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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 RESOURCEDEVELOPMENT IN THE RUSSIAN FAR EAST AND ITSIMPLICATIONSFOR JAPANESE AND KOREAN LOG MARKETSCase Study: South Korean-Russian Forestry Joint Venture,SvetlayaBYKWANG-IL TAKB. Agr., Korea University, 1977M.Sc. F., Lakehead University, 1988A THESIS SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OFDOCTOR OF PHILOSOPHYinTHE FACULTY OF GRADUATE STUDIESFACULTY OF FORESTRY(Department of Forest Resources Management)We accept this thesis as conformingto the required standardTHE UNIVERSITY OF BRITISH COLUMBIAOctober 1994© Kwang-I1 Tak 1994in presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. it is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)__________________________Department of______________The University of British ColumbiaVancouver, CanadaDate OcrtI3R i’c_, ,?‘L1L.DE-6 (2/88)ilABSTRACTLocated in one of the world’s most resource-rich regions, the Russian FarEast suggests major potential interactions with one of the world’s fastestgrowing economies in Northeast Asia, namely, Japan, Korea and China.Russian economic reform and the allowance of foreign direct investmenthave increased the chance of realizing such potential.The primary purpose of this dissertation is to investigate the role of SouthKorean investment in developing the forest resources of the Russian FarEast and exporting the raw materials produced to Japan and South Korea.The secondary purpose is to investigate the opportunities for andconstraints on the realization of the potential economic complementaritypresent among the three countries. The Russian Far East could help Japanand South Korea to increase the security of resource supply for the twocountries’ economies, whereas the Russian Far East could take advantage ofthese countries’ capital and technology to speed up regional economicdevelopment and the region’s integration into the Asia-Pacific economy.An analytical framework is developed to analyze the foreign directinvestment, or transnational corporate activities, in forest developmentprojects in the Russian Far East. This study has used a case study approachfor the analysis. The South Korean-Russian forestry joint venture Svetlayawas selected for the purpose. The case study reviewed the joint venture’sthree year operation through interviews both on site and in the head officeof the Korean investor, and the interviews were further supported by afield visit to the joint venture’s project site in Svetlaya, Primorskiy Kray.inThis dissertation has demonstrated that foreign direct investment stillposes many problems to realize the forest resource potential in the RussianFar East and consequent increase in exports to the Pacific Rim countries.Nevertheless, this dissertation suggests that joint venture as an alternativemeans to, for example, KS agreements, will be preferably employed toincrease exports of forest products from the region. This study alsosuggests that the future foreign investment should be directed towardsmore processing-oriented activities than logging which aggravates theregion’s negative attitudes towards foreign investment as exhibited in thecase study.This study also concludes that a definite interest in forestry investmentexists in the Russian Far East, though political and economic instabilitybecomes the largest barrier to attracting foreign investments in the shortterm and to integrating them into the Asia-Pacific economy in the longterm. 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 ofthe interactions between forest regions and world core markets through ananalysis of the same interactions in Northeast Asia.ivTABLE OF CONTENTSPAGEABSTRACT iiLIST OF TABLES ixLIST OF FIGURES xiiiLIST OF MAPS ixLIST OF PHOTOGRAPHS xvABBREVIATION xviRUSSIAN TRANSLITERATION TABLE xviiACKNOWLEDGMENTS xviiiCHAPTER I INTRODUCTION 11.1. INTERACTIONS BEIWEEN FOREST RESOURCE AND MARKET REGIONS 11.2. NEW CURRENTS AROUND THE RUSSIAN FAR EAST 31.3. INTERNATIONALIZATION OF KOREA’S FOREST INDUSTRY 61.4. GLOBALIZATION OF ECONOMIC ACTIVITIES 81.5. PROBLEMS OFTHE STUDY 81.6. PURPOSES OFTHE STUDY 111.7. SCOPE OF THE STUDY 131.8. STRUCTURE OF THE DISSERTATION 131.9. LIMITATIONS OF THE STUDY 141.10. SIGNIFICANCE OF THE CURRENT STUDY 15CHAPTER 11 LITERATURE REVIEW 172.1. MODELS OF ECONOMIC ACTIVITIES 172.2. THE REF AND REGIONAL DEVELOPMENT 212.3. FOREST SECTOR IN THE RFE 232.4. EXTERNAL FORCES AND REGIONAL DEVELOPMENT IN THE RFE 252.5. TRANSNATIONAL CORPORATION AND THE RFE 28VCHAPTER IIIMHOD-32CHAPTER IV HOME COUNTRY ENVIRONMENT - SOUTH KOREA 394.1. NATIONAL ECONOMIC CONDITIONS 394.1.1. The National Economy 394.1.2. Forest Resources in Korea 434.1.3. DemandandSupply 474.1.4. Log Imports 504.1.5. WoodUse 534.1.6. Structural Changes in the Forest Products Industry 564.2. GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT 594.2.1. Korea’s Outward Foreign Direct Investment 594.2.2. Government Policy Toward Overseas Investment 614.2.3. Overseas Investments in Forestry 644.3. PERCEPTION OF HOST COUNTRY-THE RUSSIAN FAR EAST 704.3.1. Northern Policy 704.3.2. Economic Relations Between Korea and Russia 734.3.2.1. Economic Aid 734.3.2.2. Trade 744.3.2.3. Investments 754.3.2.4. Other Economic Cooperation 784.4. Corporate Interests in the RFE 794.4.1. Trade with the RFE 794.4.2. Investments in the RFE 824.4.3. Korean Industrial Park in Primorskiy Kray 854.4.4. Joint Mineral and Energy Resource Development 864.4.5. Fisheries Cooperation 884.4,6. Science and Technology Transfer 884.4.7. Korean Minority in the RFE 89vi4.5. SUMMARY AND DISCUSSION -91CHAPTER V HOST COUNTRY ENVIRONMENT -THE RUSSIAN FAR EAST- --935.1. REGIONAL ECONOMIC CONDITIONS 935.2. REGIONAL ECONOMIC POLICY 1015.3. INTERACTIONS WITH NEIGHBOURING COUNTRIES 1035.3.1. Foreign Trade 1045.3.2. Foreign Investment 1095.3.3. Problems of Foreign Investment in the RFE 1145.4. FOREST RESOURCE CONDITIONS 1165.4.1. Land Classification in the Russian Far East 1175.4.2. Forest Classification in the Russian Far East 1215.4.3. Species, Volume and Distribution 1245.4.4. Annual Increment 1305.4.5. Rehabilitation of Damaged Areas 1345.4.6. Accessibility 1365.4.6. Cut Control System 1385.5. FOREST ADMINISTRATION 1425.5.1. Before the 1988 Reform 1435.5.2. The l988Reform 1445.5.3. The 1991 Reform 1455.5.4. Post USSR Reform 1465.5.5. Resource Allocation System 1465.5.6. Rights to Managing the Forest Resources 1475.6. FOREST INDUSTRY 1495.6.1. AAC and Annual Harvest 1495.6.2. Production 1515.6.3. Exports of Forest Products 1575.6.4. Export Control Mechanisms 161vii5.6.5. Foreign Investment in Forestry 1635.6.6. Recent Developments in the Industrial Organizations 1665.7. SUMMARY AND DISCUSSION 169CHAPTER VI JAPAN: THE FIRST COMER, MAJOR EXPORTMARKET AND COMPETITOR 1716.1. RUSSIAN LOGS IN THE JAPANESE MARKET 1716.2. FOREST PRODUCTS TRADE WITH THE USSR 1756.2.1. KS Agreements 1786.2.2. First KS Agreement 1796.2.3. Second KS Agreement 1806.2.4. Third KS Agreement 1816.2.5. Fourth KS Agreement 1826.2.6. Industrial Chips and Hardwood Pulpwood Projects 1836.3. INCENTIVES AND CONSTRAINTS INVOLVED IN THE TRADE WITH USSR- -1856.3.1. Incentives 1866.3.2. Constraints 1896.4. JAPANESE FORESTRY INVESTMENT IN THE RFE 1926.5. COMPETITION IN THE RFE 1956.6. SUMMARY AND DISCUSSION 197CHAPTER VII CASE STUDY - KOREAN-RUSSIAN FORESTRYJOINT VENTURE SVETLAYA 1987.1. THE JOINT VENTURE 1987.2. FOREST RESOURCE 2007.3. REFORESTATION AND RESEARCH 2047.4. REGIONAL EFFECTS OF THE JOINT VENTURE 2107.4.1. Production and Exports 2107.4.2. Regional Development 2127.5. INTERACTION WITH THE INVESTMENT ENVIRONMENT 2167.5.1. Environmental Problems 217viii7.5.2. Institutional Instability -2197.5.3. Labour 2217.5.4. Infrastructure 2237.6. SUMMARY AND DISCUSSION 224CHAPTER VIII FOREIGN DIRECT INVESTMENT AND RESOURCEAND MARKET INTERACTIONS IN NORTHEAST ASIA 2308.1. LESSONS FROM THE JV SVEI’LAYA 2308.2. FOREIGN DIRECT INVESTMENT AS COMPARED TOCOMPENSATION AGREEMENT 2328.3. INTERACTIONS BETWEEN RESOURCE AND MARKET REGIONS INNORTHEAST ASIA 234CHAPTER IX CONCLUSIONS 2389.1. IMPLICATIONS FOR EXPORT GROWTH BY FDI 2389.2. IMPLICATIONS FOR REGIONAL DEVELOPMENT IN THE RFE 2399.3. POLICY IMPLICATIONS FOR FDI IN THE RFE 2419.4. IMPLICATIONS FOR THE INTERACTIONS BETWEENRESOURCE AND MARKET REGIONS 245BIBLIOGRAPHY 247APPENDIX I : SUMMARY OF THE JOINT VENTURE SVETLAYA 266APPENDIX II : ORGANIZATIONS INTERVIEWED 267APPENDIX III: INDIVIDUALS INTERVIEWED 269APPENDIX IV : LAND CLASSIFICATION OF THE FOREST FUNDIN THE RFE 273APPENDIX V : NAMES OF POPULAR TREE SPECIES IN THE RFE 274APPENDIX VI : RUSSO-JAPANESE FORESTRY JV’S 276ixLIST OF TABLES3.1. Relationship Between the Analytical Framework andthe Organization of the Dissertation 374.1. Major Korean Economic Indicators 414.2. Share of GNP by Industry 424.3. Land Classification in Korea in 1990 444.4. Forest Types in 1990 444.5. Forest Ownership in 1990 454.6. Growing Stock Volume per hectare in Various Countries 454.7. Age Class Structure in 1990 474.8. Wood Consumption and Supply 484.9. Log Imports 514.10. Hardwood Log Imports by Source 524.11. Softwood Log Imports by Source 534.12. Trend of Wood Use 544.13. Rates of Housing Starts in Korea and Other Countries 554.14. Shares in Total Exports 574.15. Share of the Use of Imported Logs 594.16. Korea’s Overseas Investment 604.17. Logs Imported through Overseas Investment 654.18. Korea’s Overseas Investments in Forestry 664.19. Overseas Forestry Investments by Country 674.20. Overseas Forestry Investments by Ownership in 1992 684.21. Korea’s Trade with Russia 754.22. Korean Investment in the Former Soviet Union 764.23. Investment by Region and Industry (approved amount) 774.24. RFE’s Trading Partners 804.25. Korea’s Trade with the RFE 80x4.26. Korea’s Trade with the RFE by Sub-region in 1992 824.27. Korea’s Investments in the RFE (Nov. 1992) 834.28. Geographic Distribution of the Investments (Nov. 1992) 834.29. Korea’s Participation in the Resource Development in the RFE 875.1. Area and Population of the RFE 945.2. National Share of Industrial Output by Region in 1990 965.3. Geographic Distribution of Regional Economy in the RFE, 1 990---------- 985.4. Geographic Distribution of Industrial Output in the RFE, 1990 995.5. Composition of Industry within Territory in 1992 1005.6. Foreign Trade in the RFE in 1992 1055.7. Composition of Exports from the RFE 1065.8. Composition of Imports to the RFE 1065.9. Orientation of the RFE’s Trade 1075.10. Trading Partners of the RFE in 1992 1085.11. Number of Joint Ventures Registered in the RFE 1105.12. Joint Ventures in Operation in the RFE 1115.13. Geographic Distribution of the Joint Venture by Country of Origin 1115.14. RFE’s Trade by Firms with Foreign Capital Participation in 1992 1125.15. Foreign Trade and Domestic Sales by Joint Venture 1135.16. Forested Area in the RFE 1175.17. Basic Indices of the Forests in the RFE 1185.18. Land Classification of Forest Fund in the RFE 1195.19. Changes in Land Classification from 1966 to 1988 1205.20. Forest Fund under Control of Forest Authority Classified by Group 1225.21. Changes in Forested Area by Group in the RFE (1 million ha) 1235.22. Species Composition in the RFE 1255.23. Coniferous Species 1265.24. Deciduous Species 128xi5.25. Growing Stock Volume per hectare between Canada and the RFE 1295.26. Changes in Species Composition Over Time 1305.27. Annual Increment in the RFE 1315.28. Six Age Classes of Russian Forests 1325.29. Maturity of Stocked Forests under Control of State Forest Management 1335.30. Trend of Changes in Forested Area and Volume in the RFE 1335.31. Reported Area Damaged by Forest Fires in a Yearbetween 1978 and 1987 1345.32. Forest Fire Statistics in 1992 1355.33. Reforestation in the RFE (1988) 1365.34. Areas Controlled by Different Organizations in the RFE 1365.35. Area and Volume of Stocked Forests, Exploitable underControl of Forest Authority 1375.36. AAC in the RFE 1495.37. AAC and Actual Harvest Volume in 1992 1505.38. Annual Principal Harvest Volume, 1965 - 1990 1515.39. Production of Main Forest Products in 1991 1535.40. Production Trend of Wood Products between 1965 and 1991 1545.41. Exports of Forest Products from the RFE 1585.42. Forest Products Exports from the RFE in 1991 1595.43. Exports of Forest Products to Japan 1605.44. Composition of the Imports by Product Category (1983 - 1992) 1605.45. Species Composition of the Softwood Logs and LumberImported from the USSR (1983 - 1992) 1615.46. Tax Amount for Forest Products 1625.47. Subregional Distribution of FDI in Forestry (October, 1992) 1646.1. Wood Demand and Supply in Japan 1726.2. Logs and Lumber Imports by Japan 1746.3. Japan’s General Commodity Trade with USSR 1766.4. Composition of the Imports by Product Category (1983 - 1992) 176xli6.5. Species Composition of the Softwood Logs and Lumber Importedfrom the USSR(1983 - 1992) 1776.6. Summary of the 4 KS Agreements 1836.7. Summary of the Industrial Chips and Pulpwood Agreements 1846.8. Changes in Industrial Structure in Japan 1916.9. Share of Wood Products in the Imports from the USSR 1917.1. The areas and Growing Stock Volume to cut in the first 5 years(1991-1996) 2027.2. Reforestation by the JV 2078.1. Value-Adding Points by FDI and KS Agreement 2338.2. Endowment Conditions in Northeast Asia 236xnlLIST OF FIGURES3.1. Framework of the Dissertation 34A5.1. Forestry Administration System of the USSR before the 1988 Reform ---144LIST OF MAPS1.1. Korea and its Surroundings-45.1. The Russian Far East 955.2. Basic Infrastructure in the RFE 1527.1. Location of JV Svetlaya 1997.2. Neighbouring Districts of the Project Site 215xivxvLIST OF PHOTOGRAPHS1. Finnish Feller-Buncher at Work 2012. An Example of Poor Soil Condition of the Project Site 2033. An Example of Diseased Forests on the Project Site 2034. Spruce Sawlogs Graded before Trucking 2055. Puiplogs (Mainly Spruce) 2056. Greenhouse Nursery on the Project Site 2067. Spruce Seedlings in the Greenhouse 206& Spruce Seedlings from Direct Seeding 2089. Spruce Seedlings Planted after Grown in the Greenhouse Nursery 20810. A Seedling Failed to Survive 20911. Quality Logs for Exports 21112. Street Scene of Svetlaya 213xviABBREVIATIONSCDSP : The Current Digest of the Soviet PressFRI : Economic Research InstituteFDI : Foreign Direct InvestmentJAWIC : Japan Wood-Products Information andResearch CenterJffli{O : Japan External Trade OrganizationJV : Joint VentureKOTRA Korea Trade Promotion CorporationNRC : Northern Regions Center, SapporoRFE : Russian Far FastRCYOBO : Rosia Touou Boeki Kai(Japan Association for Trade with Russia& Central-Eastern Europe)TNC : Transnational Corporation orTransnational CorporatexviiRUSSIAN TRANSLITERATION TABLERussian English Russian EnglishA a P p r6 b C c sB B v T T tF r g Y y u21 d fF e e X x khzh L 14 tS3 3 z q chI’l H i W w shP1 y shchK K k b bJi 1 bI 3’M M m b bH H fl 3 3 e0 o o 0 yufl n p yaxviiiACKNOWLEDGMENTSFirst and foremost, I would like to thank my research supervisor, Dr.Robert North, who accepted me as his student and supported my efforts tobring together the divergent disciplines related to this study, and whogave me geographic insights into my forestry problems. I would like tothank my former supervisor and retired Professor Mr. F. L. C. Reed, whogave me the freedom to explore the wide variety disciplines in forestry. Igreatly appreciate his encouragement and guidance in the early stage ofmy program.I also would like to express my appreciation to each member of mysupervisory committee for his special assistance: to Forestry Dean Dr. ClarkBinkley for his knowledge and experience on the Russian Far East; to Dr.David Cohen for his expertise in forest products marketing; to Dr. DavidHaley for his thorough comments from forest economic perspectives. I alsoappreciate the practical comments on my early work by Mr. DavidCartwright, 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 thedraft of my thesis and gave constructive comments.In the final period of my study at UBC, I had a luck to spend 3 months atIJASA in Laxenburg, Austria and had an opportunity to improve my study.I thank for Dr. Charles A. Backman for his special and critical comments onmy thesis research and supervision during my stay at HASA. I appreciatethe information and data available through him. Without him the updatedand consistent data on the forest sector in the Russian Far East would nothave been obtained. I thank him for his help for me to visit the institute,which allowed me the rare opportunity to interact with scientists fromRussia. I also thank the Canadian Committee for IIASA and Mr. PaulDufor, Office of the Chief Scientist, Industry Canada, for the generousfunding for my research venture at IIASA.There are also numerous individuals who were generous with their timeand encouragement during my field studies in Japan and the Russian FarEast. Among them I would especially like to thank Drs. Hiroaki Kaldzawa,Yutaka Ishii, and Kiichi Mochizuki from Hokkaido University, Mr. AkihikoAraya from JAWIC and Mr. Kazuo Ogawa from ROTOBO in Tokyo. ProfessorKakizawa and Mr. Araya’s helps were invaluable for collecting Japanesematerials and interviews in Sapporo and Tokyo. I would like to thankProfessors Pavel Minarkir, Alexander Sheingauz, and AlexanderIvanchikov from the Economic Research Institute in Khabarovsk forallowing me to interview them and helps for finding Russian materials. Ixixwould like to express my appreciation to Korean managers of iv Svetlayafor their allowing me to interview them from the early stage of this studyand to visit the project site, and providing me all comforts during my stayon the site. Special thanks are due to Mr. Dae Sik Kim, Senior Manager ofAdministrative Department, Mr. Kang-Soo Choo, Senior Executive VicePresident of Hyundai Resource Development Co., Ltd., and Mr. Jong-YoungWon, Managing Director of Hyundai Wood Industries Co., Ltd.Numerous people helped to make my first trip to the Russian Far Eastcomfortable 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 graduateprogram: Donald McPhee Fellowship, Flectcher Challenge Forest ResourceManagement Fellowship and Asa Johal Graduate Fellowship in Forestry.These awards were the major source of funding for this thesis researchand field studies in Japan and the Russian Far East. Dr. Elisa Miller, theeditor and publisher of the Russian Far East Update, for which I have beenworking as a correspondent, and Mr. Eiichi Tsutsumi also provided mewith some financial support for my research trip to the Russian Far East. Iwould also like to thank both Dr. Donald Baker and Ms. Insun Lee for theirfinancial support by allowing me teaching assistantship in Asian StudiesDepartment for the last three years of my graduate program at UBC. Iwould like to express my sincere thanks to a group of my old high schoolclassmates for their emotional and financial support for my study inCanada, particularly to Mr. Bong-Kwan Chung and Mr. Bok-Suk Ryu whosegenerosity and friendship I would never forget. Woodland and CultureStudy Group in Seoul was also a great emotional supporter for my study,particularly, Dr. Young Woo Chun, Professor of Kukniin University, for hisencouragement and financial support for my study trips, and Dr. ChunYong Lee, Korea Forest Research Institute, for his helps for gatheringKorean forestry materials.I enjoyed the interactions with fellow graduate students throughout thegraduate program at UBC. Among others, I appreciate the time sharedwith Gary Bull, Dong-Ho Shin and Paul Wood.My final and most deeply felt appreciation goes to my family: my oldparents, who allowed me this venture in Canada while sacrificing allhardships in Korea. I am deeply indebted to them for their never-endingemotional and financial supports during my study in Canada; my daughterand son Jee-Hae and Jee-Hoon for their love and for all the time I was notable to share with them; my wife Sung-Yun for her sacrifice, patience andlove.1CHAPTER IINTRODUCTION1.1. INTERACTION BETWEEN WORLD’S FOREST RESOURCE REGIONSAND MARKET REGIONSForest resources are unevenly distributed across the globe: some countriesare richly forested and others not. The current uneven conditions aremainly attributable to artificial reasons rather than to nature. The currentconditions have been long established by agriculture, population growth,urbanization, and industrial activities which have taken place unevenlyover time and space in human history. Both Thirgood (1981) and Perlin(1989) illustrate historically how humans interacted with forests in pasttimes. Human impacts and dependence on forests in ancient times resulted in early forest depletion in the Levant and old Greece (Thirgood,1981). The depletion of forests spread over Europe and to the Americancontinents as human history continued (Perlin, 1989). Security of timberfor shipbuilding was sought by ancient Greek nations to control the sea,which led to economic and military supremacy (Perlin, 1989). Perlin remarks that fortunate Greek nations gained timber from nearby forests, butdeforested nations had to secure their timber from remote regions throughdiplomatic efforts or military alliances with well wooded countries. He alsomentioned that security of timber was one of the main motivations ofmany military activities and conquests at the time.The use of wood in naval shipbuilding has virtually disappeared, but it isstill important for other uses in modern industry, so the interactionbetween humans and forests continues. The only difference now is thescale of the interaction, which has changed from local or regional in past2times to transnational at present. Many modern cities get their wood notfrom local forests but from other countries. Every year an increasedvolume of forest products is traded, and the trend seems likely to continuein the years to come.The distribution of forest resources has a very important influence onpatterns of international economic activity and development. Despite anever-growing volume of trade, the world’s forest products trade in thenorthern hemisphere is dominated by a few major importing and exporting regions. Major importing regions are the core regions of the worldeconomy, namely, the European Community (EC), the United States, andJapan, a triad to use Ohmae’s (1986) term, and major exporting regions areperipheral resource regions close to the cores, namely, the Nordic countriesand Canada. Now the Russian Far East, its regional role within Russia becoming more economic than strategic since the break-up of the old SovietUnion, can be added to the aforementioned two resource regions becauseof its potential role as a peripheral resource region to the emerging neweconomic powers in Northeast Asia, namely, Japan, Korea and China.Each of the three resource regions in the northern hemisphere is locatedclose to one of the triad of the world economy. However, Nordic-EC andCanada-U.S. relationships have long been established and have reached amature state of resource-market relationships, but the RFE has not yetfully formed such a relationship with its Northeast Asian neighbours. Howthese two regions do and will interact with each other is the main topic todiscuss in this dissertation.31.2. NEW CURRENTS AROUND THE RUSSIAN FAR EASTThe RFE is a few hours’ flight away from Seoul. Nevertheless it was an unapproachable region for South Korea (Korea hereafter) until formal diplomatic links with the then USSR were set up in 1990. See Map 1.1. Thenew relationship with the former USSR was a fruit of the Korean government’s challenging diplomatic policy, known as the “Northern Policy”,which can be defined as Korea’s efforts to improve relations with communist countries with the ultimate goal of improving inter-Korean relations(Armstrong, 1990). Now the RFE has become one of Korea’s new neighbours.The end of the Cold War brought gradual reform to China beginning in the1970s. The reform movement in the former USSR under Gorbachev’s leadership in the late 1980s, known as perestroyka and glasnost, triggeredthe collapse of communist regimes in Eastern Europe and ended in the disintegration of the Soviet Union.The surge of reform and openness extended to the RFE, once one of themost overlooked regions in Russia, and forced the region to open up to theoutside world. The RFE is widely recognized as Russia’s resource-rich window on the Pacific Rim. Thus, for this richness, the RFE holds particularattractions for its resource-poor neighbours, such as Korea, Japan andTaiwan. In fact, these are the countries that would be most interested ingaining access to the region’s various kinds of natural resources. In otherwords, the Asian neighbours could contribute in varying degrees to regional development in the RFE.4Map. 1.1. Korea and its SurroundingsRUSSIA Kanichatkaof OkhotskB1agoveshcheflSkD ‘-..!— G/People’s Republicof ChinaHarbin,Yanbiãn Korean IAutonomous Prefecture NakhodkaDonghae (Sea of Japan)Scale: 1: 160,900Source: Chew (1970)5Gorbachev, the former president of the Soviet Union, promoted changes inthe old view that the development in the RFE depended on trade withEuropean Russia. He admitted that the RFE was part of Asia and expressedthe intention that the region would take a fuller part in the Pacific Rimeconomy in his Vladivostok speech in 1986 (CDSP, 1986). In other words,this speech implicitly acknowledged the importance of the Asian neighbours, particularly the thriving economies of these countries, for the development of the RFE.Seen from a geo-economic point of view, Northeast Asia features a disparity in the endowment of productive resources among the nations. The RFEpossesses abundant natural resources but lacks other resources. China andNorth Korea have a plentiful supply of inexpensive labour. Korea andJapan are considered capable of providing capital and technology. In otherwords, economic complementarity exists among these countries. Scholarsfrom all the above nations believe that each country in the region couldtake advantage of this complementarity to improve their mutual well-being (Toma, 1991).Such views have been increasingly expressed through various recent attempts at economic cooperation. For example, a feasibility study for amultinational joint development project for the lower Tumen River area isbeing conducted under the auspices of the United Nations DevelopmentProgram (UNDP) (Kim, 1992). Tumen River is the area where the bordersof North Korea, China and Russia meet. Besides these bordering countries,Japan, Korea and Mongolia are participating in the project. Following thedesignation of Nakhodka as a Free Economic Zone, a number of Korean6companies plan to move into a large industrial park established near thatcity.With the foregoing geo-economic dynamics in the background, Korea hasemerged as one of the countries that have shown a swift response to thenew currents in the region. No sooner had Russia and Korea establishedformal 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 ForestManufacturers Association of Primorskiy Kray (Maritime Province in theRFE: see Map 1) formed the joint venture Svetlaya’ to exploit the forests inthe northeastern corner of the province. This was the first joint venture(JV hereafter) between the two countries and remains the largest since thenew diplomatic ties were set up in 1990.1.3. INTERNATIONALIZATION OF KOREA’S FOREST INDUSTRYKorea has been one of the fastest growing economies in the world for thelast three decades. Due to its rapid economic growth, Korea is now one ofthe four leading Newly Industrialized Economies (NIEs) in Asia togetherwith Hong Kong, Singapore, and Taiwan. Korea, however, is poorly endowed with natural resources. Naturally, a labour-intensive and exportoriented industrial structure was established in the early stages of development.Interestingly, the forest industry in Korea, which is poorly endowed withforests, has greatly contributed to the country’s export industry and in1 For more details of the project see Appendix I.7turn the country’s economic development. The dominant pattern of theforest industry in the 1960s and 1970s was importing hardwood logs fromSouth East Asia and exporting mainly to North American markets afterprocessing them into a low-value bulk product such as plywood. The forest industry and exports of forest products continued to grow throughoutthe 1970s. The trend, however, was halted in 1980 by a log export ban inIndonesia, the major supplier of hardwood logs by then. Although exports of forest products have sharply declined since 1980, Korea has continued to import a large amount of logs for its growing economy, nowmainly 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 atimber supply through a continuous search for new supply sources. Simpleimports from local suppliers were the main means of getting the raw material. However, some imports have resulted from Korean logging investment in the supplying countries (Office of Forestry, 1992). In other words,Korea’s forest industry was involved in production activities across national boundaries early in its development. Korea also used the importednatural resources for hard-currency-earning exports. This is how andwhy Korea’s forest industry became internationalized well ahead of otherKorean industhes. In fact, Korea’s first outward foreign direct investmenthappened 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 toKorea since direct investment was made in the region in the form of a JVby Hyundai. The foreign direct investment (FDI hereafter) made by Korea,8an inward FDI from the RFE viewpoint, could have a significant impact onthe export potential of the forest industry and the economic growth of theRFE—a region desperate for foreign capital to boost its sagging economy.This is the background to the present study.1.4. GLOBALIZATION OF ECONOMIC ACT1VITIESOne of the most conspicuous trends of the modern world economy is thetransnational nature of economic activities. Globalization, internationalization, and borderless economy are already buzz words in much economicliterature. Global economic activities are extremely complex, and the term“globalization” is still not clearly defined in the literature. Nevertheless, itrecognizes the interconnected and interdependent nature of the worldeconomy and suggests at least the increased intensity of internationaltrade and freedom of movement of productive resources across nationalboundaries (Dicken, 1992). FDI and transnational corporate (TNC) activities are the manifestation of such global economic activities. Given thenature of the study, this dissertation will look into the resource-marketinteractions from global and transnational perspectives.1.5. PROBLEMS OF THE STUDYThe problem under investigation in this study is “what role can FDI play inrealizing the forest resource potential in the RFE for the production andexport of raw material for the two immediate neighbours, Korea andJapan?” How can the TNC’s activities in Northeast Asia be viewed from theperspective of resource-market interaction? The research problem has thefollowing subordinate questions:91. 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 formany 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 itsefforts to integrate into the Asia-Pacific economy?6. How do the resource regions and market regions interact with eachother in Northeast Asia and in the global context?The assessment of the potential export growth in the RFE is particularlyimportant and timely when considering it in the context of timber demandand supply on the Pacific Rim. The statistics in the 1990 ForestryYearbook (FAO, 1990) show that in recent years timber production and exports have not grown as quickly as in the past in major traditional supplysources in North America and Southeast Asia. Rather, they have shrunkbecause of mounting environmental pressure and the depletion of high-quality timber resources. At the same time, the statistics show that production and exports from relatively new supply sources like New Zealandand Chile are not growing quickly enough to offset the shrinkage.This particular situation on the Pacific Rim brings more attention to theRFE, which is believed to have a big potential for export growth(Cardellichio, Binkley and Zausaev, 1989; Backman and Waggener, 1990and 1991). Since the dissolution of the former USSR, the RFE itself has re10vealed its own interest in expanding exports to the Pacific Rim (Minakirand Sheingauz, 1991).In fact, the RFE has long been regarded as a potential threat to the leadingforest product exporters on the Pacific Rim (Solecki, 1985), although thepotential never substantially materialized under the former Soviet government. Now that the region has opened up to FDI, the threat needs to becarefully reassessed in the new context.There are two kinds of forces to consider for the potential production andexport of forest products in a region. One is tangible productive resourcessuch as natural resources, labour, capital and technology. The other is intangible managerial and entrepreneurial skills used to organize the firstgroup to achieve actual production and exports. The former are analogouswith computer hardware and the latter with software. As in a computer,both are essential in productive activities. In other words, production isan outcome of the interaction between these two forces. The actual production and exports, however, tend to be affected more strongly by thelatter than by the mere availability of the former.The interaction of the two forces is further governed by the political, regulatory, and legal regimes of the country where productive activities aretaldng place. The interaction usually becomes more complicated when FDIis involved. All these factors suggest either opportunities for or constraints on multinational corporate activities, including the export of commodities produced by the multinational corporations in the host country.11There have been several previous studies related to forestry and regionaldevelopment in the RFE. Most of them provide overviews of the RFE as awhole. The RFE, however, is a huge area with sufficient internal variationsto cast doubt on the value of generalizations. For example, the infrastructure is poorly developed across the RFE in general. However, some specificareas like the southern part of Primorsldy Kray, are exceptions. Forest resources also differ widely in volume, density and quality across the region.Location seems to have an important influence upon the activities ofmultinational corporations.This study will demonstrate through a case study how difficult it is to operate a iv in the RFE despite the great potential suggested by an immensestock of natural resources. This study will also demonstrate that despitethe difficulties the RFE will remain important to serve the neighbouringmarket regions in the south as a resource supply source. This study wifisuggest that the RFE will be one of the three maj or forest regions in thenorthern hemisphere and the region’s interaction with contiguous marketregions in the south will follow the pattern of the other two regions.1.6. PURPOSES OF THE STUDYThe ultimate purpose of this study is to help the resource-poor neighboursof the RFE be as well prepared as possible for the recently opened resource-rich RFE to increase their countries’ long-term security of timbersupply. Related purposes are as follows:1. This study is to contribute to an assessment of the potential growth offorest products exports from the RFE by explaining the role of TNC ac12tivities for such exports. This study does not attempt numerical projections of forest products exports from the region. It rather seeks the opportunities 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 activities in the RFE for the benefit of future foreign investments in forestryprojects in the region. It also tries to explain how FDI is undertaken inthe RFE and how the region reacts to FDI. Since the iv Svetlaya, (set upafter the former Soviet Union allowed foreign direct investment), is regarded as a flag-ship forestry JV2 in the RFE, the results of the studywill carry policy implications for the countries which have vestedinterests in importing forest products from the RFE as well as forcompetitors in traditional wood supply sources on the Pacific Rim.3. Since the results of this study will have implications for potential economic cooperation between the RFE and its neighbours in a broad sense,this study also purposes to suggest policy implications for realizing theeconomic cooperation among Northeast Asian countries, conceptualizedin recent years as, for example, the Japan Sea Rim Economic Bloc. Inother words, this study attempts to suggest opportunities and constraints for the RFE’s integration into the Asia-Pacific economy.4. This study is also purposed to contribute to the search for a global pattern of interaction between resource regions and neighbouring markets.2 Besides Svetlaya, Weyerhaeuser and the Norwegian firm FMT are also involved inthree forestry joint ventures in the RFE (Russian Far East Update, May 1993). Othercompanies in negotiation with Russia in early 1993 were Canada’s Noranda andAbitibi, Japan’s C. Itoh, and Louisiana Pacific and Georgia Pacific of the U.S. (Globeand Mail, 8 January 1993).131.7. SCOPE OF THE STUDYThis study inevitably covers three geographic areas—Korea, the RFE andJapan—which might appear too large to handle in one study. All thesecountries, however, are involved to varying degrees in the internationalproduction and marketing activities being investigated. Therefore, eachcountry will be dealt with from the perspective of its own role in FDIbased forestry production in the RFE. Korea will be looked at as the homecountry which has invested in the RFE and the RFE as the host country forthe investment. Japan will be looked at as having multiple roles of competitor to Korea, provider of surrogate experience, and major exportmarket for Korea.The impacts of TNC activities on a region range from environmental degradation to contributions to the growth of the local economy and exports. Itmay 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 expansion. The export markets to consider in this study will be restricted toKorea and Japan. The main forest products to be considered in this studywill be logs, since logs are by far the largest export item in the RFF. In1989 the share of logs in total forest product exports from the RFE by volume was 84% (Sheingauz, 1990).1.8. STRUCTURE OF THE DISSERTATIONChapter II reviews relevant literature, and chapter III describes the analytical methods used in the study. Chapter lV explains the motivation forKorea’s FDI in forestry in the RFE. Korea’s economic situation and wood14supply situation are reviewed, as well as its motivation for and interest inFDI in the RFE. Chapter V examines the investment environment forforestry in the RFE. A survey of the external economic policy, forest resource potential, and forest industry organization of the RFE is based uponthe findings of a field study. Chapter VI focuses on the Japanese RFE experience with log imports and Japan’s role as the largest export market forRussian logs. Chapter VII analyzes the experience of the three year operation of the iv Svetlaya from the Korean partner’s point of view. It alsodiscusses the various responses of the RFE to the JV Svetlaya. ChapterVIII discusses the lessons learned from the IV Svetlaya and implicationsfor resource and market interactions in Northeast Asia. Chapter XIconcludes the dissertation with the implications of this study for future FDIand the log exports potential through FDI.1.9. LIMITATIONS OF THE STUDYThere are several limitations to this study. First of all, the author’s limitedability to use the Russian language constricted the range of materials thatcould be used.Secondly, the availability of Russian materials was almost as constrainingas the language problem. For example, separate statistics for the RFE began to appear only in 1993. The RFE had been dealt with as one of theplanning regions in national statistics and no breakdown of the statisticsby subregion appeared in the national statistics. This has resulted in heavyreliance on a small number of sources for certain parts of the study. Inaddition to the lack of relevant materials, those which are available arelargely incomplete, imprecise, or mutually inconsistent. The lack of mate-15rials and the language problem were partly overcome by using Japanesematerials. Since Japan has a long history of research on the RFE, a gooddeal of relevant material was found.Thirdly, it proved very difficult, expensive, and time-consuming to trackdown current information on the RFE - an essential component of thestudy. Elements of the situation in the RFE which were relevant to thestudy were constantly changing.Fourthly, Russian terms and definitions often are not only different fromthose of the western world but also are loosely defined. The interpretationof these definitions and terms also caused problems in the application ofwestern analytical methods.Fifthly, companies interviewed during the field study were reluctant torelease information sensitive to their interests.1.10. SIGNifICANCE OF THE CURRENT STUDYBecause of the multi-disciplinary nature of this study, it is not easy tospecify a clear cut contribution to a certain discipline. Nevertheless, thefollowing contributions can be mentioned.The Russian forest sector has evolved over time as the country’s economicsystem changes. As national and global political and economicenvironments change, we need to look at the same problem with fresheyes. This study looks at the potential of the Russian forest sector fromthe perspective of interactions with neighbouring countries through FDI,16rather than physical potential based upon forest inventory orinfrastructure conditions. Also, while most previous studies on the Russianforest sector tended to cover all areas in Russia or the former Soviet Union,this study, reflecting the trend of decentralization in Russia, isgeographically 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 proceedfrom different assumptions and give rise to different conclusions. Becauseof the author’s background, this study is, to a large extent, a Koreaninterpretation of the forest sector in the RFE. This interpretation maydiffer from other studies approached through different paradigms.17CHAPTER IILITERATURE REVIEWStudying the interaction between resource regions and market regions inNortheast Asia is a manifold task. It relates to a wide variety of disciplinesand study areas: forestry, economic geography, regional development, foreign trade, and foreign direct investment. This chapter reviews only a selection of the literature and demonstrates how these different study areasare interconnected and could serve the purpose of this study. However, noattempt 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 thepoints of interest. Since the RFE has been viewed differently by outsidersover time, according to changes in the geopolitical situation in NortheastAsia, 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 methodsas well as demonstrate the appropriateness of the research direction chosen.2.1. MODELS OF ECONOMIC ACTIVITIESA model is a simplified representation of reality and purports to explain it.The main use of models is heuristic in the process of developing theoriesabout the real world (Knox and Agnew, 1994). Numerous models have attempted to explain patterns of economic development and the distributionof industrial activities. Some have identified processes of relevance to thisstudy. There follows a brief review of some of them, following theschemes presented by Knox and Agnew (1994) and focusing primarily onmore recent models, since they seem to be the most relevant.18Most of the models under review have been developed to explain the economic landscape at a given time. Few have been able to explain change ineconomic landscapes over time. According to Knox and Agnew, models canbe largely grouped into two: static and dynamic. Static models, developedin the early period of model-building, are mostly locational and basedupon the impact of distance, or space. On the other hand, dynamic modelshave been developed to explain the complex economic activities of morerecent time.The static models are further grouped by Knox and Agnew into sectoraland regional. Sectoral models are intended to explain the spatial distribution of economic activities of various industrial sectors. Von Thunen(1783-1850) developed a conception of location and differential rents toexplain agricultural land use patterns (Hurst, 1972). His model was elaborated by later theorists like Chisholm (1962) and Alonso (1964). Severalmodels were also developed for describing the location of manufacturingindusthes and the relationships among the factors affecting location. Knoxand 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 concernedwith the economic condition of regions rather than industrial sectors.These models include export-base models (North, 1955 and Perloff andWingo, 1964), income-inequality models (Myrdal, 1957 and Hirschman,1958), growth-pole models (Perroux, 1955), and centre-periphery models(Friedmann, 1956).19These regional models assume that regional inequality originates from ashort-run imbalance of demand and supply but will achieve balance in thelong run by trickle-down from the more developed to the less developedregions (Knox and Agnew, 1994). The nature and efficiency of trickle-down mechanisms is a point of dispute among the model-builders.Developed as critiques of these models, structuralist models suggest thatregional inequality is created not by a short run imbalance but by an inherent or structural feature of the market. These models predict a permanent imbalance between regions in levels of economic growth as in the dependency theory ( Frank, 1967 and Slater, 1975).These static models have limited utility for explaining the global economywhich has become increasingly complex in recent time. The industrial activities in the more developed economies have shifted from mass production supported by standardization, specialization and centralization(Fordism) to flexible production characterized by individualization, diversification, and decentralization (Toffler, 1980).Another important and related characteristic related is a shift of industrialactivities from being nationally based to being transnational. Not onlycommodities, but also technology and capital move more freely across national boundaries. There still remain limitations in the transnationalmovement of labour. However, less expensive labour now becomes accessible by relocating production facilities in more competitive labour markets. The force behind all these changes is technological development, especially the space-shrinking technologies in the field of transportation andtelecommunication (Dicken, 1992). Technological development has madedistance unimportant and created new perceptions of space and time.20Dynamic models seem more suited to explaining the complex global economy. The new international division of labour (NIDL) theorized by Hymer(1976) and Frobel (1980) explains that firms gain an access to less expensive and more controllable labour at a global scale by shifting industrialproduction from the industrialized core to the global periphery. Dunning(1980) explains in his ‘eclectic approach’ how firms are engaged in international production. He argues that foreign direct investments in international production may be undertaken to gain ownership and location advantages and to internalize markets. Another popular description of theinternalization of production is product life-cycle theory by Vernon (1966).This theory says that when a product reaches a phase of standardized production it is more profitable to move production to less developed countries where cheaper labour can be found.Most of the dynamic models well represent the interdependence, interconnectedness and transnational nature of industrial activities in the modernglobal economy. As seen in the case of Korea, manufacturing industryusually leads industrialization. As more countries are industrialized, theglobal economy become more oriented to manufacturing and also shows adomination of