JAPAN: DIMINISHING INTEREST IN SOVIET TRADE RESOURCES

Created: 6/1/1981

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Japan:

Diminishing Interest

in Soviet Trade Resources

An Intelligence Assessment

Information available as of1 has been used in ihe preparation of this report.

SOf OfS+yeXOyTRACT

Diminbhing Interest

in Smiet Trade Resources

Keywith the Soviet Union remains relatively unimportant lo the Japanese

economy in spiteapid expansion in economic relations during the pastears. The complementary nature resource-rich Siberia and highly industrialized Japantrong incentive for greaterand the potential For further trade is vast. In addition, the Japanese steel, shipbuilding, and machinery industries view the USSR as analternative market because of slower economic growth and rising protectionism in the West J

political rel.

Until recently, Tokyo and Moscow apparently believed that they might be able to turn expanded economic relations to political advantage. Thehoped that increased economic relations would enhance the Soviet stake in harmonious relations between the two nations. For its part, Moscow assumed that Japanese businessmen would find the lure of Soviet markets and natural resources irresistible and eventually pressure Tokyo to improve

In fact, the pace of Japanese involvement in Siberian development has stowed sharply since theecause of Soviet heavyhandedness and poJitical-cconomic change in Japan. Moscow flaunted itsay particularly irksome to the Japanese. Tokyo's tilt toward China has caused Moscow to view Japan as the potential third partner, with China and the United States,ostile Pacific triad. The Japanese have delayed resource development projects because they are reluctant to becomeon Soviet sources of supply, arc concerned about the security implications of several projects, are distrustful of Soviet intentions in Asia.

The cooling of Soviet-Japanese relations may mean that the opportunity available in theor rapid exploitation of Siberian resources by Japanese companies has been dissipated. Some projects continue to be implementedlower pace, but Tokyo's linking of political and economic relations makes full-scale development less probable. The Soviet treatment of Japan is unlikely to soften Tokyo's attitude. Even if the post-Afghanistan sanctions on the USSR wereumber of political and economic factors would restrain the expansion of trade and economic cooperation infl

Tilde I'cnpcclhe

Trade wiih the Soviets it relatively unimporiant lo ihe Japanese economy0 the Soviet Unionforerceni of the value of Japans toul foreign trade, and ibe Soviet share in any given year has neverercent of tbc total. With Ibe exception of ptaiinum-group metals. Japan's elepersdence on the USSR for applies of individual imported cornmodiiiei remains low On the export side there is little danger of mayor Japanese industries becoming overreliant on ibe Soviet market. Theenjoy substantial annual trade surpluses, such2 billionM

Extorts

Moscow has relied heavily on Japan for sieel and industrial machinery. Producer goods make up Ihe majority of Japanese shipments; iron and steel alone constitute one-third of all exports and two-fifths of sales of manufactured goods Oil well dnlling pipe, well casing and tubing, large-diameter welded pipe for pipelines, seamless pipes and tubes, and special steels lead the list Steel plate, which the Soviets use to manufacture large-diamctcr pipe, is also important- If the Wcsi Europeans decide to move ahead with ihe Yamburg gas pipeline and Tokyo approves Export-Import Bank financing of Soviet purchases for the project, the volume of steel exports will be even higher in Ihe future. During preliminary negotiations with Japanese sicelmakeni. Moscow proposed shipmentsons of large-diameter pipe in fiscal1 (which began lasl April)illion tons in each of the subsequent ihree yean. Since agreement on Yamburg is unlikely in the immediate future, the Seme is have instead reached preliminary agreement wilh ibe Japanese toons of pipe in FY19S1 for use in the constructionipeline from Urengoi to Pornali This figure represents an increase0 ions over ibe levelhe previous peak in pipe exports Io ibe USSR.H

Even in ihe steel sector, exports to ihe Soviet Union constitutemall part of Japanese foreign sales.hipments io ihe Soviet Union, the industry's

I third largest overseas customer, amounted loerceni of tolal iron and steel exports. Moreover,pipe and casing now booked for shipment to the Soviet Union could easily be diverted to other markets becauseorldwide oil drilling boom. The compkle cessation of business with the Soviet Union would seriously affect Japanese steelmakers in only onelarge-diameter welded pipe. The Soviet Union haa been ihe principal buyer of this item for many years, thus the importance to Ihe Japanese of such pipeline projects as Yambui

