Japan faces Russia on the diplomatic path to Central Asia

Japan faces Russia on the diplomatic path to Central Asia

Japan has sought a greater economic presence in Central Asia in recent years. While the Kuril Islands loom large in Abe’s diplomatic efforts with Russia, Japan’s interests in the Far East and Central Asia are increasingly linked as Russia stands tough on the islands.

Japan’s triangular diplomacy

Last October, Japanese Prime Minister Shinzo Abe toured all five of Central Asia’s post-Soviet states, announcing billions in business deals countering China’s surging influence in the region. Though ASEAN has become the biggest arena for Sino-Japanese business competition, the evolving One Belt, One Road Initiative has pressured Abe’s government and Japanese firms to deepen economic ties with Central Asia.

Against this backdrop, Abe’s push for a resolution of the Kuril Island dispute with Putin has become an important theater of Sino-Japanese competition for influence along China’s periphery. Now that Japan will soon be dealing with the Trump administration, Abe’s desire for an activist foreign policy may have greater political cover. Stakes for the upcoming summit between Abe and Putin in December are politically high as greater infrastructure investment in Russia’s Far East is increasingly linked with interests in Kazakhstan and other Central Asian states.

The political strategy

Abe implored Putin to reach an agreement concerning the Kuril Islands at the Eastern Economic Forum. However, it seems that Tokyo has shifted its calculus towards short-term gains in place of its principled stand that a peace treaty must precede warm economic relations. After the Forum, talks at the ministerial level gave momentum to a joint platform between the Japanese Bank for International Cooperation (JBIC) and Russia’s Far East Development Fund. By the beginning of November, Russian Minister of Development Alexander Galushka announced that Japanese firms — incredibly cautious due to political risks — had directly invested $1 billion into the Far East.

As of now, nearly 100 sanctions-friendly projects are being considered ahead of the summit. Trading house Sojitz and other Japanese firms are interested in expanding Khabarovsk’s airport and similar smaller-scale ventures are being considered by others. Tokyo is targeting technology, urban planning and waste disposal projects in cities — a comparative advantage over China — as a political bargaining chip for the Kuril Islands. Details remain scant, a byproduct of the risks posed by Russia’s Far East. Infrastructure, energy investments, and trends for coal use provide a better basis for assessing Japan’s interests, mixed signals over the rigidity of Japan’s stance on territorial settlements aside.

Longer-term interests

Energy relations largely dictate the state of Russian-Japanese trade, as hydrocarbons make up over 70% of Russian exports to Japan. Japan plans to decrease nuclear energy’s share of its primary energy mix from 30% to 20-22% by 2030. While oil use continues to decline, Abe’s government has pivoted to a much-maligned coal-heavy strategy post-Fukushima that may prove to be an economic mess as renewables becomes more competitive. Japan’s coal imports from Russia are up 20% this year from last year, roughly 11.45 million tons through August. At the end of October, JBIC lent $38.5 million to Sberbank to finance the purchase of Japanese firms’ equipment for the Vostochny coal port in a bid to encourage other Japanese firms to seek deals in Russia. There’s been an uptick in Russian-Japanese freight.

2015 saw a 17% growth in Russian-Japanese rail container traffic, totaling over 500,000 tons. Coal has driven much of this, as physical trade volume rose despite faltering trade values in dollar terms. Russian Railways’ head Oleg Belozerov has been trying to tempt Japanese investment since February as part of a program to reduce delivery times from the port of Yokohama to Moscow from 42 days to 25. The company launched a modernization program for the Trans-Siberian line four years ago and needs newer rolling stock, signal equipment, trains, and rail capacity to become a Eurasian transit state. Only 1.5% of its cargo traffic travels between Europe to East Asia.

In particular, the Russian firm Samarga is trying to develop a $6.5 billion port of the same name near key energy and trade port Nakhodka to bulk up freight capacity. For now, most are under the impression that investment remains contingent on some sort of agreement for the return of the Kuril Islands. But an increasingly self-reliant Japan will be more flexible and able to act against presumed American interests as it tries to gauge how far it can go. The Japanese government’s ability to hold hands and guide firms to invest will dictate much of their success.

All roads lead to Astana

Kazakhstan is Japan’s best partner in Central Asia as well as the funnel through which all goods from other states — most importantly fellow Eurasian Economic Union members Kyrgyzstan and Tajikistan — must flow if Japan wishes to avoid shipping through China. Though Kazakh-Japanese trade stood at an underwhelming $1.4 billion last year, Japan has seized a dominant role of Kazakhstan’s rare earths sector. Japan Oil, Gas, and Metals National Corporation (JOGMEC) signed agreements to explore the coal and mineral-rich Karaganda and Kostanay regions for rare earths, a move that would give Japanese firms an alternate source than China assuming they develop the deposits. These shipments will be transported by rail.

Kazakh coal firms have pivoted to serve the Japanese market the last year, contributing to the rise in freight turnover through Russia’s Far East. Japan is also a world-leading investor in international coal ventures, expressing interest in both coal mines and coal plants in both Kazakhstan and Kyrgyzstan. Every commodity-heavy project requires rail transport capacity if Japan is to consume anything on its domestic market.

As a result, Japan’s close relations with Kazakhstan position it well to pursue its coal strategy and creates a material basis for further infrastructure investment that coincides with Russian interests for Siberia and the Far East. Such investments would allow Japanese firms to benefit from growing regional trade, driven most strongly by Chinese investment, without transiting goods through Chinese territory.

In the shadow of the Siloviki

Rail and coal investments will take greater precedence for Japan’s economic diplomacy with Russia going forward as the recent arrest of Economy Minister Ulyukaev likely scuttled any hope of Japanese firms buying shares in a partial privatization of Rosneft. More concerning, what many assume was a power-play on the part of Rosneft CEO Igor Sechin poses a serious risk for Japanese firms interested in Sakhalin oil and gas projects or Novatek’s Yamal LNG.

Putin also pointedly reiterated Russia’s refusal to sell territory with Abe at the APEC summit in Lima, a policy principle rooted deeply in a Soviet tradition of a defense-centric approach to the region. Kremlin news outlets like Pravda have reported that Japan is trying to “bribe” Russia for the return of the Kuril Islands, which surely bodes ill for Abe’s diplomatic efforts.

As Abe continues trying to convince Japanese citizens to move their $17 trillion in financial assets from bank accounts to investments, Russian oil and gas firms stand to lose as long as fears of palace intrigues dominate. The railways and coal industry may prove luckier given Russian needs and Japan’s economically-oriented foreign policy, but tough rhetoric will likely preclude major deals. President-Elect Trump’s foreign policy chatter may push Tokyo to wit’s end as it tries to open up Russia and cement its Central Asian presence. No matter what policy tack Trump takes, Abe is facing pressure from China, Russia, and the nationalist sentiments of his own supporters and ideology. Failure would be an embarrassment for Japan.

Categories: Asia Pacific, Economics

About Author

Nicholas Trickett

Nicholas Trickett currently works as a think tanker in Washington D.C. He has focused and written on Post-Soviet foreign policy and energy politics, with an emphasis on Russia’s Pivot to Asia, Russia’s East Asian energy relations, and evolving projects in the Eurasian space such as the Silk Road or the North-South Transport Corridor. He is interested in further pursuing the development of kleptocratic networks in Eurasia and the effect the One Belt, One Road initiative is having on the political economy of Central Asia, the Caucasus, and Russia. He received an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy.