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23 May 2017

Russia-Japan Talks Trundle On

The logic of recent Abe - Putin meetings 

In late April, a state visit to Moscow by Japan’s prime minister caused little fanfare. Japan’s leader is Shinzo Abe, who met President Vladimir Putin for the sixteenth time. It was their fourth meeting in the last twelve months, a clockwork regularity which is unheard of when it comes to meetings between leaders of states which can hardly be described as being on especially good terms. In this case, some of the reflections upon the visit expressed by both leaders resemble mundane, surreal punch lines. For instance, the Japanese Prime-Minister declared: “…Japanese and Russian citizens will establish joint efforts aimed at producing fish and sea urchins”, “…will improve living standards and comfort levels for Russian citizens [residing on the southern Kuril Islands]” and “will create new opportunities for Japanese citizens who come here to engage in commerce” as well as: “the Russian season festival will be held in Japan in June”. Vladimir Putin, in turn, assured Japanese citizens that they could visit the graves of their ancestors in the southern Kuril Islands.

All the other projects announced and discussed on the sidelines of the meeting — the Sakhalin-Hokkaido gas pipeline with a capacity of 20-25 billion cubic meters, the power bridge with an underwater power cable and even the exotic Sakhalin-Hokkaido railway tunnel project — were not subject to any further developments. The issue of finally signing a formal peace treaty after the Second World War, which has been stalled for over seven decades because of ongoing territorial disputes, Putin euphemistically commented that “…of course, we discussed the peace treaty issue. A solution to this issue must meet the strategic interests of both countries and be accepted by both peoples” and promised to continue the dialogue. No consensus was reached over the problem of North Korea’s nuclear program which threatens Japan.

However, the purpose of these meetings is obvious from the point of view of the Russian authorities. The Russian budget and Russian economy are in poor shape. The projected budget deficit in 2017 equates to 2.7 trillion rubles or 3 percent of GDP. The Reserve Fund, which amounted to as little as 912 billion rubles on April 1, 2017 (the Reserve Fund decreased almost four-fold in 2016), will be absorbed entirely for this purpose. The remaining deficit will be financed through the National Wealth Fund (NWF) which was valued at 4.1 trillion rubles on April 1, 2017. Thus, the total volume of the Funds decreased by $19 billion within a month. Given that European and American markets are closed to Russia and that Chinese and Middle-Eastern rulers are unappeasable, Russian minds have naturally come to rest on the third largest economy in the world – Japan. Besides, there are common spheres of interest, and not necessarily economic ones.

What is meant here is the outcome of the so-called “Northern Territories dispute” – the fate of Iturup, Kunashir, Shikotan and Habomai Islands, de facto annexed by the Soviet Union in the aftermath of the Second World War, and not recognized by Japan de jure. The Soviet-Japanese Joint Declaration was signed in 1956. According to the declaration, the Shikotan and Habomai Islands were to be handed over to Japan following the conclusion of a peace treaty. However, in 1960, the USSR denounced the agreement on the grounds that Japan had signed the Treaty of Mutual Cooperation and Security with the United States which provided for the deployment of US military bases in Japan, although there was no mention of it in the declaration. Unexpectedly, Minister of Foreign Affairs of the Russian Federation (RF) Sergey Lavrov announced in 2004 that Russia recognized the 1956 declaration. Less than 20 thousand Russian citizens, whose number was a little higher in Soviet time, reside on the “Northern Territories”. Japan, whose absolute GDP exceeds $4 trillion, a sum which is three times greater than the absolute GDP of Russia, is more than able to pay a decent sum in compensation for relocation at the drop of a hat. And actually, the Japanese do not even mind these people staying on the islands. All talk of rich deposits of oil and gas on the islands has no basis – no explorations have been carried out (not to mention extractions). The only real economic benefit is via fishing revenues from fish and seafood in territorial waters. However, this problem could easily be resolved through a dual access regime, for example.

Truth be told, Japan acted very cautiously in the aftermath of the annexation of Crimea. Initially, Japan announced the suspension of consultations on simplifying the visa regime along with a number of secondary agreements. Next, it introduced individual sanctions against absolutely insignificant persons representing the administrations of Crimea, Donetsk and Luhansk People’s Republics. And as recently as in December 2014, Japan banned five banks – state-owned Vnesheconombank (VEB), Vneshtorgbank (VTB), Sberbank, Rosselkhozbank and Gazprombank - from issuing debt securities with a maturity of over 90 days without special permission. The list of imposed sanctions is quite modest compared to other states. Besides, Putin and Abe held face to face talks twice in 2015 on the sidelines of the UN General Assembly in New York in September and on the sidelines of G20 in Antalya in November. Three meetings between the two leaders took place in 2016: in Sochi in May, in Vladivostok in September and in Japan in December. Putin would make some conciliatory statements or statements such as: “We don’t trade territories” (as he said before his last visit to Japan). There are some allusions that Putin might keep his word, that is, rather than sell the islands, hand them over for free, as happened with China.