Japan's machinery exports io the Soviet Union are almost all capital goods destined for resourceprojects or for upgrading Soviet manufacturing facilities The value of sftipmenu varies widely from year to year, as projects are started and finished., machinery worth almost SI billion accounted for abouterceni of all exports to ibe Soviet Union. Tbe next year ihe total fell lo0 million. The industry generallyurther decline0 million0 to Tokyo's ban on Export-1mpor: Bank credits lo Ibe Soviet Union after the invasion of Afghanistan. Japan's machinery manufacturersrely on official credits to finance large-scale plant

Machinery exports should expandokyo has already approved inI billion buyer's credit in connection with the third phaseoint limber resources project. The contract signed by ihe Soviets last March specifics thai plant and equipmentmust be made within two years. Japanese firms are also bidding for contracts toumber of chemical plants included in the Soviet Union's new five-year plan. The availability of governirtem-backed credits is crucial, and machinery manufacturers and trading companies can be expected to lobby thefor removal of the economic sanctions now that Washington has lifted the grain embargo.may be trying to increase Ihe pressure byitachi-Marubeni group Ihe prospectI billion order for Yamburg pipeline gas compressor stations.

^^ecrel^

Machine loots essential lo the improvement of indus-trial prodlciinly are Ihe most importanl component of machinery exports to (he USSR. Meulvvorkjnfl; machine-tool exports increased byercentany Soviet purchases arc for tute-of-thc-ar;boring and drilling machines,achining centers, andes The Soviets also rely on Japanese suppliers for numerical controls and indusirial robotics tec hnolog> The Soviet market is no more important for machine tool makers than it is for steelmakers Shipments bound for the Soviet Union wereercent of Japanese exports of machine toolsnlike pipe fabricators. Japanese machine-too) manufacturer* arc not highly dependent on the Soviet market for the sale of any one product line p

Imports

The inability of tbc Soviet Union and Japan to come to terms on many of the resource development projects discussed over the years has kept the volume of Soviet exports below its potential Many of the resource projects involve substantial sums and exceedinglyad times, and the Japanese have gone elsewhere to secure needed raw materials Last year the share of Japanese imports corning from the USSR dropped fromercent9 toercent. Although Japanese imports were inflated by an increase of aboutercent in the price of crude oil, the value of imports from the Soviet Union declined in real terms. Prospccu are not good for any resurgence soon I

Wood pulp, logs, and lumber composed (wo-fifthsofall imports from the Soviet Union. Japaiiesc trading housesreactedwo-year downiurn in the domestic housing market bypcrccnt cut in log prices for the second quarter.which is decided on an annual basis, remains unchanged. The prospectsapid revival of the housing industry, and thus lumber import prices, are not good J

Of0 million Japan spent on Sovietand semimanufactures* percentof. palladium, andio Japan's advanced technology sectors Japanese dependence on the Soviet Union for strategic metal supplies is substantial. By value, the Suvict Union provideserceni ofplatinum imports.ercent of lis palladium imports, andercent of its rhodium imports. Dependence on the Soviet Union for other metals is low. Japan imported aluminum worth0 rnillioo from the Soviet Unionut this wasercent of total aluminum imports J

Japan is not dependent on the Sovici Union for mineral fuels- Imports from tbe USSRercentage of al) mineral fuel imports have fallen steadilyercentuel oil worth approximatelyillion was the most valuable item. Coal imports have declined consistently over the last five years0 totalillion tons worthillion; in bothndoviet coal shipments have fallen short of the contracted quantities. The Japanese steel industry is concerned that imports of coking coal, which constitute most of the Soviet coal told to Japan, will be slashedillion tons in FYI98I. Coal that otherwise would have been exported to Japan is now being consumed within the Soviet Union because of declining imports from Poland. Transports!ion bottlenecks in the Soviet Far East also may be contributing to the slowdown in shipments. Although the short-term outlook for energy imports from tbc Sovietoor, ongoing joint development of the Yakutsk coal deposits and Sakhalin oil and gat should lead to some increase in the longer run

iiini.il Trade Refstioss

Recently, the renewal and revision of governmcnt-to-governmcnt agreement* between Japan and the USSR has given the Soviet leadership an opportunity tothe interest of Japanese businessmen in bilateral commerce and thereby increase ihe pressure on Tokyo to ease the post-Afghanistan sanctions. Tokyo has alreadyew bilateral Irade and payments agreemento that the expiration of the old pact would not create obstacles for businessmen in their efforts to capitalize on ceuporiuntties presented byei Union'sh Five-Year Plan. Similar to tbe preceding accord, the new pact provides for

The import from the Soviet Union of approximatelytems, such as wood, mineral fuels, cotton, and ores of several kinds

The export io the Soviet Union of roughlytems, including iron and steel products, industrial planis. machinery, and chemicals

use of convertible currencies in bilateral transactions.

