WILL JAPAN AND THE CAUCASUS BE LINKED BY THE SILK ROUTE?

Irina KOMISSINA


Irina Komissina, Senior scientific fellow, Russian Strategic Research Institute (Moscow)


Japan and the Caucasus... The Caucasus and Japan... Are there concepts that could be more incompatible geopolitically? Whereas in Central Asia, Japan has long been ranked among the key contenders for Caspian oil and gas resources (along with the United States, Russia, China, and other regional leaders), until the mid-1990s, the Caucasus seemed to be outside the scope of interests of the Country of the Rising Sun. And that looked only natural since they are geographically very far removed from each other and lack common historical traditions or ethnic or religious roots.

But then there was a sea change when Japan put the Caucasus on the map. A turning point came with the decision by a number of Japanese companies to take part in Azerbaijan oil projects. Japanese private capital, generally known for its trend to play it safe, and so typically biding its time, for a long time stayed out of investment projects in Azerbaijan.

Yet, when it became clear that the Azerbaijani economy began to stabilize and the September 1994 treaty, pompously called by the local media a ďcontract of the century,Ē went off to a good start, Japan finally joined the game. The first Japanese company to take part in developing Azerbaijan shelf oil deposits was Itochu. In 1996, it joined an international consortium of world oil majors, buying out Mcdermottís share and a part of Pennzoilís, thus landing a 3.9 percent stake in the ďcontract of the century.Ē In late 1996, it joined in yet another oil projectóprospecting and development of Dan Ulduzu and Ashrafi deposits (with a 20 percent share).

These steps are evidence of Japanís aspiration to make up lost ground as soon as possible and join in the process of dividing up the Caspian ďoil pie.Ē According to representatives of the Japanese Federation of Economic Organizations (Keidanren), an influential organization among Japanese business circles, access to alternative sources of energy in Azerbaijan and the Central Asian republics will be conducive to ensuring the countryís long-term energy security. Clearly, this tacticsódiversification of energy suppliersóis designed to minimize and, if possible, even end the dependence of its economy on oil import from the Middle East, which at the time accounted for approximately 90 percent of Japanís total oil import.

In the fall of 1996, Satami Tono, vice president of the Japanese State Oil Company, said that after a thorough, two-year analysis of the regionís economic potential, made by Japanese experts, the company was joining in the development of the Caspian sector. Furthermore, delegations of other major Japanese companies, specializing not only in oil production but also in petrochemistry, communications, and other fields, began regularly visiting Baku to study investment opportunities. For his part, Azerbaijani President Heydar Aliev confirmed Bakuís intention to support Tokyo in its aspiration to ďmake up for lost opportunities in the region.Ē

Increasingly active involvement of Japanese capital in Azerbaijan, Central Asian countries, where it has already secured a foothold, and in the Caspian region as a whole, is part of Japanís new foreign policy strategy, known as ďEurasian diplomacy,Ē including, among others priorities, development of relations with this region, rich in oil and natural gas. In elaborating this strategy, which was officially put forward in July 1997 by then-Prime Minister Ryutaro Hashimoto, Japanese experts stressed that the rich oil and gas resources of the Caspian region are emerging as an important factor in the world energy market, which is of major interest to Japan; countries in the region can serve as a bridge linking Eurasian states; active support for the Central Asian and Transcaucasian republics in the process of nation-building will be crucial for Japanís developing its relations not only with these newly independent states but also with their neighborsóRussia, China, and Islamic states, which will eventually enable Japan, in the 21st century, to considerably expand its political influence in the Eurasian region.1

In pursuit of this strategy, Japan embarked on a new foreign policy course in its relations with the republics of Central Asia and the Southern Caucasus, designed to consolidate and advance contacts with these countries. The main priority lines here are as follows: political dialog to deepen trust and mutual understanding; economic cooperation, especially in developing natural resources; and achieving peace in the region through strengthening the nuclear nonproliferation regime, democratization, and stabilization.

