Assessing the outcome of the “Hot Springs Summit”

Assessing the outcome of the “Hot Springs Summit”

Despite a lack of breakthrough on the return of the Kuril Islands, Abe likely came away from his meeting with Putin with more to help Japan in light of its interests down the road.

The Kuril Islands have been an obstacle for Russian-Japanese relations since the close of World War II. For decades, Japan offered economic engagement—usually the development of oil and gas reserves on Sakhalin Island—to the off-and-on pariah Soviet Union or Russia as a means of reaching a territorial agreement. While there are economic and security interests at stake, the islands are ultimately symbols used by Japanese and Russian political leaders to achieve foreign policy objectives.

The deal announced last Thursday is yet another episode of this long-running drama. Though many have framed the summit in light of Abe’s pursuit of a legacy and Putin’s gamesmanship, the underlying economic and security interests of both sides suggest that though Abe far oversold his ability to deliver a deal domestically; the agreement and surrounding business deals are a bigger positive for Japan than Russia longer-term.  

Russia and Japan’s oil and gas needs

The Kuril Islands have historically been linked to Japanese oil and gas investment in Russia’s Far East, notably Sakhalin Island. Other investments are largely political ploys for influence. Today, Japan is not wanting for Russian oil or gas. Gulf producers accounted for 86.7% of Japan’s oil imports between January and June of this year, about 2.92 million barrels per day (bpd) coming into 2016. In the same time period, Russian crude imports dropped by 27.9%, and they only accounted for 8.8% of Japan’s total in 2015. Through June, Russia sold Japan about 214,000 bpd. That number is declining, largely due to a Saudi push for market share.

Japan’s oil consumption dropped to around 3 million bpd by September due to increased coal usage, stagnant growth, and hybrid car use. Japan’s coal imports from Russia increased 20% this year without any concern for a peace treaty, territorial deal, or sanctions. The country’s demography and energy security strategy suggest a continuing decline in oil imports and near-term decline in natural gas consumption. Japan’s oil and gas firms make decisions predicated on market forces in times of oversupply like today. Japanese firms gladly take their money elsewhere.

Iran, while a risky market, has drawn attention from Japan’s Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance, who have extended a $10 billion line of credit for interested firms. Abe himself promised another $10 billion in debt guarantees last October for Iranian projects. The United States’ decision to end the export ban on oil has also pushed Japanese firms to seek investments in shale oil and gas producers as well as offshore blocks in Louisiana. Finally, Japan Oil, Gas, and Metals National Corporation (JOGMEC) — a state-owned exploration company — signed memoranda of understanding for oil and gas projects in Turkmenistan and Uzbekistan last October and Japanese firms are expanding their presence in Kazakhstan.

JOGMEC hedged against ongoing oil and gas sanctions in March, floating a $450 million liability guarantee for the development of the Odoptu field in the Sakhalin-2 project. But it amounts to a wait-and-see approach. Abe’s commitment to uphold sanctions coincides with huge doubts among Japanese firms over the viability, safety, and value of investments in Russia’s Far East. Japan is not facing pressure to develop and buy Russian oil or gas and Russia has little means to compel Japanese energy investments. Sanctions are also largely irrelevant to Japanese investment in Russia, as corruption, inefficiency, costs, and low profit-margins deter participation in Far East projects.

Divergent security interests

China’s economic rise and increasingly assertive plays for maritime rights on its periphery have triggered a shift in Japan’s military towards power projection. In particular, the ongoing dispute over the Senkaku Islands has altered Japan’s security posture away from its Russia-facing Cold War tradition to containing China on its maritime periphery. On the diplomatic front, Japan has sought closer naval cooperation with India, bid for submarine contracts with Australia to deepen defense ties, and sought closer defense ties with ASEAN. But talk is cheap.

Abe has increased military spending for five consecutive years, hitting $51.47 billion in this year’s budget. As part of its reorientation towards China, Japan has adopted a doctrine to deploy missile batteries, radar stations, and ships to deny Chinese warships access, freedom of maneuver, and air superiority in the East China Sea. But Japan’s budget pales in comparison to China’s this year, projected at $214 billion when off-book spending is factored in. That imbalance will keep growing and China has a nuclear arsenal.

At the same time, Russia’ new naval doctrine is focused almost entirely on countering NATO in the Atlantic and Mediterranean as well as maintaining supremacy in the Arctic. Though Russia has classified 17% of its 2017 budget, known spending is set to fall from as much as $65 billion to less than $50 billion, however, a strengthening ruble and oil price would change this. Neither country views the other as a naval threat. But Russia is uneasy to see Japan asserting itself more on security matters and will continue to lose relative naval power unless its priorities shift away from its Eurocentric confrontation with NATO. At present, losing the Kurils would weaken Russian control over the Sea of Okhotsk.

Another shared issue for Russia and Japan is North Korea. Japan is accelerating procurement of upgrades to its Patriot Missile defense systems and is considering pursuing the Terminal High Altitude Area Defense (THAAD) system or an onshore version of the US-designed Aegis Ballistic Missile Defense System (ABMD) as a gesture towards US concerns over burden-sharing. But Russia and China view the THAAD deployment in South Korea as part of a US strategy to guarantee nuclear first-strike capability against them and will perceive even a gesture as a threat. Japan’s missile defense capabilities affect Russia’s ability to project nuclear power in East Asia.

The case for a minor Abe victory

Abe and Putin’s agreement to jointly develop the economic activity of the islands is a misnomer. Thus far, only military spending has flowed to the Kurils from Moscow and business ventures are generally inefficient due to their remote location from Russian consumers. The islands’ main industry is fishing and if mineral and gold deposits are to be developed, it will be Japanese financing and likely Japanese firms that will do so given their physical access and resources. Japanese investments can create a fait accompli over time, such that a future administration in Tokyo bargaining with a future Russian leader may be able to acquire the islands. This all depends on how they define the legal mechanisms that bind these projects so as to save face for all parties, which no doubt a tall order.

Abe and Putin also agreed to reopen contacts between their respective foreign and defense ministries, namely to discuss the humanitarian crisis in Syria. Renewed contacts will help cooler heads prevail when discussions about missile defense inevitably arise. Further, Russia and Japan were deepening security ties in late 2013 because of structurally shared interests concerning China. Though Putin likely sees it as a chance to work with a key American partner, Japan has long had a triangular diplomatic strategy between itself, Russia, and China. Any cooperation gives Tokyo room to maneuver between Moscow and Beijing, seeking to cleave them apart when the chance arises.

Russia’s economic challenges and reliance on energy exports prevent it from exploiting Japan the same way. If and when reforms come to the Far East, Japan will be the biggest beneficiary. Announced cooperation between Rosneft and several Japanese firms to explore for oil and gas resources in the Sea of Japan is a larger win for Japan, as it will bother China and places Rosneft against Chinese interests in Vietnam’s offshore industry. It also may help Japan better cement its territorial claims in the East China Sea. This deal plants seeds for greater Japanese leverage in the longer-term, even if Abe has lost face today.

Of course, no one’s holding their breath, as it will take many more months of hand-wringing and backtalk until anything moves forward. But the Trump administration will likely tacitly encourage cooperation, something to watch as Tokyo has a tendency to line up behind Washington.   

Categories: Asia Pacific, Europe

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.