Regular consultations between official4 of the two governments.

Procedures for the settlement of commercial^

Although the new agreement was widely heralded in Ihe Japanese press as the beginningelaxation of the sanctions and an improvement in economicwith ihe Soviets, the accord ilself did net negate Tokyo's sanctions. Japan

Restrict irade credit lo the Soviet Union.

Prohibit Ihe export of high technology items included intheCOCOMlisi.

Restrict high-level intergovernmental personnel contacts.

For the present, Tokyo seemse doing no more than is necessaryeep intact the pre-Afgbanbianfor bilateral trade. Nothing has been done 10

embellish the framework by, for example,ax treaty. |

On ihe other hand. Moscow, appears eager to reach agreement on some issues to establish Ihe pretense of normal relations. Tbe Soviets were especiallyduring recent negotiations with the Japanese to settle airline routes and fishing quotas. Beyond undermining the existing set of economic sanctions, the Kremlin may also be trying to engender Japanese resistance to the sanctions thai have been proposed if the Soviets invade Poland.

Export Credits

In complying with ihe sanctions, tbe Export-Import Bank has suspended almost all new credits, including suppliers' credits for regular merchandise trade.businessmen, who are agitated by news of West European competitors signing plani-export contracts with ihe Soviets and want to supply materials for the proposed Yamburg pipeline project, haveelaxation of the curbs.H

Inhe Japanese Governmentthe complaints of the private sector without destroying the basic sanctions framework by granting additional credits for two ongoing resourceventures. Approval was given for the extension of buyers' credits to the Soviet Union toillion supplement to the South Yakutsk coking coal project and the third phase of the Siberian timber project. Tokyo has also been contemplating approval in principle for suppliers' credits of less0 million. This limit was chosen becauseS proposal to review projects ofillion or more in COCOM. At present, official supplier credits have been authored for only two small6 millionkiln for lacquer manufacturing3 million sulfur-concentration project. Final agreement wasuntil December when the Soviets agreed to an interest rate consistent wilh OFCD guidelines on cx-pori

Officials contend the South Yakutsk and forestry projects are continuations of existing projects and therefore special cases. They contend lhat thecredit for ihe South Yakutsk mining project is necessary to ensure commencement of coal deliveries to Japanithout ihe infusion of new money, ihe USSR might be able io renege on its obligation to repay earlier loans wilh coal from ihe project. Tbe Japanese argue lhat ihey, rather than ihe Soviets, would be the losers in lhat case. The Japanese have been eager to move forward wilh the forestry projectubstantial percentage of total lumbercomes from the Soviet Union. J

Tokyo justifies the approval of suppliers' credit of less0 million wilh the argument that il cannoi sil idly by while ihe Wesi European countries continue io trade with the Sovietsusiness-as-usual basis. Japanese businessmen and diplomats have cited Creusot-Loire's takeover of the Novolipcisk steel plant project and the signingontract lo build the Sayansk aluminum project by Klockner of Westas examples of opportunities lost because West European governments have been less stringent in their application of sanctions. The Japanesetrong case; the Europeans have approved official credits or credit guarantees andiberal view of COCOM restrictions thai otherwise mighl have blocked the proiectsM

One determinant of Tokyo's future decisions on export credits will be its perception of trends in Westtrade wilh the Soviets. The Japanese lend to interpret every tripajor West European country by high Soviet trade officials as ihe culmination of important trade negotiations. The outcome of talks on the Yamburg project couldecisive influence on Japanese policy. If the West Germans reach anJapanese big business will intensify its lobbying for an casing of Tokyo's credit rest rail

A second influence on Japanese export credit policy is the stance of ihe United Stales. Abolition of the gran embargo opens ihe door to renewed private-sectorfor removal of Japanese sanctions against ihe Soviets. Moscow is encouraging Japanese businessmen by initiating or reviving commercial negolaliorisariety of plant export proposals. Some officials within the Ministry of International Trade and Industry (MlD) singled out ihe announcement of US approval for export license applications related io the Sakhalin Oil and gas project soon after ihe lifting of ihe grain embargo as an indication that the United States is further tela sine its

curb on high-level personnelfollowed by ihe grantingew carefully selected export creditsasc-by-casc basis. The Japanese Government is likely toirmer line on rcsiriciions on the sale of COCOM items.

