Will Gorbachev Ask Tokyo To Play `Let's Make A Deal'?

In most real estate markets, they wouldn't be worth much: Four rocky islands of the Kuril chain that are sterile and desolate outposts in the chilly North Pacific, just off Japan. But ever since Stalin grabbed them from the Japanese at the end of World War II, they've symbolized the stubborn hostility that has marked relations between Japan and the Soviet Union.

All that could begin to change on Apr. 16, when Soviet President Mikhail Gorbachev and Japanese Prime Minister Toshiki Kaifu meet in Tokyo at the first-ever visit to Japan by a Soviet head of state. No one expects any dramatic diplomatic breakthroughs. But both leaders are facing growing pressure to take the first steps toward the eventual transfer of the islands to Japan.

The implications of a settlement are enormous. The path would be clear for a peace treaty that has eluded the two countries since World War II. A political thaw could profoundly influence the Asia-Pacific region, where the cold war still isn't quite over. Billions in Japanese investment could pour into the faltering Soviet economy. Already, presummit speculation has placed a price tag on the islands as high as $28 billion in Japanese loans and aid. That's nearly double what Bonn provided the Kremlin--in part to win Soviet cooperation on German reunification.

FUDGE FACTOR. Although it's unlikely that so much money will change hands soon, the two sides appear to be moving inexorably toward common ground. Gorbachev may somehow acknowledge Japanese sovereignty over two islands and fudge on the other two. The first two comprise a handful of islets--the Habomai group--and smallish Shikotan. Much larger are the other two islands, Kunashiri and Etorofu, home to Soviet military installations and most of the islands' 32,000 residents. Several senior Soviet officials have hinted at such a formula recently. Members of Japan's ruling Liberal Democratic Party have started talking about a "phased" return.

It's an opportune time for Japan to cut a deal. The Soviet Union, wracked by an imploding economy and nationalist strife, is in a weaker bargaining position than ever. What's more, Kaifu and his party need a triumph to offset public disappointment with Japan's nonperformance in the Persian Gulf. To be sure, the islands have little strategic or economic importance to powerful Japan. But many Japanese have strong emotional ties to the islands because many of their ancestors are buried there.

If an understanding can be reached at the Tokyo summit, a string of business deals could follow. Japanese executives say that some $450 million could be provided to help pay back trade debts to Japanese companies after Soviet enterprises imported more goods than they could afford. Additional credits could benefit a proposed $600 million van-manufacturing project involving Japan's Marubeni Corp. in Bryansk, a city in western Russia, according to Masakatsu Inoue, general manager of Marubeni's Moscow office. Gorbachev's reported willingness to even discuss the islands reflects "a big difference from the past," says Inoue. Also waiting for signs of a warm-up are giants Mitsubishi Corp. and Mitsui & Co. Along with ABB Asea Brown Boveri Ltd. subsidiary Combustion Engineering Inc., they have plans for a $2 billion petrochemical complex in the western Siberian city of Tobolsk. If the summit speeds things up, Tokyo could kick in about $600 million in government credits, according to Atsui Akiyama, general director of Mitsubishi's Moscow office. Such credits could lure other banks needed to help finance the project, allowing construction to start by yearend, he says.

Moreover, liberalized trade credits

could speed up development of the Soviet Pacific Rim, where the Russians have long hoped for Japanese investment. One project Japanese executives cite is a proposed $2 billion oil and gas venture near Sakhalin Island, not far from the Kurils. Up to now, however, Japanese executives have been loath to invest in the Soviet Far East, complaining that the region is hamstrung by poor highways, railroads, and port facilities along with meddling Soviet bureaucrats. Indeed, the Japanese have taken a go-slow approach to investing in the Soviet Union in general. While foreign companies have registered about 3,000 joint ventures with the Soviets since 1986, only a few dozen, primarily in the timber and fish industries, are Japanese.

INTERNAL AFFAIRS. To cut a deal on the islands, Gorbachev will have to negotiate some tricky internal politics. The Soviet President has talked of Asian initiatives for five years. Now, he is increasingly beholden to hardline military officers and Communist Party members, who have wanted to block any island agreement. What's more, his chief political rival, Boris N. Yeltsin, claims that the islands are under the domain of the Russian republic he heads. "The Soviets have been deliberately trying to cool down growing Japanese expectations," says Hiroyuki Kishino, a senior research fellow at Tokyo's International Institute for Global Peace. "They're saying the issue is too complicated to settle with just one visit."

But there are powerful reasons for Moscow to push for a settlement. With his popularity plummeting at home, Gorbachev needs a diplomatic coup. Better relations with Japan could supply some of the economic, technical, and managerial assistance the Soviet Union so desperately needs, especially as Western business interest flags. And even hardliners may see gains in linking up with high-tech Japan, particularly after the humiliating show of Soviet military hardware in the Persian Gulf. "They're figuring it's better to cooperate with Hitachi and Matsushita than sit on four rocks," says a Western diplomat in Tokyo.

Washington will be carefully watching the body language at the Kaifu-Gorbachev meeting. Japan's cool relations with Moscow seem out of sync with the approach of Washington and the rest of the West. And improved relations between Moscow and Tokyo could also salve the remaining sore spot in the region: belligerent North Korea. The results of the Tokyo summit may prove to be modest, but if they result in serious talks, more than 45 years of tension could finally be eased.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE