Russia's economic moves in Asia
President Vladimir Putin’s trip to Japan has emphasised that the dispute over the Kurile islands need no longer be an impediment to improved ties. Japan has now backed Russia’s entry to the WTO and the sides are looking to deepen investment and trade ties—although Russia still refuses to commit to building its eastern pipeline to the Pacific rather than China. The islands dispute will remain a high-profile issue, but for as long as Japan has serious economic interests in Russia there is no prospect that the failure to reach a deal will prevent trade and investment ties expanding.
Mr Putin on November 21st visited Japan for the first time in five years, bringing with him over 100 Russian businessmen including high-level representatives from leading Russian companies in the fields of gas (gas monopoly Gazprom), oil (state oil company Rosneft), telecoms, metals and banking.
Bilateral relations are still marred by the absence of a peace treaty to end formally the hostilities that ceased in 1945, because of a territorial dispute over four islands—Kunashiri, Etorofu, Shikotan and the Habomai islets—that Russia seized at the end of the Second World War. Japan demands the return of these “Northern Territories”; Russia refers to them as the “Southern Kuriles” and has refused to hand them over. At one time Moscow was prepared to return two of the islands, but this remains unacceptable to Japan and in the current Russian domestic political climate there is little scope for Moscow to be more flexible. Indeed, it is not clear that Mr Putin could afford to cede ground (literally) without denting his popularity. A VTsIOM poll published shortly before the trip showed that 64% of respondents would think less of Mr Putin if he were to hand over the islands to Japan.
Sidelining the islands
As expected, the two sides agreed to disagree—and to continue talking—over the islands. The issue is too sensitive in Japan simply to be dismissed, but there is now a mutual understanding that the Japanese and Russian positions are so far apart (and so immoveable) that there is no prospect of a breakthrough within the short to medium term. Indeed, comments by Mr Putin and Japan’s prime minister, Junichiro Koizumi, indicate that the leaderships envisage a solution only when bilateral relations are much better developed than they are today.
This is a fundamental change from the position when Mr Putin entered office, whereby Japan sought to condition bilateral relations on a solution to the islands dispute. Now there is an acceptance that a territorial deal and a peace treaty will be a product of better relations rather than a precondition for them.
Who’s got the power?
The shift in stance has been occasioned by Russia’s increasing economic importance (and potential) for Japan. In large part this reflects Russia’s position as a global oil and gas player and Japan’s determination to diversify its energy supply base away from an excessive reliance on the Middle East. Japan and China are currently locked in a competition for oil resources, with Russia as one of the largest prizes. Primarily this concerns Russian plans to build an oil export pipeline from Eastern Siberia, an emerging oil region, to eastern markets (although initially it will rely on oil from Western Siberia). The final destination will be either China or Perezovnaya on Russia’s Pacific Coast, although there are plans eventually to build a spur to the “losing” destination. For the moment, Russia’s government has only committed to building a first leg of the pipeline, to Skovorodino, by 2008. This does not close off either option for the main line, although the fact that Skovorodino is close to the Chinese border—and a new Chinese oil pipeline—has fuelled fears in Japan that it is holding a losing hand.
Within Russia, the competing arguments remain finely balanced. The oil pipeline monopoly, Transneft, favours the Pacific route because it gives Russia flexibility to send its oil to any of several destinations, rather than tying it solely to China. The Pacific route also offers a better chance to regenerate the Russian Far East—although the practical possibilities to achieve this via pipeline construction appear slim. The Chinese route, meanwhile, makes better business sense because it is cheaper to build and will be more profitable for oil producers to use. In addition, political considerations favour the Chinese route: the two states have a relationship underpinned by a large arms trade and a shared security agenda.
One of the fruits of Mr Putin’s visit was a bilateral accord wherein Russia promised to build a pipeline to the Pacific. Without an attached deadline, however, this offers Japan no guarantee that it will get Russian oil ahead of China. Because there is no guarantee that it will have enough oil within the next decade for both routes, it is vital for both Japan and China to win the battle over the eastern pipeline’s primary destination.
