ВЕСТНИК
Хабаровской государственной академии экономики и права

Yoji Koyama,
Niigata University, (Japan)

ROLES OF THE RUSSIAN FAR EAST AND JAPAN IN PROMOTING ECONOMIC COOPERATION IN THE NORTHEAST ASIA

The relation between the Russian Far East and Japan is 'near and far'. In the Cold War period there existed an 'invisible wall' in the Sea of Japan. The Cold War ended about 10 years ago. Although a tense atmosphere remains in the Korean Peninsula, people's comings and goings and cultural exchange between Japan and Russia have remarkably increased since then. In this sense the 'invisible wall' has collapsed. Nevertheless, the business between the Russian Far East and Japan has not made a big progress. Why? In this paper I would like to argue what should be done by the Russian Far East and Japan in order to promote economic cooperation in the Northeast Asia.

I The Russian Far East

Russia is usually regarded as a European country, but it is at the same time an Asian and Pacific country. Already in the period of Perestroika the Soviet Union declared itself as an 'Asian and Pacific country'. During the period of the former Soviet Union the Far East was placed a resource base and a munitions-producing base for a whole country. As for its industrial structure industry and mining accounted for about 60% of its national income, and the share of transportation and construction were relatively big. The most important branches in industry and mining are forestry, wood-processing, extraction of nonferrous metals and their refinement, which depend on abundant natural resources. In this way, the Far East has been characterized by its industrial structure dependent on natural resources. The self-sufficiency of foods in the Far East is only about 50%. Necessary foods and other consumer goods have been provided by the European Russia and other Republics, which are far to the west.

As a result of the breakup of the Soviet Union in December 1991, the regional connection in the country was cut off. Most of the business partners within a country reappeared as foreigners. The most important artery that connected the Far East with the European Russia and other Republics was the Trans Siberia Railways, which could exercise its power in the socialist planned economy. The Railways were subsidized by the State budget during the socialist period. After the transition to a market economy, the transportation cost by means of the Railways has soared due to an abolition of the subsidy, coupled with inflation factors. Thus it became difficult to transport goods between east and west in a vast country Russia. After the collapse of the highly centralized planned economy and its transition to a market economy, it is quite natural for the Russian Far East to direct its attention toward neighboring countries in the Northeast Asia.

II Megatrends

We have to pay attention to the megatrends in the world. The first megatrend is globalization. In my opinion, this has two aspects. The one is a neutral aspect, that is, the fact that owing to application of results of scientific-technological development to the field of transportation and communication, it becomes increasingly easy for us to travel, transport goods, transmit information and transfer even money across borders, and consequently the globe became relatively small. In other words, this phenomenon is explained as an expansion of economic activities to the global scale. Thus the conceptions such as borders and sovereign states, which previously had important meanings, have relatively insignificant meanings now. The another aspect relates to the end of the Cold War. Since socialism with the Soviet Union as its top had collapsed, the confrontation between America and the Soviet Union had disappeared, and America's hegemony over the world was established. Owing to this fact, American values and standards are promulgated as the global standards.

The second megatrend is regionalism, which means a phenomenon that a group of countries strengthen their cooperation and unity. This does not contradict the globalization. This is enabled by the advent of borderless era which accompanied the globalization. The example includes EU, NAFTA, APEC, etc. Besides, there is a trend that smaller regions (subregions) which compose a wider region voluntarily cooperate with each other. This is called subregional cooperation. For example, Baltic Sea Rim countries (Estonia, Latvia Lithuania, Finland, Sweden, Norway, Denmark, Germany and Poland) are cooperating with each other, first of all, in environmental problems. In addition, they are cooperating with each other in a wide sphere such as economic problems, cultural exchange, human rights, etc. 'Euroregions' are interesting examples of 'cooperative relationship of municipalities across borders'. Although there are still high hurdles between the Western Europe and the Eastern Europe at the national level in the integration process, the integration of the both parts of the Europe is making steady progress at the micro level. At the level of municipalities which are adjacent to each other, on the borders of Czech and Poland, and Slovakia and Poland, cooperation makes headway in the sphere of improvement of transportation, prevention of air pollution, promotion of regional development, health and social security, education and culture, tourism, etc. More than 40 'Euroregions' are established in the whole Europe. Such cases are too numerous to mention¹⁾.

