RUSSIA - The Japan & Asian Oil Market Dimensions.

A territorial dispute and a potentially lucrative oil partnership with Japan are issues of primary importance to President Putin, who is due to visit Tokyo in January 2005. Also of primary importance to Putin is a close relationship with the US (see News Service of this week's APS Diplomat).

Wearing a white windbreaker to protect him from the Siberian wind, Japanese Prime Minister Junichiro Koizumi on Sept. 2 stood on the bridge of a Japanese Coast Guard patrol boat, scanning the treeless shores of islands occupied by Russia since September 1945. Following close behind was an uninvited escort: a Russian Coast Guard patrol boat. That moment, on the Sea of Okhotsk, seemed frozen in time.

Nearly six decades after Soviet troops swept down the Kurils and seized the Japanese islands, there is no peace treaty between Russia and Japan. But the rapidly changing geo-politics of Asia's energy industry could break a logjam that has endured since World War II. About 560 kilometres to the north-east, off Sakhalin Island, part of Russia, Japanese firms are participating in the first $10 bn slice of what could be a $100 bn development of oil and natural gas reserves believed to rival the North Slope of Alaska.

About 1,125 km to the east, at Vladivostok, Japanese and Russian officials met this summer to outline a plan for a 4,000-km, $12-13.5 bn pipeline to bring Siberian crude oil to the Sea of Japan. A Russian decision on the pipeline is expected this autumn.

Behind Japan's drive to lock in access to Russian oil and gas are forecasts that over the next 15 years China's oil imports will double and its gas imports will increase fivefold. Japan's energy use, meanwhile, is far from stagnant. In July, Japan, which imports 88% of its oil from the Middle East, experienced a 9% jump in the volume of its oil imports. "Japan finds itself very much like before World War II". Alexander Losyukov, Russia's ambassador to Japan, said in a recent interview. "It needs resources and markets, and those two things can combine to lead to a very dangerous situation".

As Japan has become the largest foreign investor in Russia's energy-rich Far East, the time is nearing for both sides to negotiate a truce over the four disputed islands. Both have said they would like to announce a formula for a bilateral peace treaty during Putin's visit, which would coincide with the 150th anniversary of the first trade treaty signed by the two countries, in 1855. On Sept. 4, The New York Times (NYT) quoted Takashi Inoguchi, professor of international politics at the University of Tokyo, as saying: "Prime Minister Koizumi is very much interested in getting this bilateral relationship to move. Something has to be done to get the two countries closer".

Toyota Motor, Japan's largest carmaker, is expected to take advantage of Putin's visit to announce the opening of its first assembly plant in Russia, probably in the Volga region, east of Moscow. Last year, Toyota tripled its new car sales in Russia to 25,000, making it the most popular imported brand in the country.

Despite the signs of a thawing relationship, however, Putin and his aides frowned on Koizumi's boat trip around the islands - the first by a Japanese prime minister. The Russian Foreign Ministry warned on Aug. 30, after Koizumi announced plans for the trip: "Such actions, let alone their demonstrative timing with the anniversary of the end of World War II, not only fail to give a positive impetus to the peace treaty negotiations, but will only complicate the negotiations once again. As far as we understand, these plans are primarily based on internal political considerations".

Koizumi's Sept. 2 tour might have been calculated to neutralise conservative opposition before serious negotiations begin. That would fit a pattern by his administration. On Aug. 15, the anniversary of Japan's World War II surrender, Shoichi Nakagawa, Japan's minister of economy, trade and industry, was one of four members of Koizumi's cabinet to visit a Tokyo war memorial shrine venerated by conservatives. The next day, Nakagawa flew to Sakhalin, becoming the first Japanese minister to visit the island, which was partly controlled by Japan until the end of World War II.

During a five-day tour, Nakagawa visited the site of the construction of Russia's first plant to liquefy natural gas. This is part of the Sakhalin-II venture, owned 55% by Shell, 25% by Mitsui and 20% by Mitsubishi. Several of Japan's largest utilities have signed long-term contracts to import the Sakhalin LNG.

With Japan expected to win rights to the Siberian oil pipeline, Russia is moving to mollify China. On a visit to Beijing in August, Industry and Energy Minister Khristenko told journalists that Russian oil sales to China would increase fivefold by 2010. Russia is China's fifth-largest source of oil. With gas emerging as an equally valuable energy source, China and Japan are shadowing each other in the East China Sea.

While China laying a roughly 480-kilometre gas line to offshore deposits, Tokyo has complained that China will tap into a 246 BCM (8.7 TCF) gas field that is partly Japanese. With each country's exclusive economic zone in dispute, China's moves to develop the gas have been met by a Japanese survey ship, exploring the contested area in the southern tip of Okinawa Prefecture.

The US restored Okinawa to Japanese rule in 1972. Now, people in Tokyo say the time has come for Russia to give up its war booty as well - the four disputed islands, which the Japanese call the Northern Territories and the Russian call the Southern Kurils. The islands' total land mass is larger than Okinawa's. "Without restoration of the four islands, we will not have a Japan-Russia peace treaty", Koizumi on Sept. 2 said in a meeting with representatives of 8,000 former inhabitants of the islands. "Restoration of the four islands will not only benefit Japan, but it will benefit Russia".