U.S.-JAPAN CENTRAL ASIA DIALOGUE: PART THREE,

UNCLAS SECTION 01 OF 02 TOKYO 007166

SIPDIS

SENSITIVE
SIPDIS

DEPT PLEASE PASS TO SCA/DAS FEIGENBAUM
PLEASE PASS TO USTR BEEMAN

E.O. 12958: N/A
TAGS: ENRG PREL PGOV JA
SUBJECT: U.S.-JAPAN CENTRAL ASIA DIALOGUE: PART THREE,
JAPANESE VIEWS OF INVESTMENT CLIMATE IN CENTRAL ASIA



1. (SBU) Summary. Ministry of Economy, Trade, and
Industry's (METI) Trade Policy Bureau Central Asia
division head and a Japanese trading company researcher met
separately with SCA/DAS Evan Feigenbaum on December 8 to
discuss the difficult business and political climate in
Central Asia. Political uncertainty, poor infrastructure,
onerous regulation and other problems precluded most Japanese
foreign direct investment (FDI); Japan's only investment in
the region at the moment is through overseas development
assistance (ODA). Interest in natural resources remains
high, however, particularly in uranium, which is abundant,
and in hydrocarbons. End Summary.

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METI VIEWS ON INVESTING IN CENTRAL ASIA
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2. (SBU) METI Trade Policy Bureau's Europe, Middle East and
Africa Division Director Toshikazu Masuyama and Agency for
Natural Resources and Energy Nuclear Facilities Development
and Nuclear Fuel Cycle Industry Division Deputy Director
Hirobumi Kayama met with DAS Feigenbaum to discuss the
Japanese government's role in investing in Central Asia.
Masuyama told Feigenbaum that Japan is shifting from
liquefied natural gas (LNG) toward uranium extraction and
civil nuclear cooperation. As the world's third largest
consumer of uranium, Japan is specifically targeting
Kazakhstan for its uranium, the deposits of which are the
second largest in the world.


3. (SBU) Masuyama noted that Prime Minister Koizumi had
traveled to Central Asia in August 2006 and that technical
discussions culminated in the signing of a memorandum of
understanding (MOU),which included a sentence declaring the
importance of cooperation in nuclear energy. Masuyama added
that Japan's Ministry of Foreign Affairs had to change its
stance on nuclear cooperation in order for that sentence to
be allowed into the MOU. This was an important symbolic
result. Still, more tangible Japanese investment would
require a change in the region's business environment. He
suggested, however, that the MOU might lead to larger
cooperation with both Kazakhstan and Russia in the civil
nuclear area. Japan is already involved in discussions over
a joint venture with Kazakhstan to build a light water
nuclear reactor as well as a mine and an enrichment facility.
(Comment: Business sources have told the Embassy that
Kazakhstan wants to increase its use of nuclear power and
would like to build its own light water reactor. Because
Kazakhstan relies heavily on Russia for its technology, it
views Japan as a welcome counter-balance. The Japanese and
Kazakh governments are still negotiating over the building of
a light water reactor. End comment.)


4. (SBU) Masuyama reiterated that Japan's involvement in the
region has been entirely in the form of ODA, not FDI. He
stressed the need to improve the business environment for new
projects to protect existing Japanese investment and bemoaned
the authoritarian systems of government prevailing in the
region, which largely ignored the complaints of foreign
businesses. In Uzbekistan, in particular, Masuyama stressed
the negative political and business climate and the campaign
against U.S. and Asian businesses, including Japanese
business. Feigenbaum noted that Newmont Mining, a major U.S.
investment, had been driven from the country. Masuyama
complained about the lack of predictability and transparency
and claimed that business environment data often was
fabricated by the Uzbek government. Feigenbaum raised USG
support for WTO accession across the region. He noted
Kazakhstan,s bid to join the WTO, suggesting that Russia may
accede before Kazakhstan, which would have interesting
implications for Kazakhstan's own accession negotiations.


5. (SBU) Masuyama called for the rehabilitation of energy

TOKYO 00007166 002 OF 002


plants in Uzbekistan, noting that this is one way to earn
Kyoto Protocol energy credits. He also recommended that
bilateral and multilateral treaties be used to protect
investments. Finally, he noted that the region's tourism
industry could be expanded. Encouraging Japanese investment,
SCA Senior Advisor Robert Deutsch raised USG efforts, along
with the World Bank and others, to promote infrastructure
development linking Central to South Asia, including
development of hydroelectric power for Afghanistan, Pakistan,
and beyond. He asked whether hydro-electric power might be a
source of Kyoto Protocol credits. Masuyama noted that
Japanese power generation companies are very conservative by
nature and, thus, would not likely be interested in
international business opportunities, such as those Deutsch
had described. He added that Japanese trading companies have
begun bilateral business dialogues in Kazakhstan, Uzbekistan,
Turkmenistan and Azerbaijian, with each company dividing the
labor and responsibility by focusing on one country each.

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A PRIVATE COMPANY PERSPECTIVE
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6. (SBU) Marubeni Research Institute Senior Analyst Patrick
Ryan told DAS Feigenbaum that none of Marubeni's investment
in Central Asia is foreign direct investment (FDI) and that
this basically is true for all of Japan's other trading
companies (Mitsui, Sumitomo, Itochu and Mitsubishi). The
political and investment climate is such that no Japanese
company is yet willing to risk direct investments in the
region; the return ratio is simply too low. Ryan added that
the region's poor infrastructures contributes to Japanese
reluctance. Contracts to implement official development
assistance (ODA) are a much safer vehicle for the trading
companies because of government backing.


7. (SBU) Ryan explained that Marubeni's primary goal in
Central Asia has been to organize consortiums for projects in
infrastructure development. Marubeni's ODA projects have
included building railways, roads, and airports, modernizing
power plants, and installing gas pipelines. Among the many
difficulties the company faces in the region are import and
export restrictions, parts and materials supply chain
instability, anti-foreign sentiment, and the lack of suitable
local partners.


8. (SBU) Ryan noted, however, that Japan is viewed as
apolitical in Central Asia, allowing Japan to move into
vacuums created by the lack of U.S. and other country
investment. He added that although Japan companies, as well
as Korean mineral extraction firms, have done well, most
non-Russian companies struggle in the region. He added that
Marubeni has offices in Tashkent and Almaty.


9. (U) SCA/DAS Feigenbaum has cleared on this cable.
DONOVAN