Putin's Threat to East Risks New Market Russia Has Cultivated

Aug. 15 (Bloomberg) -- Bloomberg’s Hans Nichols reports on the emergency European Union meeting in Brussels to discuss Iraq and Ukraine crises. Nichols speaks on “Bloomberg Surveillance.” (Source: Bloomberg)

As a convoy of white trucks heading from Moscow to Ukraine raises alarm about a potential Russian invasion, Vladimir Putin is opening up a new front on his global chess board.

Putin sparked outrage in Japan with a military drill along Russia’s eastern frontier this week, reigniting a territorial dispute with his Asian neighbor that has festered since the Soviet Union occupied the Kuril Islands, which Japan calls its Northern Territories, at the end of World War II.

The move risks upending years of rapprochement and rising trade with Japan, according to analysts from Tokyo to Washington. It also suggests that Putin is willing to take his European playbook to Asia and subordinate Russia’s economic interests to the calling of power and prestige.

“The military exercises are about projecting confidence and strength,” said Michael Auslin, director of Japan Studies at the American Enterprise Institute in Washington. “Putin wants Russia to be seen as a great player in the Pacific, otherwise it’s going to be eclipsed by China.”

Related: Ukraine Says It Destroyed Part of Armed Convoy From Russia

The risk for Putin is that the gambit backfires and shuts off another market for Russian companies already trying to adapt to sanctions imposed by the U.S. and the European Union. It comes after years during which Russia ramped up its role as an energy supplier to Asia, especially after Japan shut down its nuclear reactors in the aftermath of the Fukushima disaster.

A Russian serviceman takes part in a military training exercise at the Ashuluk firing range in Russia, on Aug. 8, 2014. Artem Zhitenev/RIA Novosti Close

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A Russian serviceman takes part in a military training exercise at the Ashuluk firing range in Russia, on Aug. 8, 2014. Artem Zhitenev/RIA Novosti

Chinese Reliance

Alienating Japan threatens that business and raises the risk of Putin becoming even more reliant on China as a destination for Russian goods at a time when he’s running out of global allies. China is already Russia’s biggest trading partner, and three months ago the two countries signed a $400 billion gas-supply deal.

“In the case of China, it may further accelerate the process of Russian-Chinese relations becoming a China-dominated partnership,” said Arkady Moshes, head of the European Union’s Eastern Neighborhood and Russia research program at the Finnish Institute of International Affairs in Helsinki.

Russia’s influence along its Far Eastern frontier has ebbed and flowed since the czars tightened their grip on the region in the 19th century, stoking tensions with Japan, also a rising power at the time.

In 1905, Japan decimated the Russian navy and thwarted Russian territorial ambitions over China and Korea, dealing a blow to a Tsarist regime already struggling with a wave of labor unrest at home.

Photographer: Andrey Rudakov/Bloomberg

Russia's President Vladimir Putin. Close

Russia's President Vladimir Putin.

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Photographer: Andrey Rudakov/Bloomberg

Russia's President Vladimir Putin.

Final Days

The final days of World War II prompted a victorious Soviet Union to attack Japan. It grabbed a number of disputed territories, including the Kuril Islands where this week’s drills started, and Sakhalin Island, just north of Japan. Sakhalin is now home to a gas project that supplies 9.6 million metric tons of the fuel a year, nearly 10 percent of Japanese gas demand.

During the Cold War, Sakhalin featured in northeast Asian tensions when the Soviet Union shot down Korean Air Lines Flight 007 in 1983 when it strayed into Soviet air space near the island.

Under Putin, Russia has turned increasingly toward its Asian neighbors as the U.S. shale boom weakened demand for Russian products from traditional markets and a string of crises from Georgia to Ukraine soured relations.

The deal with China in May between the world’s largest energy exporter and the biggest consumer will allow state-run gas producer OAO Gazprom to invest $55 billion developing giant gas fields in eastern Siberia and building the new pipeline.

‘Major Step’

In 2012, Putin announced a $20 billion plan to upgrade the sea port of Vladivostok when it hosted the Asia-Pacific Economic Cooperation leaders’ gathering.

Photographer: Andrey Kronberg/AFP/Getty Images

Drivers walks past the Russian humanitarian convoy trucks parked on a field outside the town of Kamensk-Shakhtinsky in the Rostov region, Russia, on August 14, 2014. Close

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Drivers walks past the Russian humanitarian convoy trucks parked on a field outside the town of Kamensk-Shakhtinsky in the Rostov region, Russia, on August 14, 2014.

“The summit marked a major step forward in Moscow’s engagement with multilateral organizations in Asia,” Andy Kuchins, director of the Russia and Eurasia Program at the Center for Strategic and International Studies, a Washington policy group, wrote in a report on Russia’s Asia pivot.

China, Japan and South Korea accounted for 18 percent of total Russian trade last year, up from 11 percent a decade ago, according to International Monetary Fund data.

Trade Climbs

Until recently, that push also included improving relations with Japan, even if the two countries never signed a peace treaty after World War II. Japanese Prime Minister Shinzo Abe had been pushing for closer ties to resolve territorial differences and tap Russia’s gas supply. He is the first leader in a decade to make an official visit to Russia, and has met Putin five times, including a trip to the Sochi Olympics opening ceremony that was shunned by President Barack Obama.

Bilateral trade rose more than sixfold in a decade to $37 billion last year, propelling Japan to sixth place among Russia’s commercial partners, from 12th in 2003, according to the IMF.

Earlier this year, Japanese lawmakers renewed a push for a 600 billion yen ($5.9 billion) natural gas pipeline running 1,350 kilometers from Sakhalin Island to Japan.

At the same time, Putin’s self-proclaimed mission is to resurrect the prestige Russia lost after the collapse of the Soviet Union, and he’s prepared to threaten those who stand in his way. The number of times Japan dispatched jets in response to Russian planes flying near its airspace rose to 359 in the year to March 2014, compared with 248 the previous 12 months.

With drills also under way in the Pskov region of western Russia, Putin is now running exercises at both ends of the world’s biggest country by area.

China-Russia Drills

“If you hold an exercise on the Northern Territories, in our territory, Japan will be angry,” said Ikuo Kayahara, a visiting professor at Takushoku University in Tokyo. “So it is clearly not logical for them to go out of their way to do this. But they’ve gone and done it. They may be trying to put Japan off balance.”

In another sign of Putin picking between the two traditional Far Eastern powers, Russia and China in May held their first joint naval exercises near Japanese-controlled islands that are at the center of the Chinese-Japanese rift. About 800 Russian troops also entered China on Aug. 13 to take part in a multinational counter-terrorism drill later this month, Xinhua News said.

As Putin tests the Japanese leadership, he is also deepening the fault lines developing in geopolitics in Asia, according to Sergei Markov, a political analyst who consults for the Russian government.

‘Clear Partnership’

“There is a rather clear partnership of Russia and China in the region on the one hand, and of Japan with the U.S. on the other,” Markov said by phone from Moscow. “Japan can’t be considered a fully independent country. It’s taking decisions against its own interests. This is the reality we have to deal with.”

Russian military movements in the Kurils, which host a military base, are routine, according to Russian analysts including Vasily Kashin of the Center for Analysis of Strategies and Technologies, a Moscow-based defense-industry research institute.

“In 2011, there was a much more massive show of force, while what they had now is a regular element of military preparedness,” Kashin said. “The Japanese are closely following the dynamics of all maneuvers. Present games aren’t very different from past ones and the Japanese can clearly see that.”

‘Dangerous Games’

Even so, the exercises in the Kurils carry a message, according to Patrick Cronin, a senior director of the Asia-Pacific Security Program at the Center for a New American Security in Washington.

“Putin wants to tweak Abe’s sensitivity to Sino-Russian military cooperation,” he said. “These are games that are being played, but they are dangerous games.”

For now, though, Russia’s burgeoning trade ties with Japan may keep the spat over the military drills from causing permanent damage to bilateral relations, according to Fyodor Lukyanov, head of the Council on Foreign and Defense Policy research group in Moscow.

“Neither side right now is interested in stepping outside purely symbolical steps,” Lukyanov said by phone. “Neither Tokyo nor Moscow wants to abandon those perspectives that were shaping up. How much this is possible, isn’t yet clear.”

Japan’s Chief Cabinet Secretary Yoshihide Suga told reporters today that nothing had been decided on an anticipated visit by Putin to Japan this autumn.

To contact the reporters on this story: David Tweed in Hong Kong at dtweed@bloomberg.net; Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net Balazs Penz, Scott Rose

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