubic metres of chip and 2.7 million cubic metres of pulpwood logs from 1972 to 1977, and 4.4 million cubic metres of chip and 2 million cubic metres of pulpwood from 1978 to 1981. The second industhal chip and pulpwood agreement was signed in 1985. The main points of the agreement were that the Soviet Union would supply  184 8.2 million cubic metres of industrial chip and three million cubic metres of pulpwood to Japan during the 10 years from 1986 to 1995. The  industrial chip were to be delivered at the rate of 0.6 million cubic metres in 1986, an additional 50,000 cubic metres a year for the following 5 years, and one million cubic metres a year from 1994 to 1995. Plants and machinery necessary for the chip and pulpwood production would be supplied to the Soviet Union on a cash basis during the five years from 1986 to 1990. The plants and machinery included harvesters, bulldozertractors, logging trucks, chip carriers, chain saws, chip production facilities and buildings, manipulators, and barkers. The major terms of the industrial chip and pulpwood agreements are shown in Table 6.7. Table 6.7. Summary of the Industrial Chip and Pulpwood Agreements Major Terms and Conditions  First  Signed on Dec. 18, 1971 Suppliers’ Credit (US$1 mu.) 45 Credit Conditions: Advance Payment 12% Interest Rate 6% Delayed payment 6 years Japanese Exports: Chip Production plants, equipment, materials facilities and chip carrier(1972-1974) Consumer goods (US$ 1 million) 5 Japanese Imports: Hardwood Pulpwood (1 million m ) 3 4.7 Industrial Chip (1 million m ) 3 8 Supply Period 1972-1981  Second Dec. 5, 1985  plants, equipment and materials (1986-1995)  3 82 1986-1995  Source: Ogawa and Murakami (1991)  Japan experienced a lot of problems in dealing with the Soviet Union through the series of compensatory agreements. The problems largely involved the prices and quality of logs imported. The Soviet Union first entered into export contract arrangement at a very low price to attract capital investments and then attempted to renegotiate the price to reflect  185 the international market price with marginal differences even during the currency of the contract period (Mathieson, 1979).  Barr and Braden  (1988) mention that the rising price of Soviet logs and fluctuating demand for wood products in Japan also contributed to the difficulties in creating stable contract arrangements between the two countries. The quality of logs was related to the species of imported Russian logs and the Soviet grading systems. Japan received too many logs of the lesspreferred larch species in their shipments due to an inferior log grading system which resulted in undesirable logs being shipped to Japan unde tected and then regraded after arrival in Japan (Barr and Braden, 1988; Fenton and Maplesden, 1986). In addition, because of the widely differing views on contract terms and conditions experienced every time the sides renegotiated, the KS agreements failed to satisfy one of the main motiva tions of such contractual arrangement, a long-term security of log supply.  Japan became largely disillusioned with log trade with Russia. Since logs were the centrepiece of the trade between Japan and the USSR, it is necessary to discuss the factors involved in the general trade relations, which will further explain the Japanese experience with the Soviet Far East. 6.3. INCENTiVES AND CONSTRAINTS INVOLVED IN TRADE WITH USSR It was in the late 1960s that Japan increased its trade with the former USSR and became the most important trading partner to the Soviet Union in the Asian-Pacific region. Initial trade was with forest products and they have been the most important trade items ever since. There have been ups and downs in the economic relations, however, and a variety of factors  186 have been involved in shaping the relations. The rest of this chapter discusses the incentives that triggered the opening of the large-scale forest development projects in the late 1960s and the reasons behind the stagnation of trade in the 1980s. Since it is impossible to separate entirely the forest products trade from the overall trade relations between the two countries, the following discussion is not restricted to forest products but concerns itself with all commodity trade. Since trade is a two-way relationship, one side’s incentives can be the other’s constraints or vice versa.  Moreover, incentives at one time may  become constraints at another time according to the changes in the economic and political environments. The incentives and constraints pointed out here are those lasting over a period long enough to characterize the relations between the two counthes. 6.3.1. Incentives Several incentives were involved in shaping the trade relations with the USSR: geographic proximity, complementarity through different resource endowments, rising domestic demand for raw materials and energy as a result of rapid economic development, security of raw material supply, market expansion in the Soviet Far East, easing the regional disparity problems, and political motivation. The following discusses each of these, in turn. Japan is the country located closest to the RFE, except for Korea and part of China. This geographic proximity has encouraged exchanges between the two counthes from early days and seems to have been one of the strongest incentives to opening full scale trade relationships with the Soviet Far East  187 in the late 1960s. Geographic proximity meant an access to the natural resources prevalent in the Soviet Far East. There was a widely held perception that complementary economic relations could be established between the resource industries in the Soviet Far East and the manufacturing industries in Japan. This perception has largely promoted the trade between the two countries and takes advantage of the complementarity (Dienes, 1987). In the 1960s, when the export-oriented Japanese economy was growing at a rapid rate, the main industries supporting such growth were manufacturing industries which imported foreign resources and exported them after processing. As the economy grew, the reliance on foreign timber also rapidly increased from 12.1% of total timber consumption in 1960 to 48.8% in 1970 and 56.3% in 1980, and then slightly declined to 53.9% in 1988 (JETRO, 1991). Japan had to secure its raw material supply sources as well as export markets. From this point of view, the Soviet Far East emerged as a potential new resource supply source to Japan in the 1960s, when Japan’s trade development with China was progressing slowly and possible threats to supply existed in the old resource supply sources. As the domestic demand for raw materials rose, the security of their supply became an important issue. Being poorly endowed with natural resources, Japan has an extremely fragile energy and raw material supply structure. Its reliance on foreign energy sources is particularly heavy. As its economy grew, the share of foreign supply went up from 44% in 1960 to 90% in 1973, before the first oil crisis (JETRO, 1987). Although an intensive energy conservation program and the development of energy saving technology helped cut down the foreign energy supply ratio, it still  188 remained high at 83.5% in 1984 and 83.1% in 1989 (JETRO, 1991). Japan is almost entirely dependent on foreign sources for petroleum oil, with a 99.8% dependency ratio in 1989 (JETRO, 1991). Wood is no exception from such heavy reliance on foreign supply. The share of imported timber has increased from 13.3% of the total wood supply in 1960, to 5 5.0% in 1970, 68.3% in 1980, and 70.9% in 1989 (Linsan Gyoosei Kenkyukai, 1989). All of this justified the strong incentives to secure the supply of raw materials. The Soviet Far East was also seen as a potential market for consumer and industrial goods by Japan when that country began to increase its trade volume in the early 1970s. The expansion of Japanese sales in the Soviet Far East was required to improve the trade balance with the Soviet Union. See the early years of the trade in Table 6.3. Another incentive for expanding trade with the USSR stemmed from the regional development perspective. Regional development in Japan has historically focused on the eastern coast of Honshu (the main island), whereas the development of the west coast has been retarded. Partly responsible for the disparity in regional development is the fact that a powerful government has been centered in Tokyo since the early Meiji era in the late 19th century (Toma, 1991). This bias in regional development policy reached its peak when export-oriented industrial complexes began to be built along the Pacific coastal belt from the early 1960s onwards (Toma, 1991). As a result of that policy, rapid industrialization and urban ization took place mainly in large cities in the eastern coastal region. In the late 1960s many social problems resulting from such a rapid industrialization and regional disparity brought public anxiety and appre hension about the country’s future (Tanaka, 1972). Promoting trade with the Soviet Far East was suggested as one possible solution to these  189 problems. This has further evolved to what is now the idea of the Japan Sea Rim Economic Bloc. Politics also played its role in determining the scope and depth of the relations between Japan and the Soviet Union. Japan outwardly tried to keep politics separated from economic matters when dealing with the USSR. In reality, the opposite was the case.  Japanese interests in the  Soviet Far Fast were very much influenced by political motivations. Japan expected that improved trade relations could help to get the disputed Northern Islands off Hokkaido back into Japanese hands. In return for the improved economic relationship, more favorable fishing rights in Soviet territorial waters were also expected by the world’s largest fish-eating country. 6.3.2. Constraints Japanese trade with the USSR was hindered by the government’s strong diplomatic position on territorial issues with the USSR, the country’s efforts to diversify resource supply sources, species and quality problems in log trade and finally the changed economic situation in Japan. The Japanese government outwardly attempted not to intervene in Japanese companies’ commercial interests in the Soviet Union. In fact, however, it linked Japan-Soviet economic cooperation with the Northern Islands problems. Japan always put territorial issues first in its dealing with the Soviet Union, regardless of whether the items for negotiation were economic or diplomatic (Oda, 1985). The development of active trade relations was hampered by the government’s attitude. Since the Japanese economy was known to be run by a strong interventionist government,  190 Japanese business circles took a less positive posture toward trade with the Soviet Union. Even the industries relying on foreign raw materials tended to lack enthusiasm. Moreover, there existed no unified voice to support the business relations with the Soviet Far East. This diplomatic position became one of the main reasons for Japanese companies to take a less positive posture vis-a-vis the Soviet Union during the contract arrangements Competition with other foreign resource regions and the government’s diversification efforts also contributed to inhibit the trade with the Soviet Far East. These other raw material suppliers included countries in North America, Southeast Asia and Australia. Although located at a greater distance, these were the sources readily and easily accessible to Japan. They were also more flexible to the changes in raw material demands in Japan than the Soviet Union. Furthermore, the East-West Cold War was still very much in place and tended to make them more attractive sources than the Soviet Far East. The species and quality of logs as mentioned earlier are also partly attributed to inhibiting the trade. Another important constraint that deserves to be mentioned is the new economic environment in Japan, which has been shaped over the years. Under the new economic environment in Japan, the industries have been restructured to consume less raw material than they did before. Japan has achieved one of the world’s fastest growing economic develop ments in a condensed period of time, especially in the post-war period. The high growth economy in the 1960s and 1970s, however, experienced an inevitable transition to a slower, steadier development after two energy crises and the steady appreciation of the yen.  191 In addition to the broad structural change from primary to secondary and tertiary industries (Table 6.8), a structural change in a narrow sense also took place among manufacturing industries. Table 6.8. Changes in Industrial Structure in Japan 1970  Industries  1980  2000(forecast)  (Share of GNP:%) Agriculture, forestry & fishery Manufacturing Service  6.1 39.7 54.3  3.7 42.3 54.0  2.1 46.1 51.8  Source: Anon. (1988)  The industries with heavy use of raw materials began to be replaced by those with less raw material use. As a result, a structural realignment of industry began by focusing industrial efforts more on light, thin, short and small products instead of traditional heavy, thick, long, and large products (JETRO, 1991). Japanese efforts to reduce reliance on raw materials is well reflected in the changes in the share of wood products in the imports from the USSR (Table 6.9). Table 6.9. Share of Wood Products in the Imports from the USSR Products  1975  1982  1984  1988  1990  (96 of total imports) Logs Sawn Timber Total Source: Anon. (1988)  27.6 25.1 52.7  25.0 20.9 45.9  24.1 20.1 44.2  -  -  -  -  21.8  20.7  192 At the same time as the industrial restructuring, a change in the comple mentary relationship with the USSR also took place. While Japan’s depen dency on the RFE as a wood products supply source has gradually decreased, the share of machinery and equipment in the USSR’s import from Japan has largely remained unchanged (Smith, 1987). This explains a weakening complementary relationship between the two economies. The KS agreement, one of the representative trade relations at the time, was motivated by more incentives than constraints. 