Russia's Putin expected to deliver a deal on contested islands in Japan

By bne IntelliNews December 15, 2016

Russian President Vladimir Putin is expected to deliver a partial deal on the contested Kuril Islands during a two-day trip in Japan that began on December 15, opening the way for a possible formal peace treaty ending WWII and yielding a surge of new joint economic projects.

While a full-fledged agreement on the territorial dispute is unlikely to be reached, comments from the Kremlin press office point to a deal in the works on "joint economic activity" that can ease the issue of the islands' towards a final resolution.

Reportedly Putin and his host Japanese Prime Minister Shinzo Abe are jointly developing a text of a possible agreement on joint economic activity around the islands under Russian jurisdiction, which could involve fishing, tourism, and medicine, reported on December 15, citing presidential aide Yury Ushakov.

The dispute over the ownership of the Southern Kurils, a string of volcanic islands that stretch between Russia's Kamchatka peninsula and Japan's northern Hokkaido island that were occupied by Soviet forces in 1945. The status of the islands, which  Japan still claims, has prevented a peace treaty between the countries to formally end World War II. Earlier reports claimed that Putin's visit could even deliver a historic peace treaty deal.

Aside from the geopolitical agenda, Putin's visit is expected to seal a number of energy deals, most notably in the financing of Russian Liquefied Natural Gas projects, of which Japan is one of the main current and potential buyers.

Mizuho Bank and Sumitomo Mitsui Banking Corp were reportedly negotiating to grant ‎€800mn to Russia's largest gas producer Gazprom. It is also anticipated that Putin will sign a cooperation deal with JBIC for the LNG (liquefied natural gas) project Arctic-2 Russia's second-largest gas producer Novatek.

Russia's recently arrested economy minister Alexey Ulyukaev said in September that JBIC state Japanese bank and exports' credit agency NEXI could participate in the financing of the third stage of Gazprom's Sakhalin-2 LNG project and Novatek's LNG project Arctic-2.

Japan is expected to be one of the biggest buyers of Russian LNG in the Asian-Pacific market. Gazprom CEO Alexei Miller also told the Rossiya 24 TV channel in November that Sakhalin-2 is among projects where cooperation with Japanese investors is possible.

Currently the only LNG facility in Russia is operated by Gazprom on the Far Eastern island of Sakhalin. The expansion of the plant, along with Novatek's Yamal LNG project due for launch in 2017 and the planned Arctic-2 project, will all enhance Russia's LNG presence on the Asia-Pacific market.

Meanwhile, a Russian-Japanese investment fund is planned to be established by the Russian Fund for Direct Investment (RFPI) and the JBIC, Prime reported on December 15, citing the fund's head Kirill Dmitriev. Reportedly, up to $1bn could be set up for joint projects and attract up to $10bn in the Russian economy, according to Dmitriev's estimates.

Citing unnamed sources, Vedomosti daily reported on December 16 that Japanese Mitsui & Co could buy 10% in Russian pharmaceutical producer R-Pharma for $130-$174mn, potentially expanding the deal to 20% by attracting a pool of investors, which could include RFPI and JBIC.

Negotiations on the deal were confirmed by the founder and sole shareholder of R-Pharma, Alexei Repik. The company is Russia's largest supplier of pharmaceuticals to the state, with a share of 10.6% (RUB35.6bn supplied in 2015), followed by Pharmstandard and Pharmimeks (5.9% and 5.6% shares, respectively).

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