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South Korea could help nudge Primorye into the Pacific Rim economy. But despite investments like Hyundai's new hotel, not everyone thinks Russia is worth the risk.

Primorye is suffering from an identity crisis, and South Korea isn't helping.

The krai, closer to San Francisco than it is to Moscow, still takes orders from its western capital. But that hasn't stopped South Korea from trying to persuade this far eastern outpost of its own economic importance in the booming Pacific Rim arena.

Primorye is moving rapidly toward the east Asian economic community, says Lee Kwang-Hee, Director of the Korea Trade and Investment Promotion Agency in Vladivostok. The region is too far from Moscow and the transportation costs to the west are too high.

Primorye's trading patterns reflect this shift. In the first quarter of 1997 alone, South Korea spent $50.9 million on import and export activity in the area. Japan spent $74.5 million, and China $62.1 million. Except for the United States, which has made strong inroads into the Pacific Rim for more than a decade, the top eight traders with the region were Asian Pacific countries. Trade activity with other areas of Russia for the same period totaled $7.2 million.

Understandably, Primorye isn't quite ready for all the sudden interest in the area. The market economy here is still young, the government is broke, and more than a few remnants of the old Soviet bureaucracy remain. Vladimir Brezhnev, chairman of the Primorye Chamber of Commerce, will be the first to admit that his government hasn't gotten all the kinks worked out.

"We are at a stage of moving from one economy to another," he says. "Our business laws are definitely not perfect, but of course there are going to be problems.'"

Many of the difficulties cannot be solved without lots of money, something Russia doesn't have. For one, the infrastructure is poor - the city loses power occasionally, the roads are filled with potholes, the rail lines are deteriorating.

Other problems arise from cultural differences.

"On one side, Koreans are extremely interested in getting into the investment market here," Brezhnev says. "But their approach is different. While Russians want to get loans, Koreans think, 'Sell us your shares.'"

The worst problem for investors, according to Brezhnev, are the legal, tax, and customs systems. Laws vary depending on place, time and financial situation. By the time a foreign company signs an agreement with a Russian firm and gets ready to implement it, all the tax laws change, Brezhnev says.

In addition, there are few safeguards for foreign investors.

When the going gets tough, failing Russian companies are known to simply declare bankruptcy, empty their accounts, and hardly even apologize for defaulting on their debts.

Foreign investors just don't know what laws exist, or what loopholes Russian companies can exploit to save themselves - and sacrifice their partners, Brezhnev says. So, in the face of so many pitfalls, what makes South Koreans so eager to spend their money in Vladivostok?

Well, apart from Hyundai's $96 million hotel venture, they're not so sure of themselves, at least right now. And Hyundai itself admittedly will target foreign money, not Russian, to make a profit. The brochure tells customers to "feel what business travel should be like." With $250 to $1,000 rooms and $7 bowls of soup - well out of most Russians' price range - the hotel will most likely draw businessmen who want western standards at any cost as they consider the area's sizeable risks.

Despite the pricey soups, Hotel Hyundai General Manager Yung Kung Soo says the company won't make a profit for nine years. And other Koreans think along similar long-term - but optimistic - lines, said South Korean Consulate General Choi En Sam.

"In my opinion, things are going to take a long time," Sam says. "It's impossible to get things done right now, and there is a lot of Korean resistance [to investing] because of Russia's financial problems." It's not only the tax system that worries South Koreans, but also the temptation to simply go elsewhere, where the global economy is better established. LG Electronics, a Seoul-based firm with annual sales revenue at over $74 billion, set up shop here at the start of the year. But the Vladivostok office isn't getting much attention from back home, says LG Representative Tony Kim.

"We get all approval from our Seoul office and now they can't afford to think about the [Russian] Far East. LG is concentrating on moving into China, India, and Thailand right now."

In other words, though LG is making inroads into Vladivostok, Kim says that it isn't ready to committ a $96 million hotel to the area just yet.

South Korean firms also profit from the area without risking significant investment. According to Sam, South Korean businesses, particularly in the food industry, simply import to Russia through small traders, eliminating the need for risky partnerships or local offices.

On the export side, South Korean companies find that, despite the tax problems, buying Russian gas, fish, timber, and scrap metals are excellent ways to pump money back into Primorye without coming away empty-handed.

But most South Koreans and Russians agree that the time for long-lasting partnerships are on the horizon. Importing and exporting is costly, and though Hee thinks that eventual reunification on the South Korean peninsula will cut costs drastically, South Koreans want to establish cooperative agreements to develop a more stable and attractive economy in Russia, he says.

The partnerships aren't just set with economic goals, but also facilitate information swapping and native experience - something sorely needed to navigate the tax and legal systems here.

LG is already establishing partnerships with Russian electronics dealerships and wants to begin assembling its products here - but not alone, Kim says. Avest, a Russian electronics firm, is interested in manufacturing a line of LG's color TVs. Of course Avest wants 20 to 30 percent of the venture's funding to come from LG, Kim says.

What the Chamber of Commerce and the Korean Trade Center can't do, their governments are doing for them. Russians and South Koreans are working together to build a jointly run industrial complex that will establish 100-150 manufacturing enterprises on a piece of land 6 km from Vostochny port in Nakhodka. The move, it is hoped, will spur investment in Nakhodka's languishing Free Economic Zone, hindered by steep customs duties, inefficient processing time, and confusing tax laws.

Despite these challenges, the South Korean government wants its enormous commitment to be a sound one. Instead of waiting for city, state and federal officials to clean up tax laws, South Korean representatives recently signed an agreement with the federal government that would bring South Korean companies in the complex enormous tax breaks and the possibility of "tax holidays." Already, many South Koreans are interested, Hee says. Although he won't say who, Hee indicates that members of the timber, fish, electronics, automobile, a garment industries are all considering the project, still in the initial stages.

Understanding the benefits such agreements bring, the krai Duma recently introduced a law that, if passed, will provide tax breaks and investment protection to foreign investors throughout the region. And now that visas to Russia from South Korea are easier to get than from any other country, the Russian government shows that it recognizes foreign interest, and is trying to accommodate it.

Russian businesses are also doing their part. They attend conferences and seminars, and learn how to make their venures more attractive, Brezhnev says.

"Yes, there are problems in Russian-South Korean relations," he says. "There are great differences in our legal and social systems, as well as in our psychological thinking. But this is a time when we need Korean experience. When Korea developed its market economy it listened to America and Japan. Now we are learning from the Koreans."