Agreement on the implementation of a feasibility study for a proposed pipeline project
On December 15 and 16, 2016, Russian President Vladimir Putin made a two-day visit to Japan for the first time in 11 years. In his talks with Prime Minister Shinzo Abe, the two leaders agreed to take concrete steps in line with the eight-point economic cooperation program, which had been presented by Abe during the previous summit meeting at Sochi in May 2016 (Japanese economic cooperation under the program, including private-sector projects, is expected to amount to 300 billion yen).
As factors defining the course of the world economy in 2017, much attention is being focused on newly-elected U.S. President Donald Trump's economic program (Trumponomics), the trend of the Chinese economy, and the movement of crude oil prices. However, my view is that the success or failure of the Japanese economy in 2017 hinges on how we can utilize a "hidden asset" called the "Russian economy."
Particularly notable among the eight points of Japanese economic cooperation to Russia is energy, or more specifically, the treatment of a proposed plan to construct a natural gas pipeline between Sakhalin and Hokkaido.
Although the mainstream Japanese media have not been reporting this, their Russian counterparts have been giving it extensive coverage.
On December 16, 2016, the Russian news agency Interfax reported that the two leaders confirmed their mutual interest in the Sakhalin-Hokkaido natural gas pipeline and agreed to intensify detailed talks at a level of economic entities during their working dinner on the previous day at the city of Nagato in Yamaguchi prefecture.
Likewise, on December 17, 2016, the Russian daily Kommersant quoted Alexey Miller, the chief executive officer of Gazprom who accompanied Putin to Japan, as saying that discussions on the gas pipeline project are well underway, and he is expecting an approach from the Japanese side for specific negotiations in the near future.
In contrast, the reality on the Japanese side is that it remains undecided which entities are to participate in the proposed pipeline construction project, and people are hardly aware of this latest agreement concerning the project because the government did not brief the media on this fact.
However, even though no final decision has been made on the participating entities, some major Japanese companies are beginning to show interest in the initiative to develop distributed heat and power supply networks covering extensive areas within Hokkaido by utilizing natural gas to be supplied by pipeline from Sakhalin, and they are pinning their hopes on Russian companies' active participation in this endeavor.
The implementation of such co-generation projects in cities along the pipeline, such as Asahikawa and Sapporo, would make people's lives just as comfortable as those in Northern Europe. There is no doubt that it would contribute significantly to the development of the local economy in the way of utilizing the potential of Hokkaido such as those of the tourism and dairy industries.
German-Russian economic ties strengthened by pipeline
I expect that becoming connected by pipeline will give a significant boost to the overall level of the economic relationship between Japan and Russia.
In the early 1970s, then Federal Republic of Germany (West Germany) decided to import natural gas by pipeline from then Soviet Union in exchange for its pipeline technologies, as part of its efforts toward normalizing relations with then German Democratic Republic (East Germany) and other East European countries under Neue Ostpolitik or new eastern policy and in view of the need to reduce its dependence on the Middle East for fossil fuel. Since then, Germany has been relying on Russia for more than one-third of natural gas consumed domestically to date. More importantly, it is said that the construction of the pipeline contributed to the reunification of East and West Germany as well as to the end of Cold War between the former Soviet Union and West European countries.
Since the Ukrainian crisis in March 2014, the European Union (EU) has been taking a tough line with Russia on the political front as seen in the imposition of economic sanctions. However, a group of European companies struck an agreement with Gazprom on the expansion of Nord Stream, a natural gas pipeline directly linking Russia and Germany across the Baltic Sea.
Particularly notable is the fact that Russia has by now become an ideal export market for small and medium enterprises in Germany. They are urging their government to press the EU to ease economic sanctions against Russia as German exports to Russia has declined sharply following the imposition of the economic sanctions.
Today, 40 years after the construction of the first pipeline between Germany and Russia, the two economies enjoy a very close economic relationship, and it is the pipeline that laid the foundation of the relationship.
Making Russia the "second Australia" across the sea to the northwest
Russia is now beginning to shift toward the East. The country, which by definition belongs to Europe, is deepening its interest in the Asia-Pacific region.
Since the turn of the century, Russia's public sector investors have been continuing to grow. However, if resource prices remain weak, it will become increasingly difficult to finance public investment. The Russian government is exploring ways to reduce its dependence on resource exports, but the reality is that it is reliant on foreign companies in developing local manufacturing industries.
However, is a resources-dependent economy truly bad?
When we look over the economic growth of the member countries of the Organisation for Economic Co-operation and Development (OECD) in the past 30 years, the country that has achieved the most stable economic growth is Australia. This means that being dependent on the export of agricultural products and mineral resources is not a problem so far as the mix of such commodities is well-balanced and the country has a great capacity to supply them.
Given the success of the Australian economy, it looks more reasonable for Russia to seek to enhance its competitiveness in resource exports rather than trying to develop manufacturing capabilities, an area that is not necessarily its forte.
The reason why Australia was able to attract massive investment from Japan is that it offers an open and transparent regulatory environment, enabling Japanese companies to gain by exporting infrastructure and thereby creating a win-win situation.
As transport infrastructure remains underdeveloped in the Russian Far East and Eastern Siberia, it is difficult for Russia to become another successful growth model comparable to Australia by taking a short-term approach.
Russia needs to make steady and sincere efforts to improve the investment environment so as to enable the country of demand (Japan) and the country of supply (Russia) to build a mutually dependent relationship.
For Japan, this means that Russia will become not only a stable supplier of natural resources but also a major destination of infrastructure exports. It is no exaggeration to say that the "second Australia" will emerge across the sea to the northwest of Japan.
I believe that 2017 will be the first year to define Russia as one of the growth engines for the Japanese economy with the Sakhalin-Hokkaido pipeline project serving as a pump primer.
January 6, 2017