SNA (Tokyo) — In 2019, Japan’s involvement in the Russian energy sector increased significantly, most notably with the purchase by a Japanese consortium of a 10% stake in Russia’s Arctic LNG-2 project. The Abe administration evidently hopes that these new investments will bring benefits, both in terms of energy economics, and as a means of furthering Prime Minister Shinzo Abe’s ambition to settle Japan’s territorial dispute with Russia. In both respects, the Japanese leadership risks disappointment.

Improved economic relations with Russia have been a consistent goal of Prime Minister Abe’s foreign policy. However, despite Japan’s announcement of an eight-point economic cooperation plan in May 2016 and the appointment of a minister for economic cooperation with Russia, progress was initially slow.

Indeed, the Russian side expressed frustration that Japan was only providing warm words and small technical schemes, such as a pilot project for smart traffic lights in Voronezh. Finally, however, Tokyo’s expansive rhetoric is being backed up by the billion-dollar commitments that Moscow was waiting for.

During Abe’s attendance at the Eastern Economic Forum in Vladivostok in September 2019, the final investment decision was taken for Arctic LNG-2. This liquified natural gas project on Russia’s Gydan Peninsula is expected to have a total capacity of 19.8 million tons per annum (mpta), with the gas being shipped out via the Northern Sea Route on specialized ice-breaking LNG carriers. The project, which is expected to cost US$21 billion and begin production in 2023, is being led by Russia’s Novatek with a 60% stake. Japan’s 10% share is held by a consortium of Mitsui & Co. and state-controlled JOGMEC. The other investors are China’s CNOOC and CNPC (20%), and France’s Total (10%).

The purchase of the stake in Arctic LNG-2 is the largest Japanese investment in Russian energy in many years, but it is set to be rapidly followed by another. In December, the Japanese media reported that the Sakhalin Oil and Gas Development Co. (SODECO), a Japanese consortium formed by the Ministry of Economy, Trade and Industry (METI) as well as Itochu, Marubeni, and JAPEX, will work with Russia’s Rosneft and ExxonMobil of the United States to begin exporting LNG from Sakhalin-1. This project, which already produces oil, will be expanded via a 200 kilometer pipeline that will take gas to the Russian mainland where a new LNG plant will produce 6.2 mtpa. The total cost is estimated at US$9.1 billion and production could begin in 2027.

As ambitious as these projects are, there is the potential for something even more grandiose. When Rosneft CEO Igor Sechin visited Tokyo in December, he met with figures within the Japanese energy sector to encourage investment in the Vostok Oil project. This new venture proposes to produce 2 million barrels of oil per day, around a fifth of Russia’s current total. This enormous increase in production is anticipated to come from fields in the Russian Arctic, with the exports again being shipped via the Northern Sea Route. The scale of the project is so vast that Rosneft is seeking investment of US$157 billion, with Japanese investors being asked to finance between 10% and 40%.

The Japanese government’s interest in promoting such investments is twofold. Firstly, there is the desire to diversify Japan’s energy imports. At present, Japan relies on the Persian Gulf region for more than 80% of its oil. This dependence has long been considered a risk to Japan’s energy security and such concerns only deepened following the military clashes between Iranian and US forces at the start of 2020. Indeed, on January 7, METI Minister Hiroshi Kajiyama responded to heightened regional tensions by stating that “Japan has been trying to secure interests in non-Middle Eastern countries and develop resources. We will continue these efforts.”

The second motivation is the Abe administration’s belief that energy investments will help facilitate a resolution to the countries’ territorial dispute over the Russian-held Southern Kuril Islands, which are claimed by Japan as the Northern Territories. This issue has been a key focus of Abe’s foreign policy, and he has promised to solve it before the end of his time in office. To do so, Abe has promoted a “new approach” that consists of three elements.

Firstly, he has sought to deliver a breakthrough by cultivating close personal relations with Russian President Vladimir Putin. Secondly, Abe has effectively reduced Japan’s territorial claims by prioritizing the return of just two of the four disputed islands. Thirdly, the Japanese leader has sought to encourage Russian concessions by offering economic incentives. This is the reason for the launch of the eight-point economic cooperation plan in 2016, and it also helps explain the government’s current enthusiasm for Russian energy investments.