the global industries by a few core economies. Many of theglobal economic models are well equipped to explain the distribution ofmanufacturing industry. They rather seem less well equipped to describenatural resource industries. In fact, natural resources have been increasingly dealt with as less important factors in the models. As intangible values of natural resources are increasingly appreciated with the growth ofenvironmental problems, however, it is necessary in analyzing the globaleconomy to take a fresh look at natural resources.212.2. THE RFE AND REGIONAL DEVELOPMENTAlthough the RFE was referred to as the most ignored region in the formerSoviet Union earlier in this discussion, the region has not been neglectedin national planning (Gosplan). In fact, numerous initiatives for intensivedevelopment were taken in the late 1960s through the 1970s. TheBaykal-Amur Mainline (BAM) railway construction and the incentive payment system to encourage immigrant labourers to make a long-termcommitment to the region are among these (North, 1978). Also, attemptswere made to improve economic relations with neighbouring countries,particularly Japan, which was regarded as the most effective partner forFar East development.North (1978) described the initiatives taken by the Soviet Union in the1960s and 1970s, discussed the reasons for taking the initiatives, and forecast their impacts on the RFE and on Pacific trade. One of his forecasts concerned the important role of Japan and other Pacific Rim economies. Infact, Japan has been the most important trading partner on the Pacific Rimduring recent decades (Bradshaw, 1988a and 1988b). Japan also has beenthe largest log importer from the USSR since 1968 (FAQ, 1990).The developments suggested for the RFE have been related mainly to extractive industries based upon the rich natural resource endowment in theregion. It may not be necessary to reiterate that natural resources are oneof four essential production factors along with capital, labour and technology. Regional economists also acknowledge the importance of the role ofnatural resource endowment for a region’s growth, especially in the early22stages of development (Perloff and Wingo, 1964). North (1964), for example, is one of the most notable proponents of the idea that developingstaples and a consequent establishment of export bases are the determining factor in a region’s growth. In other words, a region can develop byexporting natural resources richly found in the region. The positive role ofexternal trade in early stages of development in regions where extractiveindustries are concentrated was well illustrated with the example of theU.S. Pacific Northwest by Pfister (1964).The problem of the spatial imbalance between resource regions in the RFEand Siberia and markets in European Russia has been frequently referredto as a Russian geographic dilemma (Barr and Braden, 1988). Thisdilemma was particularly strong when the Soviet Union was under a moreclosed economic system and self-sufficiency was the norm. However, alogical consequence of the regional imbalance is the idea that resourcesfrom the RFE should be exported to markets on the Pacific Rim rather thanbeing shipped thousands of kilometres to western Russia (Mieczkowski,1968). More recently, Minakir and Sheingauz (1991) shared the sameview.Despite its potential, the region has remained largely undeveloped for thelast several decades. The region can best be characterized in Bradshaw’s(1988a) terms: “a highly truncated regional economy, dependent on external sources of capital and equipment, specializing in the production of alimited number of natural resources, with the bulk of economic activityconcentrated in urban settlements in the southern parts of the region.”232.3. FOREST SECTOR IN THE RFEMost early literature on Russian forestry dealt with the entire SovietUnion, focusing on the heartland of western Russia rather than the remoteFar East and Siberia. However, it may not be a good idea to look at the national picture when dealing with a region and its interaction with neighbouring countries.Solecki (1965 and 1967) contributed early introductory treatments ofSoviet forestry in English. Barr (1970) studied the role of transportationcosts in location and flow patterns of the Soviet wood-processing industry.In his study he attempted to draw a national picture of the forest industrywith little consideration of foreign trade in forest products. Reflecting thetime of the study, i.e. the 1960s, much of the discussion was focused onEuropean Russia where most industrial activities related to wood-processing were concentrated. Braden (1983) examined the role of foreigntechnology to increase the export potential of the Soviet forest productssector. She concluded that the foreign technology had a higher marginalproductivity than the domestic one, but its contribution to the actualexports needed an examination within the context of the total USSRproduction system. Barr and Braden (1988) predicted a more intensivedevelopment of forest industry in western Russia and a continuation ofunderdevelopment in the RFE. Their prediction was grounded on theeconomic rationale that more investment would be directed to westernregions accessible to major processing locations and markets rather than tothe remote RFE and Siberia. This probably would be true only if theRussian economy were to maintain its inward orientation and avoid theinfluence of external forces.24North and Solecki (1977) assessed the export potential of the Soviet Unionbased upon its previous export performance from 1950 to 1975. Thestudy concluded that westward exports would not be substantially increased unless a heavy capital investment were made to improve the utilization of forest resources and access to remote forest regions.Blandon (1983) studied the performance of the forest industry by lookinginto its productivity. The role of foreign trade was not discussed in thestudy. Reflecting the reform mood of the time, Backman and Waggener(1990) reviewed the overall forestry conditions and forest industry of theUSSR, and forecast the changes likely to come as a result of perestroykaand glasnost. A considerable portion of the study was assigned to foreigntrade and the possibility of joint ventures. Backman and Waggener(1991) also interpreted the current condition of forest resources and industry based upon the 1988 national inventory and estimated potentialharvest levels across the nation.Barr, Braden, Blandon, and Backman and Waggener all drew nation-widepictures of the forest sector in the former Soviet Union. RFE-specificstudies appeared only in more recent years, in Fenton and Maplesden(1986), Cardellichio, Binkley, and Zausaev (1989), and Barr (1989b and1990).Fenton and Maplesden, in addition to evaluating the forest resource base inthe RFE, analyzed the commercial acceptance of the most dominant andprevalent species in the RFE, larch, in the Japanese market. They related asuccessful growth in exports from the RFE to the increased utilization of25these species. They viewed the Japanese market as a testing-ground for apotential penetration of the species into other Asian markets. The research found that larch was increasingly gaining acceptance in theJapanese market.Cardellichio et al. (1989) to a large extent intended to look into whatFenton and Maplesden (1986) sought in their study, a potential expansionof log exports from the RFE. They concluded that the possibility of a substantial increase in log exports from the RFE would be limited due to economic conditions, environmental restrictions, and institutional factors.Barr (1990) looked at the forest sector in the context of regional development. He concluded with a near-term forecast that the forestry and wood-processing industries in the RFE would remain undeveloped and insignificant except in regard to roundwood exports.The current forest resources and industry situation in the RFE are presented in greater detail in Chapter V.2.4. EXTERNAL FORCES AND REGIONAL DEVELOPMENT IN THE RFERegional development is referred to as an interaction between internal andexternal forces by Dienes (1987). Although ever-globalizing worldeconomies and the increased mobility of productive resources beyond anation’s boundaries make it difficult to draw a clear demarcation line between these two forces, one can be distinguished from the other roughlyby the origin of the forces.26For example, natural resources endowment, manpower, physical infrastructure, and the policies of the regional government largely tend to beinternal forces, whereas the central government’s regional policies, foreigntrade, inward foreign direct investment, and foreign countries’ attitudestowards the region are external forces.This section will emphasize the role of external forces in the developmentof the RFE, which has emerged as a new centre of attention in NortheastAsia, as discussed at the beginning of the dissertation.As mentioned earlier, the former Soviet Union maintained an inward-looking economy and participated in foreign trade reluctantly, especiallywith western countries, until recently.1 Under such a closed centrallyplanned economy, the main external force in any region was central government policy, with very limited freedom for the region’s own foreigntrade opportunities.In the case of forest products trade, Exportles, a timber export organizationunder 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 orthrough KS agreements2,came through Exportles (Nomura, 1988). Therewas a channel for the RFE to trade directly with bordering countriesthrough DaPintorg, known as border trade (Miller, 1981). The amount ofsuch trade, however, was largely insignificant because of the monopoly oflarge-scale trade by Exportles.1 The Soviet Union became an observer in the General Agreement on Tariffs andTrade (GATI’) only on May 16, 1990 (The New York Times, May 17, 1990)2 See Footnote 1 in Section role of Soviet foreign trade in regional development was discussed byNorth (1983), Dienes (1985), and Bradshaw (1988a and 1988b). Bradshawand Dienes focused on the regional development of the RFE and the role offoreign trade, particularly with Japan. Dienes pointed out that the geographic proximity of the two countries and the complementarity of theireconomies were misleading and did not help to promote trade. Bradshawalso noted that trade between the RFE and Japan stagnated in the 1980s; aswell, he cast doubt on the potential for an export-led development strategyfor the RFE. Both authors unequivocally held the view that the RFE mustcontinue to rely overwhelmingly on internal efforts for its development-even for capital and technology.Since Japan has been the most important Pacific Rim trading partner to theRFE, numerous studies on the subject have appeared in the Japanese literature, too. Kimura (1981 and 1983) stated that the passive posture takenby Japan reflected the international attitude towards the Soviet Union after the Soviet invasion of Afghanistan in 1979. He also revealed a negativeview of the possibility of Japan taking a greater role in the RFE development, referring to the small share of Japan-USSR trade in total Japanesetrade and the rather weak position of the RFE as a resource supply sourcein competition with others on the Pacific Rim.One of the most crucial problems related to an export-led strategy for development in the RFE seems to have derived from the centralized economic system of the Soviet Union, under which export earnings went to thecentral authority before they were redistributed according to national priorities. Long-term compensation agreements, which dominated Sovietlarge-scale trade, were a product of the centralized economic system.28Under this form of trade, export earnings were often reinvested into thedevelopment of other regions than into where they had originated.In sum, foreign trade, as implied in the export base model and as demonstrated 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, therole of foreign trade in regional development was largely truncated.Perestroyka brought numerous reform policies. Although the announcement of perestroyka itself did not cause actual changes in the old system,it was a clear manifestation of a political will to change. Allowing foreigndirect investment is clearly a consequence of such political will.2.5. TRANSNATIONAL CORPORATION AND THE RFEBy resolution of the USSR Council of Ministers on 13 January 1987, foreigndirect investment or foreign ownership of Soviet equity became possible inRussia. Subsequently, the joint venture Svetlaya project was formed as aFDI.Foreign direct investment, by definition, is “an investment made outsidethe home country of the investing company, but inside the investing company. Control over the use of the resources transferred remains with theinvestor” (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 activities in more than one country is a TNC, more popularly known as amultinational corporation (Dicken, 1992). In other words, a TNC is a multi-29activity firm which internalizes a cross-border intermediate product market (Dunning, 1993). By forming the joint venture, the Hyundai ResourceDevelopment Co., Ltd. became a TNC. However, the parent company was already a Korean TNC for other business activities.Dicken (1992) remarked that TNC activity is becoming an increasinglypopular means of adding value. In fact an increasing proportion of worldtrade is being made through TNC activities rather than through traditionalinternational trade (Dunning, 1993) Such transnational corporate activityis known as intra-firm trade, which takes place between parts of the samefirm 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 activitytakes place whenever each of the following three conditions exists:1. Ownership-specific-advantages: when a firm possesses certain specificadvantages not possessed by competing firms of other nationalities.2. Internalization: when such advantages are most suitably exploited by afirm itself rather than by selling or leasing them to other firms. Inother words, the firm internalizes the use of its ownership-specific-advantages to maximize its profit.3. Locational advantages: when it is more profitable for a firm to exploitits assets in overseas, rather than in domestic, locations.FDI is a way of strengthening international links with the rest of the worldeconomy, and a way for a country and a region to survive and succeed inthe increasing globalization of the world economy and ever-changing in-30ternational economic environment. From the above viewpoints, FDI channeled through transnational corporations is likely to be one of the mostpowerful external agents to reshape the industries and the regional economy of the RFE.A typical form of TNC activity is a multinational corporation investingoverseas to expand its market. The corporation is traditionally from a developed country possessing the ownership advantages of technology, quality and managerial skills. Japanese foreign investments in the 1960s and1970s were made to relocate its “sunset” industries to locations wherecompetitive advantages were still viable. This type of investment has adifferent effect from that of the market seeker. It promotes trade between home and host countries, or between host and third countries(Kojima, 1990). Some resource-poor countries invest abroad to gain accessto natural resources unavailable at home. This is known as resource-seeker investment (Euh and Mm, 1986). Foreign investment can also beundertaken in search of technology transfers.The primary motivation for Hyundai’s investment in the RFE is understoodas resource-seeking investment, but it can also seen as trade-promotinginvestment since Hyundai plans to export the produced logs to Korea andJapan. FDI has a location- and situation-specific nature. Therefore, itsometimes fails despite the investment being strongly motivated by theadvantages described in the “eclectic paradigm”. These advantages mayattract an initial flow of investment but do not guarantee the longevity ofthe investment and eventual long term economic relationship betweenhome and host countries. This study will explore other advantages andmotivations, and their role in promoting long term economic relationships31between Korea and the RFE while confirming the role of the advantagesdescribed by the eclectic paradigm.32CHAPTER IIIMETHODThis chapter describes the analytical framework around which thedissertation is constructed. The dissertation consists of two parts; ageneral analysis and a case study.As mentioned in Chapter II, there is a small number of previous studies onthe potential export growth of forest products from the RFE (Fenton andMaplesden, 1986; Cardellichio et al., 1989; Backman and Waggener, 1990and 1991). When approaching the problems of estimating the potentialexport growth, these studies focused on the availability of physical productive resources such as the volume of annual allowable cut, infrastructure, and manpower rather than on any others. Physical resources are nodoubt important for the estimation of forest potential in this relatively unknown region.An approach different from those of the previous studies is employed inthis study. It focuses on the interactions among the forces that control andorganize physical resources for production and export. Related to the dynamics of TNC activities, these are largely intangible forces such aseconomic conditions, government policies on FDI in both the home and thehost countries, corporate interests, and local reactions to TNC activities.The context of these intangible forces has significantly changed intransitional Russia and thus deserves close scrutiny.Assessing the complex activities of TNCs is not an easy task. Moreover, itis difficult to generalize about TNC activities. Therefore, research on TNC33activities is often highly situation-specific (Edgington, 1988). The caseunder investigation in this study also involves several unique considerations as far as TNC activities are concerned. For example, the investments are from a small developing country, and the destination of theinvestment is a frontier-like area barely known to the outside world. Thehost region is surrounded by countries with varying degrees of economicdevelopment. A strong complementary economic relationship is believedto exist among the countries. Since it is only a few years since the hostcountry first allowed FDI, insufficient records have accumulated to assessstatistically how the study area generally responds to FDI. In short, Russiais a completely new country to Korea in cultural, political, and economicterms.With such a unique situation, the dissertation is constructed around theorganizing framework shown in Figure 3.1. In the framework a TNC isviewed as a system that responds to various opportunities and constraintsin the home and host countries, and engages in productive activities acrossnational boundaries. Both the physical resources and the intangible forcesmentioned above are the components of the framework, which is designedto explain TNC activities in forestry in the RFE. The framework in thissense can be used as a model to trace the motivations, operations andoutputs of FDI in forest development in the RFE. The relationship betweenFigure 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 FDIin the RFE and on the influence of the home and host countries’environments on TNC activities. The second part is the centrepiece of theframework and focuses on actual TNC activities and problems. This part34reflects the efforts of the TNC to combine the various productive resourceswithin the RFE, taking into account various components of the home andhost countries’ environments, in order to generate positive outcomes forthe local economy and overseas markets. The case study bears on this partof the framework. The third and last part focuses on the impacts of TNCactivities on the local economy and on exports to Korea and Japan. Thecomponents of the first two parts of the framework are modified fromEdgington’s (1988) model of TNC location and behaviour.IeeObacK________________________________Output(VII&VIII)HomeCountryEnvironment(IV)I——*__—jJapan’sExperienceintheRFE(VI)[oYment.2Regionalr.o______—IDevelopment.9UnkageV0LiEffectsI0.ooTNCActivitiesinHostCountry(VII)I—.20....2.0-eoLDP.V(Resource‘I_____________________0Heductiontalo__Iw.,IIIfIkI___________.9IIII________________________I‘IlloineIExportsI)P.IIICountryo.?IIIIIIIIIo0ift1aIExportsolol101Ff1U101II0..IIII400III.IiIIEnvironmenThirdHIDe5dation1CountryHostCountryEnvironment(V)FeedbackFigure3.1.AnalyticalFrameworkoftheDissertationNotes:1.Numbersinbracketsrepresentcorrespondingchaptersandsectionsinthedissertation.2.‘Feedback’hasbeendepictedinsimplifiedfashion.Infact,itcantakeplacethroughoutthesystem.E.g.‘ThirdCountry’changesindemandcanaffect‘Exports’and‘TNCActivitiesinHostCountry’.35Because of its significance, the framework deserves a description in greaterdetail as follows: This study assumes TNC motives for FDI have emergedfrom both the home and host countries’ environments—in particular,national or regional economic conditions, policy on economic developmentand FDI, the home country’s perception of the host country, and corporateinterests and strategies.The lack of past records on Korean TNC activities in the RFE precludes asearch for consistent patterns and behaviour, which would make it possible to forecast the future behaviour of Korean TNCs in the region as well asto assess the potential impact of TNC5 on export growth. In order to overcome such limitations, this study “borrows” Japan’s relations with the former Soviet Union as a surrogate experience for Korea. Japanese experiencein the RFE is particularly valuable in comparing the approaches taken byKorea in importing forest products from the RFE. Japan also functions as amajor market for Russian logs and other forest products to be exportedfrom joint ventures in the RFE. As the world’s largest timber importer,Japan has a vested interest in increasing its imports by investing in theforest industry in the neighbouring RFE. The state of the Japanese marketand its attitude towards Russian logs are analyzed in terms of competitionwith Korea in the RFE.The focus of the framework is forest resource potential and its interactionwith the various forces of FDI and TNC activities. Since so many reformsare now taking place in the RFE, an attempt was made to elucidate recentadministrative and legislative reforms related to foreign investment, forestproducts exports, and the organization of the forest industry in the RFE.The implications of such recent developments for the investing countriesare also discussed in this part of the framework.36Although figure 3.1 shows a hierarchical order of organization, each levelcan interact with every other—that is to say, as well, that the influencescould act in either direction. For example, once a corporation encounters astrong incentive for EDT, then a rough corporate strategy is established andrefined by filtering through the various policies and regulations of thehome country government, which could suggest either opportunities orconstraints to the corporation. Corporate strategy usually needs to befurther filtered through the various policies and regulations in the hostcountry environment.The middle part of the figure shows the TNC engaging in value-addedactivities after the actual EDT has been undertaken. The activities involvedhere are organizing the available physical resources for actual productionand export. For this part of the study, the Korean-Russian forestry jointventure in Svetlaya was selected as a case study. The joint venture’sperformance since its formation, as well as obstacles and opportunities foroperating the JV in the RFE, were analyzed. The analysis was facilitated bya visit to the joint venture site and interviews with top management bothon 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 eitherpromote or hinder regional development and exports. The perception ofthe TNC activities on the part of the host country and the overseas marketsis fed back to the overall environment of the home and host countries, andthis in due course modifies the activities and behaviour of the TNCs.37Each part and component of the framework can be referred to thecorresponding chapters and sections of the dissertation as in Table 3.1.Table 3.1. Relationship Between the Analytical Framework and the Organization ofthe DissertationParts & Components Chapters & Sectionsin the Framework in the Dissertation• Home Country Environment • Chapter IVNational Economic Conditions Section 4.1Government Policy on FDI Section 4.2Perception of Host Country Section 4.3Corporate Interests in the RFE Section 4.4• Host Country Environment • Chapter VRegional Economic Conditions Section 5.1Regional Economic Policy Section 5.2Interactions with neighbouring countries Section 5.3Forest Resource Conditions Section 5.4Forest Administration Section 5.5Forest Industry Section 5.6• Japan’s Experience in the RFE • Chapter VI• TNC Activities in Host Country (Case Study) • Chapter VII• Output • Chapters VII & VIIIBased upon the above framework, visiting the three study countries andinterviewing the organizations and people involved became the mainmeans of gathering information and data on the dynamics of theinteractions among the various components in the framework. The organizations and persons visited and interviewed during the study trip, from 15July to 9 October, 1993, are listed in Appendix II and III.In addition to Svetlaya, the field study covered trips to major cities in theRFE, Japan, and Korea to interview the people involved in related organizations to find out how the above framework works in reality. Theorganizations visited included government offices, research organizations,38industry organizations, and corporations. See Appendices III and IV for alist of these organizations. The visit to Japan facilitated access to valuableinformation on recent developments in forest resources, industries, andtrade in the RFE as well as the situation in the region’s forest industry.Although the field study was mainly aimed at confirming whether thereality works as the framework suggested, considerable effort also wentinto gathering recent information on FDI in the three countries involved inthis study since FDI is a recent development in the RFE. For most of theorganizations interviewed in the three countries, the interviews did notuse ready-made questionnaires. Instead, the interviews used questionsderived from the above framework. The questions were first categorizedon the basis of the framework, then modified to meet the circumstances ofthe organizations to be interviewed. Most of the questions used during theinterviews focused on information not readily available from theliterature. The categories of the questions are listed in Appendix IItogether with the names of the organizations interviewed.39CHAPTER IVTHE HOME COUNTRY ENVIRONMENT - SOUTH KOREA4.1. NATIONAL ECONOMIC CONDITIONS4.1.1. The National EconomyKorea’s economy is in a critical condition now, as the country stands on thethreshold of becoming a major world economic power. While a wide gapstill exists between it and a country like Japan, Korea is being chased byChina and the NIEs from Southeast Asia. Growth seems to have lostmomentum. Social unrest has emerged as the price to be paid forremarkably rapid economic success in the past and for its continuation inthe future. The purpose of this section, then, is to overview the currentstate of the country’s economy.Korea is a small country with a poor endowment of natural resources. Asmall land area and a large population have been additional constraints onthe development of its economy. The fragile economy which existed afterindependence from Japan in 1945 was completely dismantled by theKorean War from 1950 to 1953 and had to be rebuilt from the ashes of thewar. However, the economy has grown very rapidly under the control ofthe strong authoritarian government and its outward-looking economicpolicy since the early 1960s. The average annual growth rate was nearly9% for the period from 1962 to 1991. Per capita income grew 80 times inthis period. Trade volume was US$153.4 billion in 1991, up from US$477million in 1962. Average annual growth in exports was about 40% from1962 to 1979. Average annual growth in trade was the world’s highest,4022.5%, for the period from 1970 to 1987 (Kim, 1990). Korea became theworld’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 theHoffman index. The index is, roughly, the ratio of light industry to heavyindustry. Ught industry here is defined as those manufacturing industrieswhich produce consumer goods, whereas heavy industries produce capitalgoods. Among the former are food, textile and wood product industries,while the latter produce chemicals, metals, and fabricated metal andmachinery. When the ratio is less than one, the country can be calledindustrialized. 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 yearsfor England, Germany and U.S.A to reach this ratio, 30 or 40 years forJapan, and only 14 years for Korea (Watanabe, 1982). Korean industryreached a ratio of 0.5 in 1991 (Oh, 1993).Besides these statistics, there are symbolic examples illustrating thesuccess of the country’s economy. Hosting the 1988 summer OlympicGames and exporting brand-name cars and high-technology consumerelectronic products to the world’s major markets are among these. Inaddition, joining the OECD (Organization for Economic Cooperation andDevelopment) by the mid 1990s is being seriously considered by thegovernment.’1 Reported on Hankuk Ilbo dated April 19 and 20, 1991, published in the Koreanlanguage in Canada.41Table 4.1. shows that the climax of Korea’s march to success was the threeyear period from 1986 to 1988, when the growth in GNP continuously wasover 10%. For the first time since 1977, the trade balance shifted tosurplus, pealdng at US$11.4 billion in 1988. However, growth suddenlyslowed in 1989. The economy grew 6.8% that year, the slowest since1981. Subsequently, export growth continued to decline from 1989onwards; indeed, the trade balance turned back to deficit in 1990.Table 4.1. Maj or Korean Economic IndicatorsGNP GNP TradeYear Growth per capita Export Import Trade Balance(%) (US$) (US$ billion) (US$ billion)1981 5.9 1,734 20.7 24.3 -3.61982 7.2 1,824 20.9 23.5 -2.61983 12.6 2,002 23.2 25.0 -1.81984 9.3 2,158 26.3 27.4 -1.11985 7.0 2,194 26.4 26.5 -0.11986 12.9 2,505 33.9 29.7 4.21987 13.0 3,110 46.2 38.6 7.61988 12.4 4,127 59.6 48.2 11.41989 6.8 4,994 61.4 56.8 4.61990 9.3 5,659 63.1 65.1 -2.01991 8.4 6,518 69.6 76.6 -7.01992 4.7 6,749 75.1 77.3 -2.2Source: Bank of Korea (1993b)During the three year period from 1986 to 1988, a favourable externaleconomic environment enabled Korea to keep its economy growing at ahigh rate. Especially important were the low international interest rates,low oil prices, and low ratio of the US dollar to the Japanese yen, known asthe three lows. The low oil price and international interest rates boostedthe world economy, which helped Korea increase its exports. Theappreciation of the Japanese yen also contributed to the growth in Koreanexports.42As Koo (1993) pointed out, the 1986-1988 boom did not originate from asolid competitive advantage of the nation in the world market. Externalconditions became favourable and Korea simply benefited from them.Once external conditions went into recession, the bubble of economicgrowth soon burst.Table 4.2 shows that as Korea has become more industrialized, there hasbeen a shift from primary to secondary and tertiary industry. In 1960Korea was still an agrarian society with agriculture, forestry and fisheryaccounting for as much as 36.8% of total GNP. That share had gone down to8.4% by 1992. On the other hand, secondary industry rose to 49.3% in1992 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 inemployment in each of these industries, which means that a large numberof farmers migrated to manufacturing or service industries.Table 4.2. Share of GNP by Industry (%)Year Primary Secondary Tertiary1960 36.8 20.0 43.21970 26.0 29.2 44.91980 14.9 41.4 43.81985 12.9 41.8 45.41990 10.0 49.5 40.51991 8.7 50.7 40.61992 8.4 49.3 42.3Note: 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 andthe new NIEs in export markets. In other words, Korea’s competitive edgebased upon labour intensive industry has largely been lost. The relocation43of domestic production facilities to other countries where inexpensivelabour is available has been taking place rapidly for several years. Inaddition, Korea’s market share in North America and Europe has beeneroded by competitors armed with inexpensive labour. Furthermore, thelevel of Korean technology is not high enough to compete in highly industrialized markets. Raw material sources also need to be diversified toprovide a stable supply of raw materials required to feed the ever-growing domestic economy.Currently, there are five major goals for the Korean economy, if it is tocontinue 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). Theformer USSR, China, and the East European countries have emerged ascountries which could help Korea achieve part of these goals.4.1.2. Forest Resources in KoreaKorea is a small country: merely 99,270 square ldlometres, or about onetenth of the size of British Columbia, or three times the size of VancouverIsland. But the country is highly populated. The estimated population asof 1990 is 42.9 million. Population density is 431.8 persons per squarekilometre. With Korea, located between 34 and 38 degrees in latitude,most of it belongs to the temperate zone except for some subtropical areasin the southern coastal region and Cheju Island in the southernmost part ofthe country. About 64% of the land is mountains, where most of thecountry’s trees are found. The total forested area is 6.48 million hectares,44or 65% of the total land area (Forestry Administration, 1991). See the landclassification in Korea in Table 4.3.Table 4.3. Land Classification in Korea in 1990Land Classification Area (1,000 ha) Share (%)Forested Land 6,476 65%stocked (6,285) (97%)unstocked (174) ( 3%)unsurveyed (16) ( 0%)Farm Land 2,109 21%rice paddies (1,345) (64%)upland fields ( 764) (3 6%)Others 1,342 14%Total 9,927 100%Source: Forestry Administration (1991)Table 4.4. Forest Types in 1990Forest Type Area (ha) Growing Stock Volume (m3)Coniferous Forests 3,078,827 113,868,995(47.5%) (45.8%)Non-coniferous 1,389,215 64,509,236Forests (21.5%) (26.0%)Mixed Forests 1,809,717 70,048,061(27.9%) (28.2%)Bamboo 7,997 -(0.1%) -Total 6,476,030 248,426,292Source: Forestry Administration (1991)Table 4.4. shows forested area and volume by forest type. Coniferousforest is the major type of forest covering 3.08 million hectares, or 49% ofthe stocked forested area. Non-coniferous forest accounts for 1.39 millionhectares, or 22% of the stocked area. Mixed forests occupy 1.81 millionhectares, or 29% of the stocked area, and the remaining 7,997 hectares arecovered with bamboo stands. Total growing stock volume of the forests inKorea is 248.43 million cubic metres. Coniferous forests have the largestshare, 113.89 million cubic metres (45.8% of total), followed by mixed45forests, 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: nationalgovernment, local governments at the provincial and district levels, andprivate ownership. As in Table 4.5, national forests account for 20.8%.Over two thirds of the forested area is under private ownership. Publicforest land accounts for only 7.6% of the total. However, the growing stockvolume is not proportional to the share of forested area. Whereas thenational forests have a larger stocking (volume to area ratio), the privateforests have a smaller stocking.Table 4.5. Forest Ownership in 1990Ownership Area (ha) Growing Stock Volume (m3)National Forests 1,345,954 85,159,972(20.8%) (34.3%)Public Forests 489,012 18,111,120(7.6%) (7.3%)Private Forests 4,625,228 145,155,200(71.4%) (58.4%)Total 6,476,030 248,426,292Source: Forestry Administration (1991)Table 4.6. Growing Stock Volume per hectare in Various CountriesCountries Growing Stock Volume per ha (m3)Korea ‘40Japan 113United States 78Canada 183(British Columbia) (241)Russian Far East 75(Primorskiy Kray) (157)Source: Compiled from Forestry Administration (1991), Noorin Tookei Kyookai (1993),Forestry Canada (1990), Sheingauz et al. (1989)46Although 65% of the total land is forested, the growing stock volume perhectare 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 theforests in Korea. The climate and soil conditions of Korea, for example, arenot very hospitable to the growth of forests. The climate is characterizedby a hot and moist monsoon summer and a cold and dry continentalwinter. Granite and gneiss comprise more than 70% of all the parentmaterial. Due to the changeable continental climate and especiallytorrential rains in summer, the soil is susceptible to rapid erosion. Most ofthe forest soil is acidic sandy loam (Forestry Administration, 1992a).However, the most important reason is the poor age class structure asshown in Table 4.7. The majority of the present forests were establishedthrough a massive reforestation effort launched in the early 1960s.Korean forests had been heavily exploited to supply the war economyduring the Japanese colonial period. Again, the forests were almostcompletely destroyed during the Korean War from 1950 to 1953. By 1952,total growing stock volume had been reduced to 36 million cubic metresand the average growing stock volume per hectare plummeted to as low as5.6 cubic metres per hectare (Forestry Research Institute, 1985). The factthat the growing stock has now recovered to 40 cubic metres per hectare ismainly due to the reforestation of the last 30 years. However, the ageclass structure is skewed towards young and immature forests. The ageclass under 20 years accounts for 68% of the forested area and 43% of thevolume. Forests under 40 years represent 98% of the area and 92% of thevolume.47Table 4.7. Age Class Structure in 1990Age Class Area Share Volume Share(years old) (1,000 ha) (%) (mu. m3) (%)Under 20 4,403 68 106 43Under 40 1,914 30 123 49Over 41 159 2 19 8Total 6,476 100 248 100Source: Forestry Administration (1991)A poor ownership structure also helps explain the low growing stockvolume of the forests in Korea. The 4.63 million hectares of privateforests, or 7 1.4% of total forest land, is owned by 3.03 million owners(Forestry Administration, 1991). The average forest area per owner isonly 1.52 hectares. Many of these small woodlots are owned for otherpurposes than productive forest management such as for keeping ancestraltombs. 96% of private owners own less than 10 hectares of forest. Thisownership structure prevents the forests from being managed to achievescale economies.4.1.3. Demand and SupplyAs in other countries, wood is one of the indispensable basic materials foreconomic activities in Korea. Wood demand in Korea has grown rapidlywith the Korean economy during the last three decades. Table 4.8 showsthat consumption had risen to 9.42 million cubic metres by 1990 from 2.81million cubic metres in 1968, i.e. at an average rate of 6.5% a year. Morethan half of the wood demand was derived from booming plywood exportsbetween the late 1960s and the late 1970s. The share of demand derivedfrom exports peaked at 65% in 1976. The export-oriented wood consump48lion pattern changed to a more domestic-oriented pattern as the domesticeconomy grew. Therefore, the internalization of wood consumption wentup from 43% in 1969 to 97% in 1990. At present, then, virtually all wooddemand is derived from domestic consumption.Table 4.8. Wood Consumption and SupplyConsumption SupplyYear Total Domestic Export RDC* Total Domestic Import Self-Supply Balance(1,000 m3) (%) --------(1,000 m3) (%) (1,000 m3)1968 2,810 1,550 1,260 55 2,810 800 2,010 28 01969 3,534 1,510 2,024 43 3,534 884 2,650 25 01970 4,000 1,713 2,287 43 4,000 845 3,155 21 01971 5,060 2,192 2,868 43 4,772 1,016 3,756 21 -2881972 5,348 2,293 3,055 43 4,949 782 4,167 16 -3991973 6,412 2,782 3,630 43 5,945 943 5,002 16 -4671974 6,356 2,873 3,483 45 5,799 969 4,830 17 -5571975 6,465 8,889 3,576 45 6,015 896 5,119 15 -4501976 7,825 2,700 5,125 35 7,266 943 6,323 12 -5991977 9,817 4,406 5,411 45 8,834 1,027 7,807 10 -9831978 11,611 6,346 5,265 55 10,423 996 9,427 9 -1,1881979 10,940 6,616 4,324 60 10,038 952 9,086 9 -9021980 7,750 5,785 1,965 75 7,149 1,008 6,141 13 -6011981 7,265 4,585 2,680 63 6,688 1,130 5,558 16 -5771982 7,417 5,661 1,756 76 6,772 1,157 5,615 16 -6451983 8,302 6,340 962 76 7,625 1,101 6,524 13 -6771984 7,472 6,727 745 90 6,891 1,118 5,773 15 -5811985 7,321 6,792 529 93 6,766 1,188 5,578 16 -5451986 7,582 6,996 586 92 7,014 1,242 5,772 16 -5681987 8,532 7,816 116 92 7,850 1,388 6,462 17 -6821988 8,565 8,153 412 95 8,565 1,246 7,319 15 01989 9,014 8,448 566 94 9,014 1,227 7,787 14 01990 9,423 9,121 302 97 9,423 1,138 8,285 12 0ratio of domestic consumption and indicates the importance of* RDC represents thedomestic market.**Balance: The difference between total demand and supply from 1971 to 1988 iscaused by the omission of recycled wood from the total supply.Source: Forestry Administration (1991)49On the supply side, the limited land base and growing stock in Korea couldnot meet the soaring wood demand boosted by the economic growth of thecountry. Indeed, the average annual share of domestic wood supplybetween 1968 and 1990 was only 16% of total timber demand. Domesticwood supply has increased by only 70% from 0.8 million cubic metres to1.14 million cubic metres for the period from 1968 to 1990. For the sameperiod, total demand has gone up by 3.4 times from 2.81 million cubicmetres to 9.42 miffion cubic metres. The consequent gap has been filledby imports, and the self-sufficiency ratio thus declined to 12% from 28%during the same period (Table 4.8). As alluded to earlier, domesticallyproduced timber has a small diameter and low quality and is thereforesuitable only for mine-props and pulping. This limited use even morerestricts the contribution of domestic timber. This situation has forcedKorea to remain an absolute timber deficit country. The government hasan ambitious plan to increase the self-sufficiency ratio from the current12% to 51% in 2030 and 60% in 2080 (Forestry Research Institute, 1991).However, considering the movement of the self sufficiency ratio over thelast 20 years, it is doubtful whether the plan can be realized. The averageannual growth rate of timber demand for the period from 1968 to 1990was 6.5%. This rate far exceeds the growth rate of domestic timber supplyfor 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-sufficiencylevel has gone down to 25.0% in 1991 from 86.7% in 1960 (Noorin TookeiKyookai, 1993). It is expected that Korea will have to continue expandingits imports to meet increasing timber demand as its economy grows.504.1.4. Log ImportsEvery year, Korea imports about 85% of its total timber supply. In 1978and 1979, the share of imports reached 91%. See Table 4.8. Afterpetroleum, logs were the most important raw materials imported to Koreain the 1960s and 1970s (Korea Foreign Trade Association, 1986 and 1989).Its share in total imports was generally around 10% in that period. Whenimporting wood products, Korea preferred logs to sawn timber or otherforms of processed products. Since then, Korea has been either the secondor 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 UnitedStates. No diversification of supply source existed until Indonesia bannedlog exports in 1980. It was only after 1980 that Papua New Guinea andthe Solomon Islands, and Chile and New Zealand emerged as new supplysources to Korea for hardwood and softwood logs respectively. In the late1980s, when Korea and the former USSR were paving the way for formaldiplomatic ties, the Russian Far East was added to the new supply sourcesof softwood.Generally, hardwood logs took a larger share of total imports in the 1970s.However, from the early 1980s, the hardwood imports have graduallydecreased due to the Indonesian log export ban. This has resulted in thedecline of the plywood export industry, which was the major user oftropical logs. In 1986 the volume of softwood log imports surpassed that51of hardwood logs. In 1991 the share of hardwood logs was 41% of total logimports and the share of softwood was 59%. See Table 4.9.Table 4.9. Log ImportsTotal Hardwood SoftwoodYear Qty Value Qty Value Share* Qty Value Share*(1,000 m3) (US$1,000) (1,000 m3) (US$1,000) (%) (1,000 m3) (US$1,000) (%)1970 3,155 125,451 2,852 112,532 90.4 303 12,919 9.61971 3,756 160,995 3,296 142,068 87.8 460 18,927 12.31972 4,167 131,233 3,834 117,602 92.0 333 13,631 8.01973 5,002 283,590 4,411 246,745 88.2 591 36,845 11.81974 4,830 312,572 4,042 258,432 83.7 788 54,140 16.31975 5,119 269,190 4,661 236,401 91.1 458 32,789 9.01976 6,323 415,298 5,450 351,687 86.2 873 63,611 13.81977 7,807 524,195 6,584 425,305 84.3 1,223 98,890 15.71978 9,427 642,737 6,863 461,438 72.8 2,564 181,299 27.21979 9,086 1,008,531 6,670 781,302 73.4 2,416 227,229 26.61980 6,141 858,228 4,486 660,613 73.1 1,655 198,215 27.01981 5,558 634,635 4,324 495,647 77.8 1,234 138,988 22.21982 5,615 607,687 3,998 451,171 71.2 1,617 156,516 28.81983 6,524 587,840 4,139 338,552 63.4 2,385 199,288 36.61984 5,773 566,625 3,310 351,827 57.3 2,463 214,798 42.71985 5,578 479,356 3,228 280,997 57.9 2,350 198,359 42.11986 5,772 484,123 3,051 269,106 52.9 2,721 215,017 47.11987 6,462 655,454 3,204 363,517 49.6 3,258 291,937 50.21988 7,319 900,256 3,502 457,820 47.9 3,817 442,436 52.21989 7,787 960,023 3,538 454,791 45.4 4,249 505,232 54.61990 8,285 990,474 3,483 418,350 42.0 4,802 572,024 58.01991 8,861 1,040,754 3,655 466,496 41.3 5,206 574,258 58.8*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 largestsupplier. Its share of hardwood log imports rose from 37% in the 1970s to73% in the early 1980s. Papua New Guinea provided Korea with theremaining 17% annual average of total hardwood logs in the early 1980s.The Solomon Islands, which became a new source of supply only after521985, presently accounts for about 3% of total hardwood imports. ThePhilippines was one of the major log suppliers in the 1960s, but it played aminor role in the 1970s because of its own log export ban and resourcedepletion. Overall, the hardwood supply system in Korea has a fragilestructure, with heavy reliance on Malaysia. Indeed, in 1990 and 1991 thatcountry’s share reached over 80% of total hardwood log imports.However, a reduction of logging in Sarawak, Malaysia, has been suggestedby the International Tropical Timber Organization (ITfO), one of the intergovernmental 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 4.10shows hardwood log imports from various sources from 1970 to 1991.Table 4.10. Hardwood Log Imports by SourceTotal Indonesia Malaysia Philippines P.N.G.Year Qty Value Qty Value Qty Value Qty Value Qty Value(1,000 m3), (US$1,000)1970 2,852 112,532 477 19,457 1,487 59,923 888 33,152 - -1975 4,661 236,401 2,769 142,253 1,628 81,561 264 12,587 - -1980 4,486 660,613 1,817 284,462 2,474 351,178 82 11,087 133 13,2861985 3,228 280,997 12 1,312 2,308 203,988 67 6,622 841 69,0761990 3,483 418,350 (159) (14,875) 2,912 361,860 - - 412 56,4901991 3,655 466,496 (76) (7,658) 3,086 409,872 - 5 493 48,961Note: 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 since1979. The shortage caused by declining hardwood imports has beengradually made up for with increased softwood imports, which haveincreased by 17% every year from 1980 to 1991. The United States has53been by far the largest softwood log supplier to Korea, supplying anaverage of about 70% of all softwood logs imported to Korea for the lasttwenty years. New Zealand and Chile each account for about 10% eachyear, and the remaining 10% of total annual softwood log imports are fromvarious other sources, including Russia. However, imports from the UnitedStates will drop because of the Clinton government’s log export ban fromthe national forests. On the other hand, the shares of other sources arelikely to increase in the future (Forestry Research Institute, 1991).Naturally, the role of the Russian Far East has become important as apotential new source of softwood log supply to Korea. Table 4.11 shows logimports by source.Table 4.11. Softwood Log Imports by SourceTotal U. S. A. New Zealand Chile OthersYear Qty Value Qty Value Qty Value Qty Value Qty Value(1,000 m3) (US$1,000)1970 303 12,919 236 9,549 56 2,227 - - 11 1,1431975 458 32,789 448 30,624 - - - - 10 2,1651980 1,655 198,215 1,043 134,085 185 19,556 280 24,583 147 19,9911985 2,350 198,359 1,494 141,907 99 6,096 514 28,564 241 21,7921990 4,802 542,606 2,971 416,029 1,290 102,601 289 23,976 252 29,5181991 5,206 574,258 2,687 366,400 1,786 139,683 425 34,390 308 33,785Source: Forestry Administration (1991, and 1992b)4.1.5. Wood UseWood use in Korea is broadly grouped in four categories, namely, mineprops, pulpwood, plywood, and others, the share of which in total wood usebetween 1968 to 1980 averaged 7.8%, 5.1%, 40.4.