Resource Detelopnwfll Projects

Resource development projects in the USSR no longer appear as advantageous to the Japanese as they did8apan has been reluctant to move further ahead in Siberia for both economic and political reasons. Siberia's severe climate, greatand perennial labor shortages are seriouslo profitable development. Moreover, ihehave proved to be difficult business partners. They have sometimes overplayed their hand,convinced that the Japanese were so hungry for Siberian resources that ihey would ullimalely accept Soviet lerms. Japanese entrepreneurs, however, are used to operatinglobal economic arena and evaluate Siberian resource developmem projects as one of several altemalives. During the. Japanese

businessmen began to conclude lhat il would be more prudent and profitable to pursue diversificationNevertheless, they have kept ihe door open by continuing to discuss new projects with the LSSRJJJJ

The judgments of Japanese businessmenroject's economic viability arc shaped in part by perceptions of ihesalabilily of iis output ai home. In ihendigh Japanese growth rates andexpanding demand for raw materials eliminated any doubts about the availability of markets five orears in ihe future. Since the oil crisisowever, demand for ihe commodiiies imported from ihe Soviet Union has become much morehift in ihe Japanese economy from raw-maierial-imensive heavy industries to technology-intensiveis diminishing the need for new sources of

many raw materials. Lower growth rates and sectoral shifts have narrowed tbe number of fields in which Japanese investors can feel certain of an adequate return on investment. Oil, gas, coal, and pulpwood projects still hold promise, but proposals for theof nonfeirons metals, iron ore. and asbestos lack appc |

A number of oiher concerns contribute io pessimism even in the case of Ihe most promising commodiiies:

* Shortfalls and delays in the deliveries of some commodities have raised questions about theof the Soviet Unionupplier: ihe USSR's inability to fulfill coal export contracts is ihe most recent example.

The economic limitations of ibc Sovici Union stand in ihe way of several proposals An acule shortage of labor in Ihe Far East may contribute to Sovietto move ahead with pulp and paper plants, from which the Japanese hope to obtain long-term supplies. Lack of capital is another concern. As bilateralhave worsened, Soviet inconsistency, secrettve-ness, and bargaining tactics have delayed, and in some cases even prevctned. Japanese acceptance of project proposals]

Given the long-term nature of these economicthe immediate prospects for joini resource development are mixed. In spile of difficulties inimber projects should progress. Most of the USSR's timber exports are logs, which requirelittle labor to cut. Moscow's willingness lo export logs makes it an attractive supplier to Japanese proccs-sors who arc faced wiih increased opposition to log exports in Canada, the United States, and Indonesia. The prospects for pulpwood and coal exports are because the Soviets are unlikely to give them sufficien priorily. The Japanese should eventually receive gas from Sakhalin, but probably later than scheduled in the original plan. Other projects arc likely to remain in limbo for some tunc

The Political Perspectiie

The economic sanctions imposed by Tokyo after the Soviet invasion of Afghanistan made tbc connection between economies and politics more explicit than at any time since the restoration of diplomatic relations6 The sanctions arc only one manifestation of broader alterations in Japan's foreign policy. Thebuildup of Soviet strength in the Far East and ihe diversion of some US forces to the Indian Ocean have put more pressure on Japan to accept greater military and political responsibilities in northeast Asia. These increased rcsponsibitiiies reduce Tokyo's freedom to circumvent the political and military ramifications of economic cooperation with the Soviet Union. H

The Kremlin's reaction to the signing of the Sino-Japanesc Peace and Friendship Treaty and theofa Soviet garrison into the Northern Territories have put additional strain on Tokyo. The Japanese suspect the Soviet troop buildup in the Northernwas an attempt to deter them from improving relations with Beijing If so, the attempt has backfired

The potential Soviet threat to Japan's security has assumed an immediacy il never had before. Theof troops on the disputed territory has alsothe USSR's contention that the islands are an integral part of the Soviet Union. No longer willing to ignore Moscow's refusal to even acknowledgeerritorial dispute, Tokyo has linked basic improvements in relationsoviet admissionerritorial problem exists, as well as to Sovietfrom Afe

Although many Japanese nowreater degree of linkage between their economic and politicalwiih the Soviet Union, they are still unprepared to subjugate Soviet-Japanese trade and economicto political issues arising elsewhere in the world. In the case of overt Soviet military intervention in countries outside the Sovici Bl as it did after.

Polandpecial case. Because itatelliteSoviet intervention there might not arousepoliticians were it not for tbe likely reactions of Japan's allies. Afghanistan and the relative decline in US power during recent years have heightened Tokyo's awareness of the need for Western unity in the face of

Moscow could soften Tokyo's policies by withdrawing troops from Afghanistan, offering political concessions on ihe Northern Territories, or presenting attractive new trade opportunities. The Kremlin, however, has shown no indication that it feels compelled to break the present stalemate in relations wiih Japan. Recentdiplomatic iniiiatives fail to address the crucial

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