Since these two megatrends are under way irrespective of whether we like or not, we should behave taking into our consideration this reality. Now we are requested to change our way of thinking. It seems that my talk jumps to a quite different topic, but I would like to explain the case of Slovenia, which composed the former Yugoslavia. It is a small country with an area of 20,251 square kilometers and with population of less than 2 million. As Niigata prefecture where I live has an area of 12,500 square meters and population of 2 million and a half, Slovenia is smaller than our prefecture in terms of population. After the breakup of the Federation and the transition to a market economy Slovene economy experienced a depression for a while, but since 1993 it has been steadily developing. In 1998 the per capita GDP was US$ 9,899. If we view the per capital GDP on purchasing power parity basis already in 1997 it corresponded to US$ 13,000, exceeding the level of Czech Republic. When I visited Slovenia in April 1991, that is, immediately before the Federation's breakup, I was skeptical about its independence on the ground that Slovene industries, which were competitive in the Yugoslav markets, were less competitive in European markets. Nine years later, however, the performance of Slovene economy seems good in spite of the previous anticipation. What is the reason for its success? My research on Slovenia's strategy for survival and development was motivated by this question.

In this regard, Marjan Svetlicic's paper "Small Countries in a Globalized World: Their Honeymoon or Twilight?" is very informative. His opinion can be summarized in the following two points: First, fundamental technological changes, the information revolution and related changes have made small countries (SCs) more viable today than they were "yesterday", the external environment is enhancing smallness. In view of globalization tendencies and increasing importance of economies of scale and scope, the thesis that SCs cannot survive should be rejected; Second, the viability of an SC in the globalized economy depends to a large extent on its ability to swiftly adapt to the changing external environment.

In order to support these arguments, he compares and examines strengths and weaknesses of small countries. On the one hand, weaknesses of small countries such as Slovenia include: a weak position in international relations due to the lack of different kinds of power; lack of natural resources, labour and local factor conditions; an inability to realize economies of scale due to a small markets; limited financial funds and R&D capabilities, etc. On the other hand, strengths of small countries include: more easily achieved social (cultural and religious) cohesion, better implemented policies and more stable system; absence of responsibility for the international order which might be costly to large states; stronger and swifter adjustment capability; better possibilities specialization; computerization and telecommunications which are relatively more powerful weapons for small firms and countries than for large ones, etc.

Similarly he compares and examines opportunities for small countries and threats for small countries. He stresses that despite the weaknesses and threats mentioned above small countries have now strengths and opportunities which surpasses their weaknesses and threats. In his opinion, smallness of domestic markets is not important. Access to the world markets is decisively important. Small countries like Slovenia does not need to have a whole set of industries. Instead, they should find good areas appropriate to them, that is, niches and specialize in the areas. For that purpose, they should thoroughly internationalize all kinds of activities2).

"At present the richest countries are small countries such as Belgium, Switzerland and Singapore. In the period when agriculture was dominant the size of one country's territory. In the period when industry is dominant its significance has considerably decreased. In contemporary society capital, technology and information are decisively important"³⁾. Presumably Slovenia aims to become a small advanced country of this type.

All countries in transition have experienced depression. According to Kornai Janos, this 'transformational recession' was caused by the transformation from supply-constrained economies to demand-constrained ones4) Generally speaking, in contrast to the Central Eastern Europe, in the Southeastern Europe as well as Russia and Ukraine the depression was very serious and their economies would not show dynamic upward movement. One of the reasons for the difference derives from the degree of development of market economy in pre-socialist period. In addition, the difference seems to relate to the fact that small countries' strength such as their ability to swiftly adapt to changing external environment, etc. favorably works in the Central Eastern Europe. Figuratively speaking, we can imagine a situation in which a gigantic tanker has a trouble in making a complete turnaround in a small bay while a small boat is easily doing it. In our time, from the size of countries it does not necessarily follows that big countries a priori have clear advantage over small countries. In some cases small countries are more advantageous.

