COVER STORY
Making Progress
Primorsky Krai is making progress, albeit not always in a stright line--lack of domestic capital is both a hindrance and an opportunity
RIMORSKY KRAI, Russia's maritime province, has found economic progress to be not as straightforward as it hoped when first emerging from the cold waters of the Soviet era.These initial expectations were probably not entirely realistic. In addition to obvious geographical advantages and certain high-quality infrastructure (particularly ports), the region also had a lot of Soviet-era baggage that weighed it down.
However, as a result of some hard work and clear objectives, the province has recently been making some real and identifiable progress--everything from a new business centre and hotel in Vladivostok to progress in clarifying the legal basis underpinning the Nakhodka Free Economic Zone.
FESCO, or the Far Eastern Shipping Company, which opened its own office in Hong Kong last year, claims to be the largest shippers between Hong Kong and Australia and New Zealand, outgunning such obvious contenders as COSCO. Similarly, Primorsk Shipping, with a regional subsidiary in Singapore, carries cargos that have nothing to do with Russia-between, for example, Australia and Africa.
Asia's largest aircraft manufacturer is in next-door Khabarovski Krai-KNAAPO, manufacturer of the Sukhoi fighters whose major export markets are now in Asia including new customers such as Malaysia. Primorsky Krai is also a player in aerospace--Arsenyev-based Progress Aviation Association is competing on bids to supply Black Shark and Alligator combat helicopters to Finland and Turkey. The company has also received an advance payment from Rosvooruzhenie to manufacture a batch of Moskit supersonic anti-ship missiles for China.
The next stage of integration is likely to be the extension of the region's ports in Vladivostok, Nakhodka and Khasan to a "regional" rather than just national (Russian) role. As described in a related article, the ports are well-positioned to serve north China and, if the Trans-Siberian's traditional role can be re-established, to become a major route for shipping cargo between East Asia and Europe.
The province produces some 1 million tons of fish and seafood products each year, for example. Fish from Russian seas, caught by Russian trawlers, finds its ways in American fish sticks after processing in, among other places, China. Russian timber is built into Japanese houses after processing in Japan.
A clear development objective is to bring as much of this added-value back home as possible, with assistance of foreign partners-one of the key rationales for establishing the Nakhodka Free Economic Zone. The FEZ is essentially unique in Russia, as is the Administrative Committee which runs it. Although a Government agency, the Administrative Committee's role is to create the conditions for profitable domestic and foreign investment in the FEZ, and often backs projects with its own money, behaving more like a company than a bureaucracy.
Recognising the opportunity (or perhaps the inevitable), countries such as Korea and China have embarked, or plan to embark, on extensive investment projects including several full-fledged industrial parks in the FEZ.
According to Government statistics, by the end of June 1997, the amount of direct foreign investment exceeded US$300 million, resulting in over 1200 companies with foreign capital, including more than 50 companies with 100% foreign investment.
Coca-Cola has opened a bottling plant in Vladivostok, perhaps the best possible evidence that a consumer culture has arrived in the Russian Far East.
From a distribution point of view, Vladivostok is a long way from Moscow., Foreign goods are usually shipped directly into the Primorsky Krai ports rather than coming from a Moscow distribution centre. The result is that the Russian Far East is in many ways a separate market from that of European Russia.
As the Moscow market becomes increasingly the preserve of large firms with strong advertising and promotion budgets, the Russian Far East gives smaller companies, especially ones from the Asia-Pacific, another shot at the Russian market. For example, while foreign automobile manufacturers are investing heavily in local assembly of cars for the Russian market, the Russian Far East car market is likely to be dominated by second-hand Japanese cars for some time to come. Toyota has even set up a joint venture in Nakhodka to service Japanese cars.
Business ties are especially strong around the Pacific Rim. While Europeans have a natural advantage in western Russia, they are surplanted in the Russian Far East by ties with the West Coast of North America (which now has a sizeable ethnic Russian population), Korea, Japan and China. Australia and New Zealand have found in the Russian Far East a ready market for their meat and dairy products and have moved into some local manufacturing (in, for example, beer).
New Zealand companies have found a market in the Primorsky Krai, says Louis Allen of the Russia-New Zealand Business Council, "mainly in supplying foodstuffs. New Trade is trading meat and dairy products, and Enza supplies fresh fruit. Two companies are sending New Zealand ice cream to the area: the Tip Top Ice Cream Company and Vostock Trading."
Working in conjunction with the Russian firm Gram Company Ltd., Vostock is also sending fresh flowers from New Zealand, which are distributed to shops in Vladivostok and Khabarovsk.
Even multinationals have sometimes found it more convenient to run the Russian Far East operations as if they were part of Asia. ING Bank's Vladivostok rep office reports into Japan, while Britain's Cable & Wireless treats its joint venture Nakhodka Telecom as if it were Asian (the downlink is actually with Hongkong Telecom, another Cable & Wireless firm). American Express Asian office in Hong Kong has responsibility for the Russian Far East.
Primorsky Krai is in the footprint of Star TV (a Hong Kong-based satellite broadcaster) with the incongruous result that the citizens of the region get their weekly doses of Baywatch routed via Hong Kong.
Telecoms in general has attracted much attention. In addition to the Cable & Wireless joint venture, Japanese investors set up VostokTelekom, another satellite overlay network. Rokotel is a Korean investment providing digital telephone service in Nakhodka. The regional telephone company has itself drawn foreign investment, with a Singaporean company taking an initial stake several years ago.
The Nakhodka Free Economic Zone provides tax incentives for companies who do just that.
Another under-exploited resource, says Mr. Sapozhnikov, are pine seeds from Primorsky Krai's forests. "These are eaten in China, but also all over the world, and we have enquiries from trading companies as far away as the Mediterranean. Unfortunately, the seeds need some minimal processing before exporting, to remove moisture, and while this is not very difficult to do, no one has yet set up the facilities."
Person-to-person links between Primorsky Krai businessmen and their counterparts in the Asia/Pacific have meant that even rather small businesses have been able to attract foreign investment. FAST, a Vladivostok-based firm, is well-known locally for being the main supplier of photograph-development services, a business which attracted investment from individual American investors. FAST has since branched out into stationery and pharmaceuticals, two businesses which can make use of the distribution networks they have already built up. The company plans to set up nine new drug stores by the end of the year; a healthcare centre is also on the cards.
It pays to keep one's eyes open and build on existing relationships. The Nakhodka FEZ reports some recent new foreign investments in a wind power plant, new retail outlets (actually the development of a Chinatown) and in the local food processing industry.
Foreign investors have also found potential in hotels. Investment has come from North America (the Vlad Motor Inn and, in Nakhodka, the Dialog-Invit), Japan (the Versailles and Acfes-Seiyo), China (the Gavan in Vladivostok the Yuan Dong and Suan Yuan in Nakhodka) and, most recently, Korea with the newly-completed Hyundai business centre and hotel.
Although a great deal of this is so-called "commercial tourism" (also known as "shuttle trading"), it now appears that ordinary recreational tourism is now the largest part of this business.
While the Russian Far East is not as large a securities market as Moscow, many Russian brokerages are now recommending concentration on "regional stocks". Vladivostok has its own foreign-run brokerage and investment firm-Tiger Securities, run by Britain's Andrew Fox.