Japan nudges wary firms to invest in Russia to help resolve islands dispute

November 1, 2016 10:34 PM EDT

Russian President Vladimir Putin (R, front) and Japanese Prime Minister Shinzo Abe (L, front) ride down an escalator during their meeting on the sidelines of Eastern Economic Forum in Vladivostok, Russia, September 2, 2016. Sputnik/Kremlin/Alexei Druzhini


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By Takashi Umekawa and Linda Sieg

TOKYO (Reuters) - Japan's government is lobbying its firms to invest in Russian projects to help secure a breakthrough in a festering territorial row with Moscow when President Vladimir Putin visits Japan in December, sources told Reuters.

The dispute over four islands north of Japan's Hokkaido, called the Northern Territories in Japan and the Southern Kuriles in Russia, has kept Tokyo and Moscow from signing a peace treaty formally ending their conflict in World War Two.

Japan's Prime Minister Shinzo Abe is betting his close ties with Putin and the lure of investment from Japanese companies could set the stage for progress in the dispute when the pair meet in Abe's home constituency on Dec. 15.

"Basically, economic cooperation is led by the private sector, and the government is now recruiting companies," said one Japanese government source.

But Japanese corporate concerns about an unpredictable investment environment in Russia and tough calculations of risk and return could deter private-sector deals.

"If it is not profitable, even under pressure, they wouldn't say yes," said a former official at Japan's trade and industry ministry. "They like to please the prime minister, but they have to please their investors even more."

Abe has handed trade minister Hiroshige Seko a new portfolio for economic cooperation with Russia.

Seko, who has said he wants to produce results by the end of November, leaves on Wednesday for Moscow.

Japan in May proposed eight sectors - many overseen by Seko's ministry - including medical technology and energy, for cooperation.

Russia in turn has presented a list of dozens of projects from port development and energy to farming and fisheries - and even a "cosmodrome" space port in the Russian Far East, Japanese government sources said.

The two sides are trying to agree on "priority projects" within each of the eight sectors, perhaps while Seko is in Moscow, another Japanese government source said.

Russia's Ministry for Development of the Russian Far East said last week that attracting Japanese business was a priority, and deputy minister Alexander Osipov said "we plan to reach concrete results" by the December meeting.

The ministry said Japan was mulling investing over $16 billion in joint ventures in the Russian Far East and Siberia.

"The PM's office is saying the more they can announce on Dec. 15, the better, but we can't announce what hasn't been decided," the first Japanese government source said.

TWO SIDES OF A COIN

One project that could see progress by then is an extension of Sakhalin-2, Russia's only operating liquefied natural gas (LNG) project, a third Japanese government source said.

Partners Gazprom , Royal Dutch Shell and Japan's Mitsui & Co <8031.T> and Mitsubishi Corp <8058.T> have already agreed a marketing strategy for the planned third train.

A Mitsui spokeswoman said business was proceeding as usual, while a Mitsubishi spokesman said talks on an investment decision were continuing.

Another possibility is for Japan Oil, Gas and Metals National Corp (JOGMEC) to invest in Russian oil producer Rosneft, subject to legal changes to let the state-run agency do so.

Mitsui and the Japan Bank for International Cooperation (JBIC) - which could play a role in other projects - have exchanged notes on taking up to 4.88 percent of Russian state-run power company RusHydro.

JBIC has agreed to help finance Russia's Yamal project, where Novatek [NVTK.MM] and partners are building the country's second gas liquefaction plant, and is ready to support Novatek's second LNG project, Artic LNG-2, Novatek's CEO, Leonid Mikhelson, said in September.

Mitsui is also in talks to invest in Moscow drugmaker R-Pharm, a Japanese government source said. Mitsui declined to comment.

Building a gas pipeline linking Russia and Japan is a long-standing idea, but that could prove a hard sell to Japanese gas and electric utilities that have invested heavily in LNG import terminals.

Japanese firms have long complained about the business environment in Russia. Among their concerns are an opaque and changeable legal system, burdensome bureaucracy and corruption, according to surveys by Japanese business lobby Keidanren.

In 2006, Shell, facing accusations of ecological violations, ceded control of the Sakhalin-2 project to state-monopoly Gazprom after months of political pressure. Mitsui and Mitsubishi also had to reduce their minority stakes.

"Yes, companies have concerns about unpredictability. If some sort of treaty is agreed and they have a package deal which improves the business environment, they may be more comfortable," the former trade and industry official said.

Japanese companies, including lenders, are also wary of running foul of Western sanctions imposed on Russia after it annexed Crimea from Ukraine in 2014.

"You can make a list of cooperation (projects), but to realize it, the global environment needs to be more favorable," the former official said, referring to the sanctions.

Progress on the economic side also hinges on making headway on the islands row.

"The territorial issue and economic cooperation are two sides of a coin," the first government official said. "It's meaningless if only economic cooperation moves ahead."

(Additional reporting by Aaron Sheldrick, Yuka Obayashi, Ami Miyazaki and Kiyoshi Takenaka in Tokyo and Denis Dyomkin in Moscow; Editing by Will Waterman)



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