III Problems which Russia faces

Although now in economic difficulties, Russia is a big country which is a permanent member of the United Nations Security Council, a nuclear power and a member of the G8. Russia need not such an economic assistance as is extended to developing countries. In fact, the Russian people have huge amount of surplus money, as I will mention later. The most essential is development of business between Russia and Japan on the basis of mutual interest.

What is the potential strength of the Russian Far East? It consists in the point that the Russian Far East has a vast territory with abundant natural resources. The natural resources are roughly classified into forest resources, marine resources, mineral resources and energy resources, but these are not sufficiently utilized. As for mineral resources, many kinds of valuable mineral ore, for example, gold, diamond, etc. are under the ground, but only a part of them are exploited due to severe natural conditions. In the condition of the market economy these mineral resources are simply sleeping under the ground and they do not represent the country's actual strength unless exploited mineral ores can be profitably sold on the world markets. The Russian Far East is now exporting mainly marine products such as crabs well as timbers in those regions where forests can be easily cut. We are xkqous about exhaustion of marine products and negative effects the environment.

In the Russian Far East there are many defense enterprises which have relatively advanced technology. The Russian Far East should establish investment-technology links between defense industry and the extract industry. As Dr. Vladimir Ivanov wrote, "if the export income from the mining sector can become available to the defense industry, it will provide a financial solution to the protection of restructuring. In return, technology and industrial base available at the defense enterprises should serve the needs of the extracting industries in their efforts to achieve modernization, technological upgrading, higher productivity and competitiveness. Such investment-technology links between these two branches of the economy will not only serve their commercial interests but those of the Russian economy as a whole"5)

The volume of foreign trade between Russia and Japan is held in check due to the economic stagnation of Russia. As Russia has insufficient capitals it needs an increase in foreign direct investments. However, the direct investment from Japan is stagnating. Problems of the Russian side in economic cooperation between Japan and Russia can be pointed out as follows 6) :

a) Insufficient investment in domestic industries. We hear that a huge amount of foreign currencies earned by exports of natural resources and energy is not utilized in domestic industries but deposited in foreign banks. Also ordinary citizen's deposits are not utilized for investment in production. It is said, "The underground economy occupies 40% of the economy as a whole. At citizen's home a large sum of cash and US$ 40-60 billion foreign currencies are 'deposited under mattresses'. At least US$ 100 billion are estimated to fled Russia to overseas"7). Funds are actively circulating only in the distribution sphere. One of the reasons for insufficient investment in industries seems to consist in the too high rate of taxes imposed to production enterprises. Preferential treatments of production enterprises in taxation as well as measures to return foreign currency deposits with foreign banks to Russia should be taken.

b) A lack of preferential treatment of foreign capitals. It is necessary to take adequate preferential treatments of investment from overseas at the Federal level. It is said that although in 1992 in order to stimulate foreign direct investment the Khabarovsk territory took measures to exempt it from taxation on companies' profit in the framework of local public finance for two years, no investment have come from overseas at all. The reasons for it are as follows-' First, such a tax revenue in the framework of local public finance was insignificant, so that it could not serve as an incentive; Second, in order to make the best use of foreign capital, actual merits in the field of customs policy, regulation on foreign currencies, management, ethical environment, security were much more important 8).

c) An insufficient power of local authorities. In the Perestroika period local governments demanded more power. Yeltsin, who challenged Gorbachev, supported the demand to strengthen local regions' sovereignty. When the Economic Association of the Far East adopted 'the concept for promoting regional development in the Far East's economy' ('the concept') the Government of Russian Republic headed by Yeltsin promptly supported this. However, Yeltsin, who came into power after the defeat of the coup d'etat in August 1991, changed his attitude altogether. Because since then the strengthening of local regions' power as a weapon for ousting Gorbachev became encumbrance. In September 1991 the Central Government in Moscow deleted development fund plan for the Far East, introduction of convertibility of Ruble in a certain region, preferential treatment of customs and taxation, etc. which composed the main pillars of the 'concept'. In addition, President Yeltsin canceled the right of enterprises in the Far East to freely dispose 30% of their products. In this regard, Sakha Republic is in more favorable position because it is given a little bit bigger power than other territories and provinces in the Far East. As a matter of fact, my description in this paragraph is based on rather old information. By the way, in Japan the package law on decentralization of power came into force on April 1, 2000. According to this law, the new era when the Central Government and municipalities would establish equal partnership began, and the scope of municipalities' competence was to be extended 9). I would like to know the present situation in this field in Russia.