6.4. JAPANESE FORESTRY INVESTMENT IN THE RFE After the Soviet central planning system collapsed, the value of compen satory agreements seemed largely to be eroded in Japan.  Under the  central planning system, foreign trade was strictly monopolized and few alternatives were available to the importers of Soviet products. Now foreign trade is open to anybody who wishes to take part in Russia. Although the forest products exports are being conducted by a small number of organizations in the RFE, importers now can choose their own partner among them for their best interest. Moreover, a more active form of economic relationship with Russian partners has become possible through direct investment in the RFE. For these reasons, the type of compensatory agreement represented by the KS agreements has become an old style of trade now and less favored by the large trading companies which formerly were involved in the KS agreements. In fact, Mitsui & Co., Ltd. and Sumitomo Corporation, former members of KS Industry, have discontinued their membership for the 4th KS agreement (Nakazawa, 1993 and Tomita, 1993). Furthermore, the KS agreement is not attractive any more to the Japanese log importers for its inflexibility to the market  193 conditions. Within the KS system, the imported logs and lumber have to be bought by the KS member companies at prefixed prices and quantity regardless of whether the international market conditions which could offer better prices. At the beginning of the trade with the USSR through the KS agreement, each of the participating companies was itself a large trading company importing forest products and at the same time a manufacturer of machinery and equipment for forestry development. Contributing to the security of timber supply in Japan by increasing imports from the USSR was one of the main motivations of the early KS agreements.  The  companies were also greatly motivated to promote the seffing of their own machinery and equipment to the USSR, however, which might become more important to them as the agreement continued.  Now that the  economic situations both in Japan and Russia have greatly changed since the first KS agreement, many of the incentives which initially motivated the member companies to stay with the agreement, have vanished. Foreign investment has emerged as a new aspect of trade and economic relations with the RFE since it was first allowed in 1987. As with trade, Japan is the leading investor in the RFF. Forestry is one of the major areas that Japanese investment is directed towards in the RFE together with fisheries. Currently eight Japanese-Russian JV’s are in operation, three in Irkutsk, three in Khabarovskiy Kray, and two in Primorskiy Kray. All the JV’s involve lumber production and export most of the production from the iv’s. For details of the individual joint ventures see Appendix VI.  194 As these JV’s begin to operate to their capacity, they are expected to contribute to Japan’s increased imports of Russian lumber. The exports by the first Japanese-Russian JV Igiruma-Tairyuku already account for one third of the total Japanese imports of Russian lumber. The lumber imports to Japan from these 8 joint ventures will be about 100,000 cubic metres in 1994 and will be increased up to 300,000 cubic metres (Nikkan Mokuzai Shinbun, 1993). A significant improvement in the quality of the exported lumber is expected due to the technology brought in from Japan by the JV’s. The imported lumber from the joint ventures will make it easier to debark, regrade, and inspect, preventing inferior quality lumbers from being slipped in in place of good ones, as experienced in the previous trade. Despite the potential of FDI as a new form of trade, Japanese investment in forestry in the RFE has been so far characterized as small in size, and oriented towards saw-milling and export. The political and juridical instability mentioned in earlier chapters can equally apply to the characteristics of the Japanese investments in the RFF. The prudence entrenched in the decision making process of Japanese companies may well disallow a more active investment in the RFE under the current situation. These characteristics have made some of Japanese investments successful compared to other country’s. The Japanese-Russian saw milling joint venture Igiruma-Tairyuku is a good example of such success story (Backman, 1994). The overall inactive posture of Japanese firms in the RFE together with the territorial problems over the Northern Islands mean that matters remain  much as they were before.  195 The individual companies perceive the  problem somewhat differently, however, under the current situation, where the acceptance of FDI has put business activities on a more individual-company footing than in the former USSR period.  The  territorial problem was one of the most important reasons for the companies to get involved in the compensatory agreements, which required a large amount of government backed loans. The territorial issue, however, seems to have less influence on Japanese corporations’ current decisions on FDI, particularly with respect to small projects. Japanese companies are more autonomous in making decisions on investment in the RFE. This is evidenced by investment statistics that shows Japan as the largest and most active investor in the RFE.  Nevertheless, general  criticisms of inactivity are largely grounded in comparisons with investments in other countries, since Japan invests more elsewhere. The lack of Japanese investment in the RFE, as perceived by other countries, stems from the prevailing instability in Russia rather than the territorial issue, which would not affect the companies’ commercial interests even if it were resolved. 6.5. COMPETITION IN THE REE  Japan is the country which has accumulated a good deal of information and knowledge on the RFE from their own trade experience since the late 1960s and from earlier researches. For the research related to commercial trade, ROTOBO (The Japanese Association for Trade with Russia and Central-Eastern Europe) has been a prominent organization since its establishment in 1967.  196 Japan has also initiated the development of the idea of a Japan Sea Rim Economic Bloc, as mentioned earlier, to support the promotion of economic relations with the countries surrounding the Sea (Toma, 1991). Japan has long been regarded as the most capable partner for the development of Siberia and the RFE. Several long-term and large scale development plans have been drawn up by former Soviet governments to induce Japanese interest in such development. The Year 2000 plan by Gorbachev in 1987 is one of these examples. Japan itself has also believed that it is the most suitable partner for the technological and capital requirements involved in the development projects. For example, the production of a large diameter pipe for the gas development project in Yakutia requires a highly developed production technology only available in a few countries in the world including Japan (Ogawa, 1993). All of these facts have put Japan in the most competitive position in relation with the RFE. In reality, however, disregarding the technological advantage, Russia chose Korea as the partner for the project  and the two countries are now under negotiation for a feasibility study. The competitive position of Japan has also been damaged by Korea’s initiation of forestry development by JV Svetlaya, which is using logging technology imported from Finland. Korea, however, is a much weaker economic power than Japan. If there exists any competition between Korea and Japan in the RFE, it is transitory, created by Russia overestimating the Korean economy (Ogawa, 1993) or by Russia using Korea to stimulate Japanese interest in the RFE (Manezhev, 1993).  197 6.6. SUMMARY AND DISCUSSION  Japan is the largest consumer of Russian logs. Japan has imported large quantities of logs through compensatory agreements specially arranged to circumvent the problems of two different economies and to promote mutual benefits. Many of the incentives which opened up the trade with Russia in the 1960s have largely vanished under the new economic conditions in Japan. After FDI was allowed, the value of such trade has further diminished. The new form of trade through FDI suggests a great potential for more active and individualized participation in the RFE by Japanese companies.  The full potential of FDI, however, has not yet  realized in the region. All the Japanese investments in forestry in the RFE are for sawmilling, a technology which Japan is interested in transferring. Japanese investments in the forest industry in the RFE are small in scale, by and large, cautious and experimental, which is quite a contrast to Korean investments.  198 CHAPTER VII CASE STUDY: KOREAN-RUSSIAN FORESTRY JOINT VENTURE SVETLAYA 1 7.1. THE JOINT VENTURE Svetlaya is a 50/50 Korean-Russian joint venture forestry project established on 1 July 1990. The JV Svetlaya is located in a small town of , which is a district in the northeastern 2 the same name in Ternei Rayon corner of Primorskiy Kray.  It is about 800 km away from Vladivostok,  the capital of the territory (Map 7.1). The Korean partner in the  iv, Hyundai Resource Development Co., Ltd., was  newly incorporated at the time the joint venture was established. The company was formed of departments separated from two companies in the Hyundai Group: Hyundai Corporation and Hyundai Wood Industries Co., Ltd. The former is a trading arm of the group and the latter specializes in manufacturing wood products including popular brands of office and home furniture for the Korean and overseas markets. The Russian partner, after disintegration of the former Soviet Union, changed to Prim orsklesprom, the Forest Industry Association in Primorskiy Kray and Tern eilesprom, a district level forest production organization in Ternei Rayon. 1 The information on the project is based upon personal communication with Hyundai Resource Development Co., Ltd in Seoul, repeated several times from the early stage of the JV, and the author’s personal site visit to Svetlaya where the iv is being operated. 2 Rayon, or district in English translation, is a lower administrative unit than kray. For example, there are 31 rayons including 5 city-districts in Primorskiy kray (Miller, 1992b).  199  i  • I  Raohe.  •  + r Bikin  China  •  Mishan  •  I  Lesozavodsk Dalnegorsk  Hulin  Cava1evo  (  Spassk Dalnyi Arsenev Suifenhe  Ussuriisk  Hunchun  ,fNort  Map 7.1. Location of iv Svetlaya Source: RFEU (1992a), reproduced with permission  200 The project site had been an area allocated to a small lespronzklioz under Terneilesprom before the iv Svetlaya was established. The JV project amounts to US$54 million. Hyundai’s investment was undertaken by purchasing logging equipment and machinery and building camps and offices. As of April 1992, US$40 million had been spent on purchasing logging machinery, mainly Finnish ‘Finlanp’ feller-bunchers (Photograph 1) and a few Canadian harvesters, and logging trucks, and US$4 million on purchasing spare parts and supplies.  The Russian  partners’ share of the investment took the form of logging rights and land for offices, camps and port facilities necessary for the IV. The period of the logging concession granted is 30 years from 1990 to 2020. The line of business activities the joint venture initially intended consists of logging, log sales, forest protection and reforestation, building logging roads and wood processing. The Russian partner is mainly re sponsible for the production planning whereas the Korean partner takes only a supportive role for the iv such as administration for the project. 