By Hisane Masaki

TOKYO - For Tokyo, Japan-Russia relations always seem to revolve around a long-running territorial dispute stemming from World War II. But for Moscow - and, not surprisingly, Japan Inc - they revolve around business.

Prime Minister Mikhail Fradkov recently made a two-day visit to Japan, the first by a top-level Russian official since Japanese Prime Minister Shinzo Abe took office last September. Fradkov's visit came about 15 months after Russian President Vladimir Putin visited Tokyo in late 2005.

As widely expected, there was no progress on the long-standing territorial row over small islands off the northernmost main Japanese island of Hokkaido that were seized by Soviet troops in the closing days of World War II but are still claimed by Japan. The islands - Etorofu, Kunashiri and Shikotan islands plus the Habomai islet group - are called the southern Kurils by Russia and the Northern Territories by Japan.

Moscow has taken a harder line recently and showed much less enthusiasm about breaking the stalemate over the issue, the biggest stumbling block to concluding a peace treaty formally ending wartime hostilities.

To be sure, the territorial dispute, along with energy, was high on the agenda for talks between Abe and Fradkov on Wednesday. But the two leaders just agreed to continue to talk. Instead, what Fradkov apparently wanted to do most in Tokyo was to expand economic exchanges between the two countries, especially investment. The Russian premier seems to have gotten his way in this respect.

In addition to Industry and Energy Minister Viktor Khristenko, the Russian delegation accompanying Fradkov on his Tokyo visit included most of the key Russian figures involved in economic ties with Japan, including ministers in charge of transport and information and telecommunication, the president of the external economic bank, and the chairman of the association of industrialists and entrepreneurs.

Abe and Fradkov agreed to promote trade and investment between the two countries. After the summit, the two governments inked four documents to promote economic ties by boosting Japanese investment in Russia as well as other bilateral cooperation, including customs cooperation to fight drug and gun trafficking. After his talks with Abe, Fradkov said, "I believe the time is ripe for us to seriously broaden and deepen our cooperation.''

On energy, a major topic in his discussions with Fradkov, Abe called for stepping up mutually beneficial cooperation at both the governmental and private levels. The two leaders also agreed to start negotiations on a nuclear cooperation agreement that, if concluded, will enable Tokyo to outsource to Moscow uranium enrichment for recycling nuclear fuel.

Earlier the same day, Fradkov met with Canon Inc chairman Fujio Mitarai, who concurrently serves as chairman of the Japan Business Federation (Nippon Keidanren), Japan's biggest business lobby, and other federation officials. Mitarai told Fradkov that Japan-Russia economic relations will further expand once Russia is admitted to the World Trade Organization (WTO). The Japanese business leaders asked Russia to improve its investment climate.

On Monday, 13 Japanese firms related to the energy industry, including Mitsui & Co Ltd and Tokyo Electric Power Co, met with Khristenko - who arrived in Tokyo a day earlier than Fradkov - and other Russian officials and confirmed that Japan-Russia ties in the energy industry should be strengthened.

Japan, which imports almost all of its oil and natural gas, has been scrambling to secure access to Russia's reserves to reduce its dependence on oil from the volatile Middle East so as to ensure stable supplies, while bolstering its nuclear-energy program.

Meanwhile, some high-profile business tie-ups were signed this week, as many Russian business executives accompanied Fradkov. Isuzu Motors Ltd agreed with a Russian auto maker to consider in earnest a joint-venture truck-assembly plant in Russia and NTT Communications Corp agreed with a Russian communications firm jointly to lay a fiber-optic network between Hokkaido and Sakhalin.

In the early 1990s, after the demise of the Soviet Union, Russia desperately needed help from Japan - and Western industrialized nations - in turning around the ailing economy. But now the situation has changed dramatically. The Russian economy has been barreling ahead in recent years thanks to high prices of crude oil, the country's main export item. Russia, which competes with Saudi Arabia for the status of the world's biggest oil producer, is also the world's largest natural-gas producer.

Flush with oil money, Russia now apparently does not feel any need to budge on the territorial tussle with Japan in return for increased economic cooperation with the world's second-largest economy. These days, the attraction of the Russian economic magnet for Japan seems even stronger than that of the Japanese one for Russia. Japanese businesses are showing a growing interest in investing in economically booming Russia.

Territorial dispute
In 1956, Japan and the Soviet Union issued a joint declaration normalizing bilateral diplomatic ties. In that declaration, Moscow promised to return Shikotan and the Habomai islet group - the two smaller of the four disputed islands - after the signing of a peace treaty.

Foreign Minister Taro Aso has raised the possibility of solving the row with Russia by splitting the total area of the disputed islands between them, rather than dividing the islands by number. In a parliamentary session last December, Aso acknowledged that the idea of giving the two southernmost islands - Shikotan and Habomai - to Tokyo and the two others - Etorofu and Kunashiri - to Moscow would apportion more territory to Russia.