% and 46.7% in Table 4.12. The trend in wood use, however, shows a somewhat54different picture. Fewer and fewer logs have been used for mine-propsduring the past twenty years. The share of pulpwood has stabilized atabout 5% over the period. Plywood production was the dominant use oflogs 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 ofother wood uses grew from 26.9% in 1970 to 69.4% in 1990. “Other” hererepresents mainly sawnwood, furniture and musical instrument production. This illustrates the fact that the forest industry has become morehighly structured than it was 20 years ago.Table 4.12. Trend of Wood Use (%)Year Mine-prop Pulpwood Plywood Others Total1970 11.3 5.2 56.8 26.9 1001975 8.4 2.9 49.9 38.8 1001980 6.7 7.1 43.4 43.1 1001985 9.8 8.0 30.1 52.1 1001990 5.4 5.1 20.0 69.4 100Average* 7.8 5.1 40.4 46.7 100*Average of 23 years from 1968 to 1990.Source: Forestry Administration (1991)Since 100% of mine-props have been supplied domestically, as has mostpulpwood, virtually all imported logs have been used for plywood andother products including sawnwood, which now account for most of theforest products produced in Korea. Indeed, imported logs have played akey role in the development and structuring of the forest productsindustry 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 woodconsumption in Korea (as in North America), although Korea uses signifi55cantly less wood for its housing construction than North America and Japando.Over 95% of all Korean residential units are in concrete high-rise apartment building complexes. Only a handful of vacation homes are of wood-frame construction. Wood is also used as a disposable material in makingconcrete forms and other temporary items on the construction site. This iswhy Korea has a relatively small amount of wood consumption in relationto its world’s highest rate of housing starts per capita. Table 4.13 showsthat housing starts numbered 750,378 units in 1990 and 613,083 units in1991. With 42.8 million and 43.3 million people in Korea in 1990 and1991, 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, 683and 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 CountriesCountry 1989 1990 1991 1992Population 42,474 42,869 43,327 43,717(1,000 persons)Korea Housing Starts 462 750 613 N.A.(1,000 housing units)Units/100,000 1,087 1,757 1,416 N.A.Population 123,200 123,610 124,040 124,450Japan Housing Starts 1,662 1,707 1,370 1,403Units/100,000 1,350 1,381 1,105 1,105Population 26,369 26,610 27,297 27,409Canada Housing Starts 215 182 156 158Units/100,000 814 683 572 578Population 247,342 249,900 252,671 255,462U.S.A. Housing Starts 1,376 1,193 1,014 1,200Units/100,000 556 477 401 470Source: 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. ofCommerce (1993)56However, since wood is also used for wooden furniture, cabinets, doors andwindows, fixtures, paneling and interior decoration, there is still a strongdemand for wood in Korea, despite the relatively low use of wood inhousing 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 inone’s life. The house is used as a means of investment for financialsecurity. Therefore, a house has been one of the most important things toown for the average Korean. However, a concentration of population andskyrocketing land prices have created a severe shortage of housing,especially in the big cities. In response, the government has conducted amassive housing construction program since the mid-1970s. Indeed, thenew government is planning to build 2.9 million new residential units inthe next five years. The main part of the plan is to build five new cities onthe outskirts of Seoul with approximately 340,000 units per city. Thismeans there will be 5 50,00 - 600,000 new housing units every year forthe next five years, and wood demand in Korea is thus expected to growcontinuously.4.1.6. Structural Changes in the Forest Products IndustryWith an 85% reliance on imports, the industry has experienced manystructural changes arising from the situations in log-supplying countries.Rapid growth of the domestic economy has also contributed to suchchanges. This section briefly discusses the development of the industryand its structural changes over the last 25 years.57It is not an exaggeration to say that the forest products industry was ledby plywood manufacturing beginning in the mid 1960s. Plywood manufacturing 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 plywoodexports in total exports of the country was over 10% between 1964 and1972, and plywood was the country’s largest export earner from 1968 to1970.Table 4.14 illustrates that the importance of the industry has gone througha dramatic change since the log export ban was imposed by Indonesia in1980. In particular, the share of plywood in total exports has sharplydropped 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 plungedfrom as high as 90.5% in 1965 and 56% in 1980 to 6.2% in 1990. Thisshows the dramatic shrinkage of the importance of plywood as an exportitem.Table 4.14. Shares in Total ExportsTotal Exports of Share Export of Share ShareYear Exports Forest Products Plywood(A) (B) (C=B/A) (D) (D/A) (D/B)(US$1 million) (%) (US$1 million) (%)1%5 175 21 12.0 19 10.9 90.51970 835 110 13.2 102 12.2 92.71975 5,081 294 5.8 229 4.5 77.91980 17,505 629 3.6 352 3.6 56.01985 30,283 264 1.7 40 0.87 15.21990 65,016 610 1.8 38 0.05 6.22Source: Forestry Administration (1992b)58Likewise, the share of forest products in total exports fell during the sameperiod, from 12.0% in 1965 to 1.8% in 1990. Korean forestry statisticsinclude totals for such non-wood products as nuts, mushrooms and evenstone products. The share of these minor-forest products surpassed thatof wood-products since 1984. If they are excluded, the share of forestproducts in total exports become even smaller than appeared in Table4.14.The forest products industry experienced a structural change in the 1980sbecause of a shortage of logs, increased labour costs, and the growth of thedomestic economy. This caused the industry to change from being anexport-oriented, labour-intensive, low-value-high-volume-producer tobeing a domestic market-oriented, capital-intensive, high-value-addedproducer.As a result, plywood manufacturing no longer takes a leading role in theforest products industry, nor in exports. After the Indonesian log exportban, the shortage of logs hit the industry particularly hard. In attemptingto build its own industry, Indonesia used logs as weapons against majorplywood manufacturing countries like Korea, Japan, and Taiwan. Theresulting scarcity of logs made the Korean plywood industry not only stopexporting its products but also deliver an inadequate supply to thedomestic market. Increased labour costs made it unable to stay inoperation domestically and to remain competitive internationally.With the help of the rapidly growing home economy, the domestic marketgrew large enough to divert the attention of the forest industry intodomestic markets, which previously had attracted little attention from the59industry. The ensuing housing construction boom and heightened livingstandard contributed to an increase in domestic consumption of woodproducts. As well, the industry shifted towards the production of morevalue-added products such as furniture and musical instruments. Table4.15 shows how imported logs have been used recently (Forestry ResearchInstitute, 1991).Table 4.15. Share of the Use of Imported Logs (%)Origin Sawn Construction Musicalof logs wood Plywood Fixtures Packaging Furniture Instrument Others TotalU.S.A. 46 - 10 1 14 25 4 100Chile 80 - - 20 - - - 100N.Z.* 80 - - 20 - - - 100S.E.A.*- 15 28 5 27 25 - 100N.Z.: New Zealand, S.EA.: Southeast AsiaSource: Forestry Research Institute (1991)4.2. GOVERNMENT POLICY ON FOREIGN DIRECT INVESTMENT4.2.1. Korea’s Outward Foreign Direct InvestmentIt was only after the mid 1980s that Korea became active in overseasinvestment. Before then, Korea’s outward foreign direct investment wasunder the strict control of the government. The country lacked capitalresources and suffered from a chronic balance of payments deficit. In thelate 1980s, for the first time in its history, the Korean economy achieved asurplus in the balance of payments thanks to the three lows mentioned insection 4.1.1 above. At the same time, the Korean economy was beingchallenged by emerging trends towards globalism and regionalism ininternational markets. Moreover, Korea had to cope with the disappearance of its industrial competitive advantage due to rising labour costs.60Such an international and domestic economic environment forced theKorean 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 thecumulative outflow by that year, since 1968, had amounted to US$484million. Table 4.16 shows that by 1992, these figures had risen toUS$1,210.41 million for 632 projects and cumulative outflows ofUS$4,421.90 million.Table 4.16. Korea’s Overseas InvestmentPermitted Realized (A) Withdrawn (B) Outstandin*Year Projects Amount Projects Amount Projects Amount Projects Amount(no.) (US$1,000)1968-1985 691 875,962 603 570,646 160 86,715 443 483,9311986 74 364,912 52 183,877 19 22,693 476 645,1151987 110 371,061 92 410,508 32 89,611 536 966,0121988 253 479,349 176 223,761 32 59,665 680 1,130,1081989 368 943,346 269 569,590 23 177,203 926 1,522,4951990 517 1,624,792 339 959,326 22 146,141 1,243 2,335,6801991 539 1,605,634 453 1,125,364 23 88,140 1,673 3,372,9041992 632 1,210,407 497 1,218,395 34 121,114 2,609 4,421,895*: Outstanding represents cumulative outflows since 1968 based on the realization ofinvestment (A) less capital withdrawn (B).Source: Bank of Korea (1993a)Most investment has been of small and medium size. Investment of lessthan US$1 million represents 72% of total investment, the average investment being US$2.02 million in 1991. (This represented an increase overthe 1986 average of US$1.36 million). In terms of equity share, 100%wholly owned investment is the most preferred type of ownershipaccounting for 55% of the total projects and 60% of the total amount in1991 (Kim, Mm and Yoo,1992).61Before 1986, nearly 50% of overseas investment was in natural resourcedevelopment such as mining, forestry and fishing. However, investment innatural resources has declined since 1986, whereas manufacturing investment has risen since then. The manufacturing sector has the largest shareof total investment, followed by the trade and mining sectors, based uponthe 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 NorthAmerica, accounting for 3 3.8% and 46.4% respectively based upon theamount of continuing investment at the end of 1991. Investment inSoutheast Asia, taking advantage of low wages, tends to be small in scaleand mainly in labour-intensive industries such as textiles, toys, andfootwear. On the other hand, investment in North America is in largerscale and more capital-intensive industries such as automobile manufacturing, iron and steel, and consumer electronics (Kwon, 1993).4.2.2. Government Policy Towards Overseas InvestmentThe legal basis for Korea’s overseas investment policy can be found in theForeign Exchange Control Act, its Enforcement Decree, and associatedregulations. Before 1986, overseas investment was highly regulated bythe Foreign Exchange Control Act for the sake of effective management ofscarce foreign exchange reserves. In principle, under the Act no overseasinvestment was permitted except for that which could bring domesticallyunavailable raw materials into Korea or promote overseas markets.62However, when Korea achieved its first surplus in the balance of paymentsin 1986, the Act went through a major revision in an effort to vitalizeoverseas investment. The approval procedure was streamlined.Notification to the government became the only requirement for a smallinvestment of less than US$5 million. The definition of overseas investment was broadened to give investors greater freedom in foreign operation. Less than 20% of the equity share of joint ventures was treated asoverseas investment, provided that the investment contributed to thesecurity of raw materials supply to Korea and the transfer of technology.The control mechanism under the revised overseas investment policyclassifies investments into three categories: encouraged, restricted, andothers. Encouraged investments are those that could increase the securityof raw material supply, promote overseas markets, or help restructuredomestic industry which is losing its competitive advantage in overseasmarkets. These investments are provided with financial support and taxbenefits from the government. Restricted investments are those that coulddamage the competitiveness of other Korean firms. Other investments arethose 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 underlying principle of the revision was a change from a “regulate in principle,approve the exceptions” agenda to an “approve in principle, regulate theexceptions” one. This provided a basic framework for a completeliberalization of overseas investment (Kim et al., 1992).63The stable supply of energy resources and raw materials from overseas isone of the most critical factors for a resource-poor economy like Korea tocontinue to grow successfully. This has been very well reflected in Korea’soverseas investment policy. Investments in overseas natural resourcedevelopment are encouraged and provided with financial support. Theseinclude long-term loans at below-market interest rates, insurance, and taxsubsidies.Among the encouraged investments, those related to energy and resourcedevelopment receive even more support through the incentive system.For example, overseas mineral development is financed up to 80% by aspecial fund set aside to encourage such investment. Up to 60% ofinvestment in overseas oil and gas exploration projects can also befinanced 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 receivegovernment loans at a low annual interest rate from the ForestDevelopment Fund.A major tax subsidy allows overseas investment companies to set upreserves for overseas investment losses amounting, at maximum, to 20% ofthe total amount of overseas investment and to deduct such losses for taxpurposes (Kim et al., 1992). Another tax incentive is that dividends froman overseas resource development project are exempt from income tax ifdividends 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 accountsfor a very small share of GNP. Indeed, in 1990, overseas investment64accounted for only 0.34% of GNP. This figure is much lower than thecomparable ones for Japan and Taiwan, which respectively spent 1.6% and3.6% of GNP on overseas investment in the same year (Kim et aL, 1992). Inaddition, Korea’s overseas investors are often criticized for their lack ofexperience in managing overseas ventures, their lack of information onhost countries, and their insufficient capital resources (Kwon, 1993).Nevertheless, Korea’s overseas investment in resource development has alonger history than does other investment, and the extreme dependence onforeign natural resources and raw materials has made the government’sincentive measures particularly favorable to such investment. Forestryventures have been one of the most important Korean overseasinvestments in natural resource development since the first investment inIndonesia in 1968.4.2.3. Overseas Investments in ForestryAlthough logs normally have been purchased on the international logmarket, 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 beenbrought in through overseas forest development as shown in Table 4.17.As noted earlier, Korean overseas forestry investment began in Indonesiain 1968 (Forestry Administration, 1992b). That investment happened to bethe first Korean outward foreign direct investment (Euh and Mm, 1986),65Table 4.17. Logs Imported through Overseas InvestmentNo. of Qty Amount Share in Total ImportsYear Firms (1,000m3) (US$1,000) (%)1969-79 5 3,511 249,003 5.721980 5 244 35,517 3.971981 6 312 43,157 5.611982 9 297 29,343 5.281983 9 387 33,017 5.931984 8 563 47,868 9.751985 7 263 21,289 4.711986 2 65 4,571 1.121987 2 90 7,285 1.461988 4 121 13,868 1.651989 5 162 19,061 2.081990 5 224 26,335 2.701991 6 297 38,066 3.35Source: Forestry Administration (1992b)Table 4.18 shows the number and amount of forestry project by overseasinvestment and the distribution by industry. A total of US$172.38 millionhas been invested in 32 forestry projects, 39 by project, since 1968. Thatconstitutes 3.9% of the cumulative oufflow and 6.4% of the projects as of1992. In the early period, from 1968 to 1980, the average amount of eachinvestment 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 manufacturingwas made in new sources such as the Solomon Islands and Papua NewGuinea. The average investment between 1981 and 1987 was approximately US$10 million. For the most recent period from 1988 to 1992, thescale of the average investment has gone down to US$4.5 million perproject.By industry, logging accounts for haff of total investment projects, followedby wood processing, plywood manufacturing and chip processing. Several66projects involve investment in multiple industries. For example, logginginvestment 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 growthsince 1988. Wood processing investment is intended to supply raw orprocessed materials to the furniture industry and musical instrumentindustry in Korea.Table 4.18. Korea’s Overseas Investments in ForestryTotal Investment IndustryYear project Amount Logging Plywood Chip Wood Processing(no.)(US$1,000) (no. of project)1968 1 2,940 11970 1 5,237 (1) (1)1973 1 735 11978 1 800 11980 1 235 11981 2 40,700 (1) 1 (1)1982 1 1,050 11983 3 30,718 2 11987 1 450 11988 2 5,640 1 11989 4 2,610 1 31990 6 50,226 1,(2) 1 (2) 21991 5 10,470 2 31992 3 20,565 (2) (1) 1,(2)Total 32(39) 172,376 16 8 3 12Note: The numbers inside 0 represent investments in integrated forestry ventures.Each of the industries in the venture is counted separately in the bracket. Forexample, total investments in 1990 numbered six. Two investments were inboth logging and chip production. In 1992 one investment was in woodprocessing, the second in logging, plywood, and wood processing, and the thirdfor logging and wood processing.Source: Forestry Administration (1992b)Table 4.19 shows the forestry investment by country. Since the firstforestry investment in 1968 forestry investment has been heavily concentrated in Malaysia and Indonesia. Perhaps as a consequence of log exportbans in Southeast Asia, however, recent investments show a diversifica67tion of investment direction. Whereas investment in Indonesia andMalaysia has been small in scale, other investment has tended to be large.Table 4.19. Overseas Forestry Investments by CountryCountry Investments IndustryProjects Amount Logging Plywood Chip Wood Processing(no.) (US$1,000) US$1,000 (No. of projects)Indonesia 8 44,085 32,613(5) 10,472(3) 1,000(1)Malaysia 10 12,042 4,791(3) 7,251(7)Solomon Is. 2 7,164 7,164(2)P.N.G. 2 43,500 43,500(2) - (1)* - (1)*Fiji 2 950 950(2)Myanmar 1 4,034 4,034(1)U.S.A. 4 20,960 5,260(3) 13,000(1) 2,700(1)Russia 1 26,876 26,876(1) - (1)*Guyana 1 10,800 10,800(1) - (1)* - (1)*Cambodia 1 1,965 1,965(1)Total 32(39) 172,396 127,163(16) 19,297(8) 13,000(3) 12,916(12)Notes: 1. P.N.G.: Papua New Guinea.2. Entries with * marks are part of integrated forestry ventures and are notseparated by amount. Investment in specific projects are included in theamount 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 befrom a large business group, Chaebol in Korean, which usually can mobilizethe capital resources necessary for the investments better than small andmedium-sized firms can. Recent investments in Russia, Myanmar andGuyana were made respectively by companies from Hyundai, Sunkyungand Daewoo: Sunkyung’s investment in an integrated forestry venture inGuyana, Daewoo’s investment in a plywood mill in Myanmar, as well asHyundai’s logging investment in Russia. Each of them is among the 10largest Korean Chaebols.As for ownership of the investment, Korean forestry ventures tend toprefer a larger share as in Table 4.20. Much forestry investment is undertaken by Korean companies without foreign participation. Overseas68investments wholly owned by domestic firms represent 3 8.5% of the totalprojects and those with equity share of 50 to 99% account for 33.3% of thetotal (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 variouslevels of equity share depends upon the rules and regulations of foreigninvestment in the host country. For example, no wholly owned investmentis allowed in Indonesia, where a strict rule applies to the share of foreignparticipation. 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 1992Classification 100% 50%-99% 20%-49% Less than 20% Total(No. of Project)1968-1980 3 3 61981-1986 3 1 2 1 71987-1992 12 9 5 26Total 15 13 10 1 39(Industry)Logging 6 6 4 16Plywood 1 2 4 1 8Chip 2 1 3Wood processing 6 4 2 12Total 15 13 10 1 39( Country)Indonesia 4 5 9Malaysia 5 2 2 1 10Solomon Is. 4 4P.N.G. 2 2Fiji 2 2Myanmar 1 1U.S.A. 3 2 5Russia 2 2Guyana 3 3Cambodia 1 1Total 15 13 10 1 39Note: 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)69In summary, Korea’s overseas forestry investment began with small scalelogging ventures in Indonesia and Malaysia to supply plywood logs toKorea when plywood manufacturing was a strategic industry in the Koreaneconomy. From 1980, investment has been directed to more countries toincrease the security of log supply after the damaging experience of theIndonesian log export ban. Investment in the early period was mainly of aresource-seeking type, and the motivation was also simply to achieve asecurity of raw material supply.The diversification of host countries continued in the late 1980s, as did themotivation for investment. The security of the log supply has remained asone of the most important motivations for overseas forestry investment;however, there has been a rising amount of investment for the purpose ofrelocating the “sunset” plywood industry from Korea to where inexpensivelabour was available, as well as for trade promotion. As the scale of theinvestment increases, larger business groups become involved in overseasforestry investment.As the Korean government further liberalizes foreign direct investmentand the Korean economy demands more wood, overseas forestry investment by Korean firms will continue to grow. The scale of such investmentis likely to be larger than before, and the host countries and the investment motivations to be more diversified. This trend was exemplified by adevelopment in 1993. The Hansol Paper Co., recently separated fromSamsung (one of the largest business groups in Korea), invested US$32million in a reforestation project in western Australia. The investment hassecured a 10,000-hectare tract of land for planting trees for the next 3070years.2 This is the first investment in a reforestation project in Korea’soverseas investment history. Similar reforestation investments are beingplanned in Vietnam, New Zealand, and Indonesia. In order to encouragesuch 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 selectedinvestors—in addition to a government subsidy of 30% of the cost involvedin surveying the area to be developed.3 This new pattern of investment inforestry is perhaps the only way for a country like Korea to increase thesecurity of its overseas timber supply under mounting environmentalpressure in the old timber exporting countries.4.3. PERCEPTION OF RUSSIA AND THE RUSSIAN FAR EASTA two-fold inquiry is made in this section, focusing on government andcorporate levels of organization. Korea’s perception of the RFE is probablybest reflected in government policy towards the region and the country.“Northern Policy” is Korea’s policy towards former communist countriesincluding the Soviet Union. This policy toward the Soviet Union is wellreflected in Korea’s economic aid allocated to the country. Korea’s interestsin and strategies for the RFE are translated into Korean firms’ activities inthe region. Since it is hard to discuss the RFE separate from the wholecountry, the discussion must first focus on Korea’s relations with Russiaand then on those with the RFE.4.3.1. Northern PolicyDespite the geographic proximity, there were, until recently, very fewcontacts between Korea and the USSR mainly due to Korea’s strong anti2 Seoul Economic Daily, 17 July 1993.3 Korea Economic Daily, 24 December 1992.71communist stance stubbornly maintained since the Korean War. However,after the mid-1980s, changes in the international political environmenthave reduced Korean isolation from the USSR and the other communistcountries.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 newemphasis on the Asia-Pacific region, well spelled out in his speech inVladivostok in July 1986. The speech stressed the redirection of the Sovieteconomy to link it to the Pacific Rim economy, focusing particularly on theeconomic dynamism of the East Asian NIEs and Japan (CDSP, 1986). Theintegration of the Russian Far East into the Pacific Rim economy wasfurther amplified with more concrete plans in his speech in Krasnoyarsk, aSiberian city, in September 1988. The establishment of special economiczones in the RFE and the introduction of a preferential benefit system ininternational trade was suggested by the Russian leader (CDSP, 1988).In the late 1980s, Korea had more contacts than ever with other countriesdue to its hosting two international sporting events in Seoul; the AsianGames in 1986 and the Summer Olympic Games in 1988. These two eventsprovided Korea with an opportunity to have numerous cultural andacademic 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 towardsimprovement of relations with then communist countries. The resultantformal diplomatic policy was called the “Northern Policy”. A rush of new72diplomatic ties with East European countries followed a few years after theOlympic Games. The USSR was one of the major countries the policytargeted. Indeed, the initial success of the “Northern Policy” reached itsclimax when new diplomatic ties were established with the Soviet Union in1990. On one level, the apparent motivation of the “Northern Policy” ispolitical. The ultimate goal of the policy is to achieve the reunification ofthe two Koreas, i.e. peace and security on the Korean peninsula. Inaddition, however, the “Northern Policy” was very strongly motivated byeconomic incentives. Now that formal diplomatic relations with most ofthe countries the “Northern Policy” had targeted have been achieved, thepolitical meaning of the policy to a large extent has vanished and theeconomic reality has overtaken the political justification.As mentioned in section 4.1.1, the Korean economy has been challengedboth by protectionism in the main export markets of the U.S. and the ECand rapidly growing competition of China and new NIEs from ASEAN(Association of Southeast Asian Nations) countries. A diversification ofexport markets and the security of raw material supply have emerged asthe most crucial for the Korean economy to continue to grow. Theeconomic motivation behind the “Northern Policy” was to cope with thesechallenges from both sides and at the same time to utilize the newdiplomatic ties with former communist countries to secure new exportmarkets and resource supply sources (Park, 1990). The Soviet Union wasregarded as one of the best countries to serve this purpose, with a newpotential market in European Russia and a potential raw material supplysource in the RFE.734.3.2. Economic Relations between Korea and Russia4.3.2.1. Economic AidAfter diplomatic ties were established, Korea granted a total US$3 billionworth of economic aid to the USSR over the three year period from 1991 to1993. The aid package consists of a US$1 billion bank loan, US$1.5 billiontrade credit to help Russian imports of Korean consumer goods and US$500million for importing plants from Korea (Kim, 1991). The share of the tiedloan in the total amount of the aid well represents the main motivation ofthe economic aid, i.e. trade promotion.The US$1 billion bank loan was provided in two installments in May andNovember 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 notbeen implemented since its approval. The loan payment was temporarilysuspended in response to the political instability after the August 1991coup 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, hadestablished the revitalization of the domestic economy as the highestpriority, announced on 30 August 1993 that it would be canceling theeconomic aid allocated to Russia, and would submit a rescheduled loanpayment plan to Moscow.4 Russia’s failure to pay the owed principal andinterest on time was referred to as the main cause of the decision. Therewas a widely shared perception that the US$3 billion aid package was theKorea Economic Daily, 30 August 1993.74cost for stabilizing security and peace on the Korean peninsula, whichultimately would help the two Koreas be reunited.5 However, such justification seems no longer viable in the harsh economic reality that Koreaitseff is still one of the world’s largest debtor countries—indeed, the loangranted to the former Soviet Union was borrowed from foreign banks. TradeTrade between the two countries began several years before formaldiplomatic relations, though it was often one-sided. A small amount ofhighly demanded raw materials was imported from the USSR. Oneshipment of pulp and 5,700 cubic metres of pulpwood were exported fromthe USSR to Korea in 1980 (Bank of Korea, 1981). The imports were oftenarranged by a third country. For example, Japan’s Mitsui & Co., Ltd.arranged a shipment of 3,800 cubic metres of Russian logs from Nakhodkato Inchon in 1982 (Japan Lumber Journal, 1982). Official trade recordsbegan to appear in statistics publications only from 1985.Trade between the two countries began to grow rapidly after the OlympicGames in 1988, and the Korea Trade Promotion Corporation (KOTRA) officewas opened in Moscow in 1989. Table 4.21 shows that the trade volumebetween the two countries quadrupled from US$290 million to US$1,202million between 1988 and 1991. In the first two years of this period, thetrade showed a Korean import surplus, but this turned to an export surplusin 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% ofKorea’s total trade volume and is 3.2% or 3.6% of that for the major tradingpartners of Korea, the U.S. and Japan.5 Korea Economic Daily, 18 November 1992.75Table 4.21. Korea’s Trade with RussiaYear Export to Import from Total BalanceRussia Russia(US$1 million)(USSR)1985 60 42 102 181986 65 68 133 -31987 67 133 200 -661988 112 178 290 -661989 208 392 600 -841990 519 370 889 1491991 625 577 1,202 48( Russia)1992 753 204 957 5491993 (Sept.) 386 689 1,075 -303(RFE)1992 92.5 136.4 228.9 -44.9Source: Korea Foreign Trade Association (1992) and ERI (1993)In order to circumvent the lack of foreign reserves in Russia, barter tradewas often used. For example, Korea received aluminum ingot, steel, andfish products in payment for exports of textiles, consumer electronics, andfootwear.6 However, the march of trade expansion between the twocountries was brought to a halt by the political instability that attendedboth the coup in August 1991 and the final collapse of the USSR. Koreanexports to Russia after 1991 were largely based upon the credit extendedto Russia for its purchase of Korean consumer goods. Trade also declineddue to the difficult economic situation in Russia. InvestmentsKorean direct investment in the former USSR and Russia had beenapproved for 28 projects and US$30.02 million as of November 1992 since6 Korea Economic Daily, 18 Nov. 1992.76the first investment in Moscow in 1989 (Korea Economic Daily, 18Nov.1992). However, Table 4.22 shows that only US$22.34 million, or 74%of the approved investment was undertaken. This figure represents lessthan 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 Amount (US$1,000)Project Approved InvestedMoscow 10 5,867 4,067St. Petersburg 1 1,912 0Alma Ata 2 738 678Kazakstan 2 398 50Khabarovskiy Kray 3 537 156Primorskiy Kray 1 16,000 16,000Vladivostok 2 1,550 250Sakhalinskaya Oblast’ 5 2,007 987Nakhodka 1 714 0Amurskaya Oblast’ 1 300 151Total 28 30,023 22,339Source: Korea Economic Daily (11 Nov. 1992)By region, Korea’s investment in the former Soviet Union shows a heavyconcentration in the Far East. The region accounts for 70% of the totalamount, or US$21.11 million representing 47% of all projects. EuropeanRussia accounts for US$7.78 million or 26% of the total amount, representing 39% of all projects. The Central Asian region accounts for the smallestshare, US$1.14 million (4 projects), only 4% of the total amount and 14% ofthe projects as in Table 4.22. However, the concentration in the RFE can beattributed to the single largest investment in forestry, which representsmore than 50% of the total investment. The average amount per singleinvestment project is US$1.07 million. The second largest project, however,amounts only US$519,000.77Table 4.23. Investment by Region and Industry (approved amount)Nov. 1992European CentralIndustry Russia Asia Far East TotalUS$1,000 (No. of Project)Forestry 16,000(1) 16,000(1)Fishing 1,964(2) 1,964(2)Heavy Machinery 1,912(1) 1,912(1)Textile & Footwear 175(2) 738(2) 913(4)Medicine 143(1) 143(1)Food 300(1) 561(2) 861(3)Chopsticks 300(1) 300(1)Imports &Exports 530(3) 255(1) 156(1) 941(5)Hotel & Restaurant 3,362(3) 275(2) 3,637(5)Telecommunication 1,500(1) 1,500(1)Aerophoto Service 70(1) 70(1)Ship Repair 1,782(3) 1,782(3)Total 7,779(11) 1,136(4) 21,108(13) 30,023(28)Source: Korea Economic Daily (11 Nov. 1992)By industry, the largest share of investment is found in primary industriessuch as forestry and fishing, followed by service industries such as hotelsand restaurants, and ship repair (Table 4.23). Primary and secondaryindustries account for 60% and 26% respectively. Manufacturing industriesaccount for only 14% of total investment.In sum, Korean investment in the former Soviet Union is directed to avariety of industries, but the amount of each individual investment tendsto be small, except for the large forestry investment in the Far East.Motivations for investment in the former Soviet Union are well reflected inthe geographic pattern of the investments. European Russia is perceivedby Korean firms as a market to promote whereas the Russian Far East isseen as a resource supply source. Investment in Central Asia is largelymotivated by the presence of the Korean ethnic minority in the region.784.3.2.4. Other Economic CooperationEconomic cooperation between the two countries has increased sinceRussian President Yeltsin’s visit to Seoul in November 1992. The visitresulted in the signing of a Korean-Russian treaty, as well as intergovernmental agreements setting up cooperative committees on economicmatters, science, and technology. Joint Korean-Russian committees forfisheries and the exploration of energy and mineral resources in Russiawere also established. Details of these are discussed in the followingsections.During Yeltsin’s visit to Korea, 23 major projects with a total value ofUS$20 - 30 billion were proposed by Russia as avenues for potentialeconomic cooperation between the two countries. These include tin andgold production, petro-chemical processing, and gas production inKhabarovskiy Kray; coal mining, wood processing, and modern fishprocessing plants on Sakhalin Island and Kamchatskaya Oblast’; and aseaport, an airport, highways and railways on Sakhalin Island.7 More thantwo thirds of these are in the RFE.Science and technology transfer from Russia has emerged as an attractivearea for investment by Korean firms. Currently, 19 Korean firms areinvolved in transferring 25 technology items including industrial gasturbine engines, helicopters, light and medium size passenger airplanes,and pharmaceutical technology.8 Korea gains access to some of thistechnology by taking part in defense conversion projects.7 Korea Economic Daily, 20 Nov. 1992.8 Korea Economic Daily, 19 Feb. 1993.79Technology development is one of the ways the Korean economy cansurvive in the face of future international competition. However,technology development is an expensive investment. Setting its expensiveprice aside, western technology is hard to acquire because of westerncountries’ reluctance to sell it. By contrast, Russian technology in someareas is highly comparable to that of the west but inexpensive and easy toacquire.94.4. Corporate Interests in the RFEFor many reasons, the RFE is perceived as a very important region forKorea. Indeed, most Korean investment in Russia is directed here. This isthe region where Korea could establish a supply source for raw materialsnecessary for Korean industries. Moreover, the presence of a large Koreanminority in the region presents an emotional attraction. Finally, the regionbrings a lot of international attention to its potential economic cooperationthrough developments such as the Japan Sea (East Sea in Korea) RimEconomic Zone (Ogawa, 1993). Thus, how the RFE is perceived by Koreanfirms and the implications of such perception for Korean investment in thisregion are the main areas of discussion in this section.4.4.1. Trade with the RFEDespite the shrinldng Russian foreign trade over the last several years,trade with Asia-Pacific countries has expanded. The share of the tradewith Asia-Pacific countries in Russia’s total foreign trade has risen from12% in 1991 to 20% in 1992 (JETRO, 1993a). The RFE’s trade with Asia-9 Korea Economic Daily, 19 Feb. 1993.80Pacific countries also has risen from 78% in 1985 to 88.4% in 1992. Priorto perestroyka and glasnost the RFE’s trade with Asia-Pacific was dominated 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 (Table4.24). These facts indicate a fast integration of the RFE into the Pacific-Rimeconomy.Table 4.24. RFE’s Trading Partners (%)1985 1990 1992Total Exports 100.0 100.0 100.0Asia-Pacific countries 78.0 (100) 85.0 (100) 88.4 (100)Japan 62.0 (79.5) 65.0 (76.5) 34.4 (38.9)China 10.0 (13) 17.0 (20) 37.9 (42.9)Others 6.0 (8) 3.0 (3.5) 16.1 (18.2)Others 22.0 15.0 11.6Source: JETRO (1993a)It was only in 1993 that separate trade statistics for the RFE becameavailable in a formal publication. According to the FRI (1993), Koreaexported US$92.5 million worth merchandise to the RFE and importedUS$145.80 million of raw materials from the RFE in 1992 (Table 4.25).Table 4.25. Korea’s Trade with the RFEYear Export to Import from Total BalanceUS$1 million(USSR, Russia)1991 625 577 1,202 481992 753 204 957 5491993 (Sep.) 386 689 1,075 -303(RFE)1992 92.5 136.4 228.9 -43.9Source: Korea Foreign Trade Association (1992), Korea Economic Daily (6.11.1993),ERI (1993) and JEfRO (1993a)81They account for 6.6% and 12.2% of the RFE’s total exports and importsrespectively. 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 Japanwhich respectively represent 38.6% and 35.4% of the RFE’s total trade.Korea imports from this region mainly steel and metal products (35% ofimports from the RFE by value), coal and petroleum (20%), and fisheryproducts (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$53.3 million.However, there usually exist more exports that are not recorded by officialstatistics. A large amount of consumer goods are being brought into theRFE by sailors and travelers returning from the Korean port city of Pusan.If these unofficial exports are taken into account, Korea’s exports to theRFE could be double the official figure (Lee, B.S., 1993). Korea hasexperienced a rapid expansion of trade with the RFE for the last few yearsdespite the fact that the overall trade with Russia began to slow down.10This reflects the recent trend that Korea’s exports directed to the Moscowregion declined while the ones to the RFF rose.Korea’s trade with the RFE has a geographic concentration on the southernpart of the RFE. Primorskiy Kray shares the largest portion of Korea’strade with the RFE, nearly 60%, followed by Sakhalinskaya Oblast’ andKhabarovskiy Kray (Table 4.26).10 Korea Economic Daily, 7 Sept. 1992.82Table 4.26. Korea’s Trade with the RFE by Sub-region in 1992Share of totalSub-region Export to Import from Total province tradeUS$lmillionPrimorskiy Kray 114.6 21.7 136.3 14.6Khabarovskiy Kray 5.3 19.5 24.8 24.8Amurskaya Oblast’ N.A. N.A. N.A. N.A.Kamchatskaya Oblast’ N.A. N.A. N.A. 4.3Magadanskaya Oblast’ 5.0 5.1 10.1 7.1Sakhalinskaya Oblast’ 9.8 45.4 55.2 17.8Yakutia 1.7 0.8 2.5 1.2Source: JETRO (1993a)It is interesting to see that more than half of Korea’s exports to the RFE aredirected to Primorskiy Kray. This is explained by the presence of majorports there. It is suspected that the exports which arrive at thePrimorskiy ports are redistributed to the other subregions in the RFE.Sakhalinskaya Oblast’ also shows a high proportion of trade mainlybecause 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 lastfew years and has the potential to grow in the near future. Koreanproducts, in particular consumer electronics, take advantage of goodquality and a relatively inexpensive price which is more affordable for thelocal inhabitants than high priced Japanese products (Ito, 1993).4.4.2. Investments in the RFEKorean investment in the RFE was US$21.1 million for 13 projects as ofNovember 1992. A large portion of the investment was directed to theregion’s major industries such as forestry, fisheries and ship repair. These83three account for 94% of the total Korean investment in the region (Table4.27).Table 4.27. Korea’s Investments in the RFE (Nov. 1992)ApprovedIndustry No. of AmountProjects (US$1,000)Forestry 1 16,000Fishing 2 1,964Food 2 561Chopsticks 1 300Trade 1 156Hotel & Restaurant 2 275Aerial photo 1 70Ship repair 3 1,782Total 13 21,108Source: Korea Economic Daily (11 Nov. 1992)Compared to other parts of Russia, the scale of the investments is large inthe 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 SovietUnion. The location of the investment is concentrated in southern subregions of the RFE. All the investments are located in Primorskiy Kray,Khabarovskiy Kray and Sakhalinskaya Oblast’ except one in AmurskayaOblast’ (Table 4.28).Table 4.28. Geographic Distribution of the Investments (Nov. 1992)ApprovedLocation No. of AmountProject (US$1,000)Primorskiy Kray 4 18,264Khabarovskiy Kray 3 537Amurskaya Oblast’ 1 300Sakhalinskaya Oblast’ 5 2,007Total 13 21,108Source: Korea Economic Daily (11 Nov. 1992)84Korea’s investment in the RFE, reflecting the RFE’s regional characteristicsand Korea’s demand for raw materials, is largely resource-oriented. Alarge proportion of the investments is directed to forestry and fishery-related industries which are regarded as industries demanding less capitalinvestment than manufacturing industries. In general, however, Korea’sinvestment in the RFE still remains small in scale and inactive. Thefollowing problems are often pointed out as the most immediate stumblingblocks for the expansion of foreign investments in this region.First is the political and social instability in Russia. Russia in transition to amarket economy has experienced reduced industrial production, highinflation, and unemployment. These adjustments have caused shrinkage ofoverall industrial activities and have changed economic relations withforeign countries.Second is the instability of the legal system. Too much new legislation,including presidential decrees, is being introduced to the transitionaleconomy. Decrees have been promulgated too frequently, only to beamended shortly thereafter. Some of them contradict each other andwithout detailed regulations they only increase confusion (Kim and Park,1993). The unclear division of power between the central and regionalgovernments also contributes to the instability of the legal system. A goodexample is the ownership and control over natural resources and theaccess to them.11 As new presidential decrees are promulgated, neworganizations and regulatory agencies are formed to administer them.Lastly, as is widely known, the inferior infrastructure in the region isfrequently pointed out as a factor hindering foreign investment.11 See Section 5.5.6 for details.85Korea has its own obstacles to increasing investment in this region. Koreaand Russia entered into economic partnership for the development ofSiberia and the Russian Far East after formal diplomatic ties wereestablished in 1990. Korea was the preferred partner to Japan with whichRussia has a long-standing territorial problem. A variety of jointdevelopment projects are being proposed to Korea. Recently 23 projectswere proposed by the Russian government during the president’s visit toSeoul in 1992. The majority of the projects are related to resourcedevelopment, large in scale, and involve the RFE. Korea, however, is lessable to satisfy the capital and technological demands of the proposedprojects, compared to Japan and other developed countries. This meansthat Korea might eventually rely on Japanese or other western capital andtechnology in order to implement the proposed projects.4.4.3. Korean Industrial Park in Primorskiy KrayIn order to promote active Korean investments in the RFE, a largeindustrial park is being established in the city of Partizansk nearNakhodka. An estate of about 330 hectares was rented to the Koreangovernment for 70 years.’2 The Korean government plans to rent it toKorean companies which are interested in investment in the region. Low-level processing and export-oriented light industries, such as textile,agricultural and fishery products processing, and wood processingindustries, will get a high priority in moving into the park. Korea LandDevelopment Corporation is building the infrastructure by 1995 on behalfof the Korean government.12 Korea Economic Daily, 19 June 1992.86In addition to the geographic proximity of the industrial park, Korea cantake advantage of the Korean population in the region for labour in thepark. In fact, the presence of Koreans in the region acted as one of themain motivations to establish the park. Once the Korean industrial park iscompleted, it will be one of the most attractive places for Korean firms toinvest in the RFE. The industrial park will help Korea relocate itsuncompetitive industries and will be a strong foothold for Korea topenetrate into the local markets in the region in the long term.4.4.4. Joint Mineral and Energy Resource DevelopmentNatural resource exploration seems to be one of the most important areasof interest in the economic cooperation between the two counthes. Russia,which suffers severe lack of capital and technological resources, expectsKorean investments in the development of mineral, gas and oil explorationin Siberia and the RFE. In addition to Korea’s high demand for these rawmaterial and energy resources, Korea would like to relate the resourcedevelopment to the outstanding export payment resulting from Russia’sshortage of foreign exchange. Korea would like to import the mineral andenergy resources after joint development, or export them to thirdcountries as a return for unpaid exports.For this purpose a Korea-Russia Resource Cooperative Committee was setup in May 1992 between the two governments. This committee acts as aformal negotiating representative for the government and encouragesKorean firms’ participation in resource exploration projects mainly locatedin Siberia and the RFE. Since most of the projects within the scope of thiscommittee are large in scale and require a heavy capital investment, a87considerable amount of time is required for feasibffity studies before anyactual investment. For example, the two countries signed an agreement toset up a joint committee in 1992 for a feasibility study on gas explorationin Yakutia and a related construction project for a gas pipe line fromYakutia to South Korea, crossing North Korea.’3 Nine Korean firms including Daewoo, Hyundai and Samsung formed a consortium for the project.Currently, the unclear negotiating authority on the Russian side and apotential high investment risk limit the level of Korea’s participation in theresource development projects to carrying out the related feasibilitystudies. Table 4.29 shows the Korean firms’ participation in the cooperative resource development projects in the RFE.Table 4.29. Korea’s Participation in Resource Development in the RFEJuly 1992Korean FirmsProject Location Involved StatusGas Exploration Near Yakut Consortium of Negotiating onin Sakha Republic 9 firms Feasibility studyOff shore gas field Lunskoye in Palmco & Being reviewed byLNG Development North East Sakhalin Samsung RussiaGround Oil Field Sakhalin ground oil Dongwon Coal Participated in jointExploration fields Mine explorationTin mining Prouvouurmi in Hyundai, Signed for joint tinKhabarovskiy Kray Samsung, Daewoo explorationDongbuCoal mining Elgynsk near Hyundai Feasibility StudyNeryungri, YakutiaCoal mining Urgal, near Hyundai Feasibility StudyChegdomyn,Khabarovskiy KraySource: Kim and Park (1993)13 Dong-Ah Ilbo, 7 Sept. 1992.884.4.5. Fisheries CooperationBy signing the fisheries pact in September 1991, Korea and Russia established a cooperative relationship.14 A 430,000 ton a year fishing quotawas allocated to Korea in 1992 and Korea gained access to direct fishing inRussian waters for up to 70,000 tons a year. Even the fishing grounds nearthe disputed Japanese Northern Islands are accessible to Korean fishingboats following a trilateral fisheries meeting among Korea, Russia andJapan. By the help of the fisheries pact, Korea’s imports of fish productsfrom Russia have increased from US$68 million in 1989 to US$125 millionin 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. Inthe joint venture, Korea provides fishing operation, ship repair service, andfishing supplies and markets the catch and Russia is responsible for securing fishing quotas, rights to access fish resources, and land for the jointventure.4.4.6. Science and Technology TransferThe two countries signed a pact for science and technology cooperation in1990. The Korea-Russia Science and Technology Cooperation Centre wasset up to link the two countries. Also, the Korea Institute of Science andTechnology (KIST) signed agreements with 37 former Soviet researchinstitutes by June 1992 (Kim and Park, 1993). The two governmentsagreed to transfer 74 highly technological items to Korean industries, 20 of14 Korea Economic Daily. 