7.2. FOREST RESOURCE The initial project area covers 439,300 hectares in Terneiskiy and Pozharskiy Rayons of which 363,900 hectares are forested.  235,900  hectares of the forested area are to be developed during the project period. The topography of the project site is largely flat and does not require heavy expenditures for building new logging roads.  201  Photograph 1. Finnish Feller-Buncher at Work  202 The total estimated volume of growing stock in the project area is 60.2 million cubic metres. The growing stock volume in the accessible area, however, is only 42.2 million cubic metres. The area planned for harvesting for the first 5 years from 1991 to 1996 is 9,393.5 hectares in Terneiskiy Rayon and 11,672 hectares in Pozharskiy Rayon and the growing stock volumes in the two areas are 1.9 million cubic metres and 2.3 million cubic metres respectively ( Table 7.1). Table 7.1. The Areas and Growing Stock Volume to be Cut in the First 5 Years (1991-1996) Terneiskiy (Svetlaya) Area (ha.) ) 3 Growing Stock Volume (1,000 m /ha) 3 Volume per ha. (m  9,394 1,910 203  Pozharskiy 11,672 2,326 199  Total 21,066 4,236 201  Source: Compiled from Hyundai (1993)  The species composition of the whole area is 50% spruce, 30% larch and 20% fir and birch. The area to be logged in the first 5 years of the project, however, has 80% spruce, 10% larch and 10% fir (Hyundai, 1993), and is therefore more profitable than the balance of the JV area. The soil conditions examined during the site visit were not productive because of large rocks, high gravel content, and generally a thin layer of top soil (Photograph 2). One part of the forests appeared unhealthy. Diseased and dead trees were quite visible on the site (Photograph 3). The site being logged at the time of the site visit had volume density as high as 250 cubic metres per hectare (Ivanovich, A., 1993).  The site was  covered with 90% spruce and 10% larch with an average age of 130 to 150 years.  203  Photograph 2. An Example of Poor Soil Condition of the Project Site  F  ..  t1.  •  Photograph 3. An Example of Diseased Forests on the Project Site  204 The average diameter of large end of the spruce logs was about 24 cm, estimated by random measurement of logs waiting at the roadside for trucking (Photograph 4). However, small diameter logs under 15 cm were also quite visible (Photograph 5). Based on volume per hectare according to published statistics, the growing stock volume on the project site is almost equal to the Canadian average (Table 5.25). By contrast to what the table implies, the actual quality of logs on site is discouragingly inferior. Average temperature of the project site is 25 degrees Celsius in the hot summer months and minus 30 degree Celsius in winter. The poor soil condition and harsh climate seem largely responsible for the inferior quality of the logs. According to regulations, the JV should cut dead and diseased trees for forest hygiene purposes, which imposes extra cost on the iv. The annual volume cut should be exactly what is permitted, otherwise a penalty is imposed on the difference. 7.3. REFORESTATION AND RESEARCH All logged areas are required to be replenished at the cost of the iv by regulations in the JV contract. The JV applies three different efforts to satisfy the reforestation regulation. 30% of the logged area is artificially reforested by seedlings grown at on-site nurseries.  Two greenhouse  nursery buildings (1,700 square metres) were built for this purpose (Photograph 6 and 7). Another 30% of the logged area relies on natural regeneration and the remaining 40% is covered by saving saplings during logging, which became possible by introducing new logging technology and  training loggers.  205  Photograph 4. Spruce Sawlogs Graded before Trucking  —  -  —  —  —  —  w  -  Photograph 5. Pulpiogs (Mainly Spruce)  —  206  Photograph 6. Greenhouse Nursery on the Project Site  Photograph 7. Spruce Seedlings in the Greenhouse  207  The logged areas were reforested both by planting seedlings and by direct seeding. An area of 50 hectares was reforested in 1991 mainly by larch seedlings and a direct seeding of spruce between the seedlings (Photograph 8). In 1992 370 hectares were reforested by planting seedlings and 123 hectares were seeded. Among them 292,000 spruce seedlings planted in the fall had been grown in the newly built greenhouse nursery on the project site (Photograph 9). Table 7.2 shows that the area to be reforested in 1993 was 340 hectares, 100 hectares of which had been reforested by June 1993. Table 7.2. Reforestation by the iv Year  Species  1991  Larch (seedling) Spruce (seed) Korean Pine (seedling) Spruce (seedling) Spruce (seed) Spruce (seedling)  1992 1993.6 1993 plan  Reforested Area (ha.)  Quantity (no. of seedlings/kg)  50  100,000 200  103 267 123  200,000 400,000  100  (340)  285,000  Source: Complied from Hyundai (1993)  The planting density in the reforestation is 2,500 seedlings per hectare and the average area planned to be reforested in a year is about 300 hectares. The greenhouse has enough capacity to produce the seedlings for the reforestation by the JV. The survival rate of the planted seedlings has become a problem. 38% of the planted seedlings died in 1992 but a local forest scientist is working to solve the problem (Photograph 10).  208  Photograph 8. Spruce Seedlings from Direct Seeding  Photograph 9. Spruce Seedlings Planted after Grown in the Greenhouse Nursery  209  Photograph 10. A Seedling Failed to Survive  210 7.4. REGIONAL EFFECTS OF THE JOINT VENTURE 7.4.1.  PRODUCTION AND EXPORTS  Currently the project operates far under its capacity, which means a financial loss to the JV. The JV’s manpower, equipment and port capacity has been prepared for the planned one million cubic metres a year production target, which has not been reached.  Because of an  environmental dispute over logging in the new area, which is not expected to be resolved soon, the realization of the one million cubic metres production target seems to be unrealistic at this moment.  The JV’s  monthly average production was 20,000 cubic metres when the author visited the site. The annual production target is set at about 200,000 cubic metres. Almost all the produced logs are exported to Japan and Korea by  two shipments per month. About 10,000 cubic metres are being shipped out in each shipment (Photograph 11). There seems to be no question about the justification for exporting the logs produced. Considering the particular location of the JV and the condition of the infrastructure, exports are a natural consequence. The fact that the world’s largest log market is only a few hundred kilometres away across the Sea of Japan even further justifies the exports. Russian logs are imported to Japan through the ports on the Japan Sea coast.  The Japanese market is familiar with Russian logs.  They have used the  logs for many years since their occupation of southern Sakhalin Island. Some of the Russian logs are similar to those of northern Japan, for example, Hokkaido. Facing a short supply of hardwood logs for plywood  211  Photograph 11. Quality Logs for Exports  212 manufacturing, Japan has developed the technology to manufacture a softwood plywood using Russian logs. The production of softwood plywood has been increasing very rapidly in Japan. Russian logs are relatively new to the Korean market. Since the Svetlaya project, however, development has been initiated by Hyundai, which has its own wood manufacturing company. The company manufactures home  and office furniture using the Russian logs imported to Korea. The Russian logs are mainly used for flooring and temporary construction materials. They are also peeled and used as core veneer for the manufacture of hardwood plywood. The general problems of quality and undeveloped uses related to Russian logs have been gradually overcome with the new technology and extra demand caused by a short supply from other sources. The demand for Russian logs will not be lowered in these two countries. 7.4.2.  REGIONAL DEVELOPMENT  Svetlaya is a village of 1,500 people on the Japan Sea coast (Photograph 12). Ternei Rayon is the least populated district in the territory with 0.6 persons per square kilometre, it is far below the territory’s average population density of 13.9 persons per square kilometre (Baklanov, Romanov, Moshkov, and Stepanko, 1992). The main industry in the village is fishing and fish processing, which employs three fourths of the villagers,  and the rest are engaged in forestry (Baklanov et al., 1992). The JV’s 280 Russian workers are mostly from the local vifiage and the JV contributes to local employment. Since the production target has been reduced to 200,000 cubic metres a year, the iv has laid off loggers.  213  Photograph 12. Street Scene of Svetlaya  214 But the target of lay-offs are the Chinese loggers: most of the Russian loggers have been kept on site for the sake of the village’s employment. Originally an integrated production system was planned for the JV as part of the long-term plan. For this, a chip mill has been built on the site to produce 400 cubic metres of wood chip a day but an extra investment is said to be required to operate it. Building a saw mill and a pulp mill was also planned in relation to the logging venture.  If these production  facilities are completed according to the original plan, the JV’s contribution to local employment will be even greater. The JV also planned some community projects including building a school. These are all up in the air at the moment, however, because of the uncertain future of the  iv, arising  from a crucial environmental dispute over the new logging area. The JV project is potentially a contributor to infrastructure in the undeveloped northern part of Primorskiy Kray. If the logging goes deeper into the interior of the project site as originally planned, it will help the village Svetlaya to be connected with other villages in neighbouring districts, namely, Pozharskiy and Krasnoarmeiskiy Rayons (See the map 7.2).  By branching further from the logging it could make a large  untapped forest region accessible, and promote regional development in the long run. This may be infeasible now, however, because of the environmental dispute over the indigenous people’s rights over the land. As more FDI’s land on more locations in the RFE, similar impacts as happened in Svetlaya are expected, and all the local impacts across the RFE  will collectively lead to a regional development.  215  Svetlaya  Rayon  Map. 7.2. Neighbouring districts of the project she Source: RFEU (1993a), reproduced with permission  216 Besides the visible and direct impacts, the JV also has brought indirect impacts. The JV has made the isolated village connected to outside world through the visitors from around the world to the JV. The high-technology satellite communication being used by the JV office has lessened the feeling of isolation. The coming and going of Korean managerial staff, hundreds of Chinese loggers, log carrier ships, foreign journalists and even a group of international environmental activists have made the remote village conscious of the inter-related world.  Such contacts with outside  world, directly and indirectly, will eventually help to change the people’s attitude toward FDI, although it will take a long time. 7.5. INTERACTIONS WITH THE INVESTMENT ENVIRONMENT A joint venture operation is a productive activity in a foreign country which involves an interaction between the productive resources and the investment environment in the host country The iv Svetlaya has had to respond to changing Russian rules and regulations, while it has also received various reactions to its operation in the host country from local, regional and international communities since it started. Most of these interactions reflect various problems the joint venture has run into since it started. Since the JV is the first foreign direct investment in logging operation in the RFE, its implications for future investments are immense. The problems the JV Svetlaya has faced are those which have already appeared in much of the literature on the subject, such as the article by Cardellichio et al. (1989). Many of these problems are so complex and interrelated that they are not easy to segregate from one another. They can, however, be classified into environmental problems, institutional instability, labour, and infrastructure.  217 7.5.1.  Environmental Problems  The environmental problems the JV Svetlaya has faced are related to two thing; nature conservation of rare tree and animal species and indigenous people’s rights. One of the two areas the joint venture planned to log in the first five year period of the project is an area of 11,672 hectares in Pozharskiy district, which covers more than half of the area to be logged in the first five years. The area in Pozharskiy district includes the upper reaches of the River Bikin and has been assigned to the indigenous Udeghe people as their hunting ground. International environmental groups claimed that the area includes untouched Korean pine forests which provide a habitat for the Siberian tiger, a rare indigenous species. They also asserted that the logging had been prohibited in the disputed area by an environmental impact assessment study. Korean pine (Pinus koraiensis) is a protected species and its logging is prohibited by law across the RFE. 50 Greenpeace activists visited the site in the summer of 1992 and protested against the logging in the area. The logging operation was also widely protested by international environmental groups from Japan and other countries. A major logging operation planned in the Pozharskiy area for early 1992 was stopped by a blockade of armed native people. The prohibition of logging in the area became the most crucial cause for the JV’s failure to meet the one million cubic metres yearly production target. The target has not been met for the last three years. In the first year of its operation, in 1991, the JV produced 250,000 cubic metres  218 because of incomplete investment in logging and transportation equipment.  In the second year, despite the early completion of the  mobilization of machinery and equipment, the JV’s production remained at 250,000 cubic metres mainly due to the protest against logging in the Pozharskiy area. No major increase in production by the JV was expected in 1993. The land in question was originally allocated to the Svetlaya joint venture 3 headed by the governor. The project by Primorskiy Kray Administration Primorskiy Territorial Council claimed on 24 July 1992 that the allocation of the land to Svetlaya Joint Venture infringes on the rights of indigenous peoples and opposed the governor’s decision.  The case was taken to the  regional court by the Council. Primorskiy Kray Court decided that the Administration’s decision was legal. The decision was again appealed to the Russian Supreme Court. On 30 November 1992 the Supreme Court invalidated the lower court’s decision and returned the case to be retried (RFFU, 1993c). This problem had a crucial effect on the project and drove it to the verge of a close-down. According to Russian law, a referendum among the indigenous people is required before an outsider’s business activity can be granted in the land allocated for native people (RFEU, 1992b). These legal requirements were not seriously considered and incorporated into the iv document by the Russian partner, Primorsklesprom. The JV project was influenced by politics from its formation. The joint venture formed and even began its 3 Each territory in the RFE is governed by two (often opposing) leaders, the head of the Administration and the Territorial Council of People’s Deputies. The former is often called the governor and is appointed by the President of the Russian Republic. The latter is called the legislature. It has elected members and is controlled by the “malyi sovet” (little council). Source: Miller (1992b)  219  operation well before Korea and the USSR established diplomatic ties. The joint venture was a kind of symbol for the two countries, which were entering into new relationships at the time. The Korean government’s “Northern Policy” contributed to the swift formation of the JV. The Russians were also impressed that the JV was formed in a hasty manner without a careful study of potential problems involved with the project. Obviously the head of the Administration was persuaded to help push the deal through. It is also conceivable that such careless JV arrangements occurred in an attempt to give more business opportunities to Korea in or der to stimulate Japanese interest in the RFE. 7.5.2. Institutional Instability Since the JV project started its operation, there have been numerous new regulations and changes in the legal system, which significantly affected the joint venture’s operation. Among others, the institutional instabilities which affected the Svetlaya JV project were related to a series of measures taken by the Russian government: freezing of foreign currency accounts, the forcible sale of foreign currency earnings, and the imposition of export duties. Faced with a serious shortage of foreign currency in October 1991, the USSR government froze all the foreign currency accounts in  Vneshekonom bank (State Bank for Foreign Economic Affairs).  This  measure resulted in the Chinese loggers employed by the JV being unpaid . There were more than 400 Chinese workers 4 for more than 6 months including Korean-speaking Chinese from neighbouring Jirin province. The 4  Economic Daily, 12 April 1992.  220 unpaid Chinese loggers threatened to leave the project. According to USSR foreign currency regulations, the iv’s export earnings were to be deposited in a Vneshekonombank account before being exchanged and withdrawn in local currency. The export earnings deposited by the JV in the bank for the 6 month period were US$2.3 million while unpaid wages for the six months were US$750,000.5 The problem was resolved soon after, but it badly hurt both the production and productivity of the Chinese loggers. Secondly, according to Presidential Decree No. 629 announced on 14 June 1992, a new export duty was imposed on forest products. The new export duty is imposed in ECUs (European Currency Units) based upon the weight of the item to be exported. Due to the new tax system, the 10% export duty previously applied to the total exported amount (ad valorem) was replaced by US$14 per cubic metre export duty on each export from 1992, and this rate was again raised to US$17 per cubic metre in May 1992.6 This has caused the IV a significant reduction in the profit margin from exports, since logs were exported to Japan at US$102 per cubic metre. As a result of the new tax system, the Iv’s tax burden increased by 7%. Thirdly, in relation to the new export duty, a 50% obligatory sale of foreign currency earnings to the Russian banks was introduced. This compulsory sale means a substantial financial loss to the  iv  by exchange from one  currency to the other. The unstable rubles and the high inflation rate in Russia makes the iv’s financial loss from the compulsory sale even greater. The impact of these institutional instabilities was damaging to the JV’s operation, in particular, to the production target. 5 Korea Economic Daily, 12 April 1992. 6 Korea Economic Daily, 25 November 1993.  221 7.5.3. Labour The JV successfully mobilized the necessary workforce from China. The Chinese workers were supplied through a Chinese manpower agency in Jirin Province.  At the peak of operations, the Chinese workers number  reached about 400. About half of them were Korean-Chinese. The JV also employed about 200 Russian workers. Most of them were villagers from Svetlaya. At the beginning, the use of Chinese workers in the project seemed an ideal solution for the labour shortage problem in the RFE. In addition, they were inexpensive and most of the Chinese had experience in working in logging enterprises in Jirin province. The productivity of the Chinese loggers was higher than Russian loggers.  They volunteered to work  overtime. However, their productivity was sharply reduced by external factors.  As mentioned above, failure to pay wages for more than six  months as a result of freezing foreign currency accounts severely lowered the workers’ morale. Another factor that undermined the workers’ productivity was the exchange rate. At the beginning of the project in 1990 Chinese loggers were paid US$300 per month, when the exchange rate was 0.6 rubles to a dollar. Little income tax was imposed on the Chinese wage.  Russian  loggers were paid in rubles. Their average monthly wage was 700 rubles. In 1992 the exchange rate became 100 rubles per dollar. This means that in terms of rubles, the Chinese wage jumped to 30,000 rubles, which was subject to a high income tax bracket by Russian tax authorities. As a result, the Chinese wage was cut down by a 30% income tax, which became a solid reason for their threat to leave the project. On the other hand,  222 Chinese loggers became expensive compared to the Russians and gave a valid reason for the iv to replace them with inexpensive Russians (Won, 1992). The actual number of Chinese loggers was reduced to 150 when the author visited the site in September 1993. The number of Russian loggers still working on the site was as large as 280. Since the logging permit was not issued as originally scheduled, it became necessary to change the number of workers on site.  For fear of resentment from the local  community, however, the IV was not able to lay off the surplus Russian workforce to fit current capacity (Kim, 1993). In addition, though a minor problem, a lot of reported embezzlement by Chinese workers required special attention for future dealings with a Chinese workforce in the region. They embezzled not only individual supply items like blankets and pillows but everything they could take home from logging-camp door handles to machinery parts (Kim, 1993). Russian workers also posed problems. They were less committed to the work than Chinese and their high proportion of idle work hours lowered productivity. The weak purchasing power of the ruble demoralized the workers.  By one account, the productivity of the Russian workforce on  the site is less than half the Koreans’ at best (Kim, 1993). By Russian labour regulation, foreign investors are responsible for providing necessary welfare including workers’ compensation insurance, and a paid vacation in summer. In conclusion, using a Chinese and Russian workforce is never cheap when taking into account their low productivity and the extra cost involved especially in such a remote and underdeveloped environment.  223 7.5.4. Infrastructure The underdeveloped infrastructure is regarded as one of the major constraints for regional development as well as for the economic activities by foreign companies in the RFE. This general assumption, however, does not apply to the case of the JV Svetlaya.  Rather the JV takes full  advantage of its particular location. Svetlaya is located in the territory’s least populated district, Terneiskiy Rayon. Within the Rayon, the village is situated in the even more uninhabited northeastern part. Only a few road networks are developed, mostly in the southern part of the Rayon. Svetlaya is a remote village accessible only by air or sea. A small nine seater biplane connects it to the district capital Ternei, 210 km away, from which other major cities in the territory are only connected by air or road. It takes about 4 days to get from Vladivostok to Svetlaya by a ferry which sails along the Japan Sea coast once a month. The village is completely isolated from other cities and the only local road is the one leading into interior logging areas used by the previous lespromkhoz. The 60 km long road leads to near the district boundary  between Terneiskiy and Pozharskiy Rayons. See the map 7.1. Currently the JV’s logging operation takes place near the end of the road, about 60 km away from the village. The existing port was too small to ship out one million cubic metres of logs a year before the JV. The port, therefore, has been dredged by the JV so that two 10,000-ton log-carrying barges can come alongside the quay at  224 the same time. Svetlaya is a ice-free port and shipping logs through the port is possible all year round. Since winter is the most productive season in the year,  because of the low productivity caused by the loggers’  vacation in summer and muddy surface conditions in spring, having a port operable all year round is advantageous. The infrastructure condition in the project area is not a constraint but rather an advantage for the JV. The trucking distance from the logging site to the quay is only about 70 km and the port has been expanded to accommodate one million cubic metres of logs a year. This is preferred by the JV in contrast to the hauling distance from interior regions of Khabarovsk territory or Amur region to the Pacific coast for export, which may well be several hundred kilometres.  For example, Mukhen is a  forestry town where one of the major territorial forestry kombinats is located 100 km southeast of the city of Khabarovsk.  From Mukhen the  logging area is 104 km further away (Fujiwara et al,, 1992). From Mukhen to Vanino port is more than 800 km by railway. Not only the hauling distance but also securing space in railway freight cars is a major problem for exports.  Having one’s own port for exclusive use is a definite  advantage in the RFE, where limited port capacity and seasonality cause serious congestion in most of the ports.  Because of its own port facility,  the JV can improve the efficiency of shipment regardless of the overall inferior infrastructure conditions in the RFE. 7.6. SUMMARY AND DISCUSSION With its three years of operation, the iv Svetlaya has illustrated the RFE’s reactions to FDI in forestry and demonstrated the problems related to the  225 investment environment in forestry. The geo-economic situation that the REF presents also has caused a particular reaction to the JV. Following is the discussion of the JV in the framework of dissertation presented in Chapter III. The  iv project is currently in a bad situation.  Because of the prohibition of  logging in new areas, the iv’s production has remained at only one fifth that of the original plan. The most serious problem threatening the continuation of the project is the huge financial loss caused by the significantly reduced production. From the beginning Hyundai was very enthusiastic to form the first Korean-Russian joint venture. The JV was a symbol of a new relationship between Korea and the USSR, which began to warm to each other after a nearly 90-year long detachment.  Hyundai’s effort were politically  supported by the Korean government which was interested in promoting new relationships with former communist countries through its own “Northern Policy”. In addition to government support, Hyundai’s corporate character played its role in the formation of the  jv.  Hyundai has been a  more resource-oriented company than others in Korea. Its style has been characterized as a pioneer company in Korea. The pioneering spirit has become a long tradition of the company since its entry into many fields of business in the early period of Korean economic development (Anon., 1991). The  iv was set up at a  time when greater internationalization of  the Korean economy was imperative because of the trade surplus. Under  this positive investment environment in Korea, the formation of the JV was realized even before the two countries formed a formal diplomatic tie.  226 Hyundai as a foreign investor quickly and successfully completed the ‘hard’ material part of the investment. It swiftly mobilized the equipment  and labour force necessary to meet production targets in the early period of the JV. The JV upgraded the port capacity to handle the targeted production.  Hyundai did not, however, effectively handle the ‘soft’ social  or intangible problems related to the investment such as the  environmental disputes and institutional instability. These problems are almost beyond the control of foreign investors who are not familiar with legal and cultural systems in Russia. Despite the country’s willingness to reform and integrate into the Pacific  Rim economy, the investment environment in the host country has not been attractive. The main reason is political instability. The instabffity has been the main cause of the JV’s lack of success. Among the instabilities experienced by the JV, the most crucial one was the disallowment of the logging permit as originally contracted, because of an environmental dispute. The environmental dispute demonstrated that even a contract signed by the Russian authorities can not be enforced. A great deal of instability also stemmed from the politics surrounding the  iv. The JV had substantial political significance and was largely backed by the Korean government’s. For Hyundai, the iv was an opportunity to enhance the company’s pioneering image in Korea. All these factors pushed Hyundai to make a rather hasty investment. The haste continued to the actual capital investment in purchasing logging and transportation machinery.  227 The Russian partner is also partly responsible for the hasty arrangement in the formation of the JV. As mentioned earlier, the iv was formed without respecting either the Russian regulations for native peoples’ rights or the requirement for environmental impact assessment on the project area. The haste is also attributed to the decision making system in Korean companies. The Korean companies’ decision making system is typically highly centralized in the hands of a few top executives, who make decisions either unilaterally or in small groups after consultation with the various parties involved (Steers, Shin and Ungson, 1989). The top-down or authoritarian nature of the decision making system tends to be more distinct in the owner-managed companies like Hyundai. Within such decision-making systems, a widespread consensus as to the desired course of action is hardly achievable from the bottom to the top of the company organization. The chairman of Hyundai on many occasions revealed his great enthusiasm for the projects related to Siberia and RFE development. Such personal enthusiasm of the owner himself has been largely translated into corporate strategy and strongly influenced the company’s decision making related to the JV. In relation to decision making, a lack of research by Hyundai before the investment was undertaken is partly blamed for the current state of the JV. Under the existing decision-maldng system, the result of the feasibility study by professional staff before investment gets little chance to be incorporated into the final decision. If the decision had been made by a more consensus-building approach from the bottom to the top of the organization as happens in Japan, the formation of the iv would not have been possible. Conversely, because of the decision-making system in Korea  228 and in particular in the Hyundai Corporation, the creation of the iv was made possible despite the potential problems. Like many other Korean firms, another characteristic typifying corporate strategy in the development of Hyundai is its awesome willingness to take risk and its growth orientation as illustrated in Porter’s (1990) description on Korean firms. Hyundai’s quick entry to the RFE and its persistence despite financial loss can partly be explained by the corporate character of Hyundai. The choice of so large-scale a project can also be explained by the firm’s mentality, oriented to growth rather than profitability. Despite a large financial loss by Hyundai Resource Development Co., Ltd., the top management is interested in and committed to continuing the IV for several reasons. The iv has deep political meaning for both the nation  and the company.  For the simple fact that the jV is the first and the  largest Korean investment in Russia gives a significant political meaning to its continuation. The advantage of the proximity of the RFE and the scale of its resources are well appreciated by Korea. In the long term, and from the point of view of economic cooperation with neighbouring countries, a presence in the region is viewed as an important foothold for when economic conditions and the investment environment improve. In other words, the long-term importance of the RFE, appreciated by Korea, is big enough to carry on the JV despite the short-term financial loss. Because of the Korean attitude towards the RFE, Korea’s interest in the region will continue. The current difficulties are generally accepted as the price to pay for Korea’s long-term commitment in the region. Through three years of operation of the JV Svetlaya, Hyundai has accumulated  229 sizable experience in logging operations in the hitherto unknown region of the RFE, which in the future will put the company in a more profitable position in the investments in the RFE. Much of the information and data on the ‘soft’ components of the JV on the Korean side were accessible and were incorporated into the discussions in the case study. Despite its importance for the integrity of the case study, however, there is not an equivalent breadth of information on the Russian side, for example on such topics as the role of organized crime and political influence on the JV deal in the early period. Few people were willing to speak about such topics and even those who were could not be certain about them. The lack of analysis on the influence of such ‘soft’ variables of the iv on the Russian side is a shortcoming of the case study.  230 CHAPTER VIII FOREIGN DIRECT INVESTMENT AND RESOURCE AND MARKET INTERACTIONS IN NORTHEAST ASIA 8.1. LESSON FROM THE JV SVETLAYA The JV Svetlaya is a product of the particular political situation at the time of its creation and its particular geographical location. Nevertheless, the following findings could be useful for future foreign investments in the RFE. Foreign investment is a business operation in a foreign country taking advantage of partnership and a foreign investment environment. In some situations, the successful operation of a JV might be guaranteed by under taking limited responsibility by each partner. Such a rule did not work out in the JV Svetlaya. Despite the enthusiastic start and the successful completion of Hyundai’s share of responsibility, within a short period of time, the JV has experienced the problems discussed in Chapter VII. Hyundai, without previous experience in Russian operations, left the production planning and operation to the Russian partner.  Hyundai,  limiting its role to supportive activities, remained unable to resolve the problems related to the host-country environment outside of the project. Unfortunately, the Russian partner was too weak and ineffective to handle such problems. It was even more difficult for Hyundai, which is unfamiliar with the local situation, to come forward and resolve the problems. As in Japanese strategies (Tak, 1993), it would be very important for any future JV to have a Russian partner which could exercise political influence to help resolve problems beyond the control of the foreign partner.  231 Although the infrastructure in the RFE is largely underdeveloped, the region is large and has a wide variety of infrastructure conditions. The location of the JV Svetlaya was well chosen and demonstrated one way to overcome the infrastructure problems. The JV also showed how to circumvent the labour shortage problem in the region. By using a labour force from neighbouring China, the JV Svetlaya successfully provided the necessary labour force supplement to the Russians employed from local areas.  Judging from the geographic  proximity and the similar forestry environment, the neighbouring Chinese provinces could present themselves as a potential source of labour for future iv’s. There had been no relationship between Korea and Russia for nearly 90 years before diplomatic ties formed in 1990.  The JV Svetlaya was  somewhat hastily formed even before the diplomatic tie without a genuine effort to understand the situation of the host country. The USSR was an  unknown country to Korea and vice versa. Without knowing one another, each overestimated the other under the amicable atmosphere at the beginning of the relationship in the late 1980s.  It was easy for the  resource-poor Korea to overestimate the natural resource potential in the RFE. Similarly, the Korean economy first seen by Russians on and around the 1988 Seoul Olympic Games was impressive enough for them to choose Korea as an alternative partner for the development of Siberia and the RFE instead of Japan, which appeared as the most capable, though reluctant, partner to Russia.  Ogawa (1993) explains well how the Russians  misunderstood the two economies in Korea and Japan after visiting Seoul  232 via Tokyo before the Olympic Games. Korea also needs to increase its understanding of Russia through further research. In summary, a mere complementarity between countries and a successful mobilization and management of the ‘hard’ part of foreign investment do not guarantee success in FDI operation.  The current case study has  demonstrated that ‘soft’ variables can play a crucial role for the investment. 8.2. FOREIGN DIRECT INVESTMENT AS COMPARED TO COMPENSATION AGREEMENT Although the iv Svetlaya is experiencing enormous difficulties now, this has not reduced the advantages of FDI in the RFE at all. FDI is normally a more active form of productive activity across the national boundary than any other forms of international business.  FDI is as risky as it is  potentially profitable. It also implies many opportunities for investors to improve productivity and competitiveness.  A comparison is made  between the compensation agreements experienced by Japan through a series of KS agreements and the FDI experienced by Korea through JV Svetlaya. Obviously, the foremost difference is the unit cost of getting logs. Table 7.3 shows a huge gap existing between the costs for the access to logs in the RFE depending upon how one obtains them. The cost to gain access to the logs in the RFE is termed as ‘value-adding point’ here, since foreign investors or importers can begin their value adding activities from this points.  