BLOOMBERG: Putin to Seek Kurils Solution Through Economic Ties: In Sakhalin, Japanese companies are investing in at least two of five oil and gas projects that may spend $50 billion to supply Northeast Asia and the U.S. Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc, the biggest publicly traded oil companies, lead three of the ventures. Sunday 20 November 2005

By Todd Prince

Nov. 20 (Bloomberg) -- Russian President Vladimir Putin will seek stronger economic and security ties this week during his first visit to Japan in five years, as a path to solving a dispute over four islands, the biggest issue clouding bilateral relations.

Russia took possession of the islands, known by the Russians as part of the Kurils and in Japan as the Northern Territories, at the end of World War II.
The dispute has blocked the signing of a peace treaty between the two countries since the war and slowed investment by Japan, the world's second-largest economy, in Russia, the second-biggest oil exporter.

Relations have been laid ``that give us hope that we can solve all questions which remain unsolved,'' Putin told reporters in Tokyo today after his arrival.

Putin met today with Yukio Hatoyama, secretary general of Japan's opposition Democratic Party and chairman of the Japan- Russia Society, at the top of the $2.2 billion Roppongi Hills complex overlooking Tokyo. He will address a Japan-Russia economic forum tomorrow that will be attended by 120 Russian executives and officials.

Japanese Prime Minister Junichiro Koizumi and Putin meet tomorrow afternoon when they will sign agreements on the conclusion of World Trade Organization negotiations on goods and services and fighting terrorism.

`Concrete Conditions'

Japan seeks Russian oil to reduce its dependence on supplies from the Middle East. A Japanese plan for a pipeline from western Siberia to Russia's Pacific coast and joint development of the Russian island of Sakhalin, which lies near the Kurils, are also on the agenda for the talks, Japanese Deputy Trade Minister Hideji Sugiyama said last week.

``We value Japan's attention to the oil pipeline project and are ready to continue discussing concrete conditions of its possible inclusion to this project,'' the Kremlin said in a statement.

OAO Gazprom Chief Executive Alexei Miller, OAO Rosneft Chief Executive Bogdanchikov and OAO Russian Aluminium Chief Executive Deripasko will be among dozens of Russian business leaders traveling with Putin. State-run Gazprom is the world's largest natural-gas producer, while Russian Aluminium makes an eighth of the world's aluminum.

Putin may call on Japan to jointly develop the disputed islands, analysts said. Japan originally balked at that idea when it was presented by Putin's predecessor Boris Yeltsin in the 1990s.

`Geostrategic Interests'

Putin said in September he'd instructed his government to create a plan to develop the Far East regions, including the Kurils, which lag behind the rest of the nation economically.

The government approved the proposal Oct. 13, saying the poor economic and social situation on the islands ``threatens the geostrategic interests of Russia.''

``Putin is likely to offer such a compromise,'' said Alexei Makarkin, an analyst at the Moscow-based Center for Political Technologies. ``Japan may feel some satisfaction and it wouldn't be a blow to Russia's prestige.''

One area that may offer scope for joint action is the development of the fishing industry in the islands, Makarkin said.

Joint economic development of the islands ``opens the door for Japan,'' said Mikhail Delyagin, director of the Institute of Globalization Issues and an adviser to former Russian Prime Minister Mikhail Kasyanov. ``Japan can begin with this and then press for more concessions.''

`Sovereign Territory'

Japan has repeatedly called on Russia to return the islands, which lie to the east of Japan's northernmost main island, Hokkaido. Koizumi told reporters on Nov. 17 he wants to resolve the dispute when he meets Putin.

The islands have changed hands before. Russia yielded the Kurils to Japan in
1875 in exchange for southern Sakhalin. Japan seized Sakhalin again after defeating Russia in their 1904-05 war, then ceded Sakhalin and the Kurils to the Soviet Union after surrendering at the end of World War II. It says the four islands are not part of the Kuril chain.

Putin said in September Russia won't give up the islands.

``They are Russian sovereign territory and this is fixed in international law,'' Putin told the nation in a live television address. ``This is one of the results of World War II. We have nothing to discuss on this particular point.''

Russia is the world's largest nation, accounting for about a sixth of the globe's landmass. The Kurils, whose waters are rich in fish and may contain deposits of gold, silver and other minerals.

Partial Solution?

Putin has made protecting Russia's territorial integrity a cornerstone of his presidency. Russia has 80,000 troops fighting rebels in the southern breakaway republic of Chechnya, and in June it canceled a border agreement with Estonia amid concerns the Baltic state may make future claims on Russian territory.

Returning even some of the islands -- an idea first floated by Soviet Leader Nikolai Khrushchev in 1956 -- would be unpopular in Russia, hurting the chances of Putin's chosen successor in the 2008 presidential election, analysts say. According to the constitution, Putin must step down in 2008 after serving two consecutive terms.

``It would be political suicide'' for Putin's successor, said Nikolai Zlobin, a Russia analyst at the Washington D.C.- based Center for Defense Information. ``The Russian establishment is quite united that this isn't necessary.''

Putin came under attack from nationalist groups for handing back two river islands in the Khabarovsk region to China last year.

Slow to Invest

Japan has been slow to invest in Russia, hoping its economic might would persuade the Kremlin to hand back the islands. Excluding investments in oil projects on Sakhalin, Japan has invested $727 million in Russia's economy, less than 1 percent of all foreign investment. Ikea AB, the world's largest
home- furnishings retailer, has invested more than a $1 billion in Russia.

Current economic cooperation doesn't correspond to the potential the two nations possess, the Kremlin said.

Japan's bargaining position may be weakening as Russia's economy expands for a seventh year and it improves relations with China, Japan's competitor for Russia's oil and gas reserves. Russia's economy has expanded about 40 percent over the past five years. The nation this year became a net creditor.

``Japan is in an extremely difficult position for these talks,'' said Minoru Morita, a political analyst at Morita Research Institute in Tokyo. ``Russia has the advantage in all aspects, from the energy perspective, which they have plenty of, and oil prices are high.''

Pipeline Rivals

Russia, which now sells most of its oil in Europe, is negotiating with Japan and China on the direction of the pipeline to export Siberian oil. Japan is lobbying for a 4,100-kilometer (2,563 mile) link to Perevoznaya on Russia's Pacific coast while China wants a 2,400-kilometer pipeline to Daqing in northern China.

In Sakhalin, Japanese companies are investing in at least two of five oil and gas projects that may spend $50 billion to supply Northeast Asia and the U.S. Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc, the biggest publicly traded oil companies, lead three of the ventures.

``I am really convinced we will always be able to find a solution that suits both parties, a solution that will benefit the people living on these islands and benefit the peoples of Russia and Japan,'' Putin told Russians in September.

To contact the reporter on this story:
Todd Prince in Moscow at Tprince2@bloomberg.net

Last Updated: November 20, 2005 10:30 EST

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