Publication: Monitor Volume: 3 Issue: 70

Last week the Japanese government announced that it was preparing to invest $500 million in the Russian economy. The lead project is to be a $65 million loan for a car assembly line at the Izhmash plant in Izhevsk, Udmurtiya, the plant which first produced the Kalashnikov assault rifle. (Itar-Tass, April 5)

Five years ago, Japan had pledged to invest $1.2 billion in Russia as part of the G-7’s commitment to help Russia’s economic transition. Most of the money was to be targeted on socially-oriented projects, from the production of medicines to the conversion of defense plants (such as Izhmash). The head of Japan’s Eximbank office in Moscow explained in a recent interview that only a small fraction of that sum has actually been paid out, due to bureaucratic, legal, and economic barriers. (Finansovye izvestiya, April 8)

The Russian government has been slow to prepare lists of projects for possible investment, and slow to agree to cost-sharing. (Eximbank rules require that at least 15 percent of the investment be covered by the host government). Previously it had been agreed that equipment imports financed by international lending would be free of import duties and VAT. In March, 1995, this rule was changed, leaving many projects hanging in the air since it was no longer profitable for the Russian firms to take delivery of the equipment. In July 1996 the exemption from import duty was restored.

In May 1995, Japan granted a $43 million loan to the Impuls firm to buy equipment for manufacturing microwave ovens; later that year another $200 million was offered to the Yaroslavl oil refinery, and $150 million to the KamAZ truck plant. Neither of the latter two loans were taken up, and only last month was Impuls granted a special VAT tax waiver, clearing the way for delivery of the equipment.

A further complication is that Russia took over $12 billion of the Soviet debt to Japan, of which $7 billion is owed to Eximbank, and on which repayments are in arrears. Some of the Japanese trading firms holding this debt have been in extreme financial difficulty.

These Eximbank projects are essentially a goodwill gesture by the Japanese government to show that it is pulling its weight in aiding the Russian transition — although the projects seem to be generating more misunderstanding than goodwill. Japan’s real economic interest lies in developing the vast oil and gas resources of Siberia and the Russian Far East, first and foremost the Sakhalin off-shore oil fields. However, Japan has refused to move ahead with special negotiations over these projects until Russia addresses the question of the return of the Northern Territories (Southern Kuril islands) to Japan.

Russia Reaches Steel Agreement with European Union.