These might seem convincing justifications for Japanese investment, yet caution is merited. To begin with, the highlighted projects all involve substantial economic risks. For instance, there is the possibility that Japanese investors will find themselves squeezed by the Russian state. This was the experience of Mitsubishi and Mitsui in 2006-2007 when the Russian authorities used the pretext of environmental issues to force the Japanese companies to reduce their stakes in the Sakhalin-2 project. This was done to permit Russia’s Gazprom to take control.

Furthermore, US sanctions are a potential hazard. Since the Ukraine crisis in 2014, Washington has introduced extensive sanctions against the Russian energy sector, including measures that target Novatek and Rosneft. Rosneft CEO Igor Sechin has also been individually sanctioned.

Although Japan has been careful to ensure compliance with existing US restrictions, there is no guarantee that these will not be suddenly expanded, especially since the Trump administration uses sanctions as a habitual tool of foreign policy. The application of US sanctions in December against the Nord Stream 2 gas pipeline, which links Russia and Germany, is a timely reminder of this risk.

Even more problematic than the Russian investment climate is the global climate itself. The Japanese government professes a commitment to tackling global warming, yet its actions tell a different story. By promoting new investments in Russian oil and gas, the Abe administration is tying the country into a high-carbon economy for decades to come. This is particularly distressing in the case of the Russian Arctic since the region’s resources and the Northern Sea Route through which they will be exported have only become accessible as a result of existing climate change.

Japan’s failure to take global warming seriously also carries economic risk. This is because, while Japanese cabinet ministers remain wedded to the energy sources of the 20th century, other countries are rapidly moving towards decarbonization. Such efforts will only accelerate as the effects of climate change become increasingly apparent, such as through continued wildfires in Australia and Tokyo’s hosting of the Olympics in potentially record summer heat.

As the shift towards renewable energy becomes a rush, demand for hydrocarbons will plummet, leaving Japan with billion-dollar investments in stranded assets. It is one thing for private companies to make such bets; it is quite another for the government to commit taxpayers’ money in this way.

Indeed, the private sector appears more hesitant about investing in Russian energy than the government. For instance, Mitsubishi declined to buy into the Arctic LNG-2 project and Mitsui only joined after state-run JOGMOC agreed to finance 75% of the Japanese stake. Additionally, after it was announced that Itochu, Marubeni, and JAPEX were planning to invest in gas production from Sakhalin-1, the share prices of all three companies fell.

The economic basis for new Japanese investments in Russian energy is therefore dubious, but the political case is even weaker. Prime Minister Abe appears to believe that major financial commitments by Japan will be rewarded with reciprocal Russian concessions on the territorial issue. This is naive.

Abe has now met President Putin on 27 occasions and he has visited Russia eleven times since 2013. Yet, despite this assiduous courtship, no meaningful progress has been made towards resolving the territorial dispute. By now, it should be apparent that Russia has no intention of returning the Southern Kurils. The Russian public sees these islands as having been legitimately gained as a result of Soviet sacrifices in World War II and, at a time of intense geopolitical tensions, Moscow is stridently opposed to giving up this territory to an ally of the United States.

None of this will change as a result of Japanese energy investments. Indeed, as soon as the financial commitments have been made, any Japanese leverage evaporates. In fact, as demonstrated in the case of Sakhalin-2, once the investment has been sunk, it is the Russian side that has the upper hand since they can use domestic pressure to force a renegotiation of contractual terms.

Overall, if the Japanese government is going to commit billions in public money to energy projects, it should be to schemes that can be justified both economically and environmentally. Above all, Tokyo should be investing in renewables, as well as improvements in grid capacity and electricity storage. What Japan absolutely must not do is to throw away financial resources in an attempt to rescue Abe’s fading dream of becoming the prime minister to finally resolve the territorial dispute with Russia.

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