233 Table 8.1. Value-Adding Points by FDI and KS Agreement The JV Svetlaya (Korea)  The 4th KS Agreement (Japan)  • Invested Amount by Hyundai: US$27 million  • Loan Amount:  • Logs to be Produced: 3 for 30 years 30 million m  • Logs  • Project Period: 30 years * 3 • Value Adding-Point: US$0.9/m (Unit Cost to Gain Access to Logs)  • Contract Period: 5 years  US$700 million  and lumber to import: 3 for 5 years 6.4 million m  • Value Adding-Point: US$109.4/rn 3  (Unit Price of Importing Logs)  Labour and transportation costs and other expenditure required to produce and deliver logs to Korea should be added to this value to make a fair comparison with the value under the KS agreement. *  The value-adding points are obtained by a simple mathematics: the input 3 has to be divided by the output. U$27 million divided by 30 million m . 3 produced U$0.9/m . Same procedure is applied to obtain U$109.4/m 3 Obviously, this comparison is not complete. The U$0.9/m 3 indicates simply the cost for gaining access to the resources by the JV, whereas the 3 is the actual price for importing logs through the KS U$ 109.4/m Agreement and is almost equal to the price in the international log 7 An unbiased comparison would not be complete until the labour market. and transportation tariff for logging, implicit margin, and other expenditures involved in the operation of the JV are considered. Nevertheless, this simple comparison implies an important point on the relationship between the form of international trade and the control over production cost. , leaves much room open to the JV to 3 The value-adding point, US$0.9/m maximize profits through its operation. In other words, the JV has taken 3 (Korea Economic Daily, The JV Svetlaya exports spruce logs to Japan for US$102/rn 13 May 1991).  234 the beginning almost full control of the size of the profit margin right from the productive of the production by internalizing the early stages of potential profit activity. This low value-adding point still leaves a huge that in the margin after applying an estimated logging cost based on U$37.6/m (Canadian Interior region of British Columbia in 1990 of 3  d, the KS /rn On the other hand, as far as the log price is concerne 3 $47 . 8 ) e-adding point, Agreement is nothing more than a simple import. Its valu and profit by the U$109.4/m suggests a very limited control over the cost 3 of international Japanese importer. This clearly illustrates that the form for appropriating trade determines which partner has the greater scope economic surplus. , prerequisite In the RFE where FDI is riskier than elsewhere, however ial skills and conditions for a successful FDI seem to go beyond manager advantages know-how. The fact that despite a number of potential low value-adding relating to infrastructure, labour supply and the very trates how fatal point, the JV Svetlaya is currently in serious trouble illus  RFE, in other environmental issues or institutional instability can be in the h has political clout words, how important it is to find a local partner whic on the issues beyond the reach of managerial skills. ET REGIONS 8.3. INTERACTIONS BETWEEN RESOURCE AND MARK IN NORTHEAST ASIA forces in itself: The global economy seems to have two contradictory omy becomes globalization and regionalization. While the world’s econ blocs as already more transnational, countries in a region form economic 8 Estimation from British Columbia Ministry of Forests, 1990. Comparative Value No. 1. Timber Pricing. Stumpage Appraisal Information Paper  235 seen in Europe and North America. The idea that Northeast Asia could be a big potential regional market in the 21st Century has been hypothesized in Japan by numerous Japanese authors such as Kanemori (1990), Ogawa and Murakami (1991),  Toma (1991), and Ogawa (1993).  Regionally,  prefectures on the Japan Sea side of the country have initiated and promoted the hypothesis now known as ‘Japan Sea Rim Economic Bloc’ (Toma, 1991). Northeast Asia is a region covering Japan, South and North Korea, three provinces of Northeastern China, and the Russian Far East. This region has many interesting features. Nearly 300 million people, or 10% of the total Asian population live in the region, but in terms of GNP Northeast Asia accounts for as much as 70% of total Asian GNP (Kanemori, 1990). Northeast Asia can be divided into two distinct regions: resource regions in the north and market regions in the south. Resource regions include the RFE and Northeast China and market regions cover Japan and Korea. In the region, countries of varied levels of economic development coexist; highly developed Japan, NIE South Korea, less developed but fast growing Northeast China, less developed North Korea and the RFE. For the region’s diverse endowment of resources and economic conditions, this region is often referred to as potentially one of the most dynamic economic regions in the world (Toma, 1991). A combination of rich resources in the RFE, inexpensive labour from China and North Korea, and technology and capital from Japan and South Korea suggests the potential for creation of a huge market within the region.  Table 8. 2 shows the distribution of the  endowment of productive resources in the countries within the region.  236 Table 8.2. Endowment Conditions in Northeast Asia  Labour  Natural Resources  Capital  Technology  RFE  Short  Abundant  Short  Short  NE China  Abundant  Sufficient  Short  Short  N. Korea  Abundant  Sufficient  Short  Short  S. Korea  Sufficient  Short  Sufficient  Sufficient  Japan  Short  Short  Abundant  Abundant  Source: (Kanemori, 1990)  Forming a regional market, Europe and North America take advantage of  the scale of the market. Northeast Asia, by contrast, features complemen tarity and diverse levels of economic conditions as the most cohesive forces to integrate into one big market with a regional GNP of US$3 trillion (Ogawa, 1993). The region is not completely free from negative aspects. Above all, a short-run outlook poses problems in realizing the potential.  Also, while  diversity of economic and resource conditions could function positively for the formation of a regional market in this region, the different cultural and political backgrounds of the countries tend to hinder the formation of such a market (Kanemori, 1990). When developing a project that requires close multinational cooperation among the countries in the region, one country’s interests often conflict with another’s as exemplified by the Tumen River Project.’ Another hindering factor is the differing views on the idea of the Japan Sea Rim Economic Bloc. The idea enjoys popularity in Japan, but it  has been less well received outside Japan. Dubious outsiders often point out that only part of Japan, mainly the less-developed Japan Sea side 1 Korea Economic Daily, 3 September 1991.  237 prefectures, is really keen on the idea. They could not play the immense role that Japan is supposed to play if the idea is to be implemented (Minaldr, 1993). Despite the above negative aspects, circumstances generally favour market integration in the long run (Ogawa, 1993). It will be focused on the trade, investment and long term projects associated with natural resources. The interaction between the resource and market regions in Northeast Asia is characterized by the flow of raw materials from north to south. Logs are flag-ship raw materials in such interaction, as seen in chapters IV, V and VI. Technologies and capital investments flow into the north from the south, as seen in Japanese compensation agreements, JV Svetlaya and Japanese sawmllling JV’s. The sparsely populated REF allows for foreign labour to work in the region as guest workers, like the Chinese loggers in the iv Svetlaya or North Korean loggers in the Russian-North Korean JV in Khabarovsldy Kray. If the interactions between the resource and market regions continue in Northeast Asia, both regions will certainly benefit and prosper in the long run. The region, with its complementarity and varied economic conditions, will capitalize on TNC activities to encourage and promote such interactions, and FDI will be a dominant form of interaction.  238 CHAPTER IX CONCLUSIONS The situation created by perestroyka and glasnost in the USSR brought attention to the RFE’s potential for interaction with neighbouring countries on the Pacific Rim.  Foreign direct investment has been one of these  interactions. This study has examined the response of the RFE to FDI through the case study of the Korean-Russian joint venture Svetlaya. This dissertation concludes with several implications of the FDI in the RFE based on the analytical framework in Chapter III. They are implications of the FDI for potential export growth in forest products from the RFE to the neighbouring Asia-Pacific countries, implications for regional development, policy implications of the iv for future foreign investment in forestry in the RFE, and lastly implications of FDI for resource and market interactions in the global context. 9.1. IMPLICATIONS FOR EXPORT GROWTH BY FDI Because of the small local market and the high cost involved in exporting to other regions in Russia, exports to the international market are a natural consequence of foreign investment in the RFE. The JV Svetlaya and all the Japanese investments in forestry are mainly motivated by export promotion. This can be justified by the presence of the world’s largest forest products importers in neighbouring regions.  Currently the JV  Svetlaya exports all its production to Japan and Korea, which best serves the financial interest of the iv. The export motivation is further confirmed by the export records of the enterprises with foreign capital participation.  Therefore, the foreign  239 investments in the RFE appear almost destined to export their products. In view of the lack of capital investment in value-added products and the inferior quality of such products, however, exports will largely be limited in the short run to logs. On the other hand, there also exist factors which hinder exports. Since the export of forest products is one of the few hard-currency-earning businesses, the foreign investors who are motivated to export may face severe competition from local industrial organizations for export markets. Local industries will not allow their forests to be used to serve the profit maximization goals of foreign investors. Local export organizations regard the export of logs as their own business. In addition, a xenophobic attitude towards foreign investment will hinder the effect on exports. In order to overcome this, the foreign partners of the JV’s in the RFE need to have the Russian partners and local communities understand the mutually beneficial aspects of the foreign investment. This could mean educating the Russian partners and the local people as to market economy. While the previous paragraph refers to long term prospects, the short term prospects for exports are equally discouraging. Apart from the burden of numerous new export taxes, log exporters suffer from the inflation which has risen much faster than the ruble to dollar exchange rate. The ruble cost of log production can not be covered by the dollars earned by exports. 9.2. IMPLICATIONS FOR REGIONAL DEVELOPMENT IN THE RFE Geographic location naturally draws the RFE towards integration into the booming economies of the western Pacific Rim as does regional economic policy. Since the REF’s immediate neighbours are at different levels of  240 economic development, the RFE is in a position to choose from these countries those partners who could best serve the region’s economic development. This study has demonstrated that FDI is potentially a strong agent for change in the regional economy of the host country. Regional develop ment, however, is not achieved by the unilateral action of foreign investment but through interaction between the forces of FDI and the hosting environment which could nourish the FDI to promote the regional development. The forces directed from FDI to the RFE have been positive and even enthusiastic as seen in the JV Svetlaya. By contrast, this study has shown through the case study that the local environment responding to such forces has not been so positive and welcoming. The problems the JV Svetlaya has faced are a major discouragement to the future FDI in the RFE. To attract more FDI for regional development, the findings of this study call for more changes inside the RFE. The changes are strongly related to casting off the natural resource illusion as mentioned at the end of Section 5.6.5. The natural resource illusion only helps keep the RFE more isolated from the fast growing economies in the Pacific Rim, If the resource illusion continues in the RFE, it will keep the region locked against beneficial forces coming from outside.  