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Russia's Resources Lure Japanese

Despite long-standing territorial dispute, businessmen line up investment prospects

MARK GORYACHEV, an entrepreneur from St. Petersburg, came to Tokyo last week looking for a few good Japanese investors.

Having already learned how to succeed in Russia's new grass-roots capitalism, Mr. Goryachev, who says he is a self-made millionaire, was undeterred by Japan's cold shoulder toward Moscow over a territorial dispute.

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Nor was he worried that a recession in Japan has slowed overseas investments or that many Japanese firms remain cautious due to the wobbly politics, bad debt, and messy business practices in Russia, or their own government's lack of credit insurance for investors.

Goryachev left Tokyo with a "protocol of intention" from a Japanese bank for a $1 billion investment aimed at setting up a private banking operation. "With Japanese bankers in St. Petersburg," he says, "Japanese companies will soon follow."

Such ties between money-giant Japan and resources-giant Russia receive little applause in either country these days. Moscow has expectations of massive Japanese investment and expresses frustration at what it is getting. Tokyo, meanwhile, downplays such ties in its attempt to use the carrot of future aid and investment to press its claim to four small Russian-held islands.

Public frustrations on both sides erupted in September when President Boris Yeltsin canceled a trip to Tokyo. Japan recoiled in shock by trying to restrain corporate enthusiasm for investing in Russia. Then, last week, Prime Minister Kiichi Miyazawa sent a letter to Yeltsin asking that his trip be rescheduled soon.

But in a provocative move, Mr. Yeltsin signed an order Dec. 8 creating a special economic zone on the disputed Kurile Islands, known as the Northern Territories in Japan. The islands were seized by the Soviet Army in the closing days of World War II.

The decree removes many restrictions on foreign business that set up shop on the disputed islands. Some controls on hard-currency transactions would be eased. Local officials could rent land to investors "for up to 99 years," according to Itar-Tass news agency.

One aspect of Moscow's plan for the islands is to develop gold mining, according to the Japanese newspaper Mainichi. Gold ore deposits on the island of Kunashiri are estimated to be as much as 80 tons.

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If the Yeltsin decree does woo foreign investment, it could make a solution to the territory dispute even more difficult. In October, Moscow indicated it wanted to freeze talks on the islands for up to two years.

In the meantime, Japanese businesses are scouting prospects in all of Russia, especially in the resource-rich Far East, many of them setting up "representative offices."

Large Japanese corporations "are not exactly sitting idly by," says Ryutaro Omori, president of Niigata Chuo Bank. The city of Niigata is located on Japan's west coast across the Sea of Japan from Russia's Vladivostok.

"The thinking of Japanese executives is that if they just wait around, then Russia's rich resources will all be spoken for by companies from other industrialized nations," Mr. Omori says.

For the first 10 months of 1992, Russia's total two-way trade with Japan and the West was $58.4 billion, according to Moscow's State Statistics Committee. Of this, Japan accounted for 6.6 percent - about the same as that for Britain and France. Germany led with 27.5 percent, followed by Italy at 11 percent.

And for all Russian exports coming from joint ventures, those done with a Japanese partner accounted for 26 percent of the total in 1990, according to Tadashi Sugimoto, chief economist at Japan Russia Business Cooperation Committee.

A prime example of a Japanese firm not waiting for an official green light came Dec. 8 when Mitsubishi Corporation announced that it would join an international consortium to develop oil and natural gas off the Far East island of Sakhalin. The trading house will join up with Mitsui & Co., another Japanese trading firm, for a total 30 percent share of the project, which may later ship oil to Japan.

"Energy seems to be the one major area where the Japanese will break principle," says W. K. Nickoson, president of Tokyo-based Asia Dynamics (Japan) Ltd., a firm investing in Sakhalin.

Last month, Japan's overseas telecommunication carrier, Kokusai Denshi Denwa Company Ltd., said it would launch direct-dial phone service with the Russian Far East starting in January.

Still pending is a large Siberian forestry project, proposed by 17 Japanese trading firms, which has been stalled by Moscow's demands for a portion of the hard-currency export earnings. Originally set to begin in early 1991, the $1.4 billion project may not be approved until next spring.

Some analysts speculate that Tokyo's long-range strategy is to help break up Russia into smaller states that would be less of a threat to Japan. This theory is proposed to explain the tough territorial stance and the attempt to rein in Japanese investment.

But, Omori says, many ministries support investment in Russia, ignoring the Foreign Ministry's hard line. Omori himself has been to Russia nine times in the past two years seeking investment opportunities. In March he brought together 60 Japanese firms, setting up a $120 million investment fund.

He admits investors faces big hurdles in Russia. "But only by investing money can you gain information on how Russians will act in business," he says. "These struggles are lessons for Japanese companies in the future."

The biggest problem for investors is inconsistency in policies, Mr. Sugimoto says. "Just this year alone, they must have changed the rules regarding joint ventures and foreign exchange two or three times."

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