17 Sept. 1991.89which had already begun the transfer as of August 1992. Korean researchinstitutes, universities and private companies plan to employ Russianscientists. In 1992, 73 Russian scientists were to be invited to Koreanresearch organizations.Many of the technology transfers involve European Russia rather than theRFE. Since the Russian Far East has a well developed military industry,however, Korea has recently become interested in participating in theconversion of the industry to a civilian one.154.4.7. Korean Minority in the RFEAlthough the Yalu and Tumen Rivers served as a natural border betweenKorea and China for many centuries, Korean territory extended to what isnow Primorskiy Kray and southern parts of Chinese Jirin and Liaoningprovinces between the fourth and seventh centuries (Lee, 1986). In morerecent history, Koreans have migrated to Russia, for both economic andpolitical reasons, since the latter half of the 19th century (Suh, 1987).In modem times, about 200,000 Koreans lived in the RFE before they wererelocated by force to the Central Asian Republics in 1937 under the Stalinregime (Suh, 1987). They and their descendants represent the majority ofa 439,000 Korean population currently living in the Republics of theformer Soviet Union (Kim and Park, 1993). About 57,000 Koreans residein the RFE (Lee, C. J., 1993). Sakhalin Island is the place where the largestKorean population resides in the RFE. About 36,000 Koreans live there andwith 5% of the Island’s total population they account for the third largest15 Korea Economic Daily reported on 19 Feb. 1993.90ethnic group in the Island (Lee, C. J., 1993). They comprise people sent toSakhalin Island to serve forced labour under the Japanese colonialgovernment, or their descendants. They were abandoned on the islandafter Japan surrendered to the United States in 1945. About 9,000Koreans 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 thisregion from the former Central Asian Republics.The presence of a Korean population and Korea’s historical background inthe RFE largely represent Korea’s emotional attachment to this region. ThePartizansk industrial park was first discussed in relation to bringing theKoreans in Central Asia back to the RFE (Kim and Park, 1993). Once Koreanindustries start moving into the industrial park after 1995 as planned, alarge number of Koreans in the region is expected to be able to serve as aworkforce in Korean firms operating in the park. They are already visiblein Korean offices in Vladivostok and Khabarovsk.Furthermore, over two million Koreans live in the neighbouring threeNortheastern Chinese provinces, i.e. Heilongjiang, Jirin and Liaoningprovinces (Lee, 1986). Over 800,000 Koreans reside in the nearby YanbianKorean autonomous prefecture in Chinese Jirin province (See Map 1.1). Ifnecessary, these Koreans could also be a labour source for Korea’sindustrial activities in the RFE. This idea has already been experimentedwith in Korea’s logging investment. About 350 Koreans from China wereemployed for the iv Svetlaya.914.5. SUMMARY AND DISCUSSIONOne of the most important conditions for Korea to maintain its growthmomentum in the future is the security of raw materials supply. Woodwas once used as an important raw material to support the country’sexport industry. Korea is now no longer able to get an easy access to overseas forest resources to feed the export industry. Wood, however, stillremains important for domestic use. Without a revolutionary change in thedomestic wood supply system, Korea is expected to continue to relyheavily on overseas supply sources. Foreign investment will increasinglyplay an important role in gaining access to the overseas resources.The Russian Far East has emerged as a potential new supply source whileresource depletion and environmental problems severely cut down thesupply capability in the traditional timber supply regions.The Russian Far East offers a number of advantages to Korea; plentifulresources, geographical proximity, a complementary economic relationship, and the presence of a Korean population. For these reasons, the RFEhas been recognized as being very important to the resource-seeking Koreaever since the two countries established formal diplomatic relations. Koreashowed a great deal of enthusiasm toward the region in various aspects oftrade, investment, establishing its own industrial park, opening governmental and corporate offices, setting up a new air route and so on.The enthusiasm was somewhat amplified by the “Northern Policy” but hasno doubt demonstrated Korea’s vested interest in the region. While Koreaappreciates the importance of the region, it lacks a clearly defined strategy92towards it and has no long-term vision of its relation with this region.Trade structure and investment patterns have not really been undertakenin a way to appreciate the complementary economic relationship betweenthe two countries. In order to take full advantage of the relationshipbetween Korea and the RFE, a long-term vision is required at bothgovernment and corporate levels, especially when dealing with the variousresource development projects. So far Korea has been a passive partnerand has not begun to take advantage of the potential economic benefits inthe RFE.93CHAPTER VHOST-COUNTRY ENVIRONMENT-THE RUSSIAN FAR EASTUntil recently, the RFE has been largely dealt with within the context of theformer Soviet Union or Russian Republic rather than in separation fromthem. It was only in 1990 that a comprehensive analysis of the regionsegregated from the rest of Russia first appeared (Rodgers, 1990).The information on this region is still scarce. Especially, the rapidly-developing recent changes in regulations and policies related to theregional economic situation are difficult to secure. Some of them constituteimportant parts of the investment environment of host country (in thisstudy, host region). For this reason, a significant part of this chapter isdevoted to describing the general condition of the RFE, its economy, forestresources, and forest sector as well as the recent developments in them.Collectively this information helps describe the host-country investmentenvironment in the forestry sector as presented in the analyticalframework in Figure REGIONAL ECONOMIC CONDITIONSSeveral terms are used to refer to the uniqueness of the geo-economicfeatures 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 recentliterature. As these terms imply, the RFE is an isolated andunderdeveloped region but has plenty of natural resources.94Among the 4 planning areas in Russia, the RFE is the largest one coveringover 6.2 million square kilometres, nearly 6.6 times the area of BritishColumbia. This vast area is inhabited by only 8 million people in 7administrative units (See Map 5.1). The RFE occupies 36.4% of the area ofRussia but is inhabited by only 5.3% of the population of Russia. Thisregion is the most sparsely inhabited in Russia with a population density of1.3 person per square kilometre (Table 5.1).Table 5.1. Area and Population of the RFEAdministrative units Area Population Population Density(1,000 km2) (1,000 persons) (person/km2)Primorskiy Kray1 165.9 2,299 13.9Khabarovskiy Kray 824.6 1,851 2.2Amurskaya Oblast’2 363.7 1,074 3.0Kamchatskaya Oblast’ 472.3 473 1.0Magadanskaya Oblast’ 1,199.1 534 0.4Sakhalinskaya Oblast’ 87.1 717 8.2Yakutia 3,103.2 1,109 0.4The REF 6,215.9 8,057 1.3British Columbia 947.8 3,282 3.5Canada 9,970.6 27,409 2.8Japan 377.8 124,450 329.4Korea 99.3 43,717 440.3Source: 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% ofthe population inhabits the southern taiga zone along the Trans-SiberianRailway, an area occupying 7% of the total territory. The region also showsa high proportion of urban population. 75% of the regional populationresides in urban areas.1 Kray is an administrative unit higher than oblast’ and translated into ‘territory’ inEnglish literature. However, kray and oblast’ are both directly responsible to aunion Republic (Lydoiph, 1990).2 Oblast’ is a lower administrative unit than kray and translated into ‘region’ or‘province’ in English literature.95_f(SOblastAmursiaiaBunatfiaOblast KhabarovskiiRepublicKraiLake ChitinskaaBaKhabaroBaikal Oblast• 0UUdeYevreyskaia(JMongoliaAginsku-BunatskiiAC)Peoples Republicof ChinaMap. 5.1. The Russian Far EastCIiukotskaiaAORepublic at Saitha (‘Yakutlia)(YwtSkEast Sibeiia- ® Admmistrahve CaptlalAOk Autonomous OkrugAO Autonomous ObtestSource: RFEIJ (1 993a), reproduced with permission96Despite being the largest planning area in Russia, the RFE has played a low-profile role in the national economy, largely as a province which suppliesraw materials to the western part of the country. The RFE accounted foronly 4.7% of the total industrial output of Russia in 1990, which is stilllower than the comparable regions of Western Siberia and Eastern Siberia(Table 5.2).Table 5.2. National Share of Industrial Output by Region in 1990Industry W. Siberia F. Siberia Far East(%)Total Industry 10.8 6.0 4.7Mineral 35.9 12.0 15.0Processing 8.2 5.4 3.6Electric Power 12.8 12.6 5.0Fuel 45.8 7.7 3.4Ferrous Metal 10.1 1.2 0.8Non-Ferrous Metal 3.8 23.1 12.7Chemical and Petrochemical 11.8 3.4 1.3Machine Building & Metal Working 7.7 2.7 2.8Forest Products 7.4 15.8 7.4Construction Material 11.1 6.9 8.8Light Industry 5.9 5.5 1.6Food Processing 7.5 3.8 11.4Source: 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 industriessuch as fishing, non-ferrous metals industry and forestry represent over50% of total regional production. The non-ferrous metals industry andforestry account for 12.7% and 7.4% of total Russian production in theirrespective industries (ERI, 1991). Among the RFE’s industries, the fisherieshas the highest profile in the national economy. The region’s share of fishand seafood production is 58.7% (ERI, 1991).97The processing industry in the RFE is the least developed in Russia andhighly dependent upon help from outside the region. For example, 80% ofthe products of the machine building industry is exported to other regionsand 80% of the consumer commodities are imported from outside theregion (Kim and Park, 1993).Despite their great potential, forestry and the forest products industryremain at a low-profile. The RFE’s forest product industry represents only7.4% of the total national output for this sector (ERI, 1991). This is largelyattributable to high production cost, a lack of modern technology andcompetition with Siberian regions that are geographically better suited toserve markets in European Russia. The RFE, however, has a higher nationalshare (9.7%) in the logging industry, in which the region is more specialized than others.The region’s economy is dominated by two southern territories; PrimorskiyKray and Khabarovskiy Kray. These two territories account for 52% of theregional population, 42% of regional product, 54% of regional industrialoutput and 40% of capital investment (ERI, 1993). The northern part ofthe region, occupied by Yakutia and Kamchatskaya and MagadanskayaOblasts, is sparsely inhabited. This part of the region is largely coveredwith vast areas of mountain taiga, tundra, and the arctic. Harsh weatherconditions and the seasonal availability of surface transportation hamperthe economic development of the region. The economy of the northernregion is largely based upon a few special industries specific to the regionsuch as non-ferrous metals industries in Magadanskaya Oblast’ andYakutia.98Being surrounded by sea, the eastern parts of the region--Kamchatskayaand Sakhalinskaya Oblast’--specialize in fishing and fish processingindustries. However, Sakhalin Island shows a more diversified structure ofindustry than Kamchatskaya Oblast’ because of its endowment of variednatural resources and the old mills and industries established during theJapanese colonization of the southern part of the island. In addition tofisheries, the island has an established paper making industry and an oiland gas industry. Agriculture also shows a southern concentration.Amurskaya Oblast’ accounts for 2 8.6% of the regional agricultural outputfollowed by Primorskiy Kray and Khabarovskiy Kray. These threeterritories represents 71% of the regional agricultural output. (Table 5.3).Table 5.3. Geographic Distribution of Regional Economy in the RFE, 1990SubregionsBasic Indicators Primorsk Khabarovsk Amur Kamchatka Magadan Sakhalin Yakutia(%)Area 2.7 13.3 5.8 7.6 19.3 1.4 49.9Population 28.5 23.0 13.3 5.9 6.6 8.9 13.8Net Regional product 25.0 20.0 11.1 7.7 10.5 8.7 17.0Employment 27.0 22.8 12.5 5.4 7.7 9.4 15.2Industrial output 28.9 25.2 7.2 7.2 9.2 9.6 12.7Agricultural output 25.5 17.1 28.6 4.5 4.9 8.4 11.0Crops 24.2 18.1 44.0 2.8 1.4 4.9 4.6Livestock 26.1 16.7 21.2 5.3 6.6 10.0 14.0Capital Investment 22.4 17.7 12.4 5.5 10.2 10.5 21.3Capital Assets 24.9 18.9 13.2 5.7 9.6 11.6 16.1Construction 21.9 19.4 13.2 5.8 10.4 6.6 22.7Source: FRI (1991)Table 5.4 shows the industrial output by subregion. Industrial output alsoshows a concentration among the subregions similar to the overalleconomic activities shown in Table 5.3. Most of the industries areconcentrated in the southern territories of Prhnorskiy and Khabarovskiy99Krays. The two territories account for 96% of the RFE’s regional ferrousmetal industry, 97% of the chemical and petro-chemical industries, 79% ofthe machine building industry, 67% of light industry, and 51% of the foodprocessing industry. The non-ferrous metal industry is concentrated inYakutia and Magadanskaya Oblast’, the regional share being 45% and 33.7%respectively. Yakutia has the second highest share in the fuel andconstruction-material industries, with 28.9% and 20.9% respectively.Sakhalin Island has well developed fuel, forest product and food processing 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, 1990SubregionsIndustry Primorsk Khabarovsk Amur Kamchatka Magadan Sakhalin Yakutia(%)Electric Power 20.5 24.7 14.4 4.9 12.0 7.5 5.6Fuel 16.4 30.3 7.8 3.2 13.4 12.2Ferrous Metal 2.7 92.8 1.8 0.3 1.7 52.3Non-Ferrous Metal 6.9 7.8 6.2 0.3 33.7 0.1 -Chemical & Petrochemical 40.0 57.0 0.3 0.2 2.4 3.8Machine Building 35.1 44.2 7.5 3.7 3.8 3.1 -Forest Products 17.3 34.5 12.2 2.9 2.9 22.0 5.3Construction Material 26.7 18.9 9.5 6.3 9.0 8.7 10.6Light IndustryFood Processing 38.7 12.1 4.8 20.1 3.9 17.5 2.5(mci. Fish products)Source: FRI (1991)With respect to industrial output, each territory presents a varied concentration and specialization. The industrial output in Primorskiy Kray isconcentrated in the food processing industry, 45.2% of the territorialindustrial output, followed by machine building industry, 21%, andconstruction material industry, 7.7%. In Khabarovsldy Kray, 28.7% of the100industrial output comes from the machine building industry, 18.9% fromfood processing and 11.7% from the forest products industry. The industryin Amurskaya Oblast’ shows a less concentrated structure than others. Thetop four industries of the territory are the food-processing, machinebuilding, non-ferrous metals and forest products industries. Their sharesrange from 33.3% to 10.5%. Kamchatskaya Oblast’ has a heavy concentradon of food-processing industry, 73.3%. This reflects the territory’sdependence upon fishing and the fish processing industry. BothMagadanskaya Oblast’ and Yakutia are specialized in non-ferrous metalsindustries, which account for 59.4% and 63.2% of the industrial output intheir respective territories. The industry on Sakhalin Island is also mostheavily concentrated in food-processing and forest products, whose sharesin 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 1992SubregionsIndustry Primorsk Khabarovsk Amur Kamchatka Magadan Sakhalin Yakutia(%)Electric Power 2.5 3.1 6.1 4.8 6.0 2.2 3.2Fuel 1.0 6.6 3.3 0.0 1.2 5.4 6.1Ferrous Metal 0.1 4.1 0.1 0.0 0.1 0.0 0.0Non-Ferrous Metal 4.0 5.0 13.5 0.6 59.4 0.2 63.2Chemical & Petrochemical 3.0 4.0 0.1 0.0 0.0 0.4 0.0Machine Building 21.0 28.7 13.6 8.5 6.1 4.6 2.2Forest Products 6.4 11.7 10.5 3.1 2.0 28.8 3.7Construction Material 7.7 6.2 7.2 5.6 4.8 5.4 7.2Glass & pottery 0.4 0.1 1.1 0.0 0.4 0.0 0.0Light Industry 4.6 7.5 5.1 2.0 2.6 1.8 1.3Food Processing 45.2 18.9 33.3 73.3 16.4 47.7 12.5(mci. sea products)Milling 2.5 2.5 5.4 0.6 0.0 2.0 0.0Others 1.6 1.6 0.7 1.5 1.0 1.6 0.6Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0Source: NRC (1993)101A 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, andfurther declined by 17.3% in the first half of 1993 (ERI, 1993).To summarize, though it is the largest planning area in Russia, the RFEtakes the smallest role among the 4 planning areas in the national economic scene. Due to the long distance from the power centre, the RFE haslong remained peripheral to the core in the European region. Industry isheavily concentrated in primary and extractive industries, and the regionserves to supply raw materials to the European region. It has a low self-sufficiency rate in many industries. Except for a few specialized projects,industries in the region are largely under-developed due to highproduction cost, labour shortage, and an under-developed transportationnetwork. Population, transportation facffities and economic activities areall concentrated in the southern region. In general, industry in the RFE islargely extractive-oriented, narrowly structured and highly dependent onoutside influences. Under the transitional Russian economy, industrialoutput in the RFE has been continuously declining over the last few years.5.2. REGIONAL ECONOMIC POLICYTraditionally, economic development in the former Soviet Union wasplanned almost in isolation from foreign economic relations. The sheer sizeof the country supported a nearly self-sufficient economy. Economiccooperation with other countries, if any, was largely for political reasons.The economy of the RFE was not an exception in this respect. Under thecentrally planned economy, the role of the RFE as a raw material supply102source was directed towards the hearthnd in Europe. In relations with theAsia-Pacific region, the RFE was only appreciated for its military andstrategic value.It was only after the mid 1980s that the closed economy began to join theworld economy. The RFE became strongly motivated to integrate into theneighbouring Pacific-Rim economy. The desire for the reorientation of theRFE’s economy was well spelled out in two speeches given by the formerSoviet president Gorbachev in Vladivostok and Krasnoyarsk.In his Vladivostok speech, Gorbachev declared that the Soviet Union is anAsian nation and indicated the country’s willingness to participate in thePacific Rim economy. For this, he also expressed the idea of multi-lateraleconomic cooperation mainly with China and Japan and potential cooperation with other Asia-Pacific countries through the international division oflabour (CDSP, 1986). His speech implied an economic and politicalsignificance to relations with Asia-Pacific countries. The speech helped toease the political tension in Asia and resulted in normalization with China.The new direction expressed in the speech was further spelled out in 1987in the ‘Long Term State Program of Comprehensive Economic and SocialDevelopment of the RFE until the year 2000’. Even though the programclearly stated the direction of change in the RFE’s development, it was notimplemented, however, due to a budget deficit in the years following itsadoption,. The main goals stated in the program were (1) to raise theRFE’s social and economic indicators up to the level of the USSR average bythe year 2000, (ii) to restructure RFE industry and (iii) to integrate the RFEinto the Asia-Pacific economy (ERI, 1991).103In 1988, Gorbachev made another speech in the Siberian city ofKrasnoyarsk and proposed various preferential conditions in order tostimulate the RFE’s economic cooperation with foreign countries (CDSP,1988). Direct contact with foreign firms by RFE enterprises, free import ofconsumer goods and free disposal of foreign currency earnings, and theestablishment 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 hintingat possible economic cooperation with South Korea for the first time, thespeech also contributed to easing the political tension lingering over theKorean Peninsula, which could hamper full economic cooperation withKorea. These two speeches laid the groundwork for redirecting theeconomy of the RFF from a domestic-oriented to an outward-looking one.Despite a strong desire to change, the Soviet economy was not reallymoving along the direction set forth. Without the market system in placedomestically, the economy was not able to take full advantages of theforeign economic cooperation that could come about (ERI, 1991). Thegovernment realized that more reform should be undertaken internally inall aspects of the economic system before the external forces could helpthe country develop.5.3. INTERACTIONS WITH NEIGHBOURING COUNTRIESDuring the Soviet period, several forms of economic cooperation developedbetween the Soviet Union and its partners in Asia-Pacific countries.Compensation agreements were used for log exports to Japan. Border104trade was introduced to promote direct trade with neighbouring countries.With North Korea the Soviet Union maintained a complementary relationship. A good example is the USSR - North Korean Forestry Accord datingfrom 1966. Under the treaty, North Korea has been supplying manpowerand the Soviet Union provided logging equipment and machinery to sharethe logs produced (Kim and Park, 1993). Barter trade is commonlypracticed in trade with China to circumvent the problems of foreignexchange shortage. Normal direct trade and trade through FDI, however,are gradually replacing these old forms of economic cooperation under thetransitional Russian economy in which the demand on foreign exchange iseven higher.Before the collapse of the Soviet Union, foreign trade was dominated bythe central Ministry of Foreign Trade. This dominance has changedcompletely in recent years. In 1988 local governments and enterprisesrepresented only 5.6% of total exports from the RFE. Four years later, theirshare had risen to 80.7%, while the central government’s share had gonedown to 19.3% (Ivanchikov, 1993a). This illustrates the fast decentralization of control over the foreign trade. More interestingly, 52.7% of totalRFE exports in 1992 was undertaken through direct trade by localinitiative, up from 3.0% in 1988, and exports by foreign investment rosefrom zero in 1988 to 24.3% (Ivanchikov, 1993a).5.3.1. FOREIGN TRADEThe RFE was traditionally a more trade-oriented part of the USSR thanothers. For example, the RFE’s share in the country’s exports in the latterhalf of the 1980s was 4.4% while the region’s share in the country’sindustrial output during the same period did not exceed 2.9% (ERI, 1991).105The RFE’s export orientation can also be observed from its share of exportsof industrial products. Exports accounted for only 4.9% of the USSR’sindustrial output in 1990 when the exports reached a peak, a modestincrease from 3.6% in 1985 (JETRO, 1993a). The share went down to about4% in Russia in 1992 but climbed as high as 8.5% in the RFE (JETRO, 1993a).In 1992 the foreign trade in the RFE was US$2.722 billion with US$1.532billion exports and US$1.190 billion imports. The largest trading territoryin the region is Primorskiy Kray followed by Khabarovskiy Kray andAmurskaya and Sakhallnskaya Oblasts. Their shares in regional trade are34.3%, 18.2%, 15.5% and 11.4% respectively (Table 5.6).Table 5.6. Foreign Trade in the RFE in 1992Subregion Total Share Export Share Import Share(US$1 million), (%)RFE 2,722.3 100.0 1,532.8 100.0 1,189.5 100.0Primorskiy Kray 933.1 34.3 352.0 22.9 581.1 48.8Khabarovskiy Kray 496.8 18.2 371.1 24.2 125.7 10.6Amurskaya Oblast’ 421.9 15.5 231.3 15.1 190.6 16.0Kamchatskaya Oblast’ 206.6 7.6 137.2 9.0 69.4 5.8Magadanskaya Oblast’ 141.4 5.2 81.0 5.3 60.4 5.1Sakhalinskaya Oblast’ 309.9 11.4 206.9 13.5 103.0 8.7Yakutia 212.6 7.8 153.3 10.0 59.3 5.0Source: JETRO( 1993a)The exports from the RFE were composed mainly of the products fromextractive industries. Exports from the RFE in 1992 were led by fish andfish products, followed by the commodity group of fuels, minerals andmetals and by the machinery, equipment and transportation groups.Traditionally, wood products were by far the most important export itemin the RFE. However, the export of wood products has been reduced106because of high export taxes. Table 5.7 shows recent changes in thecomposition of exports from the RFE.Table 5.7. Composition of Exports from the RFEItem 1988 Share 1991 Share 1992 Share(US$1 million), (%)Machinery, Equipmentand Transportation 22.8 1.9 36.9 2.2 197.8 16.9Fuel, Minerals and Metals 301.0 24.6 312.1 18.4 308.5 26.3Coal 224.1 20.0 252.4 14.9 142.2 12.1Oil & Oil Products 38.1 3.1 28.9 1.7 98.0 8.4Ferrous &Non-ferrous Metals 18.8 1.5 30.8 1.8 68.3 5.8Fertilizer 12.4 1.0 140.6 8.3 51.8 4.4Non-Chemical 3.3 0.3 49.4 2.9 39.4 3.4Construction Material 0.8 0.1 1.0 0.1 1.2 0.1Wood Materials 346.0 28.4 290.6 17.1 169.8 14.5Consumer Goods 0.1 0.0 0.6 0.0 3.1 0.3Fish & Fish Products 418.5 34.3 777.7 45.9 381.3 32.6Others 115.3 9.5 136.5 8.0 57.85 4.9Total 1,216.9 100.0 1,696.0 100.0 1,171.33 100.0Source: JEFRO (1993a)The RFE imports consist mainly of consumer goods and food productswhich are in short supply across the region. In 1992, products in the twocategories accounted for over 64% of total imports in the RFE (Table 5.8),Table 5.8. Composition of Imports to the RFEItem 1989 Share 1990 Share 1992 Share(1 million rubles), (%) --- - -(US$ lmillion),(%) - -Machinery, Equipmentand Transportation 156.8 24.4 322.4 49.6 214.5 21.9Fuel, Minerals and Metals 1.9 0.3 9.9 1.5 16.3 1.7Food Materials 161.1 25.1 138.6 21.4 - -Food Products 95.0 14.8 24.1 3.7 245.2 25.0Consumer Goods 193.1 30.1 118.3 18.3 385.9 39.4Construction Material 17.7 2.8 11.8 1.8 8.9 0.9Others 16.7 2.5 23.7 3.7 107.9 11.1Total 642.3 100.0 648.8 100.0 978.7 100.0Source: JETRO (1993a)107Traditionally the RFE is oriented towards the Asia-Pacific trade. Thisorientation has tended to intensify recently not only in the RFE but also inRussia as a whole. The share of the Asia-Pacific region in Russia’s tradeincreased from 12% in 1991 to 20% in 1992. The Asia-Pacific market ismore significant to the RFE than elsewhere in the country. The region’sshare 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 immediateneighbours; China, Japan and Korea. The three countries account for 82% oftotal RFE trade (Table 5.9).Table 5.9. Orientation of the RFE’s Trade (%)Region 1985 1990 1992(%)Asia-Pacific Countries 78.0 85.0 88.4China 10.0 17.0 37.9Japan 62.0 65.0 34.4Korea - - 9.3Others 6.0 3.0 6.8Others 22.0 15.0 11.6Source: 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 beenthe partner in long-term compensation agreements since 1968, as well asin coastal trade and other forms of economic cooperation. The mainimports of Japan from the RFE have been logs and other wood products,coal, and fish. Japan has exported to the RFE machinery and equipment forlogging and other extractive industries. Japan’s domination of the RFE’sforeign trade has now been eroded by the emergence of other Pacificcountries, mainly China and Korea.108After the dissolution of the USSR and the following trade liberalization,China and Korea quickly moved into the RFE and have captured the marketwhich is experiencing an acute shortage of consumer goods and foodproducts after the breakdown of the centralized distribution system. Themain products being supplied by China and Korea are consumer goods andfood products.Looking at the trade structure by trading partner, the RFE recorded anexport surplus with Japan in 1992, while it showed an import surplus withboth China and Korea. To Japan, the RFE is important as a source of rawmaterials but insignificant for exporting goods. The trade with China andKorea also shows a lopsided structure. The trade with these two countriesrecords import surplus, which mainly stems from the short supply ofconsumer goods and foodstuffs in the region. This import surplus,however, appears transient for the current transitional state of the Russianeconomy. Judging from the main export items of Korea, the RFE is likely toappeal to Korea more as a source of raw materials than an export marketin the long run (Table 5.10).Table 5.10. Trading Partners of the RFE in 1992Countries Trade Export Import BalanceUS$1 million), (%)Japan 889.8 35.4 658.1 47.2 231.7 20.7 426.4China 971.3 38.6 412.4 29.6 558.9 49.9 -146.5Korea 228.9 9.1 92.5 6.6 136.4 12.2 -43.9U.S. 68.9 2.7 43.4 3.1 25.5 2.3 17.9Others 356.8 14.2 189.2 13.5 167.6 14.9 21.6Total 2,515.7 100.0 1,395.6 100.0 1,120.1 100.0 275.5Source: ERI (1993)1095.3.2. FOREIGN INVESTMENTWhile the RFE plays a minor role in the national product, it hosts one fifthof the total number of joint ventures in Russia. One of the difficulties theRussian economy faces in the process of market reform is mobilizingcapital required for such reform. With a US$60 billion foreign debt, Russiais not in a position to expect more loans from foreign governments.Attracting foreign investment is being used as an alternative. Sinceforeign investment brings in capital together with technology and otherproductive resources, Russia has made every effort to attract foreigninvestment. In the RFE, foreign investment is a short cut to movingtowards regional development by attracting the necessary capital andtechnology, and hence towards integration into the Asia-Pacific economy.The legal foundation of the FDI in Russia dates back to 1987, when theformer USSR first introduced a regulation relating to joint ventures. Afterthe collapse of the USSR, a new legislation was required by each republic tocontrol foreign economic activities. Russia legislated its own ForeignInvestment Act in September 1991 (JETRO, 1993b). The new legislationprotects foreign investors’ participation in a whole range of businessactivities within Russia. The law also ensures equal treatment of foreigninvestors and Russian enterprises. Many of the foreign investments inRussia have been undertaken in the form of iv.A handful of JV’s were registered in the RFE in the early period of thelegislation, but from 1991 a rush of foreign investment arrived in theregion. In 1992 alone, 578 JV’s registered in the RFE and by the end of1992, there were a total 916 iv’s registered in the region. In 1989, theRFE accounted for only 2% of total foreign investment in the former USSR.110The share rose up to as much as 9% in 1991. Several reasons explain thephenomenal growth. In 1990 the regional government established specialeconomic zones in the RFE and allowed foreign access to the naturalresources of the region (JETRO, 1993b). Liberalization of foreign economicactivity and the progress of decentralization in Russia also contributed tothe 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 inKhabarovskiy Kray, and 18%, or 168 projects, in Sakhalinskaya Oblast’.Most of the projects are small in scale. The average amount of the investment is less than US$0.5 million (Table 5.11).Table 5.11. Number of Joint Ventures Registered in the RFEInvestedSubregion 1988 1989 1990 1991 1992 Total Amount(no. of project) (US$1 million)Yakutia - 3 4 9 16 32 (16)Primorskiy Kray - 23 28 80 235 366 163.1Khabarovskiy Kray 1 8 5 38 155 207 60.2Amurskaya Oblast’ - - 3 20 26 49 (1,580)Kamchatskaya Oblast’ - 2 2 19 27 50 4.2Magadanskaya Oblast’ - 2 5 8 29 44 0.87Sakhalinskaya Oblast’ - 3 8 59 90 168 (502.5)Total (RFE) 1 41 55 233 578 916 -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 inthe service category, followed by 32 in fisheries and 13 in manufacturing,including wood processing. The FDI in the RFE shows a heavy concentration in the service industry such as hotel, restaurant, and other businessestargeting businessmen and tourists (Table 5.12). The majority of iv’s are111involved in foreign trade, since it is easy to make profits from sellingimported consumer goods to a region with an acute shortage of basicnecessities.Table 5.12. Joint Ventures in Operation in the RFE in 1992Subregion Fishery Manufacturing Construction Service Others Total(No. of Project)Primorskiy Kray 6 2 4 28 6 ‘46Khabarovskiy Kray 4 3 1 21 8 37Amurskaya Oblast’ - 1 1 7 4 13Kamchatskaya Oblast’ 6 3 - 3 3 15Magadanskaya Oblast’ 2 - - 4 6 12Sakhalinskaya Oblast’ 14 2 2 5 3 26Yakutia - 4 2 6 11 23Total (RFE) 32 13 6 72 39 172Source: JETRO( 1 993b)Table 5.13. Geographic Distribution of Joint Ventures by Country of OriginSubregion China Japan USA Korea Others Total(No. of Joint Venture)Primorskiy Kray 119 64 51 18 114 366Khabarovskiy Kray 73 45 31 14 44 207Amurskaya Oblast’ 36 2 2 1 8 49Kamchatskaya Oblast’ 2 15 14 1 18 50Magadanskaya Oblast’ - 2 6 2 2 12*Sakhalinskaya Oblast’ 6 66 29 20 47 168Yakutia - - 4 3 25 32Total (RFE) 236 194 137 59 258 884Note: *oflly those in operation are counted in for Magadanskaya Oblast’.Source: JETRO(1993b)Foreign investment, like economic activity in general, shows a highgeographical concentration in the southern part of the region, i.e. inPrimorskiy Kray, Khabarovskiy Kray and Sakhalinskaya Oblast’. Thecountries investing most actively in the RFE are the same as those tradingmost actively with the region, namely the most immediate neighbours.112Table 5.13 shows that China shares the largest number of JV’s, followed byJapan, the United States and Korea. Primorskiy Kray is the region wherethe 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 tradein the RFE, since the companies with more than 30% of foreign capital arenot subject to the export licensing requirements. In other words, trade isan important part of the activities of JV’s in the RFE. About 24% of totalRFE trade, or US$602.7 million is undertaken by firms with foreign capitalparticipation, i.e., FDI. Japan accounts for 43.8% of such trade, followed byKorea 28.1% and the United States 7.5% in 1992. Korea represents thehighest share in imports through such trade with US$119.2 million, or55.2%, 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 shares55.1% and Korea 12.9% of the RFE’s exports through foreign investment.From this it can be said that contrary to the overall trade picturepresented earlier, the Korea’s investment in the RFE is largely motivatedby export promotion whereas Japan’s is for imports (Table 5.14).Table 5.14. RFE’s Trade by Firms with Foreign Capital Participation in 1992Export to Import from TotalUS$1 million, (%)Japan 213.0 (55.1) 51.1 (23.7) 264.1 (43.8)S. Korea 50.0 (12.9) 119.2 (55.2) 169.1 (28.1)China 17.1 (4.4) 15.0 (7.0) 32.1 (5.3)United States 37.2 (9.6) 8.3 (3.9) 45.5 (7.5)Vietnam 34.0 (5.7) 0.0 (0.0) 34.0 (8.8)Others 35.7 (9.2) 22.2 (10.3) 57.8 (9.6)All 386.9 (100) 215.8 (100) 602.7 (100)Source: FRI (1993)113The main items imported to the RFE by JV’s are those that have a highdemand in domestic markets in the RFE, for example, consumer goods, foodproducts, computers, passenger vehicles etc. Consumer goods and foodproducts share nearly 70% of total imports (JETRO, 1993b). Fish and forestproducts 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 hardcurrency. By contrast, selling imported goods to domestic markets inconvertible currency is the main business of the JV’s in the Europeanregion of Russia (JETRO, 1993b). Reflecting such emphasis of the activitiesby iv’s, Russia recorded US$338 million import surplus in the trade by iv’sin 1992 whereas the same trade in the RFE showed an export surplus(Table 5.15).Table 5.15. Foreign Trade and Domestic Sales by Joint VentureRussian Far East Russia RFEJRussia(%)1991 1992 1991 1992 1991 1992Total Trade 405.8 564.5 2,200 3,112 19.0 18.1Exports 221.8 361.1 1,100 1,387 20.0 26.0Imports 184.0 203.8 1,100 1,725 18.0 11.8Domestic Sales byrubles 570.1 6.55 7,800 139 7.7 4.7hard currency 11.4 24.55 860 516 1.3 4.7Note: The unit of the figures in columns under 1991 is one million rubles and theones under 1992 is US$ one million.Source: JEII{O( 1 993b)The share of the RFE in total Russian exports by JV has increased from13.5% in 1989 to 26% in 1992 (Table 5.15). The potential export growthfrom this region is referred to as the prime motivation to invest in the RFEby 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-foldincrease (JETRO, 1993b).114In summary, foreign investment has provided a noticeable contribution tothe exports and openness in the RFE since the region emerged as a newhost for foreign investments in Russia. One of the main functions of theforeign investment in the RFE is the export of natural resources. Inparticular, the RFE shares a significant part of Russia’s exports by JV’s, andiv’s have significantly contributed to the positive foreign trade balance inthe RFE since 1989. The region’s share of industrial output exportedalmost 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 investmenttends to be small.5.3.3. PROBLEMS OF FOREIGN INVESTMENT IN THE REFFrom the RFE’s viewpoint, the main motivation behind opening up forforeign direct investment was to relate it to the long-term development ofthe region. The investments that can meet this goal are those related tolarge resource-development projects or manufacturing industries forconsumer goods and food products. Foreign investments in naturalresources could provide Russia with an opportunity to enhance its international competitiveness through the modern technology brought in by theinvestment. Import-substituting industries and those producing basicnecessities are also areas to which foreign investment should be directedfor restructuring the regional economy and stabilizing the local population.Currently, however, few investments serve such purposes in the RFE. Thescale of investments is small, most of them less than 2 million rubles115(JETRO, 1993b). The area where most of the investments are undertakenis weakly committed to regional growth. The majority of the JV’s in theRFE tend to be export-oriented and for primary processing of naturalresources. Technology has been imported to the RFE mainly for suchpurposes. Little has been imported for value-added processing or long-term regional growth.From the foreign investors’ point of view, the biggest obstacle to investment in the region is the instability of political, social and legal systems inRussia (JETRO, 1993b). The inconsistency of investment laws and lack ofprotective measures for foreign investments are also pointed out asobstacles for attracting more active foreign investments. Russian foreigninvestment laws clearly state that foreign investments are protected fromforcible expropriation or unlawful measures by government (Chapter 2,Section 7 in Russia’s Foreign Investment Act, 7.14. 1991). The Act alsoensures compensation for loss caused by such unlawful actions if theyhappen (Chapter 2, Section 8 in the same Act, 7. 14. 