A Tailwind in Russo-Japanese Business

|Russia

One cannot expect a tailwind to blow all the time. In business, one habitually feels that one is more likely to experience headwinds. With regard to business with Russia in particular, a headwind has been blowing since the collapse of the Soviet Union. In fact, there was a time when a favorable wind was clearly blowing, but Japan did not allow itself to recognize this tailwind as such.

To be more precise, a tailwind began to blow in Russia in 1999. The stable economic growth that has been seen thereafter has borne this out. However, the Japanese business world has maintained its cautious position. Part of the reason for this is that, along with the irregular political and economic situation of Russia after the collapse of the Soviet Union, enterprises that have actually ventured to develop the Russian market in earnest have merely achieved the kind of results that could only generate a negative impression as a consequence. In other words, because its investment-effectiveness had clearly continued to be negative, companies had no choice but to deem Russia a low priority in terms of market strategy.

As a result of this headwind, those in charge of companies and their local representatives continued to be deeply chagrined. In such a situation, even if the environment was favorable, with a tailwind, the market was forced into a situation in which it could not unleash its potential as a market. This was the situation in which the Russian market found itself vis-à-vis Japan. That is to say, there is no absolute value in the market, where value depends on evaluation by countries and enterprises that look at the market, i.e. a sense of relative value. In other words, favorable winds, headwinds and tailwinds depend on one’s viewpoint; this is how it differs from playing golf.

I am not going to say that individual companies and related economic bodies have been slacking. Groups and business federations, such as the Japan Russia Business Cooperation Committee of the Japan Federation of Economic Organizations, the Japan Association for Trade with Russia & Central-Eastern Europe (ROTOBO) and ERINA, as well as individual companies affiliated to these, have continually made extremely impressive efforts to drive a wedge into the fledgling Russian market.

However, the necessary conditions for the Japanese business community – which tends to look before it leaps – to enter the Russian market in earnest were not put in place. The list of the various negative factors is too long to enumerate in full here, but it includes a legislative system that lost its direction and was frequently revised without any guiding principles under the Yeltsin administration, the failure thoroughly to implement laws and regulations on the ground, unrealistic and self-centered presidential and governmental decrees, the arbitrary interpretation of laws and regulations (particularly by customs officers), and bribery.

The Japanese government did not sit on its hands. It contributed a two-step loan via Russian banks, which was developed by the Japan Bank for International Cooperation (JBIC) and new insurance systems (prepaid import insurance and intermediary trade insurance) developed by Nippon Export and Investment Insurance (NEXI) and launched in 2001. However, despite such efforts to promote business through the provision of support from the Japanese government, the unfortunate fact is that it culminated in Japanese companies being forced to bear the burden.

Having said this, it would be unfair not to point out that there were problems on the Japanese side nonetheless. It is true that there was sufficient reason in Russia to make the Japanese ambivalent about investment and providing finance. That was due less to a lack of effort than to the fact that, in the economic environment that prevailed following the bursting of the bubble economy, no companies were sufficiently energetic or could afford to devote themselves wholeheartedly to an uncertain market like Russia, as they were frantically trying to forge a more solid footing for themselves. In fact, Russian market was so far down the list of priority markets for Japanese companies to tackle that it would almost have been quicker to calculate its ranking by counting up from the lowest position.

In the meantime, it is an undeniable fact that the West and the ROK locked horns in an all-out turf war. They had taken the market by storm, buying up companies that had lost their direction in the reborn Russia and renewing their equipment. Companies from these countries have steadily got a foot in the door from a strategic perspective, taking note of the fact that Russian market is a vast, attractive new market. Of course, it goes without saying that they too have suffered from Russia’s unregulated legal system, haphazard business practices and predatory capitalism. What is clear, however, is that Russia was as a matter of course accorded a high priority in the rankings of markets to be conquered by Western countries, China and the ROK, even in the absence of a tailwind or headwind.

How we should look at the recent change in circumstances? For Japan, the headwind has shifted to a more favorable direction and is about to become a tailwind. I will venture to identify some of the factors responsible for “the advent of the tailwind”.

1. The Effects of Putin’s Reforms

Russia has changed considerably since President Putin was inaugurated in 2000. Serious efforts have been made with the aim of achieving institutional reforms and establishing order, and the results of these efforts have now begun to emerge. The course of action adopted by the country has rapidly become more stable and consistent. The parliament, which repeatedly engaged in pointless arguments, stopped going around in circles and the necessary regulations are now adopted with greater speed. Moreover, it is extremely significant that the President Putin’s second term in office began this year. Why? Because the continuity of reforms was guaranteed at a time when the period of economic transition had almost ended and the country was about to enter the stage at which the finishing touches were about to be added to the market economy structure. The establishment of order is the greatest beneficial effect that will attract both domestic and foreign investment.

2. Political Stability Supporting Economic Development

The fact remains fresh in our memory that, during President Yeltsin’s rule, the state declared that it had made the transition to a market economy, even as the country was suffered from the experience and becoming panic-stricken. The state glossed over the economic deadlock just as a lizard sheds its tail, replacing major cabinet members, including the prime minister. (In fact, all macroeconomic indices, including GDP, industrial production and agricultural production, have repeatedly and without exception demonstrated negative growth.) The administration has become more stable since President Putin took office and an environment that is conducive to enabling those in charge of each ministry to knuckle down to the business of government has been put in place. There is a world of difference compared with 1998 and 1999, when politics was effectively in a state of paralysis. In fact, together with the trade balance, the inflation rate and foreign currency exchange reserves, the aforementioned 1990s macroeconomic indices underwent a complete reversal, which belied the previous figures, and the country has rapidly been getting back on track since then.