Aso said the idea of splitting the islands by total area should be looked at. Such a division would give Japan three of the islands and a quarter of the largest, northernmost island, Etorofu, he said. "Talking about two islands, three islands or four without taking land area into account is unacceptable," Aso said. "We must carry forward negotiations in a sufficiently realistic way."

At their Wednesday meeting, Abe and Fradkov agreed to continue efforts to resolve the territorial dispute. "In order to fully develop the potential of Japan-Russian relations, we reaffirmed the importance of resolving the territorial dispute,'' Abe said. ''We agreed to further our efforts in negotiations to find a mutually acceptable solution based on the various agreements and documents concluded so far.''

The previous agreements Abe referred to in relation to the territorial dispute include a 2003 bilateral action plan signed by President Putin and Abe's predecessor Junichiro Koizumi, which covers wide-ranging cooperation in political, economic and other areas.

Abe and Fradkov also agreed to strengthen political dialogue between the two countries. They specifically agreed that Aso should visit Russia in the first half of this year and that the two Russian first deputy premiers, Dmitrii Medvedev and Sergei Ivanov, should visit Japan by the end of the year. Medvedev and Ivanov are the top likely candidates to succeed Putin when his presidential term ends in May 2008.

Abe and Fradkov also agreed to work together in urging North Korea to follow through on its promise to denuclearize in line with an agreement reached at six-party talks held in Beijing in mid-February. The talks involve the United States, China, Japan, Russia, and South and North Korea. Fradkov expressed Russia's understanding of and support for Japan's policy of not taking part in energy aid for Pyongyang until progress is made on resolving the issue of North Korea's past abductions of Japanese nationals.

Siberian pipeline
Japan has been competing with China, another energy-hungry Asian nation, for an oil pipeline from Siberia. Russia seems to have enjoyed success in playing off Japan and China against each other over the 4,300-kilometer pipeline.

Japan and China have lobbied for alternative routes for a pipeline from eastern Siberia's oilfields to Pacific Rim nations. Japan failed to gain a guarantee that Russia will give priority to building a "Pacific route" from Taishet near Lake Baikal to Nakhodka on the Sea of Japan coast via the halfway point at Skovorodino, near the Russia-China border, rather than to building a "China route" heading to Daqing, northeastern China, from Skovorodino.

Russia's decision to construct the "China route" has stoked Japanese fears that Moscow will favor Beijing and not extend the pipeline to the Pacific coast as quickly as planned. Japanese ministers urged Russia this week to push ahead with the Pacific route, saying Tokyo is prepared to pay part of the construction cost.

Russian state pipeline monopoly Transneft is building the pipeline in two stages. Transneft expects to finish the first stage at Skovorodino, far from the coast but close to China, next year. Before visiting Tokyo, Khristenko said the Pacific route is expected to be completed in 2012 based on the premise that the oilfield development will proceed as planned. Speaking before Japanese business leaders, Fradkov called on Japan on Wednesday to cooperate in the development of Siberia's oilfields.

Sakhalin projects
Japan's oil imports from Russia rose 3.5% to a little more than 11 million barrels in 2006, although the proportion of imports from Russia in Japan's total imports - 0.7% - pales before those from the Middle East - nearly 90%.

As part of efforts to diversify oil sources, Nippon Oil Corp and other Japanese oil wholesalers have begun to purchase crude oil from the Sakhalin-1 project in Russia's Far East. The project, which is managed by an international consortium led by US oil giant ExxonMobil Corp, began oil shipments last October.

Other participants in the Sakhalin-1 project include Tokyo-based Sakhalin Oil and Gas Development Co (SODECO), jointly owned by the Japanese government and private sector, and Russia's state-owned oil firm Rosneft. SODECO has a 30% interest in the project, while the Russian firm has a 20% stake.

But there are many uncertainties over whether oil imports from Russia will keep humming along. Until recently, there had been growing expectations in Japan of Russia's Far East, a region not only rich in oil and gas reserves but much closer to Japan geographically than the Middle East, which means lower transportation costs. But Russia recently put a damper on such expectations.

Russia's recent wresting of a majority stake in the huge Sakhalin-2 gas project, which had previously been led by Royal Dutch/Shell and involves two Japanese firms, Mitsui & Co and Mitsubishi Corp, has raised concerns in Japan about the future energy policy of Russia - and stable supplies from that country. That's why, although Japanese oil wholesalers have recently begun to purchase crude oil from the ExxonMobil-led Sakhalin-1 project, they are making spot purchases of the oil and remain cautious about buying it under long-term contracts.