1991).Despite these clauses in the Act, political instability still imperils thestability of the country’s legal system including the Foreign InvestmentAct, and foreign investment in Russia is not perceived as being 100%protected. An additional protective clause, which appeared in the foreigninvestment Act of the former USSR, would be required for guaranteeingthe protection of foreign investment within Russia.One other reason for the inactive foreign investment in the RFE is thatpreferential measures for foreign investors have become less attractivethan those in the Soviet period. The large tax benefits offered by the116former Soviet Union are not provided in the Russian foreign investmentlaws. Under the Soviet Foreign Investment Act, JV’s of foreign ownershipexceeding 30% were entitled to a tax exemption for two years after makingan 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 instrategic sectors of the economy or in remote regions within Russia (Yoon,1992). The five year tax holiday or tax reduction offered to foreigninvestments in a priority industry are not provided in the Russian ForeignInvestment Act. Currently, no regional government offers preferentialbenefits except for Khabarovsldy Kray (JETRO, 1993b).Inconsistent application of export duties and their rates, and forcibleselling of hard currency earnings are also attributed to making foreigninvestment less attractive in the RFE. In these conditions the RFE is a lessattractive region for foreign investors than other countries. The Russiangovernment plans to legislate for trade-related foreign investment.5.4. FOREST RESOURCE CONDITIONSThe RFE comprises 621.6 million hectares, and the forested area accountsfor 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 largerforested area. The total area of the RFE and its Forest Fund by subregionare presented in Table 5.16.117Table 5.16. Forested Area in the RFETotal Area Forest Fund Ratio of Forest FundSubregions (1,000 km2) (%) (1,000 km2) (%) (%)Primorskiy Kray 166 2.7 136 2.7 81.9Khabarovskiy Kray 825 13.3 779 15.4 94.4Amurskaya Oblast’ 364 5.9 317 6.3 87.1Kamchatskaya Oblast’ 472 7.6 452 8.9 95.8Magadanskaya Oblast’ 1,199 19.3 733 14.5 61.1Sakhalinskaya Oblast’ 87 1.4 76 1.5 87.4Yakutia 3,103 49.9 2,579 50.8 83.1Total 6,216 100.0 5,072 100.0 81.6Source: Finansi i Statistika (1992)5.4.1. Land Classification in the Russian Far EastThe Forest Fund is a unique Russian term in the country’s land classification system. Forest Fund is a much wider concept than forests or forestedland. Besides forested area, it includes non-forested areas such as farmlands and grass lands, and even water surface. A large part of the land inthe RFE, 80%, is classified as Forest Fund (Table 5.16). Within the ForestFund, forested land comprises the largest share.The ratio of forested area ranges from 60% to 75% in most subregionsexcept Yakutia, and Kamchatskaya and Magadanskaya Oblasts, where theratios run below 50%. Because of the low forested rate in Magadan, theaverage ratio of forested area in the RFE is only 45% (Table 5.17). Most ofthe forests in the region are found in mountains. Nearly 100% of theforests are mountain forests in the RFE, except for Yakutia.Table 5.17 shows that because of the variety of climate conditions in thisvast region the volume and species distribution vary among the118subregions. The RFE is divided into southern and northern regions. Thesouthern region comprises Khabarovskiy Kray, Amurskaya Oblast’,Primorskiy Kray and Sakhalinskaya Oblast’. Yakutia, MagadanskayaOblast’ and Kamchatskaya Oblast’ comprise the northern region. Theforests in the southern region provide, higher average volume per unitarea, and higher annual increment than those in the northern regions.Table 5.17. Basic Indices of the Forests in the RFEAverage StockingDensityRatio Mean Share ofSubregions Forested All Overmature Annual MountainLand Forests Forests Increment Forest(96) (m3/ha) (m3/ha) (m3/ha/yr) (%)(North)Yakutia 48 64 83 0.6 34Kamchatskaya Oblast’ 42 63 81 0.8 98Magadanskaya Oblast’ 19 23 34 0.4 100Average 36 53 66 0.6 77(South)Primorskiy Kray 75 157 184 1.5 100Khabarovskiy Kray () 109 145 1.3 98Amurskaya Oblast’ 62 91 131 1.4 100Sakhalinskaya Oblast’ 64 125 185 1.4 100Average 65 121 161 1.4 100RFE Average 45 75 99 0.9 65Source: Minakir and Sheingauz (1991), and Goskomles (1990 and 1991)The Forest Fund in the RFE is classified into forested and non-forestedareas (Table 5.18). The former accounts for 70.8% and the latter 29.2% ofthe 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 only22% of the forested area, or 15.6% of the Forest Fund. Appendix VT showsa more detailed breakdown of the above classification.119The forests in the RFE is further grouped by organization responsible formanaging the forests: State Forest Management which includes forestauthority, long term uses, other ministries, collective farm, and forestindustry. Forest authority controls 82% of forested areas in the RFE, thusthe discussions in the following focus on the stocked forest areas undercontrol of either this organization or State Forest Management dependingupon data availabffity.The reforestation in this region largely relies on natural regeneration. Thearea artificially regenerated is extremely low, composing less than 0.3% ofthe total Forest Fund. The ratio goes no higher than 3% even on SakhalinIsland, which has the largest artificial forests in the RFE and where artificial regeneration has been practiced since the Japanese colonial period.Table 5.18. Classification of Forest Fund under Control of Russian Federal ForestryOffice3Forested Area- Closed Forests - - Open Total Non-Forested GrandSubregion Total Artificial Forests Area TotalForests(1,000 ha)Yakutia 146,734 3 46,081 192,814 64,224 257,038Primorskiy Kray 11,160 38 426 11,595 336 11,931Khabarovskiy Kray 48,837 106 10,833 59,789 17,274 77,063Amurskaya Oblast’ 21,777 50 3,180 24,992 5,750 30,742Kamchatskaya Oblast’ 19,053 26 1,868 20,962 22,945 43,907Magadanskaya Oblast’ 22,121 3 14,856 37,000 34,772 71,772Sakhalinskaya Oblast’ 5,327 138 930 6,315 779 7,094Total 275,007 364 78,174 353,467 146,080 499,547(%) (55.1) (0.1) (15.6) (70.8) (29.2) (100)Source: Sheingauz, A. S. et al. (1989)3 This is new name of Goskomles (State Committee of Forestry) after former SovietUnion borke up.120The forests artificially opened including cutover areas account for 3.6% ofthe total Forest Fund in the RFE, and the area burned by forest fireaccounts for 3.9%. This high percentage of open forests reflects the factthat forest management is not in place to maintain the areas damaged byfire or artificial causes.The relatively high proportion of farmland (Table 5.19) results from thelarge reindeer-herding areas in Kamchatskaya Oblast’ and Yakutia whichare classified as farm land together with agricultural land. Wetlandincluding tundra accounts for a substantial part of the non-forested ForestFund, 27.5%, and a significant part of the total forested areas, 8%.The trend over time seems to indicate an improvement of overall forestconditions in the region, i.e. an increase of closed forests and a decrease ofopen forests. Nearly 32 million hectares of closed forest were added in theperiod from 1968 to 1988. The area of open forests was reduced by about20 million hectares over the same period (Table 5.19).Table 5.19. Changes in Land Classification from 1966 to 1988— ——-------Forested Non-Forested AreaFarm, Wetland. SubTotal Grass, eroded TotalWater land etc.Area—-Closed Forests -- —----—--Open ForestsGrand Total Artificial Non-closed Burned Denuded SubTotal* Forests Artificial by Forest but not TotalForests Fires etc. Regenerated(1 million ha)503.4 243.1 0.02 0.1 38.3 59.7 98.0 341.2 27.3 134.9 162.2500.1 253.8 0.1 0.1 29.7 56.9 86.6 340.5 23.1 136.5 159.6501.7 257.3 0.1 0.2 17.1 66.7 83.8 341.3 23.8 136.6 160.4500.8 266.0 0.2 0.3 22.0 57.4 79.4 345.7 24.2 130.9 155.1499.5 275.0 0.4 0.3 19.6 58.6 78.2 353.5 21.4 124.6 146.0-3.9 31.9 0.4 0.2 -18.7 -1.1 -19.8 +12.3 -5.9 -10.3 -16.2-1 13 1,900 200 -49 -2 -20 4 -22 -8 -10Year19661973197819831988Change(%)Source: Sheingauz, A. S. et al. (1989)* This area refers to only the areas under control of forest authorities.121About half of this improvement, however, is attributed to the forests inYakutia, where remoteness and inaccessibility have prevented intensiveforest development. Also it is pointed out that a tendency to exaggerateforest potential has caused a bias in forestry inventory and related statistics. Most noticeable is the case of Yakutia where overestimation of closedforests and underestimation of open forests have been commonly used toexaggerate the forest potential in the region (Fujiwara, Kaldzawa and Ishli,1992).5.4.2. Forest Classification in the Russian Far EastRussian forests are classified into three groups, Group I, Group II, andGroup III, according to their economic and environmental uses. Group Iand Group II forests are mainly for natural resource conservation andenvironmental protection, whereas Group III are mainly for industrialuses. More detail of this classification scheme is found in Backman andWaggener (1991) as follows:“Group I forests. These forests have the greatest restrictions on use and areallocated mainly for protection of the environment. The uses include protection of streams and spawning areas, prevention of soil erosion, protectionstrips along main vehicular arteries, forests in little forested regions designedto provide general protection of the surrounding environment, forests aroundcities and industrial areas designed to improve air quality, forests for thegeneral use of the urban population, forests set aside for national parks,production of nuts and berries, as well as pre tundra forests. A limited amountof harvesting is permitted in this category of forests, solely to facilitate theprotection 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 transportationnetwork. A greater degree of management is necessary in these forests toguarantee the continued supply of both industrial products and environmentalprotection functions than is the case in Group III forests below. Collectivefarm forests are located in Groups I and II. It is believed that government farmforests are located in Group I and Group II forests as well.122Group III forests. These forests are generally located in the well forestedregions and are chiefly designated to provide a flow of wood to support theforest industry of Russia without causing damage to the makeup of thoseforests. One category within Group III forests is classified as reserve forests.Reserve forests have not yet been assigned to an industrial enterprise and arenot expected to be economically developed for the next 15 to 20 years. Thesecond category of Group III forests is called special zoned forests. It is notknown for what reasons these forests have been set aside however. Probably,though not necessarily, the reasons stem from environmental factors. Thebalance of forests within Group III are considered to be operating forestspresently developed or area expected to be developed within the course of thenext two decades. Thus, reserve forests represent a store of wood volume whichhas yet to be allocated to any particular enterprise, and ceteris paribus, couldbe available for exploitation in the future. But the volume of timber from suchreserve forest lands could be more a mirage than reality.”The distribution of these three groups of forests is broken down bysubregion in Table 5.20.Table 5.20. Forest Fund under Control of Forest Authority Classified by GroupSubregion All Groups Within Group IIIGroups I II III Exploitable Reserved Others(1,000ha)Yakutia 254,998 29,284 - 225,844 18,421 131,191 76,232Primorskiy Kray 11,935 2,777 703 8,455 7,892 - 563Amurskaya Oblast’ 31,129 1,708 1,358 28,063 22,049 3,221 2,793Kamchatskaya Oblast’ 43,942 8,827 - 35,115 5,635 11,400 18,080Khabarovskiy Kray 77,583 7,565 583 69,435 25,568 37,588 6,279Magadanskaya Oblast’ 72,653 14,196 - 58,457 8,096 - 50,361Sakhalinskaya Oblast’ 7,260 1,143 986 5,131 4,139 - 992Total* 499,630 65,500 3,630 430,500 91,800 183,400 155,300Source: Goskomles (1990 and 1991)Group III is the dominant forest group in the RFE as it is elsewhere inRussia. The Group III forests are designated mainly for industrial uses,but most of the Group III forests are reserved or inaccessible. Theexploitable forests are only a fifth of the Group III forests.Compared to the other regions in Russia, the RFE presents a higher proportion of Group III forests and a relatively low proportion of Group II123forests. The region’s vastness is reflected in a large share of Group IIIforests. The low proportion of Group II forests reflects the absence ofurban areas, compared to the rest of Russia. The proportion of Group Iforests is about the same as the national average. A large share of theunderdeveloped forests in the permafrost zone, however, is classified aseconomic forests in Group III. The trend of changes in these groupings ispresented in Table 5.21.Table 5.21. Changes in Forested Area by Group in the RFE (1 million ha)GROUP 1 GROUP IIIYEAR ROUP TOTALPreserved Pmtectlve Green Nuts Others Total II Exploitable Reserved Others TotalForests Forests Eelt Collecting Forests Forests1966 31.9 31.8 1.5 0.2 1.7 67.1 3.8 168.1 254.8 9.6 432.5 503.41988 37.9 1.5 1.5 1.0 23.6 65.5 3.5 91.8 183.4 155.3 430.5 499.5Source: Sheingauz, A. S. et al. (1989)The above table shows no major changes in areas designated for eachgroup between 1966 and 1988, but significant changes have taken place inthe composition within groups. In Group I, the ratio of protected forestswas adjusted downwards after the 1988 national forest inventory. InGroup III, both the forests classified as commercial and reserved havebeen significantly reduced, and as a result, more forests have beenexcluded from being exploited by productive activities. The inaccessibleand low valued forests previously classified as productive forests in GroupIII are now excluded from productive forests. These changes weredesigned to regulate the uncontrolled expansion of productive forests atthe expense of reserved forests (Fujiwara et al, 1992)124In Russia, privatization of agricultural land is taking place but most of theforested land is still owned by the state. In 1988, 98.6% of the forestswere owned and controlled by the Russian Republic State Coniniittee onForest Resources (Goskomles). In the Far East, its subregional offices,called silvicukural territorial production agencies take the responsibilityon behalf of the state organization (Minaldr and Sheingauz, 1991).5.4.3. Species, Volume and DistributionBecause 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 majorspecies of closed forests in the RFE. An overall look at the area from thetable shows that coniferous species account for 72.6% of the total area and84.6% of the total growing stock volume, whereas hardwood speciesrepresent 9.7% of the area and 10.4% of the volume.The deciduous species here are divided into hardwood and softwoodaccording to the wood properties. The deciduous species, however, areclassified by several other names. For example, oak, ash and mountainbirch are also classified as shade tolerant, hardwooded broadleaf,broadleaved hardwoods and hardleaved. Birch and aspen and alder areclassified as shade intolerant, softwooded broadleaf, broadleaved soft-woods and softleaved (Fenton and Maplesden, 1986). There are 5coniferous species and 13 hardwood species commonly found across theRFE. Their scientific names and other names are presented in Appendix V.125Table 5.22. Species Composition in the RFESubregion Coniferous D e c i d u o u s Shrubs TotalHardwood Softwood(Area) lOOhaYakutia 127,730 - 17,019 146,732Primorskiy Kray 6,497 3,223 1,301 39 11,160Khabarovskiy Kray 36,483 1,932 4,559 5,863 48,837Amurskaya Oblast’ 14,589 516 4,720 1,952 21,777Kamchatskaya Oblast’ 1,161 5,712 1,309 10,871 19,053Magadanskaya Oblast’ 9,453 313 12,355 22,121Sakhalinskaya Oblast’ 3,814 893 301 319 5,327Total 199,727 12,376 14,486 48,418 275,007(%) (72.6) (4.5) (5.2) (17.6) (100)(Volume of growing stock) 1 million m3Yakutia 9,051.4 83.5 190.0 9,324.9Primorskiy Kray 1,240.0 380.4 127.0 1.6 1,749.0Khabarovskiy Kray 4,581.8 226.4 328.0 187.8 5,324.0Amurskaya Oblast’ 1,616.6 22.1 298.7 48.6 1,986.0Kamchatskaya Oblast’ 146.1 483.9 101.0 463.8 1,194.8Magadanskaya Oblast’ 340.9 33.5 140.4 514.8Sakhalinskaya Oblast’ 582.3 50.1 17.7 17.7 667.8Total 17,559.1 1,162.9 989.4 1,049.9 2,0761.3(%) (84.6) (5.6) (4.8) (5.1) (100)(Average volume per unit area) m3/haYakutia 71 - 42 11 64Primorskiy Kray 191 114 98 41 157Khabarovskiy Kray 126 117 72 32 109Amurskaya Oblast’ 111 43 63 25 91Kamchatskaya Oblast’ 126 85 77 43 63Magadanskaya Oblast’ 36 107 11 23Sakhalinskaya Oblast’ 153 56 59 55 125Average 88 94 68 22 75Source: 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 averagevolume per unit area. Table 5.22 explains that southern subregions havehigher volumes per hectare than northern ones. The southernmost region,Primorskiy Kray, has the highest volume per hectare in the RFE. Theaverage volume per hectare in Primorsldy Kray is higher than Canada’s163 cubic metres per hectare, and reaches the level of British Columbia’s197 cubic metres per hectare (Forestry Canada, 1990).126Table 5.23 shows coniferous species composition in the RFE. From thetable, it can be understood that by far the most dominant species in thisregion is dahurian larch (Larix gmelini). It accounts for 84.5% of the areaand 73.3% of the growing stock volume of the coniferous forests.Table 5.23. Coniferous SpeciesKorean Spruce Fir Larch European TotalSubregion Pine Red Pine(Area) lOOhaYakutia 397 380 21 116,880 10,052 127,730Primorskiy Kray 2,244 2,817 295 1,137 4 6,497Khabarovskiy Kray 803 8,559 605 25,366 1,150 36,483Amurskaya Oblast’ 6 416 52 13,389 726 14,589Kamchatskaya Oblast’ - 213 - 940 8 1,161Magadanskaya Oblast’ - - 9,453 0 9,453Sakhalinskaya Oblast’ 0 1,271 838 1,636 69 3,814Total 3,450 13,656 1,811 168,801 12,009 199,727(%) (1.7) (6.8) (0.9) (84.5) (6.0) (100)(Volume of growing stock) 1 million m3Yakutia 74.2 48.0 3.8 7,881.6 1,043.8 9,051.4Primorskiy Kray 503.4 515.0 44.6 176.8 0.2 1,240.0Khabarovskiy Kray 173.6 1,492.5 83.5 2,701.3 130.9 4,581.8Amurskaya Oblast’ 1.1 71.2 8.8 1,473.1 62.4 1,616.6Kamchatskaya Oblast’ - 45.8 - 100.2 0.1 146.1Magadanskaya Oblast’ - - 340.9 0.0 340.9Sakhalinskaya Oblast’ 0.0 239.0 149.8 192.7 0.8 582.3Total 752.3 2,411.5 290.5 12,866.6 1,238.2 17,559.1(%) (4.3 (13.7) (1.7) (73.3) (7.1) (100)(Average volume per unit area ) m3/haYakutia 187 126 181 67 104 71Primorskiy Kray 224 183 151 155 50 191Khabarovskiy Kray 216 174 138 106 114 126Amur Oblast’ 183 171 169 110 86 111Kamchatskaya Oblast’ - 215 - 107 12 126Magadanskaya Oblast’ - - 36 36Sakhalinskaya Oblast’ - 188 179 118 12 153Average 218 177 160 76 103 88Source: 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), and127fir (Abies sibirica). Most of the larch in the RFE, nearly 69%, isconcentrated in Yakutia, where it comprises 91.5% of the coniferousforests. The prevalence of larch is not restricted to Yakutia, but is commonin most of the RFE. Larch accounts for 9 1.7% and 100% of the coniferousspecies in Kamchatskaya and Magadanskaya Oblasts. Larch is scarcest inPrimorskiy Kray, where it accounts for only 17.5% of the coniferousspecies.The highly valued species, Korean pine and spruce, exist most densely inthe southern subregions, especially in Primorskiy Kray. Korean pine foresthas as high as 218 cubic metres per hectare of growing stock volume perunit area. Spruce, fir and European red pine follow Korean pine in terms ofvolume per hectare with 177, 160 and 103 cubic metres per hectarerespectively. Larch has the least volume per hectare, 67 cubic metres.Table 5.24 shows the deciduous species composition. The deciduousspecies growing in Russia are further grouped into hardwood and softwoodaccording to the wood stress point expressed in MPa4. The tree specieswith the point greater than 40 MPa are called hardwood deciduous and theones less than 40 MPa are softwood deciduous (Backman and Waggener,1991). Most of the deciduous forests are concentrated in the southernsubregions and Kamchatskaya Oblast’. Each of Primorskiy andKhabarovskiy Krays, and Amurskaya and Kamchatskaya Oblasts hasbetween 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 theInternational System of Units to denote stress. One pound per square inch (psi)equals approximately 0.007 MPa.128Deciduous forests are the most prominent in Primorskiy Kray, where theycomprise 40.5% of total forests, followed by Kamchatskaya Oblast’ (36.8%),Amurskaya Oblast’ (24.0%), and Salthalinskaya Oblast’ (22.4%). Yakutia isrecorded as having no deciduous forests. Deciduous forests are signfficantonly in Primorskiy Kray.Table 5.24. Deciduous SpeciesHardwood SoftwoodSubregion Ash Oak Bass- Others Sub- White Poplar Others Sub-wood Total Birch Total(Area) lOOha- 1,817 53 113 1,9831,947 390 677 3,223 990 63 248 1,301656 343 826 1,932 3,458 195 906 4,559436 19 61 516 4,505 30 185 4,720-- 5,712 5,712 657 173 479 1,309- 12 210 91 31325 - 868 893 139 16 146 301752(6.1)(Volume8,144 12,376 11,578 740 2,168 14,486(65.8) (100) (79.9) (5.1) (15.0) (100)of growing stock) 1 million m3YakutiaPrimorskiy Kray 309Khabarovskiy Kray 107Amurskaya Oblast’ -Kamchatskaya Oblast’ -Magadanskaya Oblast’ -Sakhalinskaya Oblast’ -Total 416 3,064(%) (3.4) (24.8)Yakutia -Primorskiy Kray 39.8Khabarovskiy Kray 14.0Amurskaya Oblast’ 0.0Kamchatskaya Oblast’ -Magadanskaya Oblast’ -Sakhalinskaya Oblast’ -Total(%)Yakutia -Primorskiy Kray 129Khabarovskiy Kray 131Amurskaya Oblast’ -Kamchatskaya Oblast’ -Magadanskaya Oblast’ -Sakhalinskaya Oblast’ -Average183.3 59.6 97.759.0 51.6 101.816.0 2.3 3.8-- 483.9380.4226.422.1483.92.064.7 6.4 12.591.0 10.5 25.5214.0 35.6 78.4275.8 5.7 17.251.3 21.0 28.70.4 26.1 7.08.1 2.1 7.553.8 260.3 113.5(4.6) (22.4) (9.8)83.5127.0328.0298.7101.033.517.7- 48.1 50.1753.3 1,162.9(64.8) (100)(Average volume per unit94 153 14490 150 12337 121 62-- 8555 5129 85 151 90 94705.3 107.4 176.7 989.4(71.3) (10.9) (17.9) (100)m3/ha1141174385area )369262617833581211671831901211241311101038793775142987263771075961 145 82 68Source: Sheingauz, A. S. et al. (1989)129The RFE represents a vast forest area but the forest conditions differamong subregions as seen above. For example, more than half of theforest in the RFE is in the northern subregions, but the quality of theforests is inferior to the other subregions because of the harsher climate,smaller trees, lower stocking, and the dominance of less-valued larch. Theaverage volume per hectare in Yakutia is less than 1/2 of that ofPrimorskiy Kray, which has the highest volume per hectare of the RFE. InMagadan the same figure goes down to as low as 1/4 of that of PrimorskiyKray. However, in the south, the average volume per hectare is comparable to the Canadian national average (Table 5.25). Average volumes perhectare of certain species in Primorskiy Kray are close to the level ofBritish Columbia’s.Table 5.25. Growing Stock Volume per hectare between Canada and the RFEHardwoodConiferous Pine Spruce Fir Larch Deciduous Softwood DeciduousAverage Average Aspen W. Birch(m3/ha)Yakutia 71 187 126 181 67 - 121 36Primorskiy Kray 191 224 183 151 155 114 167 153Khabarovskiy Kray 126 216 174 138 106 117 183 150Amurskaya Oblast’ 111 183 171 169 110 43 190 61Kamchatskaya Oblast’ 126 - 215 - 107 85 121 78Magadanskaya Oblast’ 36 - - - 36 - 124 33Sakhalinskaya Oblast’ 153 - 188 179 118 56 131 -Average(RFE) 103 218 177 160 76 94 145 61Canada 203.6 198.9 170.3 195.0 155.1 136.0 188.1 90.7B. C. 258.2 209.5 249.3 233.4 227.4 N.A. 225.6 159.2Note: 1. Hardwood deciduous species, also known as shade-tolerant hardwood speciesand “hard” hardwood, include oak, ash, beech, and stone birch.2. Softwood deciduous species, also known as shade-intolerant hardwood speciesand “soft” hardwood, include aspen, white birch, alder, lime, and basswood.3. Maple alone is used for Canada in the comparison of hardwood deciduousaverage.Source: Compiled from Sheingauz, A.S. et al. (1989), Forestry Canada (1990) andFenton and Maplesden (1986)130Table 5.26 shows that the total forest area in the RFE has been increasingover time. However, a large part of the increase is attributed to the larchin Yakutia. The areas of the high valued Korean pine show a decline overtime.Table 5.26. Changes in Species Composition Over TimeSoftwood HardwoodYear Korean Spruce Larch European Total Oak Ash White Others Total Shrubs GrandPine /Fir Red Pine Birch Total(1 million ha)1966 4.0 15.5 155.1 9.4 184.0 2.7 0.5 9.0 11.2 23.4 35.8 243.21973 3.7 15.6 162.9 10.5 192.7 3.0 0.5 9.8 11.7 25.0 36.1 253.81978 3.4 16.0 164.2 10.9 194.5 2.9 0.4 10.5 11.7 25.5 37.2 257.21983 3.2 16.0 167.9 11.5 198.6 3.0 0.4 10.6 12.2 26.2 41.2 266.01988 3.4 15.5 168.8 12.0 199.7 3.1 0.4 11.6 11.8 26.9 48.4 275.0Source: Sheingauz, A. S. et al. (1989)5.4.4. Annual IncrementThe annual increment of the forests in the RFE is 202 million cubic metres(Table 5.27). This seems overestimated compared to 84.5 million cubicmetres exclusive of Yakutia estimated by Cardellichio, et al. (1989). About82% of the increment is attributed to coniferous species. Yakutia accountsfor 40% of the increment. Yakutia and three southern subregions,Primorskly Kray, Khabarovskiy Kray and Amurskaya Oblast’, account forover 90% of total annual increment in the RFE.The annual increment in Canada is 338 million cubic metres. The standingforest contributes 335 million cubic metres and natural regeneration isresponsible for an additional three million cubic metres (Honer andBickerstaff, 1985). Among them, the province of British Columbia (B.C.)represents 103.6 million cubic metres, just about half of the RFE’s.131However, the annual increment in B.C. is from a land base less than onefourth of the RFE’s. The inventoried forest land in BC. is 60.31 millionhectares (Forestry Canada, 1990) against 275 million hectares of closedforests in the RFE (Sheingauz et at., 1989). The average annual growth rate(mean annual increment, or MAT) per hectare in Primorskiy Kray,Khabarovskiy Kray, Amurskaya Oblast’ and Sakhalin Island is between 1.3and 1.5 cubic metres per hectare, higher than that of the average of theRFE, 0.9 cubic metres per hectare. The MAT is 1.15 cubic metres perhectare exclusive of Yakutia (Cardeffichio et al., 1989). The MAT in the RFEis much lower than the one in Canada and B.C. The MAT in Canada is 1.7cubic metres per hectare. The MAT in B.C. and Nova Scotia is estimated tobe 2.3 cubic metres per hectare. In the case of managed stands onmedium-to-good sites, it could be 10 cubic metres per hectare on the coastand 4 cubic metres per hectare in the interior of B.C. (Cardellichio, et al.,1989). This comparison suggests a significantly slower growth rate of theforests and lack of forest management in the RFE (Table 5.27).Table 5.27. Annual Increment in the RFEYakutiaPrimorskiy KrayKhabarovskiy KrayAmurskaya Oblast’Kamchatskaya Oblast’Magadanskaya Oblast’Sakhalinskaya Oblast’(Averages)RFECanadaB.C.Annual IncrementConiferous Hardwood SoftwoodSpecies Deciduous Deciduous Total(1 mu. m3/yr)80.0 - 2.3 82.310.1 3.7 3.4 17.246.4 1.9 9.4 57.718.7 0.5 8.3 27.50.9 3.8 1.8 6.53.0 - 0.6 3.65.9 0.8 0.5 72165.0 10.7 26.3 202.0338.0103.6Mean Annual Increment/haConiferous Hardwood SoftwoodSpecies Deciduous Deciduous Average(m3/yr)0.6 - 1.2 0.61.6 1.1 2.6 1.51.3 1.0 2.1 1.31.3 1.0 1.8 1.40.8 0.7 1.4 0.80.3 - 1.9 0.41.5 0.9 1.7 1.40.9 1.8 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)132Table 5.28 shows the age classes of the forests in the region. There are sixage classes of forested land as in the table. According to Backman andWaggener (1991), overmaturity is reached at age between 100 and 140 inconiferous species and between 50 and 70 in softwood deciduous species,while maturity is at age between 80 and 100 in the former, and 40 and50 in the latter. Immature age class occurs at an age between 80 and 100years for conifers and hardwood deciduous tree species and between 50and 60 years for softwood deciduous species. Middle aged class occurs atage between 40 and 60 for coniferous and hardwood deciduous treespecies, and 20 and 30 for softwood deciduous species. The age class ofyoung stand I ranges from 10 to 25 years and young stand II from 25 to40 years depending on the species. The division between age classes is notclear in softwood deciduous species as seen in Table 5.28.Table 5.28. Six Age Classes of Russian ForestsAge Class Coniferous Species - - - - Deciduous Species - - - -Softwood HardwoodYoung I 1O-25yrs. 1O-25yrs. 10-25yrs.Young II 25 - 40 yrs. - 25 - 40 yrs.Middle Aged 40-60 yrs. 20- 30 yrs. 40-60 yrs.Approaching Mature 60- 80 yrs. 50- 60 yrs. 60- 80 yrs.Mature 80- 100 yrs. - 80- 100 yrs.Overmature 100 + yrs. 50- 70 yrs. 100+ yrs.Source: Backman and Waggener (1991)Table 5.29 shows the age class distribution of closed forests, or stockedforests in the region, which constitutes 55.1% of total forested area as inTable 5.18. Overmature forests in the RFE comprise 19% of the total, whilemature and overmature forests combined comprise 48%. Therefore, thematurity of the forests in the region is not very high.133Table 5.29. Maturity of Stocked Forests under Control of State Forest ManagementMiddleSubregions Total Young Stands Aged Immature Mature OvermatureI II Forests(1,000 ha)Yakutia 146,732 15,689 13,844 35,726 9,718 39,894 31,861Primorskiy Kray 11,160 335 605 2,861 1,920 4,113 1,326Khabarovskiy Kray 48,837 3,559 4,254 12,817 4,612 15,259 8,336Amurskaya Oblast’ 21,777 2,292 2,826 6,937 2,186 4,818 2,716Kamchatskaya Oblast’ 19,053 56 197 5,375 2,694 8,568 2,163Magadanskaya Oblast’ 22,121 983 2,225 5,699 3,424 5,679 4,111Sakhalinskaya Oblast’ 5,327 513 636 1,516 454 1,015 1,196Total 275,007 23,427 24,587 70,933 25,008 79,343 51,709(%) (100.0) (8.5) (8.9) (25.8) (9.1) (28.9) (18.8)Source: Sheingauz, et a!. (1989)Table 5.30 shows the trend of changes in age-class structure and volumebetween 1966 and 1988. First, it shows the change in age-class structurein that the areas of young and, middle-aged forests are increasing whereasthe ones of mature and overmature forests are decreasing. Every fiveyears, about 5 million to 10 million hectares of mature and overmatureforests disappear in the RFE by artificial or natural causes (Sheingauz, eta!., 1989).Table 5.30. Trend of Changes in Forested Area and Volume in the RFE1 million ha1966 21.8 34.4 23.0 164.01973 34.4 38.3 21.9 159.11978 39.2 45.8 22.9 149.31983 42.8 55.2 24.8 141.21988 48.0 70.9 25.0 131.11966-1988 +26.2 +36.5 +2.0 -32.9(%) +120 ÷106 +9 -20Source: Sheingauz et al. (1989)Area VolumeMature & Mature &Year Young Middle Immature Overmature Total Overmature----lmillionm322,419.5 15,714.922,098.6 16,409.221,964.1 20,163.421.702.3 14,761.819,686.3 12,982.1-2,733.2 -2732.8-12 -17134Second, the growing stock volume shows a fluctuation over time. Thefluctuation appeared in Table 5.30 suggests an unreliability of thestatistics. Nevertheless, one obvious trend in the forest volume in the RFEis downward, as with the forested areas.5.4.5. Rehabilitation of Damaged AreasSeveral factors limit the growth of the resource base and the utilization ofresources. Among others, fire damage and lack of reforestation are majorones. In fact, they are the primary issues related to the growth of timbervolume in the RFE. Statistically the average area damaged by forest fire ina year between 1978 and 1987 was 308,500 hectares, which is 0.006% oftotal forest area in the RFE (Table 5. 31). The actual figure, however, couldhave 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 ayear, which is quite a significant area and delays the improvement offorest conditions in the region. The fire protection efforts usually sufferfrom lack of manpower and equipment and budget (ERI, 1991).Table 5.31. Reported Area Damaged by Forest Fires per Year between 1978 and 1987Area damaged by Share in total forest areaSubregions forest fire(1,000 ha) (%)Yakutia 131.0 0.05Primorskiy Kray 13.7 0.11Khabarovskiy Kray 51.9 0.07Amurskaya Oblast’ 85.8 0.28Kamchatskaya Oblast 5.8 0.01Magadanskaya Oblast’ 16.9 0.02Sakhalinskaya Oblast’ 3.4 0.05Total (RFE) 308.5 0.06Source: (Sheingauz, 1990)135Table 5.32 shows the area and volume damaged by forest fires from theofficial statistics of 1992.Table 5.32. Forest Fire Statistics in 1992No. of Forest Fire Damaged Area Damaged VolumeSubregions (Occurrence) (ha) (1,000m3)Yakutia 1,040 215,135 5,104.2Primorskiy Kray 243 8,854 135.3Khabarovskiy Kray 377 20,224 147.5Amurskaya Oblast’ 404 55,681 279.0Kamchatskaya Oblast 107 10,074 175.4Magadanskaya Oblast’ 171 26,658 360.6Sakhalinskaya Oblast’ 26 104 5.4Total (RFE) 2,368 336,730 6,207.4Source:Statisticheskiy Sbornik, (1993)Reforestation is practiced to improve the areas damaged by logging andforest fires in the RFE. The results are modest. According to Russianregulation, at least 30% of cut areas are supposed to be regenerated, butthe actual replenishment lags far behind. Between 1986 and 1988, anaverage of 400,000 hectares were logged every year while only 14% ofthem, or 56,000 hectares, were replanted (Sheingauz, 1991). During thatperiod, 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, therehabilitation 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 beenreplanted and only 53% were successfully regenerated. The forested areasartificially established account for only about 2% of the total forested area.136Table 5.33. Reforestation in the REF (1988)Total Successfully Survival Share of Artificial ForestSubregion Reforested Area Regenerated Rate Closed(1,000 ha) (1,000 ha) (%) Forests (%) Total(%)Yakutia 6 4 67 0.002 0.002Primorskiy Kray 243 47 19 0.3 0.4Khabarovskiy Kray 400 225 56 0.2 0.4Amurskaya Oblast’ 173 85 49 0.2 0.3Kamchatskaya Oblast 101 67 66 0.1 0.3Magadanskaya Oblast’ 35 26 74 0.01 0.07Sakhalinskaya Oblast’ 262 196 75 2.6 3.1Total (RFE) 1,220 650 53 0.1 0.2Source: (Sheingauz, 1990)5.4.6. AccessibilityThe forest resources in the RFE allow limited access: physically bymodestly developed transportation network, and administratively bygroupings for specific uses as discussed earlier and by organizationsresponsible for managing forest lands. The organizations include forestauthority, other ministries, government farms, and collective farms, andtimber industry. Table 5.34 shows the areas controlled by theseorganizations. The forest lands allocated for forest industry is negligibleand not presented in the Table.Table 5.34. Areas Controlled by Different Organizations in the REFOrganization Total Forest Forest Stocked GrowingArea Fund Land Forests Stock Vol.(million ha) (thousand ha) (million m3)State Forest Management 499,546.0 353,467.5 275,006.0 20,761.6Forest Authority 417,360.0 314,467.8 247,858.7 19,166.7(Share of total) (82.0) (86.9) (87.8) (72.9)Long Term Use 82,186 38,999.7 27,147.3 1,594.9Other Ministries 7,489.2 6,246.3 5,447.5 493.2Kolkhoses 146.6 146.6 97.9 1,813.2Total 621.6 507,181.8 359,860.4 280,551.4 23,068Source: Goskoniles (1990 and 1991)137As 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 undercontrol of the authority. These are probably the areas where most of theinitial forestry investments would be directed in the future.Table 5.35. Area and Volume of Stocked Forests, Exploitable under Control of ForestAuthoritySubregion Coniferous Deciduous Total Total Ratio ofSpecies Species Exploitable Stocked ExploitableForests Forests Forests(1,000ha) (%)Yakutia 45,820 1,336 47,156 139,485 34Primorskiy Kray 5,202 3,793 8,995 11,157 81Khabarovskiy Kray 18,477 5,211 23,689 39,277 60Amurskaya Oblast’ 12,705 4,855 17,560 21,777 81Kamchatskaya Oblast 621 2,128 2,748 8,787 31Magadanskaya Oblast’ 2,312 132 2,443 22,052 11Sakhalinskaya Oblast’ 3,436 893 4,329 5,326 81Total Exploitable Forests 88,572 18,347 106,919 247,859 43Total Stocked Forests 188,237 59,623 247,859Ratio of Exploitable Forests(%) 47 31 43(million m3) (%)Yakutia 4,023 58 4,082 9,009 45Primorskiy Kray 962 397 1,359 1,749 78Khabarovskiy Kray 2,670 437 3,107 4,621 67Amurskaya Oblast’ 1,407 288 1,695 1,986 85Kamchatskaya Oblast 111 196 307 621 49Magadanskaya Oblast’ 76 12 88 513 17Sakhalinskaya Oblast’ 516 52 568 668 85Total (RFE) 9,766 1,440 11,206 19,167 58Total Stocked Forests 16,634 2,532 19,167Ratio of Exploitable Forests(%) 59 57 58Source: Goskomles (1990 and 1991)Table 5.35 shows the areas and volume under control of the forestauthority and exploitable based upon the transportation network to bedeveloped within the next 20 years. Out of total stocked forests under thecontrol of forest authority, 47% of coniferous, or 88.6 million hectares and31% of deciduous forest areas, or 18.3 million hectares, fall on the category138of exploitable in the next 20 years. In terms of volume, 59%, or 9.7 biffionm3 of coniferous forests, and 57%, or 1.4 billion m3 of deciduous forests,are classified as exploitable within the next 20 years. By subregion,Sakhalinskaya and Amurskaya Oblasts, Primorskiy and KhabarovskiyKrays show higher ratio of exploitable forests than other regions.5.4.7. Cut-Control SystemSeveral means to control the volume harvested are being practiced in theRFE: a prohibition of an area or species from logging, using a special systemto determine annual allowable cut, regulating diameter and stock volumefor logging, and applying user fees. How such means would affect theactual logging in the RFE is the main purpose of the discussion in thissection, which heavily draws on the report by Arai (1992).As described in section 5.4.2, Russian forests are classified into threegroups according to their uses and need for protection. The classificationaffects the determination of cut volume and cutting method for logging.Normally, the strictest regulation applies to the Group I forests and themost lenient rules to the Group III. However, the forests in Group I can belogged unless the forests belong to the following special protection areaswhere logging is banned:1. A belt 100 m in width surrounding a forest.2. 100 to 300 m riparian zone.3. An area within the radius of 100 - 300 m from a water source.4. An area within the radius of one km from a mineral water springand resort facilities.5. A forest inhabited by rare and indigenous animal and plant species.6. An area within 200 m from a tree line.7. A forest within 3 - 5 km from Tundra8. An area sloping more than 30 degrees.139The area where logging is prohibited for reasons 1 to 6 above constitutesless than 1% of the total forested area and has virtually no impact ondeciding annual cut volume. The forested area near a tundra regionaccounts for only about 3% of the total Forest Fund. All such areas arelocated in Yakutia, Kamchatskaya Oblast’ and Magadanskaya Oblast’.Needless to say, the forest industry could not profitably log and has neverlogged in such areas. The area sloping more than 30 degrees accounts for5% of the total forested area in the RFE. The share of such areas variesregionally from 1% in Yakutia to 10% in Sakhalin Island. Despite theprohibition of logging in such areas, new technology has made it possibleto log in these regions for many years. Therefore, the prohibition oflogging in certain areas has had no significant impact on annual allowablecut volume. It is not likely to be a major constraint to increasing cutvolume in the future either.In Russia, the annual allowable cut volume is controlled by an assessed cutvolume system, in which the annual cut volume is determined at regionalor territorial levels subject to final approval by the central government.The volume cut in the RFE has always exceeded this assessed cut volumeand the future cut volume in the RFE is not likely to be decreased by thesystem (Aral, 1992).There are 10 tree species which are prohibited from logging across the RFEincluding Korean pine (Pinus koraensis). In addition to the 10 species, 5rare species in Sakhalin Island and one in Magadanskaya Oblast’ arebanned from cutting. The rare species account for a small volume andpresent no significant obstacle to increasing the cut volume in the RFE140except two species, European red pine, or Scots pine (Pinus sylvestris) andbasswood (Tiia amurensis). These two species have good stockingvolumes in the RFE. Especially, the former represents 7.1% of totalsoftwood volume and the latter 9.8% of total hardwood volume (Sheingauz,et al., 1989). Logging the basswood is banned in Primorskiy Kray andKhabarovsldy Kray, where beekeeping is an important industry. Althoughthe European red pine (Pinus sylvestris) is banned from logging across theRFE, a small amount of this tree has been constantly logged in PrimorskiyKray.The trees with less than a certain diameter are prohibited from logging inthe RFE. The minimum diameter to cut varies from 12 cm to 48 cmaccording to the species, logging area and logging method. In case ofselective logging, the logging density and frequency are determined by thestocking density of the forest. In recent years, many forest areas havebeen designated for priority use by native people. The amount of loggingin 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 cutvolume before the end of 1991. On average, a one to two rubles stumpagefee was imposed on one cubic metre logged volume, which constituted only3 to 5 % of total logging cost. In 1992 a new stumpage system wasintroduced and the fee was based on species, quality and diameterregardless of logging region and hauling distance, criteria which had beenapplied previously. The new stumpage price was raised to 100 to 150rubles per one cubic metre and had no effect due to high inflation. Theshare of the new stumpage fee in total logging cost remains largely141unchanged. At present, a new stumpage system reflecting the price indexis being considered. In addition, a new land tax has begun to be imposedon the forest land being used by forestry enterprises. The tax rate is 5% ofappraised value of total growing stock volume in the forest land.Currently a forest production enterprise should enter into a lease contractwith the regional forestry office to use the forest resources in the leasedland. 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, theforests in the RFE cover a vast area and offer an abundance of potentialtimber resources. However, the stock volume of the forests is significantlylower than that of other comparable countries due to slow growth rate, lowstocking 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 foreigninvestment is high and the high-valued species are concentrated. In thenorth, where the forests have been relatively protected from developmentby remoteness and inaccessibility, the quality, species composition andvolume per hectare are inferior to the other regions because of the harsherclimatic conditions. The forests in the north are mostly in the permafrostzone, and any small changes to the forests could cause irrevocable damageto the regional environment. These vulnerable environmental conditionsbecome major constraints to intensive forest development in the RFE,especially in the north. Despite these problems, the potential of the forestresources in the region is well appreciated by foreign investors, especiallythose from neighbouring resource-poor countries. Most of the Korean andJapanese companies interviewed in the RFE recognized the potential and142expressed their views that what matters for the potential is not theresource per se but how to materialize the potential through appropriateinvestment (Ichii, 1993; Ito, 1993; Nakazawa, 1993; and Yamada, 1993).This view is quite contrasting to the one held by Russians who normallyunderestimate the resource potential in the REF (Minakir, 1993;Ivanchikov, 1993b; and Sheingauz, 1993). Given the growing stock andinfrastructure conditions, the four southern subregions of the RFE, i.e.,Primorskiy Kray, Khabarovskiy Kray, Amurskaya Oblast’ andSakhalinskaya Oblast’, have most of the economic resource base andsuggest the highest potential for forest development in future. Theexploitation of the forest resources in the RFE in the future is going to beaffected by various cut control regulations. The current user fee systemand the lease agreement system should be developed in a more detailedmanner before they become effective as a controlling mechanism.5.5. FOREST ADMINISTRATIONAfter the USSR collapsed, the forestry administration experienced a seriesof changes. Decentralization caused confusion and conflicts over theownership and control of natural resources. Production and distributionsystems also needed to be changed to accommodate the reform acrosswhole sectors of the country’s economy. Forestry administration andproduction is no exception. This section is devoted to exploring how muchperestroyka and glasnost took place in the field of forestry administrationand production systems, what the latest developments are, and finallywhat the implications of such reforms are for foreign investment inforestry.143In order to understand the current reforms, it is necessary to look backand refer to a series of reforms in forestry administration in recent years.There were three major reforms in the forestry administration system, onein 1988, another in 1991 and the last in 1992 after the USSR wasdissolved.5.5.1. Before the 1988 ReformAs in Figure 5.1 traditionally two systems coexisted in the Soviet forestadministration: a forest resource management system and a forestproduction system. The former was largely responsible for silviculturalmissions such as forest management, protection, regeneration, andthinning. This administration was headed by a State Committee ofForestry (Goskomles) and had line offices at regional and district levels. Atthe lowest level is leskhoz, an enterprise responsible for managingdesignated unit forest areas. Small-scale logging and saw milling were alsoundertaken under this system.The latter system was responsible for the production of various forestproducts. It was headed by the Ministry of Forest Industries(Minlesprom), and various lower level offices were organized under theministry. At the lowest level of the organization is lespromkhoz, a forestproduction enterprise involved mainly in logging and related processing.A district association like Urgalles or Terneiles consists of a number oflespromkbozes in the respective district. Several district associations forma regional or territorial association like Primorsklesprom or DaTlesprom.At the regional or territorial level, the association includes not only thelespronikhoz but also various other related enterprises.144Council of Ministersof the USSRState Committee of Ministry of ForestForestry (Goskoniles) [f.Mi.rLjMinistry of Forestsat Republic levelI_________ __________Examples:Regional and Territorial Regional Association PrimorsklespromForestry Office of Forest Industries DalilespromDistrict AssociationDistrict Forestry Office Terneiiesof Forest Industries UrgallesForestry Management Forestry ProductionEnterpriseEnterprise (Leskhoz) (lespromklioz)Figure 5.1. Forestry Administration System of the USSR before the 1988 ReformSource: compiled from Barr (1989a) and Petrov (1989)For example, the Dal1esprom in Khabarovsk Kray is formed of a integratedforest production kombinat, several North Korean forestry enterprises, sawmills, maintenance shops, port facilities, a research institute, and atechnical school in addition to lespromkliozes (Kakizawa, 1992b).5.5.2. The 1988 ReformSince an integrated control over forest management and production wasnot expected under the previous system, a reform was undertaken toincrease the level of efficiency in management and production in 1988.145The main point sought by the reform was the expansion of the role of thelespromklioz. The reform granted the lespromkhoz the right to managethe forest areas allocated to itself in addition to logging in the area. Theregional Forestry Office had been responsible for such activities beforethen. Thus, lespromkhoz turned into an integrated forest managementand production enterprise, while the Regional Forestry Office was reducedto managing the areas not allocated for production and management bylespromkhoz. Lower-level forestry offices were closed. By the reform theexclusive right to use forest resources was granted to the lespromlthoz.The regional forestry administration was restructured as intended by thereform in Primorskiy Kray, Khabarovskiy Kray, Amurskaya Oblast’ andSakhalin Oblast’. In the other subregions, in the face of opposition fromthe regional forestry offices, the old system of forestry administrationcontinued to exist.5.5.3. The 1991 ReformA new reform intending to revive the function of the former regionaloffices was announced in 1991 by a resolution in a ministerial meeting. InKhabarovskiy Kray the regional forestry office was resurrected as theresult of the resolution. It was, however, opposed in the other threesubregions of Primorskiy Kray, Amurskaya Kray and Saithalin Oblast’. Theconifict between central and regional governments over the issue is beingarbitrated by the Court of the Russian Chamber of Commerce. Meantime acompromise system of forestry administration is being established in theRFE, in which the Regional Forestry Office takes the responsibility foroverall management of forest resources while management for specificuses is undertaken by the lespromkhozes (Mai, 1992).1465.5.4. Post USSR ReformAfter the collapse of the USSR, the State Committee of Forestry wasabolished and absorbed into the newly created Ministry of NaturalEnvironment. The former Ministry of Forests turned into a forestrydepartment under the new ministry. The forestry department was againdetached from the ministry by presidential Decree in 1992 and renamedas the Russian Federal Forestry Office, mainly responsible for the management of forest uses and allocation of forest resources. On the other hand,the right to control the forest product industry has been transferred to theMinistry of Economy, and the Russian Ministry of Forest Industries wasturned into the All Russia Forest Industry Corporation(Rossiskielespromishylenniki ), which is formed of 60 corporations andorganizations including 21 corporations, 15 regional concerns, 6associations, 5 survey and research corporations and 8 research institutesacross the country (Arai, 1992). All regional or territorial forestproduction associations across the RFE participate in the corporation.Although these regional production associations are administered by theAll Russia Forestry Industry Corporation they are largely autonomous intheir operation. More recently, in December 1992, Rosslesprom, a nationalforest-industry corporation, was established to attract investment, scienceand technology transfer, and foreign economic activities for the forestry,wood processing and pulp and paper industries (Arai, 1992).5.5.5. Resource Allocation SystemThe reform has also brought a significant change in the mode of resourceallocation, and more changes are expected in the future. In order to obtain147license, the logging enterprise, lespromlthoz, should enter into a contractwith the local government. The regional forestry office is responsible forallocating logging areas to the licensed enterprise, based upon the cutvolume granted in the contract. Meanwhile the license granting system isbeing changed towards relying more on a competitive bidding process,though a stable bidding system has not been yet established. A logginglicense, almost guaranteed under the old system, can be withheld from anenterprise under the competitive system. Once the related institutionalarrangements are in place, all allocation of forest resources will be undertaken by competitive bidding.As the country’s economy is in the process of transforming to a marketeconomy, market-oriented changes are also expected to take place in theresource allocation system. Two possible alternatives are the ‘contest’system and the ‘investment contest’ system (Arai, 1992). The formergrants resource use rights to a successful contestant who offers morefavorable conditions than others. The latter system allows access to theresources only to those who have actually invested in the enterpriseholding a logging license.5.5.6. Rights to Managing the Forest ResourcesRegional forestry offices from all subregions argue that the management offorest resources should be under their exclusive control. They claim thatthe office should also take control of the long-term and strategic utilizationof forest resources. However, according to the Russian constitution andrelated regulations, the territorial or regional council of peoples deputies isheld responsible for the long-term and strategic utilization of forest148resources. At the same time, the regional forestry office is under directcontrol of the Federal Ministry of Forests and has no constitutionalrelationship with the local council. This lack of constitutional ground onthe rights to managing forest resources poses a conflict for the future(Arai, 1992).Another problem along this line is the incessant reforms and changes inthe forestry administration, which could further weaken the supervisoryfunction of regional forestry offices and result in misuse of the forestresources. At present the ownership of most of the forest resources is heldby the federal government, and the decentralization issue is restricted onlyto the rights to managing and utilization, not the ownership. A variety ofownership issues and issues related to the tenure system, however, isexpected to emerge especially from the lower level of the administrationsystem as the privatization progresses.In summary, much formerly centralized forestry administration has beendecentralized through a series of reforms. A positive implication of thereform for the FDI is the fact that the reform has been undertaken so thatthe industrial aspects of forestry are emphasized. More active andautonomous industrial activities are expected at regional and subregionallevels. The new administration system, however, stays unstable due to theunclear distribution of power over resource rights between the local andcentral administration and the incessant reforms across whole sectors ofthe country. Unclear responsibility for the use of resources will negativelyaffect TNC activities in forestry investment as experienced in the JVSvetlaya (See Chapter VI).1495.6. FOREST INDUSTRY5.6.1. AAC and Annual HarvestTable 5.36 shows the AAC volume since 1980. The AAC in the RFE hassustained at around 100 million m3, though it has dropped slightly everyyear since 1987. Each of Yakutia and Khabarovskiy Kray accounts for onethird of total AAC in the RFE. Next major portion of the AAC originatesfrom Primorskiy Kray and Amurskaya Oblast’. Two subregions combinedaccount for over 25% of total AAC.Table 5.36. AAC in the RFESubregion 1980 1985 1986 1987 1988 1989 1990 1991 1992(1 million