The only result is that these countries find  themselves falling behind the resource-poor countries which used to be poorer than they were. The point here is that national or regional wealth is not in the natural resources per se but in the global market they serve. So it is a matter of how one realizes the potential of the natural resources  and sells them in the global market. FDI could certainly be the vehicle to  241 bring regional development to the RFE via global markets in the long run. For the short run, however, this study suggests that local and regional governments should make all efforts to reduce the risk of FDI by developing well-thought-out and implementable action plans, as well as dispute resolution mechanisms. These would inspire confidence in both Russian and foreign partners in the operations of FDI projects in the RFE. 9.3. POLICY IMPLICATIONS FOR FDI IN THE RFE The new situation in the RFE has now made possible what was regarded as impossible within the closed economic system of the past. Opening up the region and allowing foreign investment have made the formerly un approachable region accessible. The investment environment in the RFE, however, is still highly problematical. For future forestry investments in the RFE this study implies the following. Instability in the Russian political and economic system has been observed as the main stumbling block for foreign investment in the RFE. However, the instability is almost inevitable since the legal tradition in Russia has a nature of constant instability in it. Russia is known as a relationship society rather than a rule-of-law society. In a relationship society rules are not really rules but rough guidelines for action, subject to endless variations and changes when applied in practice (Block, 1994). Investors should understand the nature of the Russian legal system and need to prepare themselves to face up to the instability rather than wait until it turns to stability. In addition, the RFE is a newly opened and frontier-like region, which imposes extra costs on foreign investors’ economic activities. Pioneering in  242 this frontier region, however, could secure the market and supply of resources for a long time once the investors are established. This could pay off the high cost involved in pioneering the region in the first place. In order to secure a competitive position in the region in the long run, foreign investors in the RFE should be prepared for instability and for the sacrifice of short-term financial returns to their investments. Local reaction to foreign investment is not always positive. Xenophobic attitudes toward foreign investment still linger especially over natural resources development, which is believed to be one of the areas where local industry should take control. The environmental protest against logging can also be interpreted in terms of xenophobia. Resistance tends to be amplified when the opponent is a foreign investor involved in exporting natural resources. In order to minimize the instability and the impact of poor infrastructure, the location of investment will play a major role in determining the actual investments in the RFE in the short run.  Foreign investment will be  concentrated on southern subregions where better resource stocks and infrastructure conditions are found. As already revealed from investment statistics, the investment will be directed mainly at Primorskiy Kray, Khabarovskiy Kray, and Sakhalin and Amur Oblasts. Within these regions, the export-oriented FDI can have an advantage by choosing coastal areas close to ports, as in the cases of the JV Svetlaya and the Weyerhaeuser proposals. In this respect, the undeveloped coastal region of Primorskiy Kray has a great potential for future foreign investment.  243 One of the strong messages from the experience of JV Svetlaya for future investments is environmental concerns.  Japan and North Korea, both of  which have been involved in either importing or logging in the RFE since the late 1960s, had never been challenged by environmental problems because of their logging practices until recently’. This is not because these two countries performed better environmentally in the RFE than the JV Svetlaya. In fact they could well have been worse according to recent . But what is different between then and now is the fact that 2 reports today’s world is no longer environmentally insensitive even to logging in a remote corner of Russia. In fact, the RFE itself has many environmentally sensitive areas because of the endangered animal and plant species, and the presence of indigenous people in the areas.  The JV Svetlaya  experience demonstrated that the presence of foreign enterprise tends to exacerbate local anger and protest if there is damage to the environment. Future investments in this region might need to avoid a direct involvement in logging as much as possible. This would favour investment in more value-added production such as processing and manufacturing, which has already been demonstrated by the relative success of such Japanese investments in the RFE, as discussed in Section 6.5. On the timing of the investment in the RFE, this investigation can hardly conclude by encouraging immediate FDI, in view of the current instability in the RFE and all the other problems described above. The dilemma from the investors’ point of view, however, is the fact that they cannot wait until every problem has been settled, just as one can not wait for a better 1 It was only after the RFE was opened up to the outside world in 1991 that the North Korean logging joint ventures got international media attention for their destructive environmental performance and harsh camp conditions. 2 Far Eastern Economic Review on 4 April, 1991 and 9 September, 1993  244 computer tomorrow. What is more important is to use a computer today and get the job done. Although the analogy does not suggest a delayed investment, the actual investments will hinge on the situations of investing countries. For those countries like Korea, which is desperate for logs for its economy now and seeks long-term stable supply and diversification of supply sources, an early investment would be worth the cost of initial risks. The investment would probably be large scale if the country seeks a long-term security of timber supply. However, for large scale investment, as the case study suggests, a gradual capital investment would help to reduce the absolute risk of financial loss. The financial loss to the JV Svetlaya could have been less than what it is now if a massive capital injection in the early stages of the project had been avoided.  Gradual investment would  also be a better strategy while the investor becomes familiar with the unstable investment environment in the RFE. The investments by countries less desperate for logs and with alternative sources of supply, however, should be experimental.  Japanese-style  investments would be applicable here. Japan, which is relatively well informed about the RFE, is still reluctant to undertake a major investment  and keeps its investments small and experimental.  Other potential  investors would do well to heed their experience and follow their example. In any case, the risk of investment relates to the size and sector of activities. The case study suggests that investment on a small scale and in the non-logging sector would be less risky than large scale investments in logging.  245 This study has explained South Korea’s experience of a joint venture in the RFE. This study suggests that the ‘soft’ parts of the investment are more crucial for success than the ‘hard’ parts are. While ‘hard’ problems can usually be solved, as demonstrated by iv Svetlaya, the soft’ problems tend to be difficult to overcome and require more effort from the investor. Through this study it is also observed that the establishment of the joint venture Svetlaya was more motivated by political reasons and corporate characteristics than by financial returns. This is proved by the fact that the joint venture is still being operated, though with reduced capacity. This implies that the Russian Far East is a region in which it is worth maintaining a foothold despite initial financial loss, which is the almost inevitable cost of operating a business venture in this frontier-like and unstable region. It seems this conclusion applies to South Korean forestry investment, but whether or not the same conclusion can be drawn for investment from others countries remains to be seen. 9.4. IMPLICATIONS FOR THE INTERACTIONS BETWEEN RESOURCE AN]) MARKET REGIONS This study has demonstrated that a potential interaction could take place between resource regions in the north and market regions in the south in Northeast Asia. An interesting pattern can be observed if the result of the study is put in the global context and in the long term perspective. As mentioned at the beginning of this dissertation, the world’s three major forest regions in the northern hemisphere are located north of and close to the world’s major market regions. The northern forest regions served the southern market regions.  / As the world’s major market reg 246 ions have shifted from Europe to the United States, the world’s major forest product exporting regions also have moved from the Nordic countr ies to 3 Canada. Now the centre of the world’s economy is again movin g from the United States to East As ia, and consequently we can expect similar things to happen with the major forest regions. To predict whether or not resource-market interactio ns, similar to what occurred in Europe and North America, would take pla ce in Northeast Asia would certainly req uire another major piece of resear ch. If in fact they do occur, how ever, what will significantly dis tinguish Northeast Asia from the earlier experiences will be FDI as a main channel of interaction. The extent of the interactions is potentially bro ad in the long run because of the divers e nature of the economic condition s in the region. However, the extent of potential integration of resource regions into market regions by TNC activi ties would largely be limited in the short run because of the political ins tability in Russia and the unce rtainty in North Korea.  3 Further research would be needed to confirm this observation.  247 BIBLIOGRAPHY All Nippon Checkers Corporation. 1989. Illustrated Commercial Foreign Woods in Japan. All Nippon Checkers Corporation. Alonso, W. 1964. Location and Land Use: Toward a General Theory of Land Rent. Harvard University Press, Cambridge. Anonymous. 1988. Japan Marketing Handbook. Euromonitor Publications Limited, London. Anonymous. 1991. 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Interviewed in Hyundai’s Head Office in Seoul. Yamada, Shiro. 1993. Personal Communication on 26 August, 1993. Chief Representative of Khabarovsk Office, Nissho Iwai. Yoon, Chan-Hyuk. 1992. Foreign Investment Related Institution in the Russian Republic. Research Report 92-02. Center for Northern Region, Korea Institute for International Economic Policy. Published in Korean. Zausaev, V. K. 1993. Forestry Industry in the Far East. Unpublished Paper. Zausaev, V. K., Sheingauz, A. S. and Runik, V. Y. 1984. Problemy Razvitiya Lesnogo Kompleksa Dal’nego Vostoka (Problems of Development of the Timber Sector of the Far East), Khabarovsk. Published in Russian.  266 APPENDIX I  SUMMARY OF THE JOINT VENTURE SVETLAYA  Project amount: Partners:  US$54 million Hyundai Resource Development (25%) Hyundai Wood Industries (25%) Far East Forestry Ministry of Maritime Province (50%)  Project area: Production target: Project period: Equity share: Authorized capital invested: (as of Feb. 1991)  2 9.9 billion m 3 over 30 years one million m 30 years (1990 2019) 50:50 US$13 million -  Manpower (as of 11 April 1992): 200 Russians, 350 Chinese-Koreans 15 Koreans (managerial positions) million Equipment: US$40 Machinery and US$4 million Parts (as of 11 April 1992): 3 in 1991, mostly spruce Logs shipped to Korea and Japan: 250,000 m 102/rn as of May 1991, 3 100 U$ Export price to Japan: 3 1 million m Target in 1992: -  Loading port: Handling capacity: Simultaneous berthing capacity: Sailing time to Ulsan where Hyundai Wood processing mill is located:  Svetlaya /month 3 50,000 60,000 m two 10,000 t vessel  Problems as of April 1992:  1. Difficulty of withdrawing hard currency from the bank accounts. 