JAPANESE ATTITUDES ON BUSINESS WITH RUSSIA REMAIN

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002733

SIPDIS

E.O. 12958: DECL: 09/25/2013
TAGS: ETRD EINV ENRG PREL RU JA
SUBJECT: JAPANESE ATTITUDES ON BUSINESS WITH RUSSIA REMAIN
CAUTIOUS

Classified By: Ambassador J. Thomas Schieffer for Reasons 1.4 (b),(d)


1. (C) SUMMARY: Japanese business sentiment toward economic
opportunities in Russia remains cautious. Japanese business
and government interests note concerns about the risks of
doing business in Russia, continued uncertainty following
Russia's invasion of Georgia, problems with the transport of
goods inside Russia, and lack of GOR working-level movement
on several proposed investment opportunities as obstacles to
increased Japanese economic engagement. While traditional
energy and autos trade relations remain strong, Japanese
penetration into other Russian consumer markets as well as in
the development of Russia's Far East remain sluggish. END
SUMMARY.

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PUSH FOR INVESTMENT BEYOND MOSCOW AND ST. PETERSBURG
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2. (C) Ministry of Economy, Trade and Industry (METI) METI
Trade Policy Bureau Director for Russia, Central Asia and the
Caucasus Noriaki Kojima noted the difference he saw in
perceptions between Russian and Japanese participants when he
made a presentation at an annual Japan-Russia investment
forum in St. Petersburg in early September. Kojima noted
several Russian regional government and business
representatives sought to emphasize business opportunities,
while the Japanese participants seemed to be attending the
forum out of a sense of obligation. According to Kojima, the
Russian government decided this year's central theme would be
expanding investment opportunities outside Moscow and St.
Petersburg. METI Senior Vice Minister Sanae Takaichi led a
delegation of around 250 Japanese government and business
representatives from the auto, energy, telecom and finance
industries. Responding to Emboff's questions about the
timing of the event, Kojima said it was originally proposed
for June, but because many Japanese firms have shareholders'
meetings at that time, it was rescheduled, prior to the
Russian invasion of Georgia, for September.

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JAPANESE WARY OF POOR INFRASTRUCTURE
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3. (C) Kojima identified four negative perceptions of the
Russian investment climate among Japanese companies: (1)
complicated and time-consuming administrative procedures; (2)
sometimes incomprehensible regulations; (3) insufficient
infrastructure; and (4) the poor quality of Russian
manufactured goods. Russia's infrastructure is a particular
weakness, Kojima said, explaining bottlenecks in Russia's
saturated ports hurt efficient distribution of Japanese-made
automobiles throughout Russia. Japan and Russia have had
several high-level meetings on developing the Trans-Siberian
railroad for transporting Japanese exports from Siberia
westwards to European Russia, but Kojima said the Russian
side's expectations of Japanese involvement are unclear.
Kojima also said many Japanese firms, including Toyota, are
wary of transporting sensitive and fragile high-tech goods by
rail.


4. (C) Shunsuke Nakagawara, Director of Mitsui's
Russia-CIS-Baltics Business Development Center and a key
figure in the trading house's corporate strategic planning
for the Russian market, echoed Kojima's sentiment. In a
subsequent meeting with Emboff, Nakagawara noted Japanese
perceptions of the Russian business climate have changed
significantly over the past several months. Talking about
the annual investment forum, he said many Japanese
participants did not know how to react in the immediate
aftermath of the Russia-Georgia conflict. Over the past
month, Japanese industry has been following U.S. and E.U.
reactions to events in Russia and Georgia very closely. As
far as the forum's theme of investment prospects outside of
Moscow and St. Petersburg, Nakagawara and Mitsui Senior
Counselor Takehiro Togo said the Russian Far East continues
to have promise as a destination for Japanese investment.
(Bio note: Togo was Japan's Ambassador to Russia from
1996-1999). Mitsui is participating in the Sakhalin II
project, which should make its first LNG delivery in 2009,
and Togo is encouraged by Gazprom's participation in the
venture as a guarantor of stability. Mitsui also concluded a
MOU with Russian Railways (RZD) and Russkaya Troyka to
develop a weekly "all Japan block train" cargo shipment to
Moscow and St. Petersburg starting in early 2009.

TOKYO 00002733 002 OF 002




5. (C) Itaru Otowa, Vice Director of the Institute for
Russian and NIS Economic Studies at the METI-affiliated Japan
Association for Trade with Russia and the NIS (Japanese
acronym ROTOBO),also said Japanese industry is closely
watching U.S. relations with Russia. Otowa said Japanese
companies operating in Russia are customarily risk averse.
Otowa points to recent investments by auto manufacturers,
including Toyota's commencement of production of passenger
vehicles in St. Petersburg in December 2007, as a turning
point toward additional Japanese foreign direct investment,
with other manufacturers likely to follow suit. However,
difficulties in adapting the Japanese just-in-time system to
prevailing conditions in Russia as well as a lack of
sufficiently trained local employees and a historic lack of
consumer-oriented quality control are obstacles to expanding
Japanese engagement in Russia's manufacturing sector.


6. (C) COMMENT: By the numbers, Russia remains a significant
Japanese trade and investment partner in the traditional
sectors of autos and energy. In the first half of 2008,
autos, which account for 76% of Japan's total exports to
Russia, rose 68% year-on-year, while crude oil imports from
Russia rose nearly 39%. Russia remains a growing export
market for transportation amid declining global sales, and
some manufacturers, such as Komatsu, which began building a
hydraulic shovel plant in Yaroslavl in July, continue foreign
direct investment in anticipation of sustained future growth.
However, an apparent lack of momentum coming out of the
September investment forum plus a wait-and-see sentiment
related to events in Georgia and the response of U.S.
government and business may temper Japanese economic
expansion in Russia. END COMMENT.
SCHIEFFER