m3)Yakutia 33.0 33.0 33.0 33.0 33.0 33.0 32.0 33.0 33.1Primorskiy Kray 14.5 14.5 14.5 14.5 15.0 15.0 15.2 11.5 12.2Khabarovskiy Kray 35.1 37.0 37.0 37.0 37.0 37.0 36.7 32.5 32.3Amurskaya Oblast’ 10.9 10.9 10.9 10.9 10.9 10.9 11.0 16.1 16.1Kamchatskaya Oblast’ 2.5 2.5 2.5 2.2 2.2 2.2 2.2 1.9 1.9Magadanskaya Oblast’ 3.9 1.2 1.2 1.2 0.4 0.4 0.4 0.4 0.4Sakhalinskaya Oblast’ 6.6 8.1 8.1 8.1 6.0 6.0 6.0 4.6 4.7Total 106.5 107.2 107.2 107.2 104.5 104.5 103.5 100.0 100.7Source: 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 andWaggener (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 standimprovement, thinning, and sanitation feffings. Other utilization is thoughtto occur in Groups I, II, and III forests mainly in response to industrialdevelopment.150Table 5.37 shows the AAC in 1992 and the actual harvest from the abovethree sources in each subregion. Only 24% of total AAC is actuallyharvested in the RFE. Sakhalinskaya Oblast’ shows the highest proportionof actual harvest by 55.3% of AAC and Yakutia shows the lowestproportion by 11.5% of AAC. In general southern subregions presenthigher actual harvest compared to the northern subregions. Yakutia, whilecontributing 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 1992Area AAC Actual Actual ActualSubregion Harvested Harvest Harvest Harvest(thous. ha) (mu m3) (mu m3) (m3/ha) (%)Yakutia 62.1 33.1 3.8 61.2 11.5Primorskiy Kray 50.4 12.2 3.8 75.4 31.2Khabarovskiy Kray 89.7 32.3 9.8 109.3 30.3Amurskaya Oblast’ 46.8 16.1 3.9 83.3 24.2Kamchatskaya Oblast’ 5.0 1.9 0.4 80.0 21.1Magadanskaya Oblast’ 1.6 0.4 0.1 62.5 25.0Sakhalinskaya Oblast’ 14.9 4.7 2.6 174.5 55.3Total 270.5 100.7 24.4 90.2 24.2Source: Statisticheskiy Sbornik (1993)The annual principal harvest in the RFE showed a steady increase until1980 and stagnated thereafter (Table 5.38). The annual harvest is aboutone 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 inYakutia and 38% in Khabarovskiy Kray where the utilization rate was thesecond highest after Sakhalinskaya Oblast’ in the RFE (Sheingauz, 1991).Since the annual harvest volume is based upon the logs produced, theactual volume logged is usually higher. There exists a significant amount151of losses during the logging in the RFE, ranging from 5% to 35% dependingupon the region (Cardeffichio, et al., 1989).5.6.2. ProductionTable 5.38 shows principal harvest volume from 1965 to 1990. It explainsthat three quarters of the annual principal harvest originates from thethree southern subregions, Khabarovskiy Kray, Amurskaya Oblast’ andPrimorskiy Kray. This reflects the high productivity and quality of theforests, and a relatively well developed infrastructure, especially therailway network in these subregions as shown in Map 5.2.Table 5.38. Annual Principal Harvest Volume, 1965 - 1990Subregion 1965 1975 1980 1985 1990(1 million m3), (%)Yakutia 3.3(13) 3.8(11) 4.1(11.7) 4.3(12) 4.8(14.6)Primorskiy Kray 5.4(22) 6.5(19) 6.4(18.2) 6.3(18) 4.9(14.9)Khabarovskiy Kray 7.7(31) 15.4(44) 15.4(43.9) 13.8(40) 13.2(40.1)AmurskayaOblast’ 3.4(14) 3.9(11) 4.8(13.7) 5.7(16) 6.1(18.5)Kamchatskaya Oblast’ 0.7 (3) 1.0 (3) 0.8 (2.3) 0.9 (3) 0.7 (2)Magadanskaya Oblast’ 0.6 (3) 0.4 (1) 0.4 (1.1) 0.3 (1) 0.2 (0.6)Sakhalinskaya Oblast’ 3.5(14) 3.9(11) 3.2 (9.1) 3.5(10) 3.0 (9.1)Total 24.6(100) 34.9(100) 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 andPrimorskiy Krays has slightly diminished as the harvest volume in theseterritories has been reduced since 1980. The continuous logging and theconsequent deterioration of productivity of economic forests in theseregions are to blame for the reduction. In addition, the logging areas havegradually moved into northern and remote areas, as highly productiveregions are exhausted in the south. As a result, low grade and less-valuedlogs have become more prevalent.152Map 5.2. Basic Infrastructure in the RFESource: RFEIJ (1993b), reproduced with permission153It can also be noted that the relative importance of Khabarovskiy andPrimorskiy Krays has slightly diminished as the harvest in theseterritories has been reduced since 1980. The continuous logging and theconsequent deterioration of productivity of economic forests in theseregions are to blame for the reduction (Fujiwara, et al., 1992). In addition,the logging areas have gradually moved into northern and remote areas, ashighly productive regions are exhausted in the south. As a result, lowgrade and less-valued logs have become more prevalent.The industrial activities in the other sectors show a similar subregionaldistribution in proportion to the subregional harvest. Overall Khabarov-skiy Kray shows the most active production in all sectors. PrimorskiyKray leads in plywood and chipboard production, while fibreboardproduction is heavily concentrated in Khabarovskiy Kray (Table 5.39).Table 5.39. Production of Main Forest Products in 1991SawnSubregion Logs* Timber Plywood Chipbd Fibrebd Paper Paperbmm m3 1,000 m3 - - -mm m3 1,000 ton---Yakutia 2.8 0.6 - - - --Primorskiy KrayKhabarovsldy Kray 10.4 1.7 7.5 92.0 19.0 4.9 143.2Amurskaya Oblast’ 4.9 0.7 0.7 - - 2.9 -Kamchatskaya Oblast’ 0.7 0.2 - 0.6 - - -Magadanskaya Oblast’ 0.2 0.1 - - - - -Sakhalinskaya Oblast’ 2.7 0.4 - - - 200.0 77.3Total (RFE) 25.6 4.5 15.1 186.8 20.1 207.8 220.5Source: 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 paperproduction in the RFE. The paper production on Saithalin Island largelyrelies on the old paper production facilities built by Japan after 1905.154Let us examine the changes in production over time. Log productionsteadily increased to a peak in 1987. It has since dropped sharply to 25.6million cubic metres in 1991 (Table 5.40). The production of sawn timberreached its peak in 1970 and declined thereafter. In 1991, the productionplummeted to less than 4.5 million cubic metres, which is less than thelevel of 1965. The low quality of timber and the chaotic economic andpolitical situations in Russia can be blamed for the decline (Kakizawa,1992b).Paper production has also stagnated and indeed decreased continuouslysince 1975 as shown in Table 5.40. The outdated production facilities inSakhalin Island are the main cause of the stagnation. Plywood productionalso shows a decline after reaching its peak in 1970. In 1991, theproduction dropped to as low as 30% of peak production. On the otherhand, fibreboard, chipboard and paperboard production have increasedsteadily since 1965. They are, however, still too small to meet the regionaldemand (Sheingauz, 1990).Table 5.40. Production Trend of Wood Products between 1965 and 1991Products Units 1965 1970 1975 1980 1985 1987 1991Logs 1mmm3 24.6 29.5 34.9 35.1 34.8 35.2 25.6Sawn Timber 1mmm3 5.5 6.7 6.6 6.3 6.2 6.5 4.5Plywood 1 mmm3 36 50 46 36 36 40 15.1Chipboard 1mmm3 2 34 N.A. 100 117 159 186.8Fibreboard 1mmm3 5 7 N.A. 19 23 24 20.1Paper 1000 t 167 196 229 232 228 227 207.8Paperboard 1000 t 107 121 134 169 192 262 220.5Source: Compiled from Sheingauz (1990) and Zausaev (1993)155In general, the forest industries in the RFE have stagnated since the 1970s,and processing has continued to produce a lower level of products, loggingand saw-milling. Reasons for such stagnation are discussed in thefollowing:The first is an inefficient use of forest resources, or low productivity in thelogging and wood processing industries. The forest industry in the RFE haslong been based upon a small number of high-quality exportable coniferous species. This accelerates the shift of logging into even more remoteand northern regions in search of the preferred species. Even themodernization of logging equipment has not helped to increaseproductivity. For example, the average yearly ruble cost for one cubicmetre 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 and1985 (Fujiwara, et al., 1992). In addition to the advance of logging intonorthern and remote regions, the large amount of waste produced duringproduction contributes to low productivity.Secondly, low log prices contribute to the stagnation of the industry. Underthe central planning system, the log price was set rather uniformly,regardless market preferences. Log prices failed to reflect market pricesand were kept unrealistically low. The stumpage price was also setwithout reference to the costs involved in managing the forests. Forexample, the stumpage price for pine saw logs from Khabarovskiy Kraytakes only 3% of the log price (Fujiwara et aL, 1992). The forestmanagement cost in Khabarovskiy Kray in the late 1980s was betweenabout 24 and 25 million rubles a year, but the annual stumpage revenuewas only 11.5 million rubles (Fujiwara et al, 1992). In addition, the156distribution of capital investment has been strictly controlled by thecentral government and the forest management situation has graduallydeteriorated over time.Thirdly, there has been a lack of investment in processing facilities. Theinvestment for all industries in the RFE has gradually shrunk from 752.2million 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 inEuropean Russia, where the centre of power is located. The RFE hasnormally been treated as a lower priority region for investment. As theeconomic crisis continues and available funds for investment have beenused up in Russia, investments for new production facffities have stoppedand the aging of existing production facilities has continued.The logging sector requires less capital investment and less labour per unitof production than other sectors in forestry. So far in the RFE, investmentshave been concentrated in the logging sector. As a result, the structure ofthe forest industry has become extremely unbalanced. Since the capability for expanding production capacity is notably lower in the RFE than inthe other Russian regions for the region’s lower investment priority, theimbalance is expected to continue.Fourthly, the forest industry in the RFE was developed in order to expandthe log export capability of the former Soviet Union. Log exports from theRFE increased in the 1960s and 1970s. However, the aging processingfacilities and deteriorating quality of logs forced the industry to continueto search for a small number of high quality coniferous log species. As a157result, upgrading and retooling the industry has been largely disregarded,although logging technology was imported from Japan to supply mainlylogs for KS agreement.Lastly, a labour shortage has also contributed to the stagnation of theindustry. In the RFF, labour shortage is common across all sectors ofindustry. It is more acute, however, in the forest industry where theworking environment is much harsher than other sectors. The forestindustry also tends to have a higher labour mobility, so there is a poorbuild-up of technical expertise. Imported labour from neighbouring NorthKorea, China, Cuba and Vietnam is widely used in the RFE. Some 10% ofthe total labour employed in the forestry sector was foreign in the late1980s (Cardellichio et al., 1989).Judging from the above, it will be difficult to maintain the current level ofproduction for the next few years. In order to increase the production,however, the logging operation inevitably needs to move into remote ornew areas, which, in turn, will require a large amount of new investment.5.6.3. Exports of Forest ProductsAbout 25% of the total forest products produced in the RFE over the last 20years has been exported. Traditionally, forest products are the mostimportant export commodity in the RFE. Forest products accounted for61% of total exports in the RFE in 1975. Although their share went downto 43.2% in 1990, it is still the largest among total exports in the region(ERI, 1991).158The RFE is the most important region in Russia for log exports. More thanhalf 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, sodid the exports of forest products.The largest share of the RFE’s export by value is logs, 75.4%, followed bysawn 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 remaining 19% of the exported logs are pulp logs. Fibreboard, plywood and papershare less than 1% of total exports. From the composition of the exports,the export structure is oriented to unprocessed or primary processedproducts (Table 5.41).Table 5.41. Exports of Forest Products from the RFE5LogsYear Total Saw Log Pulp Log Sawn Timber Chip(1,000m3)1965 3,545.9 N.A. N.A. 121.3 -1970 6,116.4 4,094.1 734.6 184.5 -1975 7,113.0 5,016.2 768.0 235.5 461.91980 5,595.6 3,755.6 837.0 291.5 526.01985 7,259.2 5,427.3 1,163.8 378.4 405.01988 8,203.8 6,811.0 1,369.5 539.8 669.51989 6,388.0 5,132.0 1,244.0 514.0 697.0Source: Sheingauz (1990)5 A recent report from JETRO (1993a) shows an inconsistency with the figurespresented here and a dramatic decrease in the export figures. According to thereport, the RFE exported 2,619.7 cubic metres of logs in 1989, 3,067.7 cubic metres in1990, 1,961.8 cubic metres in 1991, and 1,882.6 cubic metres in 1992. The JETRO figuresare again inconsistent with another Japanese source by Aral (1992). It seems to theauthor that a different way of tallying the figures or a different definition of exportor individual item was adopted in each of the above sources. The followingdiscussion is based upon the data available and disregards the inconsistency betweenthe sources.159Table 5.42 shows that the largest share of log exports originates fromKhabarovskiy Kray, followed by Amurskaya Oblast’, Primorskiy Kray, andSakhalinskaya 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 largelydominated by one or two subregions. For example, 73.4% of the export ofsawn timber originates from Khabarovskiy Kray and 58% of chip fromPrimorskiy Kray. Pulp exports are dominated by Khabarovskiy Kray andSakhalinskaya Oblast’, and paperboard exports are also monopolized byKhabarovskiy Kray.Table 5.42. Forest Products Exports from the RFE in 1991Subregion Logs Sawn Timber Chip Pulp Paperboard1,000 m3 (%) 1,000 ton (%)Yakutia 62.1 (2.4) - - -Primorskiy Kray 354.5(13.8) - 255.2(58.0) -Khabarovskiy Kray 1,338.5(52.3) 107.3(73.4) 83.6(19.0) 6.1(67.8) 1.9(100)Amurskaya Oblast’ 646.6(25.3) 0.4 (0.3) 87.7(20.0) -Kamchatskaya Oblast’ 38.0 (1.5) 3.5 (2.4) 13.8 (3.1) -Magadanskaya Oblast’ - - - -Sakhalinskaya Oblast’ 120.2 (4.7) 35.0(23.9) - 2.9(32.2) -Total(RFE) 2,560.0(100) 146.2(100) 440.3(100) 9.0(100) 1.9(100)Source: Aral (1992)Table 5.43 explains that traditionally Japan is the major importer ofRussian forest products, accounting for over 80% of total log exports fromthe RFE in the 1970s and about 60% in the 1980s (Sheingauz, 1990). Thelog volume exported to Japan was 3.56 million cubic metres in 1991 and3.66 million cubic metres in 1992 (JAWIC, 1993). Japan has also monopolized all the chip produced in the RFE through the two industrial chip andpulpwood agreements.160Table 5.43. Exports of Forest Products to JapanYear Logs Sawn Timber Industrial Chip1,000m31965 2,198.7 35.8 n.a.1970 4,879.5 47.9 n.a.1975 5,813.5 96.6 461.91980 4,597.2 117.2 526.61985 4,354.2 81.8 405.61988 4,899.5 116.8 669.51989 5,242.0 262.0 n.a.1990 4,841.0 264.0 n.a.1991 4,303.0 250.0 486.81992 4,268.0 222.0 303.1Source: Sheingauz (1990), Linsan Gyoosei Kenkyukai (1992), Dal’lesprom (1993)Forest products have been a flag-ship item in Japanese imports from theUSSR. They accounted for 41.1% of total Japanese imports from thatcountry in 1970. Their share decreased to 21.8% in 1988 and 20.7% in1989 but continued to be the largest share among Japanese imports fromthe USSR (Ogawa and Murakami, 1991). Forest product imports fromRussia were dominated by logs. Processed products including lumbercomprised only 5% of total forest product imports. Of total imports for the10 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 - 1992)Softwood (%)Sawlos Puinwood Lumber Others742Source: JAWIC (1993)The major species imported to Japan are spruce, fir, larch, European pineand Korean pine. Spruce and fir account for 48% and 45% respectively ofthe imports of softwood sawlogs and pulpwood logs. Larch is the secondHardwood Logs (%) Total7.2 4.9 0.1 13.6 100161most important species in the sawlog imports, and represents 45.1% ofpulpwood log imports. In the case of lumber imports, spruce and fir aredominant 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 andLumber Imported from the USSR( 1983 - 1992)Species Sawlogs Pulpwood Lumber(%)spruce/fir 48.0 45.0 41.8larch 33.0 45.1 18.1E. red pine 14.1 3.0 25.4Korean pine 4.9 6.9 0.7Others - - 14.0Total 100 100 100Source: JAWIC (1993)5.6.4. Export Control MechanismsSeveral mechanisms have been introduced to control the exports of forestproducts since direct trade by individual enterprises was first allowed in1987. They are related to export taxation, export quota and the licensegranting system, and disposal of foreign currency earnings. Many of themhave served as barriers to the growth of exports. The recent developments related to these mechanisms are discussed below.First, a Presidential Decree in 1992 imposed tariff barriers on exportedforest products. A few products such as chip and hardwood pulp logs areexempt from export tax. The export taxation system set forth a taxamount in ECU (European Currency Unit) for the export of a ton ofindividual forest products (Table 5.46). 30% of the tax amount is imposedas export tax and the rate was supposed to increase to 50% beginning in1993 (Aral, 1992).162Table 5.46. Tax Amount for Forest ProductsForest Products Tax Amount (ECU/ton)Logs (Softwood) 12Logs (Hardwood) 10Sawn Timber (Primary Product) 20Sawn Timber (End Product) 50Chipboard 5Fibreboard 25Plywood 50Wood Pulp 50Newsprint 74Kraft Paper and Paperboard 53Source: Aral (1992)This export tax system, which is supposed to control exports, does little toinhibit them due to a very low ruble to dollar exchange rate.Secondly, a compulsory sale of foreign currency earnings has beenimposed on all exporters by the same Presidential Decree because of asevere shortage of foreign reserves in Russia. The Russian Central Bank’sOrder No. 7 on 29 June 1992 and Supplementary Order No. 17 on 15September 1992 ruled that 50% of foreign currency earnings should besold to the Russian Central Bank (Yoon, 1992). 30% of them could be solddirectly to the Central Bank and 20% to the domestic foreign currencymarket. Only 50% of the earning remains at the disposal of the exporters.A growing need to secure more foreign reserves may force the Russiangovernment to raise the rate from 50% to 100% (Arai, 1992). This makesit very difficult to increase exports from the RFE. This compulsory sellingmeans a significant loss to exporters by selling and purchasing foreigncurrency at different exchange rates in the domestic market. If thehandling fees charged by banks and the high inflation rate are considered,the loss to exporters becomes larger and the exporting enterprises will beinhibited from exporting.163Thirdly, another non-tariff barrier is the export quota and export licensesystem. Export licenses are issued to regional production associationsbased upon the quotas granted to them by the central government. Thequota is distributed among the enterprises under the productionassociation. JV enterprises can freely export their own production withoutan 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 anexport contract, whether a license will be granted and for the quantitystated in the contract. Forest products, classified as a strategic material,require an additional permit for export. Only a small number ofspecialized organizations can export the items designated as strategicmaterials. Currently, three organizations including Dal’les, and DaPintorgare 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 fallingruble to dollar exchange rate is observed as a measure taken deliberatelyby the Russian government in order to increase exports while inhibitingimports. The export promotion effect which could have been obtainedunder a normal situation, however, is largely offset by the high inflationand the instability prevailing in the transitional Russia.5.6.5. Foreign Investment in ForestryAccording to ROTOBO (1993), out of a total of 445 iv’s registered in the RFEby the end of 1992, 30 were related to forestry investment. The forestrysector represents 7% of total foreign investment in the RFE. This is the164fourth largest sector where the foreign direct investment is involved afterservice, fishery and construction sectors. The investments have beendistributed fairly evenly across the RFE except Magadanskaya Oblast’ andKamchatskaya Oblast’, where only one investment is registered in each.Nearly 50% of the total forestry investment in the RFE is concentrated inboth Primorskiy Kray and Khabarovskiy Kray. In terms of the share offorestry 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)No. of P1’s in the REF Share ofSubregion All Sectors Forestry Sector(%) Forestry Sector(%)Yakutia 24 5 (16.7) 21Primorskiy Kray 168 8 (26.7) 5Khabarovskiy Kray 102 6 (20.0) 6Amurskaya Oblast’ 29 5 (16.7) 17Kamchatskaya Oblast’ 34 1 (3.3) 3Magadanskaya Oblast’ 24 1 (3.3) 4Sakhalinskaya Oblast’ 64 4 (13.3) 6Total(RFE) 445 30 (100) 7Source: 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. Except forthree of them located in Irkutskaya Oblast’, all of them are in the RFE. Allof the Japanese forestry investments are related to sawmilling and aresmall in size. Japanese JV’s are discussed in more detail in Chapter VI.Following the JV Svetlaya, other logging JV’s have been unsuccessfullyproposed in Khabarovskiy Kray. For example, the American WeyerhaeuserCompany has been negotiating since 1990 to set up a JV with Koppinskiy165Lesokombinat (Timber Complex) along the Japan Sea coast of KhabarovskiyKray near Vanino port (RFEU, 1991). The negotiations have beenunsuccessful so far despite the company’s experimental planting of about 1million seedlings grown in Tacoma for regeneration in Khabarovskiy Kray(Bill, 1993). Several other foreign companies, many of them fromScandinavian countries, have been involved in establishing logging JV’s inthe 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 toexport production from the iv’s, especially to the nearby Japanese market.The JV operation in the RFE involves a lot of difficulties as discussed earlyin this chapter. Forestry JV’s, in particular, involving a substantial area oflogging, 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 theproject proposal stage.Opposition by local groups against logging forest resources by foreign iv’sseems to be one of the most difficult barriers for foreign investors toovercome. The root of the opposition is related to Russia’s perception offoreign investment from capitalist countries. Russians traditionallyperceive foreign businessmen as coming to Russia to take profits and leavethe country. This xenophobic view of foreign investment is more deeplyrooted in natural resource industries like logging, since natural resourcesare one of the few productive resources under full control by Russiacompeting with foreigners (Sheingauz, 1993).166In addition to the negative views on foreign investment, the local forestindustry, which has been in operation for many years in the RFE, offerspotential competition to the JV’s. An industry with vested interests incontrolling forest resources is reluctant to allow foreigners to make profitsby exploiting the same resources. Exporting forest products to a thirdcountry 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 whyWeyerhaeuser’s plan to export their production to Japan would be opposedby both local and regional communities. This xenophobic attitude towardsforeign investment are largely related to the natural resource illusion,which is a belief that an ample stock of natural resources is what makes acountry rich and its products competitive (Ohmae, 1990). Such an ideaonly supports economic nationalism and helps keep the country’s economymore isolated from the global economy.5.6.6. Recent Developments in the Industrial OrganizationsSince the break-up of the former Soviet Union, the forest industry in theRFE has been restructured toward exercising more autonomous power onexports and investment decisions than ever. The emergence ofDal’exportles and DaPles is a good example. These new organizations havereplaced the monopolistic role that the Exportles of the former centralgovernment played for exporting forest products. Now the regional andlocal organizations participate in forming iv’s. Primorsklesprom at theterritorial level and Terneiles at the district level take part in the IVSvetlaya as Russian partners. Recent developments in these organizationsare discussed in the following.167There were about 160 enterprises in the RFE which were under the directcontrol of the former Soviet Federal Ministry of Forest Industry. Includedin the enterprises were lespromkhozes, sawmills, furniture factories,plywood mills, pulp & paper mills, machinery shops, constructionenterprises, maintenance shops and so on. These enterprises constitutedthe main part of the forest industry in the RFE. In the middle of theadministrative reform process, most of these enterprises joined in thenewly created Dal’exportles and DaFles. These two organizations coordinateraw 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 districtforest products exporters in the RFE and Siberia, including Dal’lesprom andUrgalies in Khabarovskiy Kray and Primorsklesprom and Terneiles inPrimorskiy Kray. Dal’exportles is involved in importing and exportinggoods and services, international market research, and coordinating theparticipating enterprises to produce a uniform action plan. DaPexportlesdeals with about 20 items of forest products such as logs, lumber, panels,plywood, pulp, paper and other intermediate wood products.DaPles has been established as a joint-stock company6and has a greatervariety of participating companies than does Dal’exportles. The participating enterprises under this organization include not only forest enterprises6 A joint stock company is a company formed to buy out the large scale state-ownedenterprises in the privatization process. The terms of the buy-out are negotiatedbetween the enterprise’s privatization committee and the Committee for theManagement of State Property. The price is negotiated, as well as the percentownership split between the labor collective, its management, the government’sproperty fund, and the general public. In certain sectors of industry, thegovernment will retain the majority share of the enterprise. In some cases, theproperty fund will hold all the shares of a “newly privatized enterprise,” then offerthese shares to management and labour, then to the general public by auction.Privatization vouchers can be used to buy shares of enterprises (Karp, 1992).168such as lespromkhoz but also shipbuilding enterprises, river-shippingenterprises, and even Exportles, the exporting arm under the formerSoviet Federal Ministry of Forest Industry. This organization undertakes awhole variety of businesses: exporting forest products; importingmachinery, equipment, farm machinery, and consumer goods; investmentin iv’s; technology transfer; construction contracts; and even tourism.Dal1es accounted for 62% of total log exports from the RFE in 1991, 55% ofsawn timber and 44% of chip exports (Arai, 1992).The current privatization process is bringing more changes in the organization of the industry. The main feature of the privatization is thetransformation of the former national enterprise into joint-stock company.Dal’lesprom and Primorsklesprom are now joint-stock companies and theenterprises under the associations have turned into shareholders. Many ofthe enterprises previously under the association have withdrawn from itand 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’èxpordesand invested in DaPles to be a share holder of the company.Many enterprises formerly connected loosely to the associations, forexample, furniture mills and vehicle maintenance shops underPrimorsklesprom, have separated from the association and formed theirown joint-stock companies. Some open joint-stock companies haveaccepted investment by other companies which had no relations with thecompany. For example, Dal ‘lesprom keeps most of the participatingenterprises as share holders of the joint-stock company but accepted nonparticipating enterprises as shareholders too. For example, Dal’exportlesand Dal’les invested in it. Sister companies or subsidiary companies are169also formed by the investment of existing companies. As another example,both DaPlesprom and Dal’exportles established the joint-stock companyLesnoi-auction, which sells hardwood deciduous species7by auction.Primorsklesprom has 4 sister companies. According to the USSR-NorthKorea Forestry Agreement, the nine lespromkhozes in Urgalles areexempted from privatization.Numerous joint-stock companies have been created in the process ofprivatization. One thing to note in the process is the response to privatization. Two kinds of response seem to appear: one tends to be stronglyindependent, while the other does not. The first is initiated either by theseparation from the previous connection or by groups of employees of theenterprise. It is also motivated by the benefits from privatization such asautonomous use of profits including foreign currency earnings. The secondkind of response reflects a preference to stay within an umbrellaorganization such as DaPexportles and Dal1es. Such a reaction is largelymotivated by a fear of losing connections with the umbrella organizations,which still own the experience, personnel, administrative power, andknow-how of the business with western countries (Arai, 1992).5.7. SUMMARY AND DISCUSSIONThe resources in the RFE offer a great opportunity for foreign investors inforestry. Although there are modest views on the potential of the forestresources in the RFE, the RFE is undoubtedly has a great potential forforestry from the point of view of foreign investors, especially those fromresource poor countries. To them it is a matter of realization of thepotential through investment. So far the RFE is the most isolated region in7 Included in this species are ash, oak, and stone birch.170Russia but is opening up to the outside in an effort to become integratedinto the Asia-Pacific economy and has increased external economicactivities with neighbouring countries. Foreign investment was allowed topromote regional development through capital and technology brought inwith the investment. For this, the government has legislated somepreferential measures to attract foreign investment. The preferentialbenefits, however, are not attractive compared to those offered by othercountries, and even the existing ones have been offset by the worseningdomestic economic conditions. Overall, the environment has not been fullyprepared for foreign investors to actively engage in productive activities inthe RFE. The political and institutional instability adds to the unattractiveinvestment environment. Forestry investments have continued in thisenvironment with a common motivation to export the production. Thisexport motivation has invited opposition from various local groups andcompetition from the indigenous forest industry, which has been longestablished in the region. This opposition and the competition from thelocal community is considered to be one of the hardest barriers forforestry investors to overcome.171CHAPTER VIJAPAN: THE FIRST COMER, MAJOR EXPORT MARKETAND COMPETITOR6.1. RUSSIAN LOGS IN THE JAPANESE MARKETThe wood supply structure in Japan is somewhat similar to the one inKorea. There is a heavy reliance on imports, the same import sources, asimilar distribution of import shares among the major supply sources, anda similar trend of changes in their shares. Japan, however, has a muchlarger domestic forest resource base than Korea, and the consumption rateis much greater than that of Korea, mainly because of the different wooduse patterns in the two countries. About half of Japanese houses are builtby wood whereas almost all houses are constructed of concrete and bricksin Korea.The wood supply in Japan was about 114 million m3 in 1991. The averageannual wood supply in Japan first reached 100 million cubic metres in1970 and was maintained at over 100 million cubic metres throughout the1970s, except for 1975. The demand for wood dropped to 90 million cubicmetres from 1981 to 1987 mainly because of the log export ban byIndonesia in 1980. But the supply returned to the 1970s level after 1987mainly because of the appreciation of the yen. Imports have been themain source of timber supply in Japan since 1968. The share of importsrose from 46.7% in 1968 to 75% in 1991. This increasing import shareresulted mainly from diminishing domestic production which was due to ashortage of forest workers, poor ownership structure of forest land andlow level of mechanization in forest operations (Forestry Agency, 1993).172The share of domestic wood supply has dropped gradually over time(Table 6.1). This is quite a contrast to the government efforts to increasethe self-sufficiency rate. The Japanese government planned to increasethe rate from 37% in 1984 to between 40% and 43% by 1994, and tobetween 43% to 48% by 2004 (Ministry of Agriculture, Forestry andFishery, 1987). The wood supply pattern in Japan, however, is likely tocontinue in favor of imports for a while, unless the wood price ininternational markets rises to a level comparable to the high domesticproduction cost (Araya, 1993).Table 6.1. Wood Demand and Supply in JapanSupplyYear Demand Domestic Imports Self Sufficiency Ratemillion m3 (%)1968 91.8 49.0 42.8 53.31970 102.7 46.2 56.4 45.01975 96.4 34.6 61.8 35.91980 109.0 34.6 74.4 31.71985 92.9 33.1 59.8 35.61986 94.5 31.6 62.9 33.51987 103.1 31.0 72.2 30.01988 106.3 31.0 75.3 29.21989 113.9 30.6 83.3 26.91990 111.2 29.4 81.8 26.41991 112.2 28.0 84.2 25.0Source: (Linsan Gyoosei Kenkyukai, 1992)A large part of the wood demand in Japan is derived from lumber andplywood production for housing construction. Every year for the last 10years there were about one million new housing starts, and about half ofthem used the traditional Japanese style of wooden housing (Ministry ofConstruction, 1992). This situation has made Japan the world’s largestwood importing nation. Japan’s share in world imports was 26% in logsand lumber and 43% in logs in 1988 (Linsan Gyoosei Kenkyukai, 1989).173Japan has had a well established forest product industry in itself anddeveloped its own dimensional system for cutting timber. For suchreasons, Japan always preferred to import logs to be processed into lumberin order to cut them to their own traditional sizes for housing construction.Japan has imported from all available sources from both sides of thePacific. The importing sources can be divided into 5 groups: SoutheastAsia, 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 twomajor sources: Southeast Asia and North America. Logs from SoutheastAsia have gradually decreased in this period while North American logimports have increased, but they showed a downward trend in recentyears. 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 recentyears. Chile also has exported more lumber than logs and has become thesecond 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 logsimported to Japan in the last 10 years. Both Russian logs and lumber havebeen supplied to Japan in a very stable manner compared to the othersources. Russian logs show the least fluctuation in supply among theimport sources. Its share in total logs and lumber imports has been almostfixed at 19% and 3% respectively. Russian logs play the greatest role interms of their contribution to stabilizing the softwood log supply (Table6.2). Although the import of Russian logs showed a downward trend in174recent 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 JapanYear Southeast- North NewAsia America U S S R Zealand Chile Total1,000m3 (%)(Logs)1983 13,879(47.7) 8,244(28.4) 6,410(22.0) 318(1.1) 220(0.8) 29,071(100)1984 12,943(47.1) 8,149(29.6) 5,750(20.9) 290(1.1) 353(1.3) 27,485(100)1985 13,001 (46.1) 8,993(31.9) 5,550(19.7) 288(1.0) 379(0.9) 28,211(100)1986 12,131(42.2) 9,632(33.5) 6,432(22.4) 264(0.9) 270(0.8) 28,729(100)1987 13,688(42.9) 11,466(35.9) 6,114(19.1) 411(1.3) 251(0.4) 31,930(100)1988 11,655(41.1) 10,246(36.1) 5,820(20.5) 555(2.0) 110(0.3) 28,386(100).1989 12,560(41.3) 11,827(38.8) 5,242(17.2) 725(2.4) 90(0.3) 30,444(100)1990 11,102(39.8) 10,548(37.8) 4,841(17.4) 1,341(4.8) 70(0.3) 27,902(100)1991 10,115(39.9) 9,319(36.8) 4,303(17.0) 1,604(6.3) 8(0.03) 25,350(100)1992 9,969(39.8) 8,977(35.9) 4,268(17.0) 1,812(7.2) 10(0.04) 25,036(100)(Lumber)1983 613(15.3) 2,966(74.3) 124(3.1) 264(6.6) 26(0.7) 3,994(100)1984 596(16.1) 2,750(74.1) 142(3.8) 159(4.3) 62(1.7) 3,709(100)1985 922(20.9) 3,116(70.5) 154(3.5) 125(2.8) 101(2.3) 4,417(100)1986 849(18.5) 3,331(72.4) 151(3.3) 118(2.6) 151(3.3) 4,600(100)1987 1,274(20.4) 4,441(71.2) 177(2.8) 135(2.2) 207(3.3) 6,233(100)1988 1,522(21.3) 4,949(69.4) 228(3.2) 112(1.6) 318(4.5) 7,129(100)1989 1,736(20.9) 5,874(70.9) 262(3.2) 113(1.4) 304(3.7) 8,289(100)1990 1,274(16.2) 5,722(72.7) 264(3.4) 205(2.6) 409(5.2) 7,875(100)1991 1,203(14.8) 6,025(74.2) 250(3.1) 241(3.0) 401(4.9) 8,120(100)1992 1,197(14.9) 6,142(76.3) 222(2.8) 234(2.9) 258(3.2) 8,052(100)Source: Linsan Gyoosei Kenkyukai (1992).Although their share is small, the role of Russian logs in the Japanese softwood market is likely to grow, because a substantial decrease in logimports from the United States is expected due to environmental problems.When log imports begin under the 4th KS agreement (see below) the roleof Russian logs will be even greater in the softwood log market in Japan.F,/I/1756.2. FOREST PRODUCTS TRADE WITH THE USSRJapan is the only capitalist country in the Asian-Pacific region which was amajor trading partner to the former Soviet Union. Japan’s experience isparticularly important to Korea, which has been following along a similareconomic development path as Japan.Early Japanese trade with the RFE dates back to the 18th century(Mochizuki, Chichkanov and Minaldr, 1988). The trade largely remainedmodest and on a private level, however, until the post-war restoration ofdiplomatic relations in 1956. The groundwork for large scale and long-term cooperative projects between the two countries was laid when theJapanese-Soviet Economic Committee was established in 1965. After this,Japan increased its trade with the former USSR and became the mostimportant trading partner to the country in the Asian-Pacific region.One of the strong motivations for Japanese industries to become interestedin the RFE at that time was to secure energy and raw materials suppliesthat were required for the rapidly growing post-war Japanese economy.The structure of the trade was naturally characterized by Japanese importsof raw materials from the RFE and exports of machinery and equipmentneeded for resource development in the RFE and Siberia. Table 6.3 showsgeneral commodity trade with USSR since 1960.Forest products have been a flag-ship item in Japanese imports from theUSSR. They accounted for 4 1.1% of total Japanese imports from thatcountry in 1970.176Table 6.3. Japan’s General Commodity Trade with USSRYear Total Exports Imports Balance(US$1,000)(USSR)1960 147,001 59,976 87,025 -27,0491965 408,556 168,358 240,198 -71,8401970 821,970 340,932 481,038 -140,1061975 2,795,818 1,626,200 1,169,618 456,5821980 4,638,099 2,778,233 1,859,866 918,3671981 5,280,121 3,259,415 2,020,706 1,238,7091982 5,580,858 3,898,841 1,682,017 2,216,8241983 4,277,250 2,821,249 1,456,001 1,365,2481984 3,912,301 2,518,314 1,393,987 1,124,3271985 4,179,838 2,750,583 1,429,255 1,321,3281986 5,121,580 3,149,547 1,972,033 1,177,5141987 4,915,138 2,563,284 2,351,854 211,4301988 5,895,660 3,129,901 2,765,759 364,1421989 6,086,203 3,081,067 3,004,527 76,5401990 5,917,859 2,563,677 3,354,182 -790,5051991 5,430,542 2,113,711 3,316,831 -1,203,120(RFE)1992 885,800 227,600 658,200 -430,600(16.3%) (10.7%) (19.8%) (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 conUnuedto be the largest share among Japanese imports from the USSR (Ogawa andMurakaint, 1991). Forest product imports from Russia were dominated bylogs. Processed products comprised only 5% of total forest productimports. Of total imports for the 10 years between 1983 and 1992,softwood sawlogs accounted for 74.2%, followed by hardwood sawlogs13.6%, 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 - 1992)Softwood (96)Sawlogs Pulpwood Lumber Others Hardwood Logs (%) Total74.2 7.2 4.9 0.1 13.6 100Source: JAWIC (1993)177The major species imported to Japan are spruce, fir, larch, European pineand Korean pine. Spruce and fir account for 48% and 45% respectively ofthe imports of softwood sawlogs and pulpwood logs. Larch is the secondmost important species in the sawlog imports, and represents 45.1% ofpulpwood log imports. In the case of lumber imports, spruce and fir aredominant 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 andLumber Imported from the USSR( 1983 - 1992)Species Sawlogs Pulpwood Lumber(%)spruce/fir 48.0 45.0 41.8larch 33.0 45.1 18.1E. red pine 14.1 3.0 25.4Korean pine 4.9 6.9 0.7Others - 14.0Total 100 100 100Source: JAWIC (1993)As mentioned in Chapter V, the forest product trade was monopolized byExportles during the Soviet period. Three different forms of trade wereconducted with Japan under Exportles. The first is normal trade basedupon Trade and Payment Contracts as in other commodity trading. Thesecond is a compensatory arrangement known as the KS agreement. Thethird is border trade carried out by Dal’intorg (literally Far EasternTrading) in Nakhodka. The shares of these three forms of trade havevaried over the years, but in 1980 they were 57%, 29% and 9% of totaltimber imports to Japan (Nomura, 1988). Since the KS agreements havebeen one of the most typical forms of trade in forest products between178Japan and the USSR and constitute a centerpiece of Japanese experience offorest product trade with the USSR, they merit an extended discussion.6.2.1. KS1 AgreementsKS agreements are compensatory trade arrangements, an advanced form ofbarter trade in which the investor provides machinery and equipment fora project and shares the project output with the resource owner. This formof trade arrangement is most commonly found in the natural resourceindustry, where a large amount of capital investment is required todevelop natural resources but the resource owner is not in a position toafford the capital required. Besides the KS agreements, two othercompensatory agreements were signed to import industrial chip andhardwood pulpwood from the Soviet Union in 1971 and 1985.There have been four KS agreements, the first in 1968 and the most recentin 1991. Despite the successful completion of the first KS agreement, manyproblems arose during successive agreements. Forest products importsfrom the USSR stagnated in the 1980s. Imports fell below the contractedamounts. Since forest products were the major component of trade, theoverall trade with the USSR similarly stagnated. Disillusionment with theUSSR also began to spread among Japanese industrial circles.The rest of this chapter will be spent on discussing the changes in Japanesetrade relations with Russia over the last two decades with an emphasis onforest products trade with the RFE. The discussion first explores the major1 The KS agreements were named after the initials of the two principal negotiators,Kawal from Japan and Sedov from the USSR179terms and conditions of the four KS agreements and then examines theproblems revealed during successive KS agreements. Finally, incentivesand constraints which have promoted and hindered Japanese-Soviet traderelations are discussed. This latter part of the discussion includes not onlyfactors affecting the forest products trade, but also those affecting traderelations between the two countries in general.6.2.2. First KS AgreementThe first KS agreement was signed on 29 July 1968 between Exportles ofthe USSR and KS Industry Limited Company, which was specially formed torepresent 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$133miffion 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 ofbank credit would be provided for the purchase of consumer goods oneyear later. Japan would export US$133 million worth of plants andmachinery for exploiting forest resources along the Amur River, and inreturn it would import 7.6 million cubic metres of logs and 420,000 cubicmetres of lumber from the USSR.Actually, more than 95% of the contracted plants and machinery wereexported to the USSR. Nearly all the logs contracted were imported during180the contract period, but only 60,000 cubic metres out of the intended420,000 cubic metres of lumber were imported during the period.All the imported logs were exclusively distributed among the companiesparticipating in the KS Industry Company Limited. Exports of plants andmachinery, however, were open to other companies with the consent of theKS Industry Company Limited.6.2.3. Second KS AgreementAs the success of the first KS agreement was confirmed, the generalagreement for the second KS agreement solidified. Although differingviews on credit arrangements and the procedures for setting log pricescaused some delays in the finalization of the agreement, it was signed on30 July 1974, within a relatively short period of time after the firstagreement ended.According to the agreement, between 1974 and 1978 Japan was to providethe Soviet Union with a 162.6 billion Japanese yen (US$500 million dollars)bank loan for purchasing plants, machinery and log transporting vesselsnecessary for forest development. Of this, 14.8 billion Japanese yen(US$50 million) was for purchasing consumer goods. In return, the SovietUnion was to supply Japan with 17.5 million cubic metres of logs and 0.9million cubic metres of lumber for the period between 1975 and 1979.Although the second KS agreement was in most respects the same as thefirst, one noticeable difference was in the loan arrangements. For the firstKS agreement, suppliers provided the loans in cooperation with Japanese181banks, including the Export-Import Bank. This system is known as asupplier’s loan. For the second agreement, bank loans were arranged.During the second KS agreement period, plant and machinery exports tothe Soviet Union went up, but Japanese imports of Soviet logs declined,compared to the first period. Only 83% of the contracted logs weredelivered (Ogawa and Murakami, 1991). The demand for Soviet logs in theJapanese market had not grown, and the Soviet capability to supply logs toJapan also reached its limits during this period. As a result, the second KSagreement led to an increase in Japanese machinery exports to the SovietUnion, but did not help to increase timber imports.6.2.4. Third KS AgreementThe economic sanctions in the wake of the Soviet invasion of Afghanistancaused delays in opening negotiations for the third KS agreement. It wasalmost two years after the second agreement term ended in 1981 that thethird KS agreement was signed.Under the third KS agreement, Japan was to provide the Soviet Union with200 billion Japanese yen, or US$550 million, worth of bank loans for thepurchase of plants and machinery required for forest developments in theSoviet Far East and along the BAM railway for the period from 1981 to1985. In return the Soviet Union would provide Japan with 12 millioncubic metres of logs and 124,000 cubic metres of lumber between 1981and 1988.182In 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 wasshipped to Japan during the period.6.2.5. Fourth KS AgreementThe fourth KS agreement was finally signed on 11 October 1991 aftermany unsuccessful negotiations. Under the agreement Russia will beprovided with US$700 million worth of machinery in return for 6 millioncubic metres of logs for the five year period from 1992 to 1996. The logswill be exported at the rate of 1.2 million cubic metres a year, and 5% is tobe pulpwood. In addition, 0.4 million cubic metres of lumber, 50,000 cubicmetres of furniture parts and 10 million square metres of veneer will beexported to Japan during the same period.One noticeable difference in the 4th KS agreement from the previous threeagreements is the export of a high proportion of non-forestry machineryby Japan. Among the Japanese machinery exports, logging