3. High, Stable Oil Prices and Sustained, Steady Economic Growth

The Russian economy hit rock bottom in 1999, as mentioned earlier, but has experienced sustained growth since then, following its escape from the doldrums. GDP in 2003 was $430 billion (a 7.3% rise on the previous year). The growth rate itself is, of course, worthy of attention, but the fact that growth has been sustained is more important. It goes without saying that the basis for this is the high, stable international oil price; coupled with this, the significance of the reforms implemented by the Putin administration is great. Now, even if the oil price declines somewhat, there are sufficient mathematical reasons to think that the Russian economy has, during the last six years of stable growth, established the foundations necessary in order to sustain future development.

4. The Necessity of Japanese Power in Order to Develop Resources in East Siberia

Where is the Northeast Asian market positioned in President Putin’s world-view? Although there are no opportunities to discover what he really feels, official announcements aside, I have been fortunate enough to have the chance to listen to the opinions of many Russian intellectuals. They expressly acknowledge the strategic importance of the Asian market and a feeling of wariness regarding China, and are of one accord in stating explicitly that Japanese power is necessary in this area. Given the political and geopolitical dynamics of the Russian position, in addition to listening to the opinions of such intellectuals, there can be little doubt that the Kremlin has reaffirmed that alliances with Japan in various fields and improving its relationships with that country are of pressing importance. The Russian side may be bent on making a profit, but the fact that the Nakhodka route of the Siberian crude oil pipeline now has the upper hand can be considered to be a major element that confirms the existence of this environment. Of course, it is not merely oil. Russia must take into account cooperation with Japan in developing and commercializing its inexhaustible supply of various underground resources in the untapped region of East Siberia. To this end, it can easily be imagined that its willingness to engage in political and economic cooperation in Far Eastern Siberia will increase in the future.

5. Emphasis Placed on the Field of the Economy by the Japanese Government as the Orientation for Improving Russo-Japanese Relations

Without needing to trot out such hoary old expressions as “good-neighborliness”, both the public and private sectors have become keenly aware of the need to make significant progress in strengthening economic relations, which had been put on the back burner until now, in order to put an end to the strained relations of the past and pave the way for a smoother, more natural relationship. Along with the developments mentioned in section (4) above, various documents attained through diplomatic efforts, such as the Japan-Russia Action Plan signed by Prime Minister Koizumi and President Putin in January 2003, the joint statement issued when Prime Minister Kasyanov visited Japan in December and the memorandum of understanding concerning the establishment of the Japan-Russia Trade and Investment Promotion Organization, have begun to generate a synergistic effect. One can easily tell this from the efforts of the government to establish the Japan-Russia Trade and Investment Promotion Organization. Although the effectiveness of the organization remains unclear, it is extremely important, as it is an experiment that has never previously been attempted. It goes without saying that the Japan Center, where I work, will not spare any effort in making the greatest possible contribution as one of the main bodies involved in this organization, investigating effective ways in which it can function.

6. The Japanese Economy Hits Rock Bottom: Increase in Expansion into Russia

The history of Japan’s economy and the doldrums by which it was beset have influenced the Russo-Japanese economic relationship. Japanese companies have fingered the turmoil of the Russian market in the 1990s as the main reason why they did not make any serious forays into it. However, with regard to another reason for this, many admit that it is not completely unrelated to the restructuring of companies by reducing assets and the fact that they were driven by the necessity to select markets, due to the slump in the Japanese economy. The Japanese economy is now finally showing signs of escaping from this tunnel and some fields are already on a new growth path, as seen in the automobile and machine tool industries. Given such circumstances, it is no less important a factor that the number of Japanese companies that have started to expand into Russia has increased. Last year alone, 14 companies joined the Moscow Chamber of Commerce; this number continued to increase and had reached 81 as of the end of March. This figure is just one-tenth of the number registered with a similar US body, the US Chamber of Commerce in Moscow, but there can be no doubt that the number has demonstrated a remarkable increase.

There are many other factors that enable us to predict the possibilities for the future.

Of course, many criticize the authoritarian approach to politics adopted by President Putin. However, history proves that this kind of authoritarian leadership is the most effective form of leadership for the Russian economy in transition. In fact, many incidental effects have arisen as a result of such measures as tax breaks and land privatization. There has also been a rapid rise in activity on the part of such organizations as the EBRD and the World Bank.

Whether or not advantage can be taken of the tailwind, which has returned after a long absence, depends on the parties involved, including the board members of the relevant companies. Companies that cannot shake off the fusty old image of Russia that they have, such as the mafia, confusion and the outstanding loans of the Soviet era, will not be able to find a place in which to be active in the Russian market. In other words, decisions about whether or not to ride on the tailwind and how to make full use of the available opportunities depend on the body concerned. In my opinion, “many sheet piles should be driven deep into the Russian market without fail, in Siberia, the Urals and the Russian Far East.”

The foregoing is purely a personal viewpoint.

[Translated by ERINA]