Japanese officials urged Russia this week to provide assurances that it will supply Japan with energy from the Sakhalin-2 project, taken over by Russia's state-controlled natural-gas monopoly Gazprom. "Mr Fradkov told me that Russia would continue to play a responsible role as a major energy supplier," Abe said at a joint press conference with the Russian premier on Wednesday.

Meanwhile, ExxonMobil reached a preliminary agreement last October to sell natural gas from the Sakhalin-1 oil and gas project to China - instead of to Japan as originally planned. That deal faces hurdles, however, including the economics of building a very long pipeline and getting the cooperation of Gazprom.

During a meeting of Japanese and Russian government officials on trade and investment held on Monday, Aso said Japan is interested in importing liquefied natural gas as well as oil from the Sakhalin-1 project. Although Khristenko replied that he well knows that, it is the project operator ExxonMobil that holds the right to decide which parties receive natural-gas exports.

Meanwhile, a group of Japanese companies, including trading houses and energy firms, reportedly plans to enter negotiations as early as March over a possible technical tie-up with Gazprom in hopes of establishing a system that will ensure stable energy supplies by strengthening cooperation with Russia. Japan's Natural Resources and Energy Agency is said to be serving as mediator for the Russian government and the Japanese group.

Nuclear cooperation
Abe and Fradkov agreed to start negotiations on a nuclear-cooperation agreement in an apparent attempt to pave the way for Tokyo to outsource to Moscow reprocessing for nuclear fuel. The two leaders did not set any specific dates to start or conclude the negotiations, however.

Japanese Minister of Economy, Trade and Industry Akira Amari said that if Tokyo and Moscow were to cooperate, Russia would have to allow inspections by the International Atomic Energy Agency to ensure that the fissile material from Japanese power plants was not used for weapons.

It is envisaged that uranium extracted from spent nuclear fuel reprocessed in the United Kingdom and France will be enriched in Russia for use as nuclear fuel at Japanese nuclear power plants. Rosatom, the Russian nuclear agency, has announced that it is establishing an "international center" for uranium enrichment at Angarsk to provide guaranteed uranium-fuel supplies for countries that do not enrich uranium themselves. President Putin also signed a bill recently to create Atomenergoprom, or Atomprom, through the merger of civilian nuclear companies, to give Russia more prominence in the nuclear-power industry.

Russia and Kazakhstan claim one-fourth of the world's total uranium reserves. Last October, Mitsui & Co won negotiating rights that would allow the firm to begin operations at the Yuzhnaya uranium mine in eastern Siberia. Meanwhile, Toshiba Corp, which acquired US nuclear-plant builder Westinghouse from British Nuclear Fuels Ltd last year, has entered negotiations on a possible tie-up with Atomprom.

New investments
In a deal timed to coincide with Fradkov's Tokyo visit, some high-profile business tie-ups were signed.

Isuzu Motors announced on Wednesday that it has agreed with Severstal-Avto to consider in earnest a joint-venture small truck-assembly plant in Russia. The joint production facility would have an annual capacity of 25,000 vehicles. The companies have been cooperating since last summer on the assembly in Russia of Isuzu trucks, with Isuzu outsourcing truck assembly to Ulyanovsky Avtomobilny Zavod, a Severstal-Avto Group company. The final details of the venture are expected to be clinched during the first half of this year.

NTT Communications and Russian telecommunications firm TransTeleCom signed a deal on Tuesday on a project to link the two nations by jointly laying a 500-kilometer undersea fiber-optic cable between Hokkaido, northern Japan, and Sakhalin, in Russia's Far East. TransTeleCom, a subsidiary of Russia's state railroad company, owns communication lines along the tracks of the Trans-Siberian Railway. By connecting these lines with the proposed Hokkaido-Sakhalin cable, the companies aim to create the shortest link between Japan and Europe. The fiber-optic cable is scheduled for completion at the end of this year.

These are the latest in a recent spate of Japanese investments in Russia in a range of sectors, including the auto one. Toyota Motor Corp and Nissan Motor Co have decided to build assembly plants in St Petersburg. The new Toyota plant is to start production next December, while the new Nissan plant is to go on line in 2009. With sales in the US and other developed markets slowing, auto makers are looking to Brazil, Russia, India and China, where growth is strong.

Buoyed by high oil prices, the Russian economy has grown strongly in recent years. Russia's foreign-currency reserves reached US$289 billion as of December 1, the third-largest amount after those of China and Japan. Analysts say there are consumer booms in Moscow and other major Russian cities, making the country an attractive destination for Japanese investment and exports.

Two-way trade between Japan and Russia hit a record high of 1.6 trillion yen (about $13.3 billion) in 2006, up 35% from 2005, as Japan's exports jumped a whopping 66%, led by automobiles. Japan's direct investments in Russia are also on the rise, although they still represent a minuscule proportion of the overall foreign direct investments in that country.
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Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is yiu45535@nifty.com.

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