machineryaccounts for only 50%, wood processing plants including furnituremanufacturing machinery for 30%, and medical and office equipment for20% (Kakizawa, 1992a). The main contractor of Russia has changed fromExportles to Dal’exportles. Despite the signing of the general agreement in1991, details of the agreement have not yet been settled at the time ofwriting this dissertation. No imports to Japan have been carried out by theagreement for more than two years since it was signed. A summary of thefour KS agreements is presented in Table 6.6.183Table 6.6. Summary of the 4 KS AgreementsMajor Terms, Conditions First Second Third FourthWhen signed 1968.7 1974.7 1981.3 1991.10Contract Period 1969-1973 1975-1979 1981-1986 1992-1996(5 yrs.) (5 yrs.) (6 yrs.) (5 yrs.)Loan Amount (US$ 1 million) 163 500 1,000 700Machinery & Plants contracted 155 507 1,100 -(US$ 1 million)Machinery & Plants Exported 149 507 1,100 -(US$ 1 million)Logs Contracted (mu m3) 7.60 17.5 12 6Logs imported (mu m3) 7.57 14.58 8.92 -% of the contracted (%) 99.6 83 74 -Lumber Contracted (000 m3) 420 90 1,240 400Supply period (1971-73) (1975-79) (1982-86) -Lumber imported (000 m3) 60 0 200 -% of the contracted (%) 14 0 16 -Source: Compiled from Kakizawa (1 992a), Ogawa and Murakami (1991), and Stolyarovand Pevzner(1986)6.2.6. Industrial Chip and Hardwood Pulpwood ProjectsBesides the KS agreements, two other compensatory agreements weresigned for Japan to import industrial chip and hardwood pulpwood logs in1971 and 1985 respectively. According to the first agreement, Japan wasto provide the Soviet Union with US$45 million worth of loans, at 6%interest with a 12% advance payment. This would finance the purchase ofmachinery and equipment to the same value, needed for processing chipand logging pulpwood. In return the Soviet Union would provide 3.65million cubic metres of chip and 2.7 million cubic metres of pulpwood logsfrom 1972 to 1977, and 4.4 million cubic metres of chip and 2 millioncubic 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 supply1848.2 million cubic metres of industrial chip and three million cubic metresof pulpwood to Japan during the 10 years from 1986 to 1995. Theindustrial chip were to be delivered at the rate of 0.6 million cubic metresin 1986, an additional 50,000 cubic metres a year for the following 5years, and one million cubic metres a year from 1994 to 1995. Plants andmachinery necessary for the chip and pulpwood production would besupplied to the Soviet Union on a cash basis during the five years from1986 to 1990. The plants and machinery included harvesters, bulldozer-tractors, logging trucks, chip carriers, chain saws, chip production facilitiesand buildings, manipulators, and barkers. The major terms of theindustrial chip and pulpwood agreements are shown in Table 6.7.Table 6.7. Summary of the Industrial Chip and Pulpwood AgreementsMajor Terms and Conditions First SecondSigned on Dec. 18, 1971 Dec. 5, 1985Suppliers’ Credit (US$1 mu.) 45Credit Conditions:Advance Payment 12%Interest Rate 6%Delayed payment 6 yearsJapanese Exports:Chip Production plants, equipment, materials plants, equipment andfacilities and chip carrier(1972-1974) materials (1986-1995)Consumer goods (US$ 1 million) 5Japanese Imports:Hardwood Pulpwood (1 millionm3) 4.7 3Industrial Chip (1 million m3) 8 82Supply Period 1972-1981 1986-1995Source: Ogawa and Murakami (1991)Japan experienced a lot of problems in dealing with the Soviet Unionthrough the series of compensatory agreements. The problems largelyinvolved the prices and quality of logs imported. The Soviet Union firstentered into export contract arrangement at a very low price to attractcapital investments and then attempted to renegotiate the price to reflect185the international market price with marginal differences even during thecurrency of the contract period (Mathieson, 1979). Barr and Braden(1988) mention that the rising price of Soviet logs and fluctuating demandfor wood products in Japan also contributed to the difficulties in creatingstable contract arrangements between the two countries.The quality of logs was related to the species of imported Russian logs andthe Soviet grading systems. Japan received too many logs of the less-preferred larch species in their shipments due to an inferior log gradingsystem which resulted in undesirable logs being shipped to Japan undetected and then regraded after arrival in Japan (Barr and Braden, 1988;Fenton and Maplesden, 1986). In addition, because of the widely differingviews on contract terms and conditions experienced every time the sidesrenegotiated, the KS agreements failed to satisfy one of the main motivations of such contractual arrangement, a long-term security of log supply.Japan became largely disillusioned with log trade with Russia. Since logswere the centrepiece of the trade between Japan and the USSR, it isnecessary to discuss the factors involved in the general trade relations,which will further explain the Japanese experience with the Soviet FarEast.6.3. INCENTiVES AND CONSTRAINTS INVOLVED IN TRADE WITHUSSRIt was in the late 1960s that Japan increased its trade with the formerUSSR and became the most important trading partner to the Soviet Unionin the Asian-Pacific region. Initial trade was with forest products and theyhave been the most important trade items ever since. There have beenups and downs in the economic relations, however, and a variety of factors186have been involved in shaping the relations. The rest of this chapterdiscusses the incentives that triggered the opening of the large-scale forestdevelopment projects in the late 1960s and the reasons behind thestagnation of trade in the 1980s. Since it is impossible to separate entirelythe forest products trade from the overall trade relations between the twocountries, the following discussion is not restricted to forest products butconcerns itself with all commodity trade.Since trade is a two-way relationship, one side’s incentives can be theother’s constraints or vice versa. Moreover, incentives at one time maybecome constraints at another time according to the changes in theeconomic and political environments. The incentives and constraintspointed out here are those lasting over a period long enough tocharacterize the relations between the two counthes.6.3.1. IncentivesSeveral incentives were involved in shaping the trade relations with theUSSR: geographic proximity, complementarity through different resourceendowments, rising domestic demand for raw materials and energy as aresult of rapid economic development, security of raw material supply,market expansion in the Soviet Far East, easing the regional disparityproblems, 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 ofChina. This geographic proximity has encouraged exchanges between thetwo counthes from early days and seems to have been one of the strongestincentives to opening full scale trade relationships with the Soviet Far East187in the late 1960s. Geographic proximity meant an access to the naturalresources prevalent in the Soviet Far East.There was a widely held perception that complementary economicrelations could be established between the resource industries in theSoviet Far East and the manufacturing industries in Japan. This perceptionhas largely promoted the trade between the two countries and takesadvantage of the complementarity (Dienes, 1987).In the 1960s, when the export-oriented Japanese economy was growing ata rapid rate, the main industries supporting such growth weremanufacturing industries which imported foreign resources and exportedthem after processing. As the economy grew, the reliance on foreigntimber also rapidly increased from 12.1% of total timber consumption in1960 to 48.8% in 1970 and 56.3% in 1980, and then slightly declined to53.9% in 1988 (JETRO, 1991). Japan had to secure its raw material supplysources as well as export markets. From this point of view, the Soviet FarEast emerged as a potential new resource supply source to Japan in the1960s, when Japan’s trade development with China was progressing slowlyand possible threats to supply existed in the old resource supply sources.As the domestic demand for raw materials rose, the security of theirsupply became an important issue. Being poorly endowed with naturalresources, Japan has an extremely fragile energy and raw material supplystructure. Its reliance on foreign energy sources is particularly heavy. Asits economy grew, the share of foreign supply went up from 44% in 1960to 90% in 1973, before the first oil crisis (JETRO, 1987). Although anintensive energy conservation program and the development of energysaving technology helped cut down the foreign energy supply ratio, it still188remained high at 83.5% in 1984 and 83.1% in 1989 (JETRO, 1991). Japan isalmost entirely dependent on foreign sources for petroleum oil, with a99.8% dependency ratio in 1989 (JETRO, 1991). Wood is no exception fromsuch heavy reliance on foreign supply. The share of imported timber hasincreased 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). Allof 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 andindustrial goods by Japan when that country began to increase its tradevolume in the early 1970s. The expansion of Japanese sales in the SovietFar 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 theregional development perspective. Regional development in Japan hashistorically focused on the eastern coast of Honshu (the main island),whereas the development of the west coast has been retarded. Partlyresponsible for the disparity in regional development is the fact that apowerful government has been centered in Tokyo since the early Meiji erain the late 19th century (Toma, 1991). This bias in regional developmentpolicy reached its peak when export-oriented industrial complexes beganto be built along the Pacific coastal belt from the early 1960s onwards(Toma, 1991). As a result of that policy, rapid industrialization and urbanization took place mainly in large cities in the eastern coastal region. Inthe late 1960s many social problems resulting from such a rapidindustrialization and regional disparity brought public anxiety and apprehension about the country’s future (Tanaka, 1972). Promoting trade withthe Soviet Far East was suggested as one possible solution to these189problems. This has further evolved to what is now the idea of the JapanSea Rim Economic Bloc.Politics also played its role in determining the scope and depth of therelations between Japan and the Soviet Union. Japan outwardly tried tokeep politics separated from economic matters when dealing with theUSSR. In reality, the opposite was the case. Japanese interests in theSoviet Far Fast were very much influenced by political motivations. Japanexpected that improved trade relations could help to get the disputedNorthern Islands off Hokkaido back into Japanese hands. In return for theimproved economic relationship, more favorable fishing rights in Sovietterritorial waters were also expected by the world’s largest fish-eatingcountry.6.3.2. ConstraintsJapanese trade with the USSR was hindered by the government’s strongdiplomatic position on territorial issues with the USSR, the country’s effortsto diversify resource supply sources, species and quality problems in logtrade and finally the changed economic situation in Japan.The Japanese government outwardly attempted not to intervene inJapanese companies’ commercial interests in the Soviet Union. In fact,however, it linked Japan-Soviet economic cooperation with the NorthernIslands problems. Japan always put territorial issues first in its dealingwith the Soviet Union, regardless of whether the items for negotiationwere economic or diplomatic (Oda, 1985). The development of active traderelations was hampered by the government’s attitude. Since the Japaneseeconomy was known to be run by a strong interventionist government,190Japanese business circles took a less positive posture toward trade withthe Soviet Union. Even the industries relying on foreign raw materialstended to lack enthusiasm. Moreover, there existed no unified voice tosupport the business relations with the Soviet Far East. This diplomaticposition became one of the main reasons for Japanese companies to take aless positive posture vis-a-vis the Soviet Union during the contractarrangementsCompetition with other foreign resource regions and the government’sdiversification efforts also contributed to inhibit the trade with the SovietFar East. These other raw material suppliers included countries in NorthAmerica, Southeast Asia and Australia. Although located at a greaterdistance, these were the sources readily and easily accessible to Japan.They were also more flexible to the changes in raw material demands inJapan than the Soviet Union. Furthermore, the East-West Cold War wasstill very much in place and tended to make them more attractive sourcesthan the Soviet Far East. The species and quality of logs as mentionedearlier are also partly attributed to inhibiting the trade.Another important constraint that deserves to be mentioned is the neweconomic environment in Japan, which has been shaped over the years.Under the new economic environment in Japan, the industries have beenrestructured to consume less raw material than they did before.Japan has achieved one of the world’s fastest growing economic developments in a condensed period of time, especially in the post-war period. Thehigh growth economy in the 1960s and 1970s, however, experienced aninevitable transition to a slower, steadier development after two energycrises and the steady appreciation of the yen.191In addition to the broad structural change from primary to secondary andtertiary industries (Table 6.8), a structural change in a narrow sense alsotook place among manufacturing industries.Table 6.8. Changes in Industrial Structure in JapanIndustries 1970 1980 2000(forecast)(Share of GNP:%)Agriculture, forestry & fishery 6.1 3.7 2.1Manufacturing 39.7 42.3 46.1Service 54.3 54.0 51.8Source: Anon. (1988)The industries with heavy use of raw materials began to be replaced bythose with less raw material use. As a result, a structural realignment ofindustry began by focusing industrial efforts more on light, thin, short andsmall products instead of traditional heavy, thick, long, and large products(JETRO, 1991). Japanese efforts to reduce reliance on raw materials is wellreflected in the changes in the share of wood products in the imports fromthe USSR (Table 6.9).Table 6.9. Share of Wood Products in the Imports from the USSRProducts 1975 1982 1984 1988 1990(96 of total imports)Logs 27.6 25.0 24.1 - -Sawn Timber 25.1 20.9 20.1 - -Total 52.7 45.9 44.2 21.8 20.7Source: Anon. (1988)192At the same time as the industrial restructuring, a change in the complementary relationship with the USSR also took place. While Japan’s dependency on the RFE as a wood products supply source has graduallydecreased, the share of machinery and equipment in the USSR’s importfrom Japan has largely remained unchanged (Smith, 1987). This explains aweakening 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 RFEAfter the Soviet central planning system collapsed, the value of compensatory agreements seemed largely to be eroded in Japan. Under thecentral planning system, foreign trade was strictly monopolized and fewalternatives were available to the importers of Soviet products. Nowforeign trade is open to anybody who wishes to take part in Russia.Although the forest products exports are being conducted by a smallnumber of organizations in the RFE, importers now can choose their ownpartner among them for their best interest. Moreover, a more active formof economic relationship with Russian partners has become possiblethrough direct investment in the RFE. For these reasons, the type ofcompensatory agreement represented by the KS agreements has becomean old style of trade now and less favored by the large trading companieswhich formerly were involved in the KS agreements. In fact, Mitsui & Co.,Ltd. and Sumitomo Corporation, former members of KS Industry, havediscontinued their membership for the 4th KS agreement (Nakazawa, 1993and Tomita, 1993). Furthermore, the KS agreement is not attractive anymore to the Japanese log importers for its inflexibility to the market193conditions. Within the KS system, the imported logs and lumber have to bebought by the KS member companies at prefixed prices and quantityregardless of whether the international market conditions which couldoffer 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 companyimporting forest products and at the same time a manufacturer ofmachinery and equipment for forestry development. Contributing to thesecurity of timber supply in Japan by increasing imports from the USSRwas one of the main motivations of the early KS agreements. Thecompanies were also greatly motivated to promote the seffing of their ownmachinery and equipment to the USSR, however, which might becomemore important to them as the agreement continued. Now that theeconomic situations both in Japan and Russia have greatly changed sincethe first KS agreement, many of the incentives which initially motivatedthe member companies to stay with the agreement, have vanished.Foreign investment has emerged as a new aspect of trade and economicrelations 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 areasthat Japanese investment is directed towards in the RFE together withfisheries. Currently eight Japanese-Russian JV’s are in operation, three inIrkutsk, three in Khabarovskiy Kray, and two in Primorskiy Kray. All theJV’s involve lumber production and export most of the production from theiv’s. For details of the individual joint ventures see Appendix VI.194As these JV’s begin to operate to their capacity, they are expected tocontribute to Japan’s increased imports of Russian lumber. The exports bythe first Japanese-Russian JV Igiruma-Tairyuku already account for onethird of the total Japanese imports of Russian lumber. The lumber importsto Japan from these 8 joint ventures will be about 100,000 cubic metres in1994 and will be increased up to 300,000 cubic metres (Nikkan MokuzaiShinbun, 1993).A significant improvement in the quality of the exported lumber isexpected due to the technology brought in from Japan by the JV’s. Theimported lumber from the joint ventures will make it easier to debark,regrade, and inspect, preventing inferior quality lumbers from beingslipped 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 inforestry in the RFE has been so far characterized as small in size, andoriented towards saw-milling and export. The political and juridicalinstability mentioned in earlier chapters can equally apply to thecharacteristics of the Japanese investments in the RFF. The prudenceentrenched in the decision making process of Japanese companies maywell disallow a more active investment in the RFE under the currentsituation. These characteristics have made some of Japanese investmentssuccessful compared to other country’s. The Japanese-Russian saw millingjoint 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 theterritorial problems over the Northern Islands mean that matters remain195much as they were before. The individual companies perceive theproblem somewhat differently, however, under the current situation,where the acceptance of FDI has put business activities on a moreindividual-company footing than in the former USSR period. Theterritorial problem was one of the most important reasons for thecompanies to get involved in the compensatory agreements, whichrequired a large amount of government backed loans. The territorial issue,however, seems to have less influence on Japanese corporations’ currentdecisions on FDI, particularly with respect to small projects. Japanesecompanies are more autonomous in making decisions on investment in theRFE. This is evidenced by investment statistics that shows Japan as thelargest and most active investor in the RFE. Nevertheless, generalcriticisms of inactivity are largely grounded in comparisons withinvestments in other countries, since Japan invests more elsewhere. Thelack of Japanese investment in the RFE, as perceived by other countries,stems from the prevailing instability in Russia rather than the territorialissue, which would not affect the companies’ commercial interests even ifit were resolved.6.5. COMPETITION IN THE REEJapan is the country which has accumulated a good deal of information andknowledge on the RFE from their own trade experience since the late1960s and from earlier researches. For the research related to commercialtrade, ROTOBO (The Japanese Association for Trade with Russia andCentral-Eastern Europe) has been a prominent organization since itsestablishment in 1967.196Japan has also initiated the development of the idea of a Japan Sea RimEconomic Bloc, as mentioned earlier, to support the promotion of economicrelations with the countries surrounding the Sea (Toma, 1991).Japan has long been regarded as the most capable partner for thedevelopment of Siberia and the RFE. Several long-term and large scaledevelopment plans have been drawn up by former Soviet governments toinduce Japanese interest in such development. The Year 2000 plan byGorbachev in 1987 is one of these examples. Japan itself has also believedthat it is the most suitable partner for the technological and capitalrequirements involved in the development projects.For example, the production of a large diameter pipe for the gasdevelopment project in Yakutia requires a highly developed productiontechnology only available in a few countries in the world including Japan(Ogawa, 1993). All of these facts have put Japan in the most competitiveposition in relation with the RFE. In reality, however, disregarding thetechnological advantage, Russia chose Korea as the partner for the projectand the two countries are now under negotiation for a feasibility study.The competitive position of Japan has also been damaged by Korea’sinitiation of forestry development by JV Svetlaya, which is using loggingtechnology imported from Finland.Korea, however, is a much weaker economic power than Japan. If thereexists any competition between Korea and Japan in the RFE, it is transitory,created by Russia overestimating the Korean economy (Ogawa, 1993) or byRussia using Korea to stimulate Japanese interest in the RFE (Manezhev,1993).1976.6. SUMMARY AND DISCUSSIONJapan is the largest consumer of Russian logs. Japan has imported largequantities of logs through compensatory agreements specially arranged tocircumvent the problems of two different economies and to promotemutual benefits. Many of the incentives which opened up the trade withRussia in the 1960s have largely vanished under the new economicconditions in Japan. After FDI was allowed, the value of such trade hasfurther diminished. The new form of trade through FDI suggests a greatpotential for more active and individualized participation in the RFE byJapanese companies. The full potential of FDI, however, has not yetrealized in the region. All the Japanese investments in forestry in the RFEare 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 toKorean investments.198CHAPTER VIICASE STUDY: KOREAN-RUSSIAN FORESTRY JOINT VENTURESVETLAYA7.1. THE JOINT VENTURE1Svetlaya is a 50/50 Korean-Russian joint venture forestry projectestablished on 1 July 1990. The JV Svetlaya is located in a small town ofthe same name in Ternei Rayon2,which is a district in the northeasterncorner 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., wasnewly incorporated at the time the joint venture was established. Thecompany was formed of departments separated from two companies in theHyundai Group: Hyundai Corporation and Hyundai Wood Industries Co.,Ltd. The former is a trading arm of the group and the latter specializes inmanufacturing wood products including popular brands of office and homefurniture for the Korean and overseas markets.The Russian partner, after disintegration of the former Soviet Union,changed to Primorsklesprom, the Forest Industry Association inPrimorskiy Kray and Terneilesprom, a district level forest productionorganization in Ternei Rayon.1 The information on the project is based upon personal communication withHyundai Resource Development Co., Ltd in Seoul, repeated several times from theearly stage of the JV, and the author’s personal site visit to Svetlaya where the iv isbeing 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 r• I Bikin IRaohe.China • •• LesozavodskDalnegorskHulinMishan Cava1evo (Spassk DalnyiArsenevSuifenheUssuriiskHunchun,fNortMap 7.1. Location of iv SvetlayaSource: RFEU (1992a), reproduced with permission200The project site had been an area allocated to a small lespronzklioz underTerneilesprom before the iv Svetlaya was established.The JV project amounts to US$54 million. Hyundai’s investment wasundertaken by purchasing logging equipment and machinery and buildingcamps and offices. As of April 1992, US$40 million had been spent onpurchasing logging machinery, mainly Finnish ‘Finlanp’ feller-bunchers(Photograph 1) and a few Canadian harvesters, and logging trucks, andUS$4 million on purchasing spare parts and supplies. The Russianpartners’ share of the investment took the form of logging rights and landfor offices, camps and port facilities necessary for the IV.The period of the logging concession granted is 30 years from 1990 to2020. The line of business activities the joint venture initially intendedconsists of logging, log sales, forest protection and reforestation, buildinglogging roads and wood processing. The Russian partner is mainly responsible for the production planning whereas the Korean partner takesonly a supportive role for the iv such as administration for the project.7.2. FOREST RESOURCEThe initial project area covers 439,300 hectares in Terneiskiy andPozharskiy Rayons of which 363,900 hectares are forested. 235,900hectares of the forested area are to be developed during the project period.The topography of the project site is largely flat and does not requireheavy expenditures for building new logging roads.201Photograph 1. Finnish Feller-Buncher at Work202The total estimated volume of growing stock in the project area is 60.2million cubic metres. The growing stock volume in the accessible area,however, is only 42.2 million cubic metres. The area planned forharvesting for the first 5 years from 1991 to 1996 is 9,393.5 hectares inTerneiskiy Rayon and 11,672 hectares in Pozharskiy Rayon and thegrowing stock volumes in the two areas are 1.9 million cubic metres and2.3 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) Pozharskiy TotalArea (ha.) 9,394 11,672 21,066Growing Stock Volume (1,000m3) 1,910 2,326 4,236Volume per ha. (m3/ha) 203 199 201Source: Compiled from Hyundai (1993)The species composition of the whole area is 50% spruce, 30% larch and20% 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 istherefore more profitable than the balance of the JV area.The soil conditions examined during the site visit were not productivebecause of large rocks, high gravel content, and generally a thin layer oftop 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 ashigh as 250 cubic metres per hectare (Ivanovich, A., 1993). The site wascovered with 90% spruce and 10% larch with an average age of 130 to 150years.203Photograph 2. An Example of Poor Soil Condition of the Project SitePhotograph 3. An Example of Diseased Forests on the Project SiteF ..t1. •204The average diameter of large end of the spruce logs was about 24 cm,estimated by random measurement of logs waiting at the roadside fortrucking (Photograph 4). However, small diameter logs under 15 cm werealso quite visible (Photograph 5). Based on volume per hectare accordingto published statistics, the growing stock volume on the project site isalmost equal to the Canadian average (Table 5.25). By contrast to what thetable implies, the actual quality of logs on site is discouragingly inferior.Average temperature of the project site is 25 degrees Celsius in the hotsummer months and minus 30 degree Celsius in winter. The poor soilcondition and harsh climate seem largely responsible for the inferiorquality of the logs.According to regulations, the JV should cut dead and diseased trees forforest hygiene purposes, which imposes extra cost on the iv. The annualvolume cut should be exactly what is permitted, otherwise a penalty isimposed on the difference.7.3. REFORESTATION AND RESEARCHAll logged areas are required to be replenished at the cost of the iv byregulations in the JV contract. The JV applies three different efforts tosatisfy the reforestation regulation. 30% of the logged area is artificiallyreforested by seedlings grown at on-site nurseries. Two greenhousenursery buildings (1,700 square metres) were built for this purpose(Photograph 6 and 7). Another 30% of the logged area relies on naturalregeneration and the remaining 40% is covered by saving saplings duringlogging, which became possible by introducing new logging technology andtraining loggers.Photograph 4. Spruce Sawlogs Graded before TruckingPhotograph 5. Pulpiogs (Mainly Spruce)205-— - — — — — w —206Photograph 6. Greenhouse Nursery on the Project SitePhotograph 7. Spruce Seedlings in the Greenhouse207The logged areas were reforested both by planting seedlings and by directseeding. An area of 50 hectares was reforested in 1991 mainly by larchseedlings and a direct seeding of spruce between the seedlings(Photograph 8). In 1992 370 hectares were reforested by plantingseedlings and 123 hectares were seeded. Among them 292,000 spruceseedlings planted in the fall had been grown in the newly built greenhousenursery on the project site (Photograph 9). Table 7.2 shows that the areato be reforested in 1993 was 340 hectares, 100 hectares of which had beenreforested by June 1993.Table 7.2. Reforestation by the ivYear Species Reforested Area Quantity(ha.) (no. of seedlings/kg)1991 Larch (seedling) 50 100,000Spruce (seed) 2001992 Korean Pine (seedling) 103 200,000Spruce (seedling) 267 400,000Spruce (seed) 1231993.6 Spruce (seedling) 100 285,0001993 plan (340)Source: Complied from Hyundai (1993)The planting density in the reforestation is 2,500 seedlings per hectare andthe average area planned to be reforested in a year is about 300 hectares.The greenhouse has enough capacity to produce the seedlings for thereforestation by the JV. The survival rate of the planted seedlings hasbecome a problem. 38% of the planted seedlings died in 1992 but a localforest scientist is working to solve the problem (Photograph 10).208Photograph 8. Spruce Seedlings from Direct SeedingPhotograph 9. Spruce Seedlings Planted after Grown in the Greenhouse Nursery209Photograph 10. A Seedling Failed to Survive2107.4. REGIONAL EFFECTS OF THE JOINT VENTURE7.4.1. PRODUCTION AND EXPORTSCurrently the project operates far under its capacity, which means afinancial loss to the JV. The JV’s manpower, equipment and port capacityhas been prepared for the planned one million cubic metres a yearproduction target, which has not been reached. Because of anenvironmental dispute over logging in the new area, which is not expectedto be resolved soon, the realization of the one million cubic metresproduction target seems to be unrealistic at this moment. The JV’smonthly average production was 20,000 cubic metres when the authorvisited the site. The annual production target is set at about 200,000 cubicmetres. Almost all the produced logs are exported to Japan and Korea bytwo shipments per month. About 10,000 cubic metres are being shippedout in each shipment (Photograph 11).There seems to be no question about the justification for exporting the logsproduced. Considering the particular location of the JV and the conditionof the infrastructure, exports are a natural consequence. The fact that theworld’s largest log market is only a few hundred kilometres away acrossthe Sea of Japan even further justifies the exports. Russian logs areimported to Japan through the ports on the Japan Sea coast.The Japanese market is familiar with Russian logs. They have used thelogs for many years since their occupation of southern Sakhalin Island.Some of the Russian logs are similar to those of northern Japan, forexample, Hokkaido. Facing a short supply of hardwood logs for plywood211Photograph 11. Quality Logs for Exports212manufacturing, Japan has developed the technology to manufacture asoftwood plywood using Russian logs. The production of softwood plywoodhas been increasing very rapidly in Japan.Russian logs are relatively new to the Korean market. Since the Svetlayaproject, however, development has been initiated by Hyundai, which hasits own wood manufacturing company. The company manufactures homeand office furniture using the Russian logs imported to Korea. The Russianlogs are mainly used for flooring and temporary construction materials.They are also peeled and used as core veneer for the manufacture ofhardwood plywood. The general problems of quality and undevelopeduses related to Russian logs have been gradually overcome with the newtechnology 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 DEVELOPMENTSvetlaya is a village of 1,500 people on the Japan Sea coast (Photograph12). Ternei Rayon is the least populated district in the territory with 0.6persons per square kilometre, it is far below the territory’s averagepopulation density of 13.9 persons per square kilometre (Baklanov,Romanov, Moshkov, and Stepanko, 1992). The main industry in the villageis 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 JVcontributes to local employment. Since the production target has beenreduced to 200,000 cubic metres a year, the iv has laid off loggers.213Photograph 12. Street Scene of Svetlaya214But the target of lay-offs are the Chinese loggers: most of the Russianloggers have been kept on site for the sake of the village’s employment.Originally an integrated production system was planned for the JV as partof the long-term plan. For this, a chip mill has been built on the site toproduce 400 cubic metres of wood chip a day but an extra investment issaid to be required to operate it. Building a saw mill and a pulp mill wasalso planned in relation to the logging venture. If these productionfacilities are completed according to the original plan, the JV’s contributionto local employment will be even greater. The JV also planned somecommunity projects including building a school. These are all up in the airat the moment, however, because of the uncertain future of the iv, arisingfrom a crucial environmental dispute over the new logging area.The JV project is potentially a contributor to infrastructure in theundeveloped northern part of Primorskiy Kray. If the logging goes deeperinto the interior of the project site as originally planned, it will help thevillage Svetlaya to be connected with other villages in neighbouringdistricts, namely, Pozharskiy and Krasnoarmeiskiy Rayons (See the map7.2). By branching further from the logging it could make a largeuntapped forest region accessible, and promote regional development inthe long run. This may be infeasible now, however, because of theenvironmental dispute over the indigenous people’s rights over the land.As more FDI’s land on more locations in the RFE, similar impacts ashappened in Svetlaya are expected, and all the local impacts across the RFEwill collectively lead to a regional development.215Map. 7.2. Neighbouring districts of the project sheSource: RFEU (1993a), reproduced with permissionSvetlayaRayon216Besides the visible and direct impacts, the JV also has brought indirectimpacts. The JV has made the isolated village connected to outside worldthrough the visitors from around the world to the JV. The high-technologysatellite communication being used by the JV office has lessened thefeeling of isolation. The coming and going of Korean managerial staff,hundreds of Chinese loggers, log carrier ships, foreign journalists and evena group of international environmental activists have made the remotevillage conscious of the inter-related world. Such contacts with outsideworld, directly and indirectly, will eventually help to change the people’sattitude toward FDI, although it will take a long time.7.5. INTERACTIONS WITH THE INVESTMENT ENVIRONMENTA joint venture operation is a productive activity in a foreign countrywhich involves an interaction between the productive resources and theinvestment environment in the host country The iv Svetlaya has had torespond to changing Russian rules and regulations, while it has alsoreceived various reactions to its operation in the host country from local,regional and international communities since it started. Most of theseinteractions reflect various problems the joint venture has run into since itstarted. Since the JV is the first foreign direct investment in loggingoperation in the RFE, its implications for future investments are immense.The problems the JV Svetlaya has faced are those which have alreadyappeared in much of the literature on the subject, such as the article byCardellichio et al. (1989). Many of these problems are so complex andinterrelated that they are not easy to segregate from one another. Theycan, however, be classified into environmental problems, institutionalinstability, labour, and infrastructure.2177.5.1. Environmental ProblemsThe environmental problems the JV Svetlaya has faced are related to twothing; nature conservation of rare tree and animal species and indigenouspeople’s rights. One of the two areas the joint venture planned to log inthe first five year period of the project is an area of 11,672 hectares inPozharskiy district, which covers more than half of the area to be logged inthe first five years.The area in Pozharskiy district includes the upper reaches of the RiverBikin and has been assigned to the indigenous Udeghe people as theirhunting ground. International environmental groups claimed that the areaincludes untouched Korean pine forests which provide a habitat for theSiberian tiger, a rare indigenous species. They also asserted that thelogging had been prohibited in the disputed area by an environmentalimpact assessment study. Korean pine (Pinus koraiensis) is a protectedspecies and its logging is prohibited by law across the RFE. 50 Greenpeaceactivists visited the site in the summer of 1992 and protested against thelogging in the area. The logging operation was also widely protested byinternational environmental groups from Japan and other countries. Amajor logging operation planned in the Pozharskiy area for early 1992 wasstopped by a blockade of armed native people.The prohibition of logging in the area became the most crucial cause forthe JV’s failure to meet the one million cubic metres yearly productiontarget. The target has not been met for the last three years. In the firstyear of its operation, in 1991, the JV produced 250,000 cubic metres218because of incomplete investment in logging and transportationequipment. In the second year, despite the early completion of themobilization of machinery and equipment, the JV’s production remained at250,000 cubic metres mainly due to the protest against logging in thePozharskiy area. No major increase in production by the JV was expectedin 1993.The land in question was originally allocated to the Svetlaya joint ventureproject by Primorskiy Kray Administration3headed by the governor. ThePrimorskiy Territorial Council claimed on 24 July 1992 that the allocationof the land to Svetlaya Joint Venture infringes on the rights of indigenouspeoples and opposed the governor’s decision. The case was taken to theregional court by the Council. Primorskiy Kray Court decided that theAdministration’s decision was legal. The decision was again appealed tothe Russian Supreme Court. On 30 November 1992 the Supreme Courtinvalidated the lower court’s decision and returned the case to be retried(RFFU, 1993c). This problem had a crucial effect on the project and droveit to the verge of a close-down.According to Russian law, a referendum among the indigenous people isrequired before an outsider’s business activity can be granted in the landallocated for native people (RFEU, 1992b). These legal requirements werenot seriously considered and incorporated into the iv document by theRussian partner, Primorsklesprom. The JV project was influenced bypolitics from its formation. The joint venture formed and even began its3 Each territory in the RFE is governed by two (often opposing) leaders, the head ofthe Administration and the Territorial Council of People’s Deputies. The former isoften called the governor and is appointed by the President of the RussianRepublic. The latter is called the legislature. It has elected members and iscontrolled by the “malyi sovet” (little council). Source: Miller (1992b)219operation well before Korea and the USSR established diplomatic ties. Thejoint venture was a kind of symbol for the two countries, which wereentering into new relationships at the time. The Korean government’s“Northern Policy” contributed to the swift formation of the JV. TheRussians were also impressed that the JV was formed in a hasty mannerwithout a careful study of potential problems involved with the project.Obviously the head of the Administration was persuaded to help push thedeal through. It is also conceivable that such careless JV arrangementsoccurred in an attempt to give more business opportunities to Korea in order to stimulate Japanese interest in the RFE.7.5.2. Institutional InstabilitySince the JV project started its operation, there have been numerous newregulations and changes in the legal system, which significantly affectedthe joint venture’s operation. Among others, the institutional instabilitieswhich affected the Svetlaya JV project were related to a series of measurestaken by the Russian government: freezing of foreign currency accounts,the forcible sale of foreign currency earnings, and the imposition of exportduties.Faced with a serious shortage of foreign currency in October 1991, theUSSR government froze all the foreign currency accounts inVneshekonombank (State Bank for Foreign Economic Affairs). Thismeasure resulted in the Chinese loggers employed by the JV being unpaidfor more than 6 months4. There were more than 400 Chinese workersincluding Korean-speaking Chinese from neighbouring Jirin province. The4 Economic Daily, 12 April 1992.220unpaid Chinese loggers threatened to leave the project. According to USSRforeign currency regulations, the iv’s export earnings were to be depositedin a Vneshekonombank account before being exchanged and withdrawn inlocal currency. The export earnings deposited by the JV in the bank forthe 6 month period were US$2.3 million while unpaid wages for the sixmonths were US$750,000.5 The problem was resolved soon after, but itbadly hurt both the production and productivity of the Chinese loggers.Secondly, according to Presidential Decree No. 629 announced on 14 June1992, a new export duty was imposed on forest products. The new exportduty is imposed in ECUs (European Currency Units) based upon the weightof the item to be exported. Due to the new tax system, the 10% exportduty previously applied to the total exported amount (ad valorem) wasreplaced 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 1992.6This has caused the IV a significant reduction in the profit margin fromexports, since logs were exported to Japan at US$102 per cubic metre. Asa 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 foreigncurrency earnings to the Russian banks was introduced. This compulsorysale means a substantial financial loss to the iv by exchange from onecurrency to the other. The unstable rubles and the high inflation rate inRussia makes the iv’s financial loss from the compulsory sale even greater.The impact of these institutional instabilities was damaging to the JV’soperation, in particular, to the production target.5 Korea Economic Daily, 12 April 1992.6 Korea Economic Daily, 25 November 1993.2217.5.3. LabourThe JV successfully mobilized the necessary workforce from China. TheChinese workers were supplied through a Chinese manpower agency inJirin Province. At the peak of operations, the Chinese workers numberreached about 400. About half of them were Korean-Chinese. The JV alsoemployed about 200 Russian workers. Most of them were villagers fromSvetlaya.At the beginning, the use of Chinese workers in the project seemed anideal solution for the labour shortage problem in the RFE. In addition, theywere inexpensive and most of the Chinese had experience in working inlogging enterprises in Jirin province. The productivity of the Chineseloggers was higher than Russian loggers. They volunteered to workovertime. However, their productivity was sharply reduced by externalfactors. As mentioned above, failure to pay wages for more than sixmonths as a result of freezing foreign currency accounts severely loweredthe workers’ morale.Another factor that undermined the workers’ productivity was theexchange rate. At the beginning of the project in 1990 Chinese loggerswere paid US$300 per month, when the exchange rate was 0.6 rubles to adollar. Little income tax was imposed on the Chinese wage. Russianloggers were paid in rubles. Their average monthly wage was 700 rubles.In 1992 the exchange rate became 100 rubles per dollar. This means thatin terms of rubles, the Chinese wage jumped to 30,000 rubles, which wassubject to a high income tax bracket by Russian tax authorities. As aresult, the Chinese wage was cut down by a 30% income tax, which becamea solid reason for their threat to leave the project. On the other hand,222Chinese loggers became expensive compared to the Russians and gave avalid reason for the iv to replace them with inexpensive Russians (Won,1992). The actual number of Chinese loggers was reduced to 150 when theauthor visited the site in September 1993. The number of Russian loggersstill working on the site was as large as 280. Since the logging permit wasnot issued as originally scheduled, it became necessary to change thenumber of workers on site. For fear of resentment from the localcommunity, however, the IV was not able to lay off the surplus Russianworkforce to fit current capacity (Kim, 1993).In addition, though a minor problem, a lot of reported embezzlement byChinese workers required special attention for future dealings with aChinese workforce in the region. They embezzled not only individualsupply items like blankets and pillows but everything they could takehome from logging-camp door handles to machinery parts (Kim, 1993).Russian workers also posed problems. They were less committed to thework than Chinese and their high proportion of idle work hours loweredproductivity. The weak purchasing power of the ruble demoralized theworkers. By one account, the productivity of the Russian workforce onthe site is less than half the Koreans’ at best (Kim, 1993). By Russianlabour regulation, foreign investors are responsible for providingnecessary welfare including workers’ compensation insurance, and a paidvacation in summer. In conclusion, using a Chinese and Russian workforceis never cheap when taking into account their low productivity and theextra cost involved especially in such a remote and underdevelopedenvironment.2237.5.4. InfrastructureThe underdeveloped infrastructure is regarded as one of the majorconstraints for regional development as well as for the economic activitiesby foreign companies in the RFE. This general assumption, however, doesnot apply to the case of the JV Svetlaya. Rather the JV takes fulladvantage of its particular location.Svetlaya is located in the territory’s least populated district, TerneiskiyRayon. Within the Rayon, the village is situated in the even moreuninhabited northeastern part. Only a few road networks are developed,mostly in the southern part of the Rayon. Svetlaya is a remote villageaccessible only by air or sea. A small nine seater biplane connects it to thedistrict capital Ternei, 210 km away, from which other major cities in theterritory are only connected by air or road. It takes about 4 days to getfrom Vladivostok to Svetlaya by a ferry which sails along the Japan Seacoast once a month.The village is completely isolated from other