Another manifestation of the Eurasian strategy is a program of action within the framework of what is known as Silk Route diplomacy, adopted by the Cabinet of Ministers in January 1998. Under the program, Japan extends credits to countries located along the Silk Route, which is due to be restored, for modernization and building of highways and railway lines, airports, pipelines, and telecommunication lines. Kato Ryozo, Director-General, Foreign Policy Bureau, MOFA, stressed that Japan sees the Silk Route not just as a project designed to develop trade and economic relations between countries located along it, but also as a key component of the international security system in the 21st century.2

A key element of this program is promotion of broad political relations and all-round economic cooperation with the republics of Central Asia and the Transcaucasus, helping them implement democratic reforms. Economic cooperation envisions Japanís active participation in modernizing the republicsí infrastructure and rendering them assistance in developing their natural resources.3 High priority is given to cooperation with the private sector. Assistance in the transition to a market economy includes, among other things, training programs in Japan for small and medium sized company managers from Transcaucasian and Central Asian countries. Another important component of the program is humanitarian aid in ethnic conflicts. According to Sankei Shimbun, in early 1998, Japan decided to provide $3.22 million worth of relief aid to refugees in Azerbaijan, Georgia, and Armenia.

For their part, the republics in the region are interested above all in economic assistance, including investment, which is critical to revitalizing and advancing their national economies. It is noteworthy that Japan has for many years held a leading position among the developed countries, members of the Organization for Economic Cooperation and Development (OECD) Development Assistance Committee, in its net contribution to ďThird WorldĒ countries.

Today Tokyo is showing strong interest to promote mutually beneficial cooperation with countries of the Southern Caucasus, both on the bilateral and the regional level. A case in point is a Japanese sponsored seminar on investment in the economy of the Transcaucasian states as well as an exhibition of consumer goods, called Three South Caucasian Republics (Tokyo, June 2001), in the course of which a number of agreements on the export of goods from these countries to Japan were signed.

At the same time, Japanís relationships with each republic of the Southern Caucasus have their own specific features, reflecting the priority that it puts on a particular country.

Japan-Azerbaijan

According to official statements by Japanese leaders, Tokyo regards Azerbaijan as a key country in the Silk Route restoration project, which would be in the interests of a broad range of states on the Eurasian continent. This accounts for the high priority that Japanís ďEurasian diplomacyĒ gives to development of economic and political relations with Baku.

The first moves in implementing the political component of the Eurasian strategy included an invitation for President Heydar Aliev of Azerbaijan to come to Japan on an official visit as well as the decision to open Japanese diplomatic missions in Azerbaijan and other Transcaucasian republics as a matter of urgency.4 The Azerbaijani president visited Japan in February 1998. On Japanese parliamentariansí initiative, the creation of a parliamentary assembly for Japanese-Azerbaijani friendship was timed to coincide with the visit. During the visit, not only bilateral but also regional problems were discussed. In the course of his meeting with Heydar Aliev, Prime Minister Ryutaro Hashimoto said that ďJapan will spare no effort to provide assistance in personnel training and expedite Azerbaijanís transition to a market economyĒ since, in his opinion, the development of Azerbaijan should precipitate the development of all countries in the Southern Caucasus and Central Asia. Thus, according to Sankei Shimbun, the head of the Japanese Cabinet stressed the geopolitical importance of Azerbaijan, highlighting Tokyoís commitment to strengthen its relationship with this country.5

The visit resulted in the signing of a joint declaration on friendship and partnership and a statement on trade and economic cooperationóthe first intergovernmental documents laying the groundwork for a further advancement of relations. The foreign ministries of both countries agreed on regular consultations.

The Joint Declaration on Friendship and Partnership reaffirmed the importance of Japanese assistance to all republics of Central Asia and the Southern Caucasus, including Tokyoís support for Azerbaijanís bid to join the World Trade Organization (WTO) and the Asian Bank for Development. Japanís support for Azerbaijanís territorial integrity in connection with the Karabakh conflict, as recorded in an OSCE resolution at the Lisbon Summit in December 1996, was especially important for Azerbaijan.