d) Poor infrastructure. Poor industry-related infrastructure (roads, railways, ports, communication facilities, airports, electric energy, water, etc.) as well as insufficient buildings available for offices are big obstacles to the development of business. Owing to the foreign capital, however, the situation in the sphere of hotels, restaurant, offices, and satellite communication is being improved. When I organized an international symposium in 1992 the communication with Khabarovsk through telephone or facsimile was very difficult. Because at that time the Russian side still used an outdated means of communication, telex, while this was seldom used in Japan. In Niigata Prefecture only several companies had telexes. I was obliged to request the international section of the Daishi Bank to communicate with Khabarovsk. Afterward, the situation was quickly improved. It became possible for us to communicate with each other through facsimile and recently through e-mail. When I think of troubles experienced 8 years ago I feel I am living in a completely different age. But the financial infrastructure is yet to be improved. The reliable banks are very few, and the bill business is not developed. Remittance and payment of money is time-consuming and insecure. If foreign companies are expected not only to help but also to entirely undertake the improvement of the industry-related infrastructure they will hesitate to go into business with Russian counterparts.

e) There are many cases in which foreign companies suffer losses due to changes in contents of contracts and a shortage of information. Although laws are often changed and new laws are adopted one after another it is difficult to obtain a collection of related laws. Besides there is a difference in business practice. Negotiators of the Russian sides are suddenly replaced, and also institutions are suddenly changed, as a result the points agreed by the both parties till then are thrown out. There is an opaqueness in business, for example, too much emphasis on personal connections. The problem, which drew people's attention in recent years, was the law on production sharing. This was adopted for the purpose of active utilization of underground resources and development of investment activities. This law regulates the relation between Russia and foreign investors concerning investigation, prospecting and mining of mineral resources within the territory, continental shell and economic waters of the Russian Federation. At the end of December 1995 the Russian Government strengthened its own competence and control over the exploitation of natural resources. According to the revised law on production sharing, in the case where a conflict occurs between the both parties of the contract the competence of arbitration belongs to an international arbitrating organization. But according to the Russian civil code, the competence of arbitration belongs to the Russian judiciary authorities. Undoubtedly there is a contradiction between the two laws. The existence of such contradictory laws discourages foreign investors to invest in Russia. What Russia should do is to improve its legal system. This is a prerequisite for establishing business environment.

I am not sure to what extent the Far East can do by its own competence, but I think that if the Far East desires to increase investment from overseas it should endeavor to improve the environment for foreign direct investments like Hungary and Poland did.

IV Japan's role

Japan should take an initiative in developing economic cooperation in the Northeast Asia in order to establish long-lasting peace in this region. Japan should contribute to the stabilization of the Korean Peninsula and at the same time it should endeavor to develop economic cooperation with Russia and China. Professor Scalapino (University of California), an authority on history of East Asian political history, said that economies of Northeast Asian countries constitute a 'natural economic territory'. I think that Japan should support the integration of the Russian Far East into the Northeast Asian economic area (the so-called Japan Sea rim economic area). At the Niigata-Northeast Asian economic conference held in 1998 Mr. Akira Nanbara, Vice-President of Japan Export-Import Bank, pointed out the importance of joint development of resources and energy by countries of the Northeast Asia in mutual cooperation in technology and funds. In his opinion, this would contribute to stabilize energy supply in the area. Besides that, this would consolidate the relationship of mutual dependence among countries and concomitantly lead to political stability in the region10). Needless to say that in this respect Japan should make an active contribution in technology and funds. I would like to call your attention to the fact that although not materialized yet the Japanese Government proposed to establish the Asian Monetary Fund already in summer 1997.