cities and the only local roadis the one leading into interior logging areas used by the previouslespromkhoz. The 60 km long road leads to near the district boundarybetween Terneiskiy and Pozharskiy Rayons. See the map 7.1. Currentlythe JV’s logging operation takes place near the end of the road, about 60km away from the village.The existing port was too small to ship out one million cubic metres of logsa year before the JV. The port, therefore, has been dredged by the JV sothat two 10,000-ton log-carrying barges can come alongside the quay at224the same time. Svetlaya is a ice-free port and shipping logs through theport is possible all year round. Since winter is the most productive seasonin the year, because of the low productivity caused by the loggers’vacation in summer and muddy surface conditions in spring, having a portoperable all year round is advantageous.The infrastructure condition in the project area is not a constraint butrather an advantage for the JV. The trucking distance from the logging siteto the quay is only about 70 km and the port has been expanded toaccommodate one million cubic metres of logs a year. This is preferred bythe JV in contrast to the hauling distance from interior regions ofKhabarovsk territory or Amur region to the Pacific coast for export, whichmay well be several hundred kilometres. For example, Mukhen is aforestry town where one of the major territorial forestry kombinats islocated 100 km southeast of the city of Khabarovsk. From Mukhen thelogging area is 104 km further away (Fujiwara et al,, 1992). From Mukhento Vanino port is more than 800 km by railway. Not only the haulingdistance but also securing space in railway freight cars is a major problemfor exports. Having one’s own port for exclusive use is a definiteadvantage in the RFE, where limited port capacity and seasonality causeserious congestion in most of the ports. Because of its own port facility,the JV can improve the efficiency of shipment regardless of the overallinferior infrastructure conditions in the RFE.7.6. SUMMARY AND DISCUSSIONWith its three years of operation, the iv Svetlaya has illustrated the RFE’sreactions to FDI in forestry and demonstrated the problems related to the225investment environment in forestry. The geo-economic situation that theREF presents also has caused a particular reaction to the JV. Following isthe discussion of the JV in the framework of dissertation presented inChapter III.The iv project is currently in a bad situation. Because of the prohibition oflogging in new areas, the iv’s production has remained at only one fifththat of the original plan. The most serious problem threatening thecontinuation of the project is the huge financial loss caused by thesignificantly reduced production.From the beginning Hyundai was very enthusiastic to form the firstKorean-Russian joint venture. The JV was a symbol of a new relationshipbetween Korea and the USSR, which began to warm to each other after anearly 90-year long detachment. Hyundai’s effort were politicallysupported by the Korean government which was interested in promotingnew relationships with former communist countries through its own“Northern Policy”. In addition to government support, Hyundai’s corporatecharacter played its role in the formation of the jv. Hyundai has been amore resource-oriented company than others in Korea. Its style has beencharacterized as a pioneer company in Korea. The pioneering spirit hasbecome a long tradition of the company since its entry into many fields ofbusiness in the early period of Korean economic development (Anon.,1991). The iv was set up at a time when greater internationalization ofthe Korean economy was imperative because of the trade surplus. Underthis positive investment environment in Korea, the formation of the JV wasrealized even before the two countries formed a formal diplomatic tie.226Hyundai as a foreign investor quickly and successfully completed the‘hard’ material part of the investment. It swiftly mobilized the equipmentand labour force necessary to meet production targets in the early periodof the JV. The JV upgraded the port capacity to handle the targetedproduction. Hyundai did not, however, effectively handle the ‘soft’ socialor intangible problems related to the investment such as theenvironmental disputes and institutional instability. These problems arealmost beyond the control of foreign investors who are not familiar withlegal and cultural systems in Russia.Despite the country’s willingness to reform and integrate into the PacificRim economy, the investment environment in the host country has notbeen attractive. The main reason is political instability. The instabffity hasbeen the main cause of the JV’s lack of success. Among the instabilitiesexperienced by the JV, the most crucial one was the disallowment of thelogging permit as originally contracted, because of an environmentaldispute. The environmental dispute demonstrated that even a contractsigned by the Russian authorities can not be enforced.A great deal of instability also stemmed from the politics surrounding theiv. The JV had substantial political significance and was largely backed bythe Korean government’s. For Hyundai, the iv was an opportunity toenhance the company’s pioneering image in Korea. All these factorspushed Hyundai to make a rather hasty investment. The haste continuedto the actual capital investment in purchasing logging and transportationmachinery.227The Russian partner is also partly responsible for the hasty arrangement inthe formation of the JV. As mentioned earlier, the iv was formed withoutrespecting either the Russian regulations for native peoples’ rights or therequirement for environmental impact assessment on the project area.The haste is also attributed to the decision making system in Koreancompanies. The Korean companies’ decision making system is typicallyhighly centralized in the hands of a few top executives, who makedecisions either unilaterally or in small groups after consultation with thevarious parties involved (Steers, Shin and Ungson, 1989). The top-down orauthoritarian nature of the decision making system tends to be moredistinct in the owner-managed companies like Hyundai. Within suchdecision-making systems, a widespread consensus as to the desired courseof action is hardly achievable from the bottom to the top of the companyorganization. The chairman of Hyundai on many occasions revealed hisgreat enthusiasm for the projects related to Siberia and RFE development.Such personal enthusiasm of the owner himself has been largely translatedinto corporate strategy and strongly influenced the company’s decisionmaking related to the JV.In relation to decision making, a lack of research by Hyundai before theinvestment was undertaken is partly blamed for the current state of theJV. Under the existing decision-maldng system, the result of the feasibilitystudy by professional staff before investment gets little chance to beincorporated into the final decision. If the decision had been made by amore consensus-building approach from the bottom to the top of theorganization as happens in Japan, the formation of the iv would not havebeen possible. Conversely, because of the decision-making system in Korea228and in particular in the Hyundai Corporation, the creation of the iv wasmade possible despite the potential problems.Like many other Korean firms, another characteristic typifying corporatestrategy in the development of Hyundai is its awesome willingness to takerisk and its growth orientation as illustrated in Porter’s (1990) descriptionon Korean firms. Hyundai’s quick entry to the RFE and its persistencedespite financial loss can partly be explained by the corporate character ofHyundai. The choice of so large-scale a project can also be explained bythe 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 IVfor several reasons. The iv has deep political meaning for both the nationand the company. For the simple fact that the jV is the first and thelargest Korean investment in Russia gives a significant political meaning toits continuation. The advantage of the proximity of the RFE and the scaleof its resources are well appreciated by Korea. In the long term, and fromthe point of view of economic cooperation with neighbouring countries, apresence in the region is viewed as an important foothold for wheneconomic conditions and the investment environment improve. In otherwords, the long-term importance of the RFE, appreciated by Korea, is bigenough to carry on the JV despite the short-term financial loss.Because of the Korean attitude towards the RFE, Korea’s interest in theregion will continue. The current difficulties are generally accepted as theprice to pay for Korea’s long-term commitment in the region. Throughthree years of operation of the JV Svetlaya, Hyundai has accumulated229sizable experience in logging operations in the hitherto unknown region ofthe RFE, which in the future will put the company in a more profitableposition in the investments in the RFE.Much of the information and data on the ‘soft’ components of the JV on theKorean side were accessible and were incorporated into the discussions inthe case study. Despite its importance for the integrity of the case study,however, there is not an equivalent breadth of information on the Russianside, for example on such topics as the role of organized crime and politicalinfluence on the JV deal in the early period. Few people were willing tospeak about such topics and even those who were could not be certainabout them. The lack of analysis on the influence of such ‘soft’ variables ofthe iv on the Russian side is a shortcoming of the case study.230CHAPTER VIIIFOREIGN DIRECT INVESTMENT AND RESOURCE AND MARKETINTERACTIONS IN NORTHEAST ASIA8.1. LESSON FROM THE JV SVETLAYAThe JV Svetlaya is a product of the particular political situation at the timeof its creation and its particular geographical location. Nevertheless, thefollowing findings could be useful for future foreign investments in theRFE.Foreign investment is a business operation in a foreign country takingadvantage of partnership and a foreign investment environment. In somesituations, the successful operation of a JV might be guaranteed by undertaking limited responsibility by each partner. Such a rule did not work outin the JV Svetlaya. Despite the enthusiastic start and the successfulcompletion of Hyundai’s share of responsibility, within a short period oftime, the JV has experienced the problems discussed in Chapter VII.Hyundai, without previous experience in Russian operations, left theproduction planning and operation to the Russian partner. Hyundai,limiting its role to supportive activities, remained unable to resolve theproblems related to the host-country environment outside of the project.Unfortunately, the Russian partner was too weak and ineffective to handlesuch problems. It was even more difficult for Hyundai, which is unfamiliarwith the local situation, to come forward and resolve the problems. As inJapanese strategies (Tak, 1993), it would be very important for any futureJV to have a Russian partner which could exercise political influence tohelp resolve problems beyond the control of the foreign partner.231Although the infrastructure in the RFE is largely underdeveloped, theregion is large and has a wide variety of infrastructure conditions. Thelocation of the JV Svetlaya was well chosen and demonstrated one way toovercome the infrastructure problems.The JV also showed how to circumvent the labour shortage problem in theregion. By using a labour force from neighbouring China, the JV Svetlayasuccessfully provided the necessary labour force supplement to theRussians employed from local areas. Judging from the geographicproximity and the similar forestry environment, the neighbouring Chineseprovinces could present themselves as a potential source of labour forfuture iv’s.There had been no relationship between Korea and Russia for nearly 90years before diplomatic ties formed in 1990. The JV Svetlaya wassomewhat hastily formed even before the diplomatic tie without a genuineeffort to understand the situation of the host country. The USSR was anunknown country to Korea and vice versa. Without knowing one another,each overestimated the other under the amicable atmosphere at thebeginning of the relationship in the late 1980s. It was easy for theresource-poor Korea to overestimate the natural resource potential in theRFE. Similarly, the Korean economy first seen by Russians on and aroundthe 1988 Seoul Olympic Games was impressive enough for them to chooseKorea as an alternative partner for the development of Siberia and the RFEinstead of Japan, which appeared as the most capable, though reluctant,partner to Russia. Ogawa (1993) explains well how the Russiansmisunderstood the two economies in Korea and Japan after visiting Seoul232via Tokyo before the Olympic Games. Korea also needs to increase itsunderstanding of Russia through further research.In summary, a mere complementarity between countries and a successfulmobilization and management of the ‘hard’ part of foreign investment donot guarantee success in FDI operation. The current case study hasdemonstrated that ‘soft’ variables can play a crucial role for theinvestment.8.2. FOREIGN DIRECT INVESTMENT AS COMPARED TOCOMPENSATION AGREEMENTAlthough the iv Svetlaya is experiencing enormous difficulties now, thishas not reduced the advantages of FDI in the RFE at all. FDI is normally amore active form of productive activity across the national boundary thanany other forms of international business. FDI is as risky as it ispotentially profitable. It also implies many opportunities for investors toimprove productivity and competitiveness. A comparison is madebetween the compensation agreements experienced by Japan through aseries of KS agreements and the FDI experienced by Korea through JVSvetlaya.Obviously, the foremost difference is the unit cost of getting logs. Table 7.3shows a huge gap existing between the costs for the access to logs in theRFE depending upon how one obtains them. The cost to gain access to thelogs in the RFE is termed as ‘value-adding point’ here, since foreigninvestors or importers can begin their value adding activities from thispoints.233Table 8.1. Value-Adding Points by FDI and KS AgreementThe JV Svetlaya (Korea) The 4th KS Agreement (Japan)• Invested Amount by Hyundai: • Loan Amount:US$27 million US$700 million• Logs to be Produced: • Logs and lumber to import:30 million m3 for 30 years 6.4 million m3 for 5 years• Project Period: 30 years • Contract Period: 5 years• Value Adding-Point: US$0.9/m3* • Value Adding-Point: US$109.4/rn3(Unit Cost to Gain Access to Logs) (Unit Price of Importing Logs)* Labour and transportation costs and other expenditure required to produce anddeliver logs to Korea should be added to this value to make a fair comparison with thevalue under the KS agreement.The value-adding points are obtained by a simple mathematics: the inputto be divided by the output. U$27 million divided by 30 million m3 hasproduced U$0.9/m3. Same procedure is applied to obtain U$109.4/m3.Obviously, this comparison is not complete. The U$0.9/m3indicates simplythe cost for gaining access to the resources by the JV, whereas theU$ 109.4/m3 is the actual price for importing logs through the KSAgreement and is almost equal to the price in the international logmarket.7 An unbiased comparison would not be complete until the labourand transportation tariff for logging, implicit margin, and otherexpenditures involved in the operation of the JV are considered.Nevertheless, this simple comparison implies an important point on therelationship between the form of international trade and the control overproduction cost.The value-adding point, US$0.9/m3leaves much room open to the JV tomaximize profits through its operation. In other words, the JV has takenThe JV Svetlaya exports spruce logs to Japan for US$102/rn3 (Korea Economic Daily,13 May 1991).234almost full control of the size of the profit margin right from the beginningof the production by internalizing the early stages of theproductiveactivity. This low value-adding point still leaves a huge potential profitmargin after applying an estimated logging cost based on thatin theInterior region of British Columbia in 1990 of U$37.6/m (Canadian$47/rn3)8.On the other hand, as far as the log price is concerned,the KSAgreement is nothing more than a simple import. Its value-adding point,U$109.4/m3suggests a very limited control over the cost and profit by theJapanese importer. This clearly illustrates that the form of internationaltrade determines which partner has the greater scope for appropriatingeconomic surplus.In the RFE where FDI is riskier than elsewhere, however, prerequisiteconditions for a successful FDI seem to go beyond managerial skills andknow-how. The fact that despite a number of potential advantagesrelating to infrastructure, labour supply and the very low value-addingpoint, the JV Svetlaya is currently in serious trouble illustrates how fatalenvironmental issues or institutional instability can be in the RFE, inotherwords, how important it is to find a local partner which has political clouton the issues beyond the reach of managerial skills.8.3. INTERACTIONS BETWEEN RESOURCE AND MARKETREGIONSIN NORTHEAST ASIAThe global economy seems to have two contradictory forces in itself:globalization and regionalization. While the world’s economy becomesmore transnational, countries in a region form economic blocsas already8 Estimation from British Columbia Ministry of Forests, 1990. Comparative ValueTimber Pricing. Stumpage Appraisal Information Paper No.1.235seen in Europe and North America. The idea that Northeast Asia could be abig potential regional market in the 21st Century has been hypothesized inJapan by numerous Japanese authors such as Kanemori (1990), Ogawa andMurakami (1991), Toma (1991), and Ogawa (1993). Regionally,prefectures on the Japan Sea side of the country have initiated andpromoted the hypothesis now known as ‘Japan Sea Rim Economic Bloc’(Toma, 1991).Northeast Asia is a region covering Japan, South and North Korea, threeprovinces of Northeastern China, and the Russian Far East. This region hasmany interesting features. Nearly 300 million people, or 10% of the totalAsian population live in the region, but in terms of GNP Northeast Asiaaccounts for as much as 70% of total Asian GNP (Kanemori, 1990).Northeast Asia can be divided into two distinct regions: resource regions inthe north and market regions in the south. Resource regions include theRFE 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 growingNortheast China, less developed North Korea and the RFE. For the region’sdiverse endowment of resources and economic conditions, this region isoften referred to as potentially one of the most dynamic economic regionsin the world (Toma, 1991). A combination of rich resources in the RFE,inexpensive labour from China and North Korea, and technology and capitalfrom Japan and South Korea suggests the potential for creation of a hugemarket within the region. Table 8. 2 shows the distribution of theendowment of productive resources in the countries within the region.236Table 8.2. Endowment Conditions in Northeast AsiaNaturalLabour Resources Capital TechnologyRFE Short Abundant Short ShortNE China Abundant Sufficient Short ShortN. Korea Abundant Sufficient Short ShortS. Korea Sufficient Short Sufficient SufficientJapan Short Short Abundant AbundantSource: (Kanemori, 1990)Forming a regional market, Europe and North America take advantage ofthe scale of the market. Northeast Asia, by contrast, features complementarity and diverse levels of economic conditions as the most cohesiveforces 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, ashort-run outlook poses problems in realizing the potential. Also, whilediversity of economic and resource conditions could function positively forthe formation of a regional market in this region, the different cultural andpolitical backgrounds of the countries tend to hinder the formation of sucha market (Kanemori, 1990). When developing a project that requires closemultinational cooperation among the countries in the region, one country’sinterests often conflict with another’s as exemplified by the Tumen RiverProject.’ Another hindering factor is the differing views on the idea of theJapan Sea Rim Economic Bloc. The idea enjoys popularity in Japan, but ithas been less well received outside Japan. Dubious outsiders often pointout that only part of Japan, mainly the less-developed Japan Sea side1 Korea Economic Daily, 3 September 1991.237prefectures, is really keen on the idea. They could not play the immenserole that Japan is supposed to play if the idea is to be implemented(Minaldr, 1993).Despite the above negative aspects, circumstances generally favour marketintegration in the long run (Ogawa, 1993). It will be focused on the trade,investment and long term projects associated with natural resources. Theinteraction between the resource and market regions in Northeast Asia ischaracterized by the flow of raw materials from north to south. Logs areflag-ship raw materials in such interaction, as seen in chapters IV, V andVI. Technologies and capital investments flow into the north from thesouth, as seen in Japanese compensation agreements, JV Svetlaya andJapanese sawmllling JV’s. The sparsely populated REF allows for foreignlabour to work in the region as guest workers, like the Chinese loggers inthe iv Svetlaya or North Korean loggers in the Russian-North Korean JV inKhabarovsldy Kray.If the interactions between the resource and market regions continue inNortheast Asia, both regions will certainly benefit and prosper in the longrun. The region, with its complementarity and varied economic conditions,will capitalize on TNC activities to encourage and promote suchinteractions, and FDI will be a dominant form of interaction.238CHAPTER IXCONCLUSIONSThe situation created by perestroyka and glasnost in the USSR broughtattention to the RFE’s potential for interaction with neighbouring countrieson the Pacific Rim. Foreign direct investment has been one of theseinteractions. This study has examined the response of the RFE to FDIthrough the case study of the Korean-Russian joint venture Svetlaya.This dissertation concludes with several implications of the FDI in the RFEbased on the analytical framework in Chapter III. They are implications ofthe FDI for potential export growth in forest products from the RFE to theneighbouring Asia-Pacific countries, implications for regional development,policy implications of the iv for future foreign investment in forestry inthe RFE, and lastly implications of FDI for resource and market interactionsin the global context.9.1. IMPLICATIONS FOR EXPORT GROWTH BY FDIBecause of the small local market and the high cost involved in exportingto other regions in Russia, exports to the international market are a naturalconsequence of foreign investment in the RFE. The JV Svetlaya and all theJapanese investments in forestry are mainly motivated by exportpromotion. This can be justified by the presence of the world’s largestforest products importers in neighbouring regions. Currently the JVSvetlaya exports all its production to Japan and Korea, which best servesthe financial interest of the iv.The export motivation is further confirmed by the export records of theenterprises with foreign capital participation. Therefore, the foreign239investments in the RFE appear almost destined to export their products. Inview of the lack of capital investment in value-added products and theinferior quality of such products, however, exports will largely be limitedin the short run to logs.On the other hand, there also exist factors which hinder exports. Since theexport of forest products is one of the few hard-currency-earningbusinesses, the foreign investors who are motivated to export may facesevere competition from local industrial organizations for export markets.Local industries will not allow their forests to be used to serve the profitmaximization goals of foreign investors. Local export organizations regardthe export of logs as their own business. In addition, a xenophobic attitudetowards foreign investment will hinder the effect on exports. In order toovercome this, the foreign partners of the JV’s in the RFE need to have theRussian partners and local communities understand the mutuallybeneficial aspects of the foreign investment. This could mean educatingthe Russian partners and the local people as to market economy.While the previous paragraph refers to long term prospects, the short termprospects for exports are equally discouraging. Apart from the burden ofnumerous new export taxes, log exporters suffer from the inflation whichhas risen much faster than the ruble to dollar exchange rate. The rublecost of log production can not be covered by the dollars earned by exports.9.2. IMPLICATIONS FOR REGIONAL DEVELOPMENT IN THE RFEGeographic location naturally draws the RFE towards integration into thebooming economies of the western Pacific Rim as does regional economicpolicy. Since the REF’s immediate neighbours are at different levels of240economic development, the RFE is in a position to choose from thesecountries those partners who could best serve the region’s economicdevelopment.This study has demonstrated that FDI is potentially a strong agent forchange in the regional economy of the host country. Regional development, however, is not achieved by the unilateral action of foreigninvestment but through interaction between the forces of FDI and thehosting environment which could nourish the FDI to promote the regionaldevelopment. The forces directed from FDI to the RFE have been positiveand even enthusiastic as seen in the JV Svetlaya. By contrast, this studyhas shown through the case study that the local environment respondingto such forces has not been so positive and welcoming. The problems theJV Svetlaya has faced are a major discouragement to the future FDI in theRFE.To attract more FDI for regional development, the findings of this studycall for more changes inside the RFE. The changes are strongly related tocasting off the natural resource illusion as mentioned at the end of Section5.6.5. The natural resource illusion only helps keep the RFE more isolatedfrom the fast growing economies in the Pacific Rim, If the resource illusioncontinues in the RFE, it will keep the region locked against beneficial forcescoming from outside. The only result is that these countries findthemselves falling behind the resource-poor countries which used to bepoorer than they were. The point here is that national or regional wealthis 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 resourcesand sells them in the global market. FDI could certainly be the vehicle to241bring regional development to the RFE via global markets in the long run.For the short run, however, this study suggests that local and regionalgovernments should make all efforts to reduce the risk of FDI bydeveloping well-thought-out and implementable action plans, as well asdispute resolution mechanisms. These would inspire confidence in bothRussian and foreign partners in the operations of FDI projects in the RFE.9.3. POLICY IMPLICATIONS FOR FDI IN THE RFEThe new situation in the RFE has now made possible what was regarded asimpossible within the closed economic system of the past. Opening up theregion and allowing foreign investment have made the formerly unapproachable region accessible. The investment environment in the RFE,however, is still highly problematical. For future forestry investments inthe RFE this study implies the following.Instability in the Russian political and economic system has been observedas the main stumbling block for foreign investment in the RFE. However,the instability is almost inevitable since the legal tradition in Russia has anature of constant instability in it. Russia is known as a relationshipsociety rather than a rule-of-law society. In a relationship society rulesare not really rules but rough guidelines for action, subject to endlessvariations and changes when applied in practice (Block, 1994). Investorsshould understand the nature of the Russian legal system and need toprepare themselves to face up to the instability rather than wait until itturns to stability.In addition, the RFE is a newly opened and frontier-like region, whichimposes extra costs on foreign investors’ economic activities. Pioneering in242this frontier region, however, could secure the market and supply ofresources for a long time once the investors are established. This couldpay 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 thesacrifice of short-term financial returns to their investments.Local reaction to foreign investment is not always positive. Xenophobicattitudes toward foreign investment still linger especially over naturalresources development, which is believed to be one of the areas wherelocal industry should take control. The environmental protest againstlogging can also be interpreted in terms of xenophobia. Resistance tends tobe amplified when the opponent is a foreign investor involved in exportingnatural 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 actualinvestments in the RFE in the short run. Foreign investment will beconcentrated on southern subregions where better resource stocks andinfrastructure conditions are found. As already revealed from investmentstatistics, 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 areasclose to ports, as in the cases of the JV Svetlaya and the Weyerhaeuserproposals. In this respect, the undeveloped coastal region of PrimorskiyKray has a great potential for future foreign investment.243One of the strong messages from the experience of JV Svetlaya for futureinvestments is environmental concerns. Japan and North Korea, both ofwhich have been involved in either importing or logging in the RFE sincethe late 1960s, had never been challenged by environmental problemsbecause of their logging practices until recently’. This is not because thesetwo countries performed better environmentally in the RFE than the JVSvetlaya. In fact they could well have been worse according to recentreports2. But what is different between then and now is the fact thattoday’s world is no longer environmentally insensitive even to logging in aremote corner of Russia. In fact, the RFE itself has many environmentallysensitive areas because of the endangered animal and plant species, andthe presence of indigenous people in the areas. The JV Svetlayaexperience demonstrated that the presence of foreign enterprise tends toexacerbate local anger and protest if there is damage to the environment.Future investments in this region might need to avoid a direct involvementin logging as much as possible. This would favour investment in morevalue-added production such as processing and manufacturing, which hasalready been demonstrated by the relative success of such Japaneseinvestments in the RFE, as discussed in Section 6.5.On the timing of the investment in the RFE, this investigation can hardlyconclude by encouraging immediate FDI, in view of the current instabilityin the RFE and all the other problems described above. The dilemma fromthe investors’ point of view, however, is the fact that they cannot waituntil every problem has been settled, just as one can not wait for a better1 It was only after the RFE was opened up to the outside world in 1991 that the NorthKorean logging joint ventures got international media attention for their destructiveenvironmental performance and harsh camp conditions.2 Far Eastern Economic Review on 4 April, 1991 and 9 September, 1993244computer tomorrow. What is more important is to use a computer todayand get the job done. Although the analogy does not suggest a delayedinvestment, the actual investments will hinge on the situations of investingcountries.For those countries like Korea, which is desperate for logs for its economynow and seeks long-term stable supply and diversification of supplysources, an early investment would be worth the cost of initial risks. Theinvestment would probably be large scale if the country seeks a long-termsecurity of timber supply. However, for large scale investment, as the casestudy suggests, a gradual capital investment would help to reduce theabsolute risk of financial loss. The financial loss to the JV Svetlaya couldhave been less than what it is now if a massive capital injection in theearly stages of the project had been avoided. Gradual investment wouldalso be a better strategy while the investor becomes familiar with theunstable investment environment in the RFE.The investments by countries less desperate for logs and with alternativesources of supply, however, should be experimental. Japanese-styleinvestments would be applicable here. Japan, which is relatively wellinformed about the RFE, is still reluctant to undertake a major investmentand keeps its investments small and experimental. Other potentialinvestors would do well to heed their experience and follow their example.In any case, the risk of investment relates to the size and sector ofactivities. The case study suggests that investment on a small scale and inthe non-logging sector would be less risky than large scale investments inlogging.245This study has explained South Korea’s experience of a joint venture in theRFE. This study suggests that the ‘soft’ parts of the investment are morecrucial for success than the ‘hard’ parts are. While ‘hard’ problems canusually be solved, as demonstrated by iv Svetlaya, the soft’ problems tendto be difficult to overcome and require more effort from the investor.Through this study it is also observed that the establishment of the jointventure Svetlaya was more motivated by political reasons and corporatecharacteristics than by financial returns. This is proved by the fact thatthe joint venture is still being operated, though with reduced capacity.This implies that the Russian Far East is a region in which it is worthmaintaining a foothold despite initial financial loss, which is the almostinevitable cost of operating a business venture in this frontier-like andunstable region. It seems this conclusion applies to South Korean forestryinvestment, but whether or not the same conclusion can be drawn forinvestment from others countries remains to be seen.9.4. IMPLICATIONS FOR THE INTERACTIONS BETWEEN RESOURCEAN]) MARKET REGIONSThis study has demonstrated that a potential interaction could take placebetween resource regions in the north and market regions in the south inNortheast Asia. An interesting pattern can be observed if the result of thestudy is put in the global context and in the long term perspective. Asmentioned at the beginning of this dissertation, the world’s three majorforest regions in the northern hemisphere are located north of and close tothe world’s major market regions. The northern forest regions served thesouthern market regions./246As the world’s major market regions have shifted from Europe to theUnited States, the world’s major forest product exporting regions also havemoved from the Nordic countries to Canada.3 Now the centre of theworld’s economy is again moving from the United States to East Asia, andconsequently we can expect similar things to happen with the major forestregions. To predict whether or not resource-market interactions, similarto what occurred in Europe and North America, would take place inNortheast Asia would certainly require another major piece of research. Ifin fact they do occur, however, what will significantly distinguishNortheast Asia from the earlier experiences will be FDI as a main channelof interaction. 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Published in Russian.266APPENDIX ISUMMARY OF THE JOINT VENTURE SVETLAYAProject amount: US$54 millionPartners: Hyundai Resource Development (25%)Hyundai Wood Industries (25%)Far East Forestry Ministry of MaritimeProvince (50%)Project area: 9.9 billion m2Production target: one million m3 over 30 yearsProject period: 30 years (1990 - 2019)Equity share: 50:50Authorized capital invested: US$13 million(as of Feb. 1991)Manpower (as of 11 April 1992): 200 Russians, 350 Chinese-Koreans15 Koreans (managerial positions)Machinery and Equipment: US$40 millionParts (as of 11 April 1992): US$4 millionLogs shipped to Korea and Japan: 250,000 m3 in 1991, mostly spruceExport price to Japan: U$ 100 - 102/rn as of May 1991,Target in 1992: 1 million m3Loading port: SvetlayaHandling capacity: 50,000 - 60,000m3/monthSimultaneous berthing capacity: two 10,000 t vesselSailing time to Ulsanwhere Hyundai Woodprocessing mill is located: 3.5 daysProblems as of April 1992: 1. Difficulty of withdrawing hardcurrency from the bank accounts.2. Obligatory sale of 50% of hardcurrency earnings for Rubles to RussianState Bank3. Repatriation of profits is withheld267APPENDIX IIORGANIZATIONS INTERVIEWEDKOREA:1. Hyundat Resource Development Co., Ltd.2. Samsung Corporation3. Korea-CIS Economic Association4. Korea-Russian Far East Association5. Korea Institute for International Economic Policy6. Forestry Research Institute, Office of ForestryTHE RFE:(Khabarovsk)7. Economic Research Institute, Russian Academy of Sciences Far EasternDivision8. Far Eastern Institute of Market Economy, Ministry of Economy ofRussia9. Khabarovsk Forestry Management, Ministry of Forests10. Far East Forestry Research Institute11. DaPles12. Daewoo Corporation13. Kohap Corporation14. Nissho Iwai Corporation15. Sumitomo Corporation16. Mitsubishi Corporation17. Mitsui & Co. Ltd.18. Toyota Tsusho Corporation19. Marubeni Corporation20. Weyerhaeuser(Vladivostok)21. Korea Trade Promotion Corporation (KOTRA)22. Hyundai Corporation23. Kohap Corporation24. Rosskor Fishery Co., Ltd. (Russian-Korean JV)25. Itochu Corporation26. Mitsui & Co., Ltd.(Svetlaya)27. iv Svetlaya (Korean-Russian Joint venture)268JAPAN:(Sapporo)28. Forest Policy Program, Faculty of Forestry, Hokkaido University29. Slavic Research Center30. Northern Regions Center31. Mitsuibussan Forestry Co., Ltd.(Tokyo)32. Forest Policy Program, Faculty of Forestry, Tokyo University33. Japan Wood-Products Information and Research Center (JAWIC)34. Japan Association for Trade with Russia and Central-Eastern Europe(ROTOBO)35. Council of Forest Industries Canada (COFI)36. Japan Lumber Importers’ Association37. Marubeni Corporation38. Itochu Corporation39. Samsung Japan Corporation(Tsukuba)40. Faculty of Forestry, Tsukuba University41. Forest Policy & Economics Laboratory, Forest Management Division,Forestry & Forest Products Research InstituteQuestion 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 market269APPENDIX IIIINDIVIDUALS INTERVIEWEDSapporo, JapanDr. Hiroald Kaldzawa Mr. Matuski, ToshthiroInstructor of Forest Policy ChairmanFaculty of Agriculture Japan Lumber Importer’sHokkaido University AssociationDr. Kilchi Mochizuki Mr. Masato SuzukiProfessor of Economics Forest Product InformationSlavic Research Center SpecialistHokkaido University Council of Forest IndustriesCanath (COFI) Japan OfficeMr. Hiroyuki KurosakaStaff of Research Divison Mr. Kazunori OhiraNorthern Regions Center Department OfficerCIS DepartmentMr. Mineo Anada Overseas Planning &Manager Lumber Section Development DivisionSapporo Branch Itochu CorporationMitsuibussan Forestry Co., Ltd.Mr. Munehito MatsuoManagerAmerican & Russian Log SectionTokyo, Japan Soft Wood DepartmentItochu CorporationMr. Akihiko ArayaManager Mr. H. MatsubaraOverseas Research Division ManagerJapan Wood-Products Information Russia Sectionand Research Center (JAWIC) International Corporate PlanningDeptMr. Kazuo Ogawa Marubeni CorporationVice Director GeneralJapan Association for Mr. Osamu AsaniizuTrade with Russia and General ManagerCentral-Eastern Europe Softwood Section(ROTOBO) and Lumber & Wood Products Dept.-IIInstitute for Russian & Marubeni CorporationFast-European Economic Studies270Mr. Jung-Chi OhGeneral ManagerSamsung Japan Co., Ltd.The International Division ofSamsung GroupDr. Vadim ZausaevChief of DepartmentFar Eastern Institute ofMarket EconomyMinistry of Economy of RussiaTsukuba. JapanDr. Haruyuld MochidaLaboratory ChiefForest Policy & EconomicsForest Management DivisionForestry & Forest ProductsResearch InstituteMinistry of Agriculture,Forestry and FisheriesDr. Narita GamiAssociate ProfessorFaculty of ForestryTsukuba UniversityKhabarovsk, RussiaDr. Pavel MinakirDirector of Economic researchInstituteRussian Academy of SciencesFar Eastern Division andFormer Deputy Governor ofKhabarovskiy KrayDr. Alexander SheingauzVice Director GeneralEconomic Research InstituteRussian Academy of SciencesFar Eastern DivisionDr. Alexander IvanchikovDirector of International Researchand Consulting CenterIntel Group Project CompanyEconomic Research InstituteRussian Academy of SciencesFar Eastern DivisionMr. Vladimir PominovHead of ManagementKhabarovsk Forestry ManagementMinistry of ForestsMr. Dmitry F. EfremovDirector, Far East ForestryResearchInstitute, KhabarovskMr. Babushkin Gennady IvanovichVice DirectorDailies, KhabarovskMr. Takeo IshinoSenior ResearcherOverseas Research DepartmentJapan External Trade Organization(JETRO)Mr. Chul KimChief RepresentativeDaewoo CorporationKhabarovsk OfficeMr. Maeng-Sik JoeChief RepresentativeKohap GroupKhabarovsk OfficeMr. M. ItoGeneral DirectorMitsubishi CorporationKhabarovsk OfficeMr. Hisashi IchiiRepresentativeMarubeni CorporationKhabarovsk Office271Mr. Tsunichi NakazawaChief RepresentativeSumitomo CorporationKhabarovsk OfficeMr. Shiro YamadaChief RepresentativeNissho Iwai CorporationKhabarovsk OfficeMr. Tomita KenjiRepresentativeMitsui & Co., Ltd.Khabarovsk OfficeMr. Sandy BillManagerInternational ProjectWeyerhaeuser CompanyMr. T. KasaiGeneral ManagerRepresentative inValdivostok OfficeItochu CorporationMr. Mitsugu MurataChief RepresentativeMitsui & Co., Ltd.Vladivostok OfficeSvetlaya. RussiaMr. Dae Sik, KimSenior ManagerRussia-Korea Joint VentureSvetlayaMr. Alexander IvanovichDirectorRussia-Korea Joint VentureVladivostok. Russia SvetlayaMR. Boom Sun LeeDirectorKorea Trade PromotionCorporationVladivostok OfficeMr. CM Yong SonGeneral ManagerHyundai CorporationValdivostok OfficeMr. Kyung Ho KongDirectorRussian-Korean Joint VentureROSSKOR Fishery Co., Ltd.Mr. Sun Tae OhChief RepresentativeKohap Vladivostok OfficeSeoul. KoreaMr. Kang-Soo ChooRepresentative DirectorSenior Executive vice PresidentHyundai Resource DevelopmentCo., Ltd.Mr. Jong-Young WonManaging DirectorHyundai Resource DevelopmentCo., Ltd.Dr. Chang Jae LeeResearch FellowKorea Institute forInternational Economic PolicyMr. Sang-Jin ChoiGeneral ManagerSocialist CountriesOperations DivisionSamsung CorporationHead Office in SeoulMr. Ml Sung LeeManagerKorea-Russia Far East AssociationMr. Choong-Keun ChoExecutive SecretaryKorea-Russia Economic Association272APPENDIXIVLANDCLASSIFICATIONOFTHEFORESTFUNDINTHERUSSIANFAREASTForestedAreaNon-ForestedAreaGsedForests0uenForeSIsGrandSubregionNon-dosedArtifidaflyBurnedTotalTotalArtificialArtificialOpenOpenByForestsCutoverSub-FarmRoadWetTotalForestsForestForestsForestsFiresAreaGapTotalLandWaterEtcLandOthesTotalYakutia146734312285697951056876021024608119281452264323125185343601664224257038PrimorkiyKray1116038981041902896426115954235341359033611931AmurOblast48837106119245125514571811449108335978993353675995107661727477063KamchatkaOblast2177750356088406655655023180249921071564343711073575030742KhabawvskKray1905326419784825967282186820962923054810340097572294543907MagadanOblast221213239748172032228779148563700013895207135267093477271772SakbalinOblast’532713858311193342861609306315415024566987797094Total2750073642863668015611196092604367078174353467147526360323401368450914608499547(%)(55.1)(0.1)(0.1)(7.4)(3.1)(3.9)(0.5)(0.7)(15.6)(70.8)(2.9)(1.3)(0.1)(8.0)(16.9)(29.2)(100.0)I—(NSource:Sheingauzetal.(1989)274APPENDIX VNAMES OF POPULAR TREE SPECIES IN THE RFEScientific English Russian Korean Japanese(Coniferous)Abies sibirica Siberian Pikhta Chunnamu Todomatsusilver firLarix gmelini Dahurian Listvennitsa Nakyopsong Karamatsu(or Larix dahurica) larchPicea jezonensis Ezo spruce, Elka Kamunbinamu Ezomatsu,White wood KuroezomatsuPin us koraiensis Korean pine Kedr, Chatnamu Chosenmatsu,Sasna - ChosengoyookoreiskayaPinus sylvestris Scots pine, Sosna Kujuchuksong AkamatsuEuropean redpine(Hardwood)Betula ermanii Russian Bereza Chachaknamu Kabanokirock birchBetula mandshurica Machurian Bereza Chachaknamu Kabanoki(or B. platyphylla) birchFraxinus spp. Ashes Iasenj Mulpurenamu TonerikoFraxinus mandshurica Japanese ashJuglans mandshurica Machurian Orekh Karenamu KurumiwalnutPhellodendron Amur cork Barkhat Kolknamu Kihadaamurense tree MikoroPopulus maximowiczii Japanese Topolj Popuranamu Doroyanagi,poplar DoroPopulus tremula Aspen Osina Sashinamu YoropianasupanYamanarashiQuercus mongolica Japanese oak Dub Chamnamu Mongolinara275Scientific English Russian Korean JapaneseCont’d(Hardwood)Tilia spp Lime Lipa Pinamu ShinanokiTiia aniurensis BasswoodUlmus davidiana var. Japanese elm hem Neureupnamu Harunire,japonica, Akadamo, Nere,Neri, NiganireUlnius laciniata Elm Ohyoonire,Atsuni, Yajina,Atshu, Ubanire,Source: All Nippon Checkers Corporation (1989), Anuchin (1985), Hong and Son(1993),bra (1981), and Johnson (1984).276APPENDIX VIRUSSO-JAPANESE FORESTRY J/V’S1. Name of the joint venture2. Location3. Established in4. Began operation in5. Invested capital6. Share of the investment7. Production and Exports/yr.8. No. of employment9. Others1. Igiruma-Tairiku2. Novayaigiruma, Irukutsk3. 19874. April 19885. 2 million rubles (440 million yen)6. Irukutsk State Forestry Department 51%: Tairiku Boeki 49%7. Log input: 160,000m3/yr.Output: European Red Pine lumber: 95,000m3/yr.Exports to Japan: 70,000 m3 /yr.8. 205 persons9. Main products: Fixture, rafter and rough sawn lumber for resawing inJapan1. Ridga2. Nanai district, Khabarovskiy Kray3. 19894. July 19905. 1.2 million rubles (276 million yen)6. Dal’exportles 90%: Itochu Corporation 10%7. Hardwood lumber production:Log input (90% ash, 10% oak); 18,000m3/yr.Output; 8,000m3/yr.8. 160 persons9. Originally the Japanese share was 49% (29.4% by Itochu, 19.6% byShinten Jitsugyo, subsidiary of Itochu)2771. Samon2. De-Kastri, Khabarovskiy Kray3. 19904. December 19925. 1 million rubles (240 million yen)6. Dal’exportles and De-Kastri Municipal Forestry Department 80%:Nichimen 20%.7. Spruce lumber and half products: 19,000m3/yr.8. 60 persons9. MIII layout and production technology will be guided by Shiba LumberCompany1. Aito2. Angarusk, Irukutsk3. 19924. April 19935. 830,000 rubles6. Japan 34%: Russia 66%:7. Larch(30%) and European Red Pine (70%) lumber: 18,000m3/yr.8. 32 persons1. Kedor2. Dal’nirechensk, Primorskiy Kray3. 19934. Autust 19935. US$600,0006. Eiwa Trading 50%, Primorsklesprom 50%7. Spruce and Larch lumber:Log input: 22,000m3/yr.Production: 13,200m3/yr.Export: 7,200m/yr., Local supply: 6,000m3/yr.8. 40 persons1. Roren-Chovuefuka2. City of Vladivostok3. 19924. August, 19935. US$300,0006. Vladio (9 Japanese investors group) 50%: three Promorsk Corporations(for forestry, fishery, and tourism and shipping): 50%7. Spruce lumber:Log input: 40,000m3/yr. Production: 23,000m3/yr.2788. 47 persons9. Vladio is invested by Orient (Russian Timber importer), KanekiyoLumber, tomigasald Industry, Ichimasa Kamaboko, Ueda Ironwork,Niigata Travel, Hokuriku Bank and Bostok1. T.M. Baikal2. Sibirsk, Cherenhopo district, Irukutsk3. 19914. September, 19935. 12 million rubles (960 million yen)6. Tajima Mokuzai 30%: Mitsui & Corporation 19%: Jrukutsk lesprom 51%7. European red pine lumber and sleeper.Log input: 220,000m3/yr., Production: 136,000m3/yr.Export 60% of finished or semi-finished products (80,000m3/yr) toJapan.8. 47 persons9. The total annual sales for the exports are estimated to be 3.3 billion yenand the domestic sales be 1 bfflion yen.1. Vanino Tairyuku2. Sovietskaya-Gavan3. 19914. October 19935. US$1.5 million6. Tairyuku Boeki 50%: Northeast Gold Mine 50%7, Spruce lumber:Log input: 90,000m3/yr. Production: 55,800m3/yr.Export to Japan 43,500m3/yr., Local supply: 12,300m3/yr.8. 120 personsSource: Nikkan Mokuzai Shinbun( 1993)


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