68 documents were reportedly signed during Putin’s visit to Japan in December 2016. These documents were largely dismissed as “junk” such as memorandums of intent or meaningless documents, for example, an agreement on the establishment of a Russian-Japanese association of university rectors. However, Putin managed to sign several important documents concerning cold, hard cash. The most important of which were: the allocation of Japanese loans to Yamal LNG ($200m by the state-owned Japan Bank for International Cooperation (JBIC)) and Gazprom ($800m by the consortium of Japanese banks headed by Sumitomo Mitsui Banking Corporation) as well as the establishment of a joint investment fund comprising the Russian Direct Investment Fund (RDIF) and the Japanese state-owned JBIC with an equity of up to $1bn and a controlling stake held by the Japanese party. Apparently, this investment fund will be used primarily to finance projects within the territory of Russia. Besides, an agreement was concluded to carry out a Project Feasibility Study (PFS) for the construction of a gas pipeline from Sakhalin to Hokkaido.

Japan has already allocated more than 1.5 billion euros for investment (the exact amount will be known when the equity capital of the investment fund is formed). Besides, one of the agreements concerns Gazprombank which is on the Japanese sanctions list (remember that sanctions operate unless there is special permission). The JBIC has earmarked $300m for Gazprombank and has offered a further $200m in the form of collateral for private bank loans. Moreover, the Japanese made a lot of small courtesies such as granting permission for the import of thermally processed meat and an increase in the validity period of multiple-entry visas.

It was announced in April that overall Japanese investment in Russia was on the rise. It amounted to $1.3bn in 2015 and $1.7bn last year. Of course, this is nothing compared to investment in Cyprus or the Netherlands where Japan has entrusted over $100bn. Yet, it is rather the general tendency that is significant as this steadily growing level of investment is in stark contrast to the constantly declining investment levels currently witnessed by the majority of European and offshore states.

Besides, as announced in December last year, Putin and Abe reached an agreement on the draft of a statement concerning joint economic activities on the Kuril Islands “within 40 minutes”. The said agreement is not currently accessible via the website of the President of the RF nor via other databases where official documents are made publicly available. One can only rely on the exposition presented at the final press conference. This exposition, similarly to subsequent statements of the Japanese side, strikes one due to its vagueness regarding Japanese interest. What is the purpose of joint cruises, harvesting algae or breeding gourmet crabs? What prevented both countries from doing so earlier? The visa-free regime for former citizens of the Northern Territories and residents of border areas of Russia and Japan, which was presented by Putin virtually as a new concession, has been long in operation and was introduced based on 1992 and 1999 agreements. A 1998 agreement which permits Japanese fishing crews to fish near the southern Kuril Islands remains in place. The outcome of Putin’s visit has caused irritation not only among the Japanese opposition, but also the ruling party. The Secretary-General of the Liberal Democratic Party of Japan (LDP) Toshihiro Nikai stated that the majority of the Japanese were displeased by Putin’s visit: 54.3 percent versus 38.7 percent, according to other data published by Japanese sociologists. Nevertheless, Abe – who garnered a stable majority in parliament following the results of the 2014 election – will be in power for the next two years at least. His popularity, stemming from his successes in overcoming the 2009-2011 economic recession and attaining accelerated growth that reached 1-1.5 percent, remains high. Besides, Japanese politicians can relay to their citizens information about new developments concerning the breeding of sea urchins as a prologue to the return of the Northern Territories.

Putin applied a principle devised by the German Social-Democrat, Eduard Bernstein: “Movement is everything, the final goal is nothing”. He is happy with the status quo and never-ending negotiations, which always result in the Japanese offering money. At the same time, as recently as in 2017, it was announced that a heavy bomber aviation division would be deployed to the Kuril Islands in order to bolster Russia’s military presence, alongside the machine-gun artillery division, already in place. On the other hand, Russian diplomats protested against plans to deploy US THAAD missile defense systems in Japan with archetypal bluntness.

The policy of unilateral advances is perceived by Putin as weakness. In fact, Japan and its partners should consider whether their plans are realistic at all. On the one hand, for decades, Japan’s leaders have been expressing the view that all 4, and not just 2 territories, should be handed over to Japan. This makes the implementation of the 1956 declaration problematic, not to mention the need to present the resolution of the dispute as a compromise in Russia. On the other hand, of paramount importance is the fact that the issue of the disputed islands has been the subject of widespread publicity in Russia. Unlike the islands on the Amur River handed over to China in 2004-2008 or the transfer of part of the disputed waters of the Barents Sea to Norway in 2010, frequent references to the islands by the Japanese and regular diplomatic talks on the subject have now seemingly come back to haunt the Russian authorities; should the islands be handed over to Japan, this would result in a serious blow being dealt to Putin’s reputation. His reputation would suffer among his core supporters who are used to hearing about the “unavoidability” of waging wars of conquest and for whom, relinquishing a single inch of native land is unthinkable. It seems that it would take a new government in Russia to resolve the territorial dispute – a new government which would be capable of looking at a map and arriving at the conclusion that Russia’s problem does not lie in its lack of territory.

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