Baroclinic processes generated by the K1 tidal flow around the Kuril Straits and their role in the linkage between the Okhotsk Sea and the North Pacific are investigated using a three-dimensional nonhydrostatic model. Large-amplitude unsteady lee waves are generated around sill tops all along the Kuril Island Chain and induce significant density inversions from the sea surface down to the ~27.6 σ$theta$ density layer. Along with this wave breaking, a large flow of energy takes place from the swift tidal flow regions to greater depths as a result of the clockwise propagation of both the topographically trapped waves around the islands and the remaining unsteady lee waves. Such wave generation and energy exchange eventually cause intense diapycnal mixing over the shallow topographic features and near the bottom, leading to a maximum diapycnal diffusivity of over 103 cm2 s-1. Even in the deep Bussol' Strait, which is thought to be the main exit of the Okhotsk Sea water, considerable mixing (corresponding to diapycnal diffusivity values of between 10 ~ 50 cm2 s-1) occurs. Vigorous mixing in the shallow regions produces low potential vorticity (PV) water in the upper layer and high PV water below. Accordingly, PV fronts are formed along the island chain and sustain instabilities that in turn release baroclinic eddies with low core PV values. These features are indicated in recent satellite imagery and in situ observations, suggesting that the tide is the controlling factor in the formation of fronts observed in the Kuril Straits. Tidally induced mean transport across the straits is estimated to reach ~26 Sv (1 Sv = 106 m3 s-1), which is much larger than in the barotropic case. However, most of the exchanged water tends to circulate around the islands due to the effect of bottom topography, whereas eddies pinched off from the tidal fronts carry the exchanged water offshore. The amount of eddy-driven offshore transport away from the islands reaches 14 Sv, with roughly half being directed to the North Pacific. This significant offshore transport spreads the effect of the diapycnal mixing taking place in the straits over wider areas of the North Pacific and the Okhotsk Sea. For example, the PV values generated in the eddies differ by 30--40% from the ambient water on average, whereas sea surface salinity within the eddies is 0.1 psu higher than the surroundings, corresponding to the density increase of 0.08 σ$theta$. Thus the eddy transport provides significant PV and salinity fluxes to both the North Pacific and the Okhotsk Sea. Hence we infer that a combination of tidally driven processes taking place at the passages leads to the formation of eddies that play a central role in water transport and transformation and are an essential aspect of the physical interplay between the Okhotsk Sea and the North Pacific.