I would like to add that between Japan and Russia further trust building measures are necessary. The both countries have not concluded a peace treaty yet. In this respect, it might be impossible to promptly solve the northern island issue, but as far as certain outlook for this issue is not given the Japanese public opinion remains reluctant to support the peace treaty with Russia. Once the peace treaty is concluded, it is no doubt that economic cooperation between the both countries will make rapid progress.

As I mentioned above, a big country Russia need not economic assistance. The most essential is development of business between Russia and Japan on the basis of mutual interest. Japan should provide Russia with know-how on technical problems in the transition to a market economy and the conversion of military into civil industries (accounting, business administration of enterprises, etc.).

Decision-making and cooperation at the level of central governments are of course important, but now in the globalized era cooperation at the level of municipalities, private companies, research and educational institutions is also important. Especially education of the youth who will shoulder the next generation is important in any nations. Japan should actively send the youth to Russia and at the same time it should actively accept Russian students. Needless to say that in this case the both governments are required to make financial support such as substantial increase in scholarship.

Notes

1) Koyama, Yoji. "Japan Sea Rim Economic Area and Strategies of Municipalities", in Koyama, Yoji (ed.). Strategies toward the APEC Era'- A New Phase of the Japan Sea Rim Economic Area, Yushindo, Tokyo, 1996, pp.l94-197 (in Japanese).

2) Svetlicic, Marjan. "Small Country in a Globalized World: Their Honey Moon or Twilight?", Paper prepared for ECPR Workshop on Small States in Transforming European System, 1997, pp.3-14 (in English).

3) On March 28, 2000, in Tokyo there was a meeting where participants discussed about problems of the NATO's bombardment over Yugoslavia which was done a year before. At the meeting a Japanese journalist said, "Yugoslavia should not stick to its territory any longer, but it should endeavor to have the economic sanctions lifted as soon as possible and tackle its economic reconstruction". The quotation in my paper is from his argument.

4) Kornai, Janos. "Transformational Recession'- A General Phenomenon Experienced through the Example of Hungary's Development", in his book, Highway and Byways, the MIT Press, London, p.l75 (E).

5) Ivanov, U.I. "Conversion of Military Industry in Russia and Cooperation in the Northeast Asia" (The original is English), in Koyama (ed.) (l996), p. 101.

6) This part is a revised description of problems mentioned in my report "A Desirable Direction of the Cooperation in Development of Natural Resources in the Russian Far East", in The Directions for Practical Cooperation in the East-Sea Rim Economic Sphere in the 21^st Century (Proceedings of the International Symposium held by Kangwon National University, June 12, 1997) (J).

7) Ashida, Fumio. "Consequence of the 'Transition to a Market Economy' as Prescribed by the Monetarism", Investigation Materials of Russian and Eurasian Economies, No.800, p.37 (J); Also Sergei Karashnikov said as follows: "At the end of the last year [l997], in Russia there were, according to the Central Bank's estimate, [surplus funds equivalent to] about 300 trillion Rubles, according to a specialist's estimate, US$ 30-100 billion. Suppose it is US$ 50 billion, it corresponds to our investment for about 10 years. Why these funds are not utilized? The reason for it is because, first of all, people have no motivation to invest them. In our country there is no efficient mechanism that will assure investors of proper profit from investment of these funds". Karashinikov, Sergei,. "Social Sector by Self-finance", Ekonomika i Zhizni, No. 15, april 1997 (in Russian); Yakov Dubnetski gave a similar opinion. Dubnetski, Yakov. "There are 3 Sources. Where are Components?", Ekonomika i Zhizni, No. 19, May 1998 (R).

8) Minakir, P.A. "Economic Cooperation and International Cooperation in the Region of the Russian Far East", The Region of the Russian Far. East in a Transitional Period and Japan: Proceedings of the 10^th Academic Symposium of Japan and the Russian Far East, Society for Academic Exchange between Japan and the Russian Far East, 1995, p.28 (J).

9) Editorial, Asahi Shimbun (Newspaper), April 1,2000 (J).

10) Nanbara, Akira. "Economic Development of the Northeast Asia", Niigata-Northeast Asian Economic Conference 98-' Proceedings, 1998, p.l5 (J).

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