Territorial Dispute Takes Second Place to Russian-Japanese Economic Cooperation

On February 18 Japanese Prime Minister Taro Aso visited Sakhalin Island, becoming the first Japanese leader to do so since the end of the Second World War. He was there at the invitation of Russian President Dmitry Medvedev to participate in a ceremony marking the opening of the Prigorodnoye gas liquefaction plant near the port of Korsakov, south of Yuzhno-Sakhalinsk. The plant is the partial culmination of the Sakhalin-2 project, a $22 billion consortium composed of two Japanese trading houses (Mitsubishi and Mitsui), the Anglo-Dutch energy giant Shell, and Gazprom (which controls the project after seizing fifty percent plus one share in 2007). Exports of liquefied natural gas (LNG) will begin in April, the lion’s share going to Japan but with some going to South Korea and the United States. The larger issue is whether the beginning of large-scale energy exports from Russia to Japan signals the effective end of the long-standing territorial dispute as a hindrance to bilateral cooperation.

Various groups in Japan have signaled their unhappiness with Aso’s decision to go to Sakhalin. The southern half of the island, known as Karafuto in Japan, was controlled by Tokyo from the end of the Russo-Japanese War in 1905 until the end of the Second World War. Although the Japanese government effectively recognized Russian control over Sakhalin when it opened a consulate there in 2001, some groups in Japan continue to claim that the island, the "Northern Territories," and the entire Kuril Archipelago belong to Japan. At least one commentary stated that Aso had turned "a deaf ear" not only to certain political groups but also to the Japanese Foreign Ministry and that he "might end up sending the wrong message to Russia and the Japanese public" (Sankei Shimbun, February 12). One headline in Russia alleged that Aso’s visit legally "secured" (zakrepil) Sakhalin for Russia (Kommersant, February 18). Aso shrugged off these concerns, claiming that his visit was a success.

The gas extracted from the Sakhalin-2 project will be piped to the LNG plant, processed through the new $3.9 billion terminal, and then shipped overseas. Over the next decade 65 percent of the LNG (slightly more than 6.2 million tons annually) is under contract to be exported to Japan. This will account for 8 percent of Japan’s natural gas consumption (Moscow Times, February 18). Leaders in Tokyo have long looked hungrily at the resources of Russia’s Far East. Japan is the world’s largest importer of LNG, so Russia is a natural partner. "It is a long-standing dream of Japan to have energy supplies so near," Aso said. The Japanese government has also expressed interest in financing the Sakhalin-3 LNG project. The Sakhalin-3 consortium, which includes the China Petroleum and Chemical Corporation (Sinopec), is expected to begin producing sometime after 2017 (Oil & Gas Journal, February 13). Aso and Medvedev affirmed that Prime Minister Vladimir Putin would visit Japan in May to discuss further cooperation in the development of the Russian Far East. This would be timely for the region, because the Russian government announced this week that the massive socioeconomic spending program for the Kuril Islands would have to be curtailed. The program, announced in the summer of 2006, calls for an outlay of $630 million over nine years-or $1,000 per resident per month over that period (Nezavisimaya Gazeta, February 18). The plan has clearly fallen victim to the economic crisis.

On Sakhalin Aso and Medvedev discussed the dispute over the "Northern Territories" and promised to find a "creative approach" to solving the territorial dispute. Moscow continues to stand by the offer of two islands, as specified in the 1956 joint declaration. As Foreign Minister in 2006, Aso came up with a plan to divide the ‘Northern Territories’ in half, thereby giving Japan three islands, and one quarter of the land on Iturup (Etorofu in Japanese), the largest and most northern of the disputed islands. His plan was met with silence in Moscow and with severe criticism in Japan, where the "four islands at once" strategy is practically written in stone. There is speculation (and concern) in Japan that Aso could again float such an offer (Nikkei Shimbun, February 19). Aso, whose days in office are already numbered, would be wise to keep in mind Prime Minister Yoshiro Mori, who visited Irkutsk in the Russian Far East in 2001. At his meeting with then-President Putin, Mori also floated a "creative approach" concerning the territorial dispute; and within a month of his return to Japan, Mori was forced from office for this and other transgressions. The fact is, no matter how much the political leadership in both countries is committed to finding a solution, any agreement would be seen as zero-sum, with one of the two losing out. Tokyo badly wants the return of the islands; Moscow is content to play the waiting game, in hope that one day the demands will stop and a peace treaty signed.

As long as the Russian government can attract Japanese investment in the Russian Far East, why would Moscow not be satisfied with the status quo? Bilateral trade has risen six-fold since 2002, topping $30 billion in 2008. Toyota opened an auto assembly plant in St. Petersburg in 2007, and Nissan has plans to do the same in May. At the Sakhalin ceremony, Aso stated that the Japanese government would assist with the construction of a bridge linking Vladivostok to Russky Island, the site of the 2012 Asia-Pacific Economic Cooperation (APEC) summit (Asahi Shimbun, February 18). Meanwhile in Beijing, on the same day as the Sakhalin ceremony, the China Development Bank offered a loan of $25 billion to the Russian energy firm Rosneft and the state pipeline monopoly Transneft. Both firms are short of cash and need this loan to offset the costs of the East Siberian-Pacific Ocean (ESPO) pipeline. In return China will receive, through a spur of the ESPO to Daqing, 15 million tons of oil (300,000 barrels per day) annually for 20 years (Moscow Times, February 18). Even during the economic downturn, Moscow is procuring the capital it needs.

Political problems continue to dog the relationship between Japan and Russia. Besides the territorial dispute, the program allowing for Japanese officials and former residents to visit the disputed islands without a visa is now in danger of being suspended. Japanese fishing vessels operating in the waters surrounding the islands continue to be impounded by Russian authorities; the latest incident took place last month. The Japanese side continues to focus on events such as these, as well as the territorial dispute. The Russian side, however, is happy to focus on economic cooperation and energy deals. Upon completion of the ceremony on Sakhalin, Medvedev beamed: "All this… strengthens our position…as the biggest player on the energy market…I will not conceal it: We are very much delighted about that" (Moscow Times, February 18).

It appears that Moscow is continuing to hold the upper hand in relations with Tokyo, in spite of the fall of energy prices and the subsequent economic crisis. As much as the Japanese government and Japanese interest groups would love to keep the territorial dispute at the center of Japanese-Russia relations, the fact is that each passing day takes them further from a settlement. Moscow has time on its side; and barring a major upheaval in the Russian Far East or elsewhere in Russia, it is unlikely that the Kremlin will be willing to give up more than two islands.