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Thursday, Sept. 22, 2005

JAPAN HOLDS THE CHIPS, RUSSIA THE ISLES, OIL ACES

Firms betting on Russia amid political poker


Staff writer

A screen up front read "Welcome to St. Petersburg!" as top officials of Russia's second-largest city gave a presentation in Tokyo to lure Japanese investment.

News photo
Yuri Molchanov,vice governor of St. Petersburg, speaks during an investment seminar in Tokyo on Sept. 15.

"The economy of St. Petersburg grew twice as fast as Russia as a whole," Yuri Molchanov, vice governor of the city, told the Sept. 15 investment seminar of 110 participants, organized by the government-linked Japan External Trade Organization.

Despite little substantial progress in government-level relations, Japanese firms are turning their eyes toward Russia.

Tokyo hopes these deeper economic relations will create a better environment in the long run for resolving the two nations' long-standing diplomatic row over the Russian-held islands off Hokkaido -- a dispute that has kept the two nations from signing a peace treaty formally ending World War II.

Molchanov and his delegation of 24 other St. Petersburg officials visited Japan from Sept. 12 to 16 to promote investment from Japanese companies. Foreign Ministry officials described the pitch as rare.

Molchanov stressed his city is the center of transportation, finance and culture and a place where Japanese firms can find business opportunities. According to Russian figures, St. Petersburg enjoyed 14 percent economic growth in 2004 -- double the 7.1 percent the Russian economy experienced as a whole.

The delegation's visit followed Toyota Motor Corp.'s plan to build a $150 million automobile plant in St. Petersburg. It will start production in December 2007.

Paul Nolasco, a spokesman for Toyota, said the carmaker was encouraged by being the largest-selling foreign automaker in Russia in 2003. Toyota sold 26,400 vehicles, topping rivals General Motors Corp. and Ford Motor Co.

"Russia's market has potential, and our sales are growing," Nolasco said. "China, India and Russia are the three nations attracting our attention."

The Foreign Ministry supported Toyota's project in a variety of ways, including arranging for President Vladimir Putin and former Prime Minister Yoshiro Mori to attend the plant's groundbreaking ceremony in June.

Although most foreign investment in Russia comes from Europe and the United States, which came in after the 1991 collapse of the Soviet Union, Japanese firms are gradually starting to increase their presence.

Japan's trade with Russia hit a record $8.85 billion in 2004, up 48 percent from the previous year. Japanese investment in Russia also increased sharply, from $117 million in 2000 to around $1 billion in 2003.

Members of the Japan Chamber of Commerce and Industry in Moscow nearly doubled from 60 in March 2002 to 110 last June.

Shigeki Hakamada, a professor of international politics and economy at Aoyama Gakuin University, said Russia in the past wasn't able to count on investment from Japanese firms reluctant to take the plunge due to the perceived risks.

"But the move by Toyota, a big-name firm worldwide, sent the message that Japanese businesses are now eager to do business in Russia," Hakamada said.

Recent months have seen Sumitomo Mitsui Banking Corp. open a new office in Moscow, and Bank of Tokyo-Mitsubishi plans to upgrade its Moscow office to a subsidiary next spring. Hoping Toyota's move spurs more Japanese investment, many other financial institutions are now looking to jump in.

The growing interest by Japanese firms reflects Russia's expanding domestic demand as the economy there continues to prosper from the global surge in oil prices, said Koji Karatsu, deputy director of JETRO's Russia and Eurasia division.

"Japanese consumer products businesses are prospering as domestic demand expands," Karatsu said.

He noted that many Japanese firms had earlier considered it too risky to do business in Russia following the collapse of the Soviet Union in 1991. Politics were often unstable when Boris Yeltsin was in power, and firms were still cautious after Putin took the helm in 2000.

While Moscow welcomes the increased presence of corporate Japan, Tokyo hopes the deeper economic ties in the long run help resolve the 60-year dispute over the islands of Kunashiri, Shikotan and Etorofu and the Habomai islets. They were seized by Soviet troops in the closing days of World War II.

Tokyo and Moscow remain a long way apart over Japan's demand for the islands' return.

During the Cold War, the Japanese government had a policy of not promoting economic cooperation with Moscow unless the islands were handed back.

Then Tokyo shifted its position in 1996, saying it will simultaneously work to resolve the dispute and boost economic cooperation.

However, the government's biggest investment project in Russia is showing scant progress.

Russia plans to build an oil pipeline linking East Siberia with the Russian Far East, for which Japan offered to extend some $12 billion in financial help.

In April, Moscow issued an order for the pipeline to be built from Taishet to the halfway point at Skovorodino near the Chinese border. But it has yet to provide detailed plans for extending the pipeline to Nakhodka on Russia's Sea of Japan coast, triggering worries in Tokyo that the oil will go to rival China first.

A senior Foreign Ministry official in charge of Russian policy admitted that increased Japanese private-sector investment alone will not be sufficient leverage to change Moscow's position on the isle row.

But since bilateral talks on the dispute are deadlocked, it is better to nurture friendly ties for now and think about resolving the row if and when the opportunity arises, the official said.

Last year, Tokyo set up a body to facilitate trade and investment by Japanese firms in Russia by providing information and match-making support, and Moscow established a counterpart organization in March.

Some observers meanwhile say closer economic relations may put the territorial dispute on the back burner.

"It's a double-edged sword," said Hakamada of Aoyama Gakuin University. "If economic ties increase, the Russians may think they do not need to resolve the territorial issue."

However, he added Russia should think seriously about the row if it hopes to invite Japanese participation in large-scale oil or natural gas projects, because it would be too risky for Japanese firms to get involved without financial backing from Tokyo.

"If Russia needs Japan's cooperation, it first needs to resolve the territorial dispute," he said.



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