2. Obligatory sale of 50% of hard currency earnings for Rubles to Russian State Bank 3. Repatriation of profits is withheld  -  3.5 days  267 APPENDIX  II  ORGANIZATIONS INTERVIEWED KOREA: 1. Hyundat Resource Development Co., Ltd. 2. Samsung Corporation 3. Korea-CIS Economic Association 4. Korea-Russian Far East Association 5. Korea Institute for International Economic Policy 6. Forestry Research Institute, Office of Forestry THE RFE: (Khabarovsk) 7. Economic Research Institute, Russian Academy of Sciences Far Eastern Division 8. Far Eastern Institute of Market Economy, Ministry of Economy of Russia 9. Khabarovsk Forestry Management, Ministry of Forests 10. Far East Forestry Research Institute 11. DaPles 12. Daewoo Corporation 13. Kohap Corporation 14. Nissho Iwai Corporation 15. Sumitomo Corporation 16. Mitsubishi Corporation 17. Mitsui & Co. Ltd. 18. Toyota Tsusho Corporation 19. Marubeni Corporation 20. Weyerhaeuser (Vladivostok) 21. Korea Trade Promotion Corporation (KOTRA) 22. Hyundai Corporation 23. Kohap Corporation 24. Rosskor Fishery Co., Ltd. (Russian-Korean JV) 25. Itochu Corporation 26. Mitsui & Co., Ltd. (Svetlaya) 27. iv Svetlaya (Korean-Russian Joint venture)  268 JAPAN: (Sapporo) 28. Forest Policy Program, Faculty of Forestry, Hokkaido University 29. Slavic Research Center 30. Northern Regions Center 31. Mitsuibussan Forestry Co., Ltd. (Tokyo) 32. Forest Policy Program, Faculty of Forestry, Tokyo University 33. Japan Wood-Products Information and Research Center (JAWIC) 34. Japan Association for Trade with Russia and Central-Eastern Europe (ROTOBO) Council of Forest Industries Canada (COFI) 35. 36. Japan Lumber Importers’ Association 37. Marubeni Corporation 38. Itochu Corporation 39. Samsung Japan Corporation (Tsukuba) 40. Faculty of Forestry, Tsukuba University 41. Forest Policy & Economics Laboratory, Forest Management Division, Forestry & Forest Products Research Institute Question Categories for the Interviews: • • • • • • • • • • • • •  Korean Government policy on the outward FDI Korea’s perception on the RFE Corporate strategy on the RFE in Korea Regional development policy in the RFE Russian Government policy on inward FDI Local perception on the FDI in forestry Local perception on log exports by JV Recent industrial reorganization in forest industry in the RFE Resource ownership and control Hyundai-Svetlaya Joint Venture Project operation Local response to the iv Svetlaya Environmental problems related to Forestry investment in the RFE Japanese iv’s in wood processing industry in the RFE • Japan’s experience in the forest product trade with the RFE • Japanese corporations perception and strategy on the RFE • Russian logs in Japanese market  269 APPENDIX  III  INDIVIDUALS  INTERVIEWED  Sapporo, Japan Dr. Hiroald Kaldzawa Instructor of Forest Policy Faculty of Agriculture Hokkaido University  Mr. Matuski, Toshthiro Chairman Japan Lumber Importer’s Association  Dr. Kilchi Mochizuki Professor of Economics Slavic Research Center Hokkaido University  Mr. Masato Suzuki Forest Product Information Specialist Council of Forest Industries Canath (COFI) Japan Office  Mr. Hiroyuki Kurosaka Staff of Research Divison Northern Regions Center Mr. Mineo Anada Manager Lumber Section Sapporo Branch Mitsuibussan Forestry Co., Ltd.  Tokyo, Japan Mr. Akihiko Araya Manager Overseas Research Division Japan Wood-Products Information and Research Center (JAWIC) Mr. Kazuo Ogawa Vice Director General Japan Association for Trade with Russia and Central-Eastern Europe (ROTOBO) and Institute for Russian & Fast-European Economic Studies  Mr. Kazunori Ohira Department Officer CIS Department Overseas Planning & Development Division Itochu Corporation Mr. Munehito Matsuo Manager American & Russian Log Section Soft Wood Department Itochu Corporation Mr. H. Matsubara Manager Russia Section International Corporate Planning Dept Marubeni Corporation Mr. Osamu Asaniizu General Manager Softwood Section Lumber & Wood Products Dept.-II Marubeni Corporation  270 Mr. Jung-Chi Oh General Manager Samsung Japan Co., Ltd. The International Division of Samsung Group  Dr. Vadim Zausaev Chief of Department Far Eastern Institute of Market Economy Ministry of Economy of Russia  Tsukuba. Japan  Mr. Vladimir Pominov Head of Management Khabarovsk Forestry Management Ministry of Forests  Dr. Haruyuld Mochida Laboratory Chief Forest Policy & Economics Forest Management Division Forestry & Forest Products Research Institute Ministry of Agriculture, Forestry and Fisheries Dr. Narita Gami Associate Professor Faculty of Forestry Tsukuba University Khabarovsk, Russia Dr. Pavel Minakir Director of Economic research Institute Russian Academy of Sciences Far Eastern Division and Former Deputy Governor of Khabarovskiy Kray Dr. Alexander Sheingauz Vice Director General Economic Research Institute Russian Academy of Sciences Far Eastern Division Dr. Alexander Ivanchikov Director of International Research and Consulting Center Intel Group Project Company Economic Research Institute Russian Academy of Sciences Far Eastern Division  Mr. Dmitry F. Efremov Director, Far East Forestry Research Institute, Khabarovsk  Mr. Babushkin Gennady Ivanovich Vice Director Dailies, Khabarovsk Mr. Takeo Ishino Senior Researcher Overseas Research Department Japan External Trade Organization (JETRO) Mr. Chul Kim Chief Representative Daewoo Corporation Khabarovsk Office Mr. Maeng-Sik Joe Chief Representative Kohap Group Khabarovsk Office Mr. M. Ito General Director Mitsubishi Corporation Khabarovsk Office Mr. Hisashi Ichii Representative Marubeni Corporation Khabarovsk Office  271 Mr. Tsunichi Nakazawa Chief Representative Sumitomo Corporation Khabarovsk Office Mr. Shiro Yamada Chief Representative Nissho Iwai Corporation Khabarovsk Office  Mr. Tomita Kenji Representative Mitsui & Co., Ltd. Khabarovsk Office Mr. Sandy Bill Manager International Project Weyerhaeuser Company  Vladivostok. Russia MR. Boom Sun Lee Director Korea Trade Promotion Corporation Vladivostok Office Mr. CM Yong Son General Manager Hyundai Corporation Valdivostok Office Mr. Kyung Ho Kong Director Russian-Korean Joint Venture ROSSKOR Fishery Co., Ltd. Mr. Sun Tae Oh Chief Representative Kohap Vladivostok Office  Mr. T. Kasai General Manager Representative in Valdivostok Office Itochu Corporation Mr. Mitsugu Murata Chief Representative Mitsui & Co., Ltd. Vladivostok Office Svetlaya. Russia Mr. Dae Sik, Kim Senior Manager Russia-Korea Joint Venture Svetlaya Mr. Alexander Ivanovich Director Russia-Korea Joint Venture Svetlaya Seoul. Korea Mr. Kang-Soo Choo Representative Director Senior Executive vice President Hyundai Resource Development Co., Ltd. Mr. Jong-Young Won Managing Director Hyundai Resource Development Co., Ltd. Dr. Chang Jae Lee Research Fellow Korea Institute for International Economic Policy  272 Mr. Sang-Jin Choi General Manager Socialist Countries Operations Division Samsung Corporation Head Office in Seoul Mr. Ml Sung Lee Manager Korea-Russia Far East Association Mr. Choong-Keun Cho Executive Secretary Korea-Russia Economic Association  I— (N  F o r e s t e d  3  138  146734  5327 364 (0.1)  38 106 50 26 3  275007 (55.1)  11160 48837 21777 19053 22121  1 9  286 (0.1)  58  119 35 41 23  22856 8 2451  36680 (7.4)  31  608 978 9748  A  r  e  9795 10568 104 190 4571 2551 665 59 3222 334  15611 19609 (3.9) (3.1)  119  840 482 1720  APPENDIX IV  F o r e Cutover Gap Area  502 282 79 160  2102 96 449  565 67 87 286  3670 (0.7)  760 28 811  2604 (0.5)  a  0 u e n Gsed Forests Artifidafly Burned Non-dosed Open By Forests Artificial Artificial Open Fires Forests Forests Forests Forest  Total  S  192814  Total  46081  a  Othes  r e  Wet Land  36016  A  Road Water Etc  18534  Non-Forested  Farm Land  125  34  4323  Total  Grand Total  64224 257038  336 17274 5750 22945 34772 779  5226  90 10766 1073 9757 26709 98  11931 77063 30742 43907 71772 7094 135 5995 4371 3400 7135 566  14608 499547 (29.2) (100.0)  67  35  43 10 20 24  84509 (16.9)  353  42  156 548 895 50  6360 323 (1.3) (0.1)  40136 (8.0)  93  11595  59789  107 9230 13 41 14752 (2.9)  24992 20962 37000 6315 78174 353467 (70.8) (15.6)  3180 1868 14856 930  10833  426  SubTotal  I s  LAND CLASSIFICATION OF THE FOREST FUND IN THE RUSSIAN FAR EAST  Subregion  Yakutia PrimorkiyKray AmurOblast KamchatkaOblast KhabawvskKray MagadanOblast  SakbalinOblast’  Total (%)  Source: Sheingauz et al. (1989)  274 APPENDIX V NAMES OF POPULAR TREE SPECIES IN THE RFE Scientific  English  Russian  Abies sibirica  Siberian silver fir  Pikhta  Larix gmelini (or Larix dahurica)  Dahurian larch  Listvennitsa Nakyopsong  Karamatsu  Picea jezonensis  Ezo spruce, White wood  Elka  Kamunbinamu  Ezomatsu, Kuroezomatsu  Pin us koraiensis  Korean pine  Kedr, Sasna koreiskaya  Chatnamu  Chosenmatsu, Chosengoyoo  Scots pine, Sosna European red pine  Kujuchuksong  Akamatsu  Betula ermanii  Russian rock birch  Bereza  Chachaknamu  Kabanoki  Betula mandshurica (or B. platyphylla)  Machurian birch  Bereza  Chachaknamu  Kabanoki  Fraxinus spp.  Ashes  Iasenj  Mulpurenamu  Toneriko  Fraxinus mandshurica  Japanese ash  Juglans mandshurica  Machurian walnut  Orekh  Karenamu  Kurumi  Phellodendron amurense  Amur cork tree  Barkhat  Kolknamu  Kihada Mikoro  Populus maxim owiczii  Japanese poplar  Topolj  Popuranamu  Doroyanagi, Doro  Populus tremula  Aspen  Osina  Sashinamu  Yoropianasupan Yamanarashi  Quercus mongolica  Japanese oak Dub  Chamnamu  Mongolinara  Korean  Japanese  (Coniferous) Chunnamu  -  Pinus sylvestris  Todomatsu  (Hardwood)  275  Scientific  English  Russian  Tilia spp  Lime  Lipa  Tiia aniurensis  Basswood  Ulmus davidiana var. japonica,  Japanese elm hem  Ulnius laciniata  Elm  Korean  Japanese  Cont’d (Hardwood) Pinamu  Shinanoki  Neureupnamu  Harunire, Akadamo, Nere, Neri, Niganire Ohyoonire, Atsuni, Yajina, Atshu, Ubanire,  Source: All Nippon Checkers Corporation (1989), Anuchin (1985), Hong and Son(1993), bra (1981), and Johnson (1984).  APPENDIX VI RUSSO-JAPANESE FORESTRY J/V’S 1. Name of the joint venture 2. Location 3. Established in 4. Began operation in 5. Invested capital 6. Share of the investment 7. Production and Exports/yr. 8. No. of employment 9. Others 1. 2. 3. 4. 5. 6. 7.  Igiruma-Tairiku Novayaigiruma, Irukutsk 1987 April 1988 2 million rubles (440 million yen) Irukutsk State Forestry Department 51%: Tairiku Boeki 49% Log input: 160,000 m /yr. 3 Output: European Red Pine lumber: 95,000 m /yr. 3 Exports to Japan: 70,000 m 3 /yr. 8. 205 persons 9. Main products: Fixture, rafter and rough sawn lumber for resawing in Japan 1. Ridga 2. Nanai district, Khabarovskiy Kray 3. 1989 4. July 1990 5. 1.2 million rubles (276 million yen) 6. Dal’exportles 90%: Itochu Corporation 10% 7. Hardwood lumber production: Log input (90% ash, 10% oak); 18,000 m /yr. 3 Output; 8,000 m /yr. 3 8. 160 persons 9. Originally the Japanese share was 49% (29.4% by Itochu, 19.6% by Shinten Jitsugyo, subsidiary of Itochu)  276  277 1. 2. 3. 4. 5. 6.  Samon De-Kastri, Khabarovskiy Kray 1990 December 1992 1 million rubles (240 million yen) Dal’exportles and De-Kastri Municipal Forestry Department 80%: Nichimen 20%. 7. Spruce lumber and half products: 19,000 m /yr. 3 8. 60 persons 9. MIII layout and production technology will be guided by Shiba Lumber Company  1. Aito 2. Angarusk, Irukutsk 3. 1992 4. April 1993 5. 830,000 rubles 6. Japan 34%: Russia 66%: 7. Larch(30%) and European Red Pine (70%) lumber: 18,000 m /yr. 3 8. 32 persons 1. 2. 3. 4. 5. 6. 7.  Kedor Dal’nirechensk, Primorskiy Kray 1993 Autust 1993 US$600,000 Eiwa Trading 50%, Primorsklesprom 50% Spruce and Larch lumber: Log input: 22,000 m /yr. 3 Production: 13,200 m /yr. 3 /yr., Local supply: 6,000 m 3 Export: 7,200 m /yr. 3 8. 40 persons  1. Roren-Chovuefuka 2. City of Vladivostok 3. 1992 4. August, 1993 5. US$300,000 6. Vladio (9 Japanese investors group) 50%: three Promorsk Corporations (for forestry, fishery, and tourism and shipping): 50% 7. Spruce lumber: Log input: 40,000 m /yr. Production: 23,000 m 3 /yr. 3  278 8. 47 persons 9. Vladio is invested by Orient (Russian Timber importer), Kanekiyo Lumber, tomigasald Industry, Ichimasa Kamaboko, Ueda Ironwork, Niigata Travel, Hokuriku Bank and Bostok 1. 2. 3. 4. 5. 6. 7.  T.M. Baikal Sibirsk, Cherenhopo district, Irukutsk 1991 September, 1993 12 million rubles (960 million yen) Tajima Mokuzai 30%: Mitsui & Corporation 19%: Jrukutsk lesprom 51% European red pine lumber and sleeper. /yr., Production: 136,000 m 3 Log input: 220,000 m /yr. 3 Export 60% of finished or semi-finished products (80,000 m /yr) to 3 Japan. 8. 47 persons 9. The total annual sales for the exports are estimated to be 3.3 billion yen and the domestic sales be 1 bfflion yen. 1. 2. 3. 4. 5. 6. 7,  Vanino Tairyuku Sovietskaya-Gavan 1991 October 1993 US$1.5 million Tairyuku Boeki 50%: Northeast Gold Mine 50% Spruce lumber: Log input: 90,000 m /yr. Production: 55,800 m 3 /yr. 3 Export to Japan 43,500 m /yr., Local supply: 12,300 m 3 /yr. 3 8. 120 persons  Source: Nikkan Mokuzai Shinbun( 1993)  


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