Too good to miss
If the arguments in favour of China win out, it may be that Mr Putin will seek to soften the blow for Tokyo by pointing to the potential for Sakhalin oil to be sold to Japan. Two of the giant blocs at Sakhalin are now beginning to produce oil and gas, and already Japanese power companies have contracted with the Shell-led Sakhalin-2 consortium to buy liquefied natural gas (LNG). One outcome of Mr Putin’s visit was an accord between the Japanese authorities and Gazprom to explore the possibilities for co-operation in developing gasfields in north-eastern Russia and utilising gas-to-liquids technology in Russia.
Energy is not the only factor in the investment equation, however. Russia’s strong economic growth in recent years has opened up economic opportunities across the board, particularly in the consumer goods sector. In April this year Japan’s car giant, Toyota, announced that it would open an assembly plant in St Petersburg in order to tap the Russian market. Initially the plant is to have a production capacity of 50,000 units per year and it will focus on producing the Camry, which is Toyota’s best-selling model in Russia. Already several of Toyota’s rivals—Ford, GM, Renault and Hyundai—are making cars in Russia, which is a large and fast-growing market. This merely underlines that, for a number of Japanese companies, Russia is now too big an opportunity to ignore—regardless of the political problems centring on the territorial dispute.
Trade gains
The most tangible sign of a more equitable relationship that has a stronger focus on business ties came in the agreement on the terms for Russian entry to the World Trade Organisation (WTO). Although the trade issues between the two states were not especially contentious, there was always the potential for political obstacles to halt progress: this concern can now be laid aside.
As a result of the deal with Japan, there are only seven countries with which Russia needs to reach agreement so it can join the WTO. Of the remaining countries, only three still present major problems: the US, Brazil and Canada. Meat quotas and the reduction of existing sugar duties are the main areas of disagreement with Brazil, whereas the US and Canada are insisting on banking sector liberalisation and a reduction in civil aircraft import duties.
With regard to Japan, the key to the shift in relations has been Russia’s rising profile as an emerging market and global energy power. For as long as it retains this elevated position within the perceptions of Japan’s political and economic decision-makers, there is little prospect that the territorial dispute—despite its resonance in Japanese society—will hamper trade and investment relations. With the issue of the islands put to one side, the prospects for deeper economic ties arguably have never been better.
SOURCE: ViewsWire Eastern Europe
Mr Putin on November 21st visited Japan for the first time in five years, bringing with him over 100 Russian businessmen including high-level representatives from leading Russian companies in the fields of gas (gas monopoly Gazprom), oil (state oil company Rosneft), telecoms, metals and banking.
Bilateral relations are still marred by the absence of a peace treaty to end formally the hostilities that ceased in 1945, because of a territorial dispute over four islands—Kunashiri, Etorofu, Shikotan and the Habomai islets—that Russia seized at the end of the Second World War. Japan demands the return of these “Northern Territories”; Russia refers to them as the “Southern Kuriles” and has refused to hand them over. At one time Moscow was prepared to return two of the islands, but this remains unacceptable to Japan and in the current Russian domestic political climate there is little scope for Moscow to be more flexible. Indeed, it is not clear that Mr Putin could afford to cede ground (literally) without denting his popularity. A VTsIOM poll published shortly before the trip showed that 64% of respondents would think less of Mr Putin if he were to hand over the islands to Japan.
Sidelining the islands
As expected, the two sides agreed to disagree—and to continue talking—over the islands. The issue is too sensitive in Japan simply to be dismissed, but there is now a mutual understanding that the Japanese and Russian positions are so far apart (and so immoveable) that there is no prospect of a breakthrough within the short to medium term. Indeed, comments by Mr Putin and Japan’s prime minister, Junichiro Koizumi, indicate that the leaderships envisage a solution only when bilateral relations are much better developed than they are today.
This is a fundamental change from the position when Mr Putin entered office, whereby Japan sought to condition bilateral relations on a solution to the islands dispute. Now there is an acceptance that a territorial deal and a peace treaty will be a product of better relations rather than a precondition for them.
Who’s got the power?
The shift in stance has been occasioned by Russia’s increasing economic importance (and potential) for Japan. In large part this reflects Russia’s position as a global oil and gas player and Japan’s determination to diversify its energy supply base away from an excessive reliance on the Middle East. Japan and China are currently locked in a competition for oil resources, with Russia as one of the largest prizes. Primarily this concerns Russian plans to build an oil export pipeline from Eastern Siberia, an emerging oil region, to eastern markets (although initially it will rely on oil from Western Siberia). The final destination will be either China or Perezovnaya on Russia’s Pacific Coast, although there are plans eventually to build a spur to the “losing” destination. For the moment, Russia’s government has only committed to building a first leg of the pipeline, to Skovorodino, by 2008. This does not close off either option for the main line, although the fact that Skovorodino is close to the Chinese border—and a new Chinese oil pipeline—has fuelled fears in Japan that it is holding a losing hand.
Within Russia, the competing arguments remain finely balanced. The oil pipeline monopoly, Transneft, favours the Pacific route because it gives Russia flexibility to send its oil to any of several destinations, rather than tying it solely to China. The Pacific route also offers a better chance to regenerate the Russian Far East—although the practical possibilities to achieve this via pipeline construction appear slim. The Chinese route, meanwhile, makes better business sense because it is cheaper to build and will be more profitable for oil producers to use. In addition, political considerations favour the Chinese route: the two states have a relationship underpinned by a large arms trade and a shared security agenda.
One of the fruits of Mr Putin’s visit was a bilateral accord wherein Russia promised to build a pipeline to the Pacific. Without an attached deadline, however, this offers Japan no guarantee that it will get Russian oil ahead of China. Because there is no guarantee that it will have enough oil within the next decade for both routes, it is vital for both Japan and China to win the battle over the eastern pipeline’s primary destination.
Too good to miss
If the arguments in favour of China win out, it may be that Mr Putin will seek to soften the blow for Tokyo by pointing to the potential for Sakhalin oil to be sold to Japan. Two of the giant blocs at Sakhalin are now beginning to produce oil and gas, and already Japanese power companies have contracted with the Shell-led Sakhalin-2 consortium to buy liquefied natural gas (LNG). One outcome of Mr Putin’s visit was an accord between the Japanese authorities and Gazprom to explore the possibilities for co-operation in developing gasfields in north-eastern Russia and utilising gas-to-liquids technology in Russia.
Energy is not the only factor in the investment equation, however. Russia’s strong economic growth in recent years has opened up economic opportunities across the board, particularly in the consumer goods sector. In April this year Japan’s car giant, Toyota, announced that it would open an assembly plant in St Petersburg in order to tap the Russian market. Initially the plant is to have a production capacity of 50,000 units per year and it will focus on producing the Camry, which is Toyota’s best-selling model in Russia. Already several of Toyota’s rivals—Ford, GM, Renault and Hyundai—are making cars in Russia, which is a large and fast-growing market. This merely underlines that, for a number of Japanese companies, Russia is now too big an opportunity to ignore—regardless of the political problems centring on the territorial dispute.
Trade gains
The most tangible sign of a more equitable relationship that has a stronger focus on business ties came in the agreement on the terms for Russian entry to the World Trade Organisation (WTO). Although the trade issues between the two states were not especially contentious, there was always the potential for political obstacles to halt progress: this concern can now be laid aside.
As a result of the deal with Japan, there are only seven countries with which Russia needs to reach agreement so it can join the WTO. Of the remaining countries, only three still present major problems: the US, Brazil and Canada. Meat quotas and the reduction of existing sugar duties are the main areas of disagreement with Brazil, whereas the US and Canada are insisting on banking sector liberalisation and a reduction in civil aircraft import duties.
With regard to Japan, the key to the shift in relations has been Russia’s rising profile as an emerging market and global energy power. For as long as it retains this elevated position within the perceptions of Japan’s political and economic decision-makers, there is little prospect that the territorial dispute—despite its resonance in Japanese society—will hamper trade and investment relations. With the issue of the islands put to one side, the prospects for deeper economic ties arguably have never been better.
SOURCE: ViewsWire Eastern Europe
posted by Marko at 11/23/2005 08:18:00 AM
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