High priority in the course of the negotiations was put on implementation of the Silk Route project. According to foreign political observers, this visit was meant to demonstrate Tokyoís aspiration to intensify bilateral relations not only on the personal but also on the governmental level.

Upon his return to the country, Heydar Aliev issued an executive directive, On Measures To Expand Cooperation between Azerbaijan and Japan, including the elaboration of mechanisms for bilateral cooperation.

In May 1999, Japanese Foreign Minister Masahiko Koumura arrived in Azerbaijan on an official visit. Both sides pinned high hopes on the visit. A number of important agreements was reached in the course of negotiations between Masahiko Koumura and Azerbaijan Prime Minister Arthur Rasizade.

In 2000, Japan opened its embassy in Azerbaijanóthe first in the Southern Caucasus, which shows the high priority that it gives to this republic, as compared to other Caucasian countries. This embassy also represents Tokyoís interests in Georgia.

Much work is in hand to implement the economic component of Japanís new strategy. Foreign policy moves in the Caspian region were to be followed up with large-scale aid, designed to expedite the republicís economic development. Furthermore, Heydar Alievís visit to Japan encouraged Japanese companies to expand economic cooperation with Azerbaijan, above all in its oil sector. Thus, in February 1998, Mitsui Oil Exploration Co. signed a contract with the State Oil Company of Azerbaijan (SOCAR) for a 15 percent share in developing the Kiurdashi oil field, with probable reserves of 500 million to 800 million barrels.

In August 1998, a delegation of the aforementioned Federation of Economic Organizations (Keidanren) visited Azerbaijan. In the course of the visit, the sides discussed Japanese proposals to deepen and expand economic contacts. Prospects for joint development of oil and gas reserves were high on the agenda. This area of cooperation continued to be actively pursued. In December 1998, the Japan-Azerbaijan Operating Company (JAOC), the first consortium of Japanese companies (Japan Petroleum Exploration Co., Inpex Nord Ltd. of Japan, Japan National Oil Corp., Teikoku Oil Co., Itochu) was created in Azerbaijan, without participation of U.S. or European companies. The consortium signed a contract with the SOCAR for the development, on a parity basis, of a block of depositsóYanan Tava, Mugan-Deniz, and Atashgiakhówith probable reserves of 100 million tonnes.6 The volume of investment is approximately $2.3 billion (with $33 million already committed). In the event of successful exploration, it is planned to begin its development in 2006. At present geophysical exploration is in progress.

In the spring of 2001, the Japan Bank for International Cooperationóone of the chief vehicles of providing soft credits to developing countriesósigned a $3 billion contract with the Iranian National Oil Company on preliminary financing of an oil development project in Azerbaijan. Under the contract, the bank gets preferential rights in conducting negotiations and financial participation in developing Azerbaijanís oil fields by designating consortium members for the projectís implementation. Project funding is to be completed within three years. Tehran is to repay the Japanese credit with crude oil deliveries over a period of 11 years.

According to a geological survey conducted by Iran, Azadeganóa new oil field in Azerbaijanócan almost immediately yield 5 billion to 6 billion barrels of crude oil with probable reserves of at least 26 billion barrels.7

The flow of early, and then big-time, oil in Azerbaijan necessitates the building of a diversified pipeline network, linked to international sea terminals. In this connection, several projects for transportation of Azerbaijani oil have been drafted with Japan participating in one of them (the Baku-Ceyhan pipeline, actively lobbied for by the United States). At present this project is still in developmental stage. Its leading investors, along with the SOCAR and a number of large Western companies, include the Japanese Itochu. Another active participant in the project is Georgia, across whose territory it is to pass. The pipeline, with an estimated cost of $2 billion to $4 billion, is to go into operation in 2004.

In March 1999, the first session of a bilateral economic cooperation commission took place in Baku, as a result of which the Japanese government gave Azerbaijan grants to build two hospitals in the city of Baku and develop the republicís food processing industry.8 Agreement to set up the commission was reached in the course of Heydar Alievís visit to Japan. Subsequently, he ordered the creation of the State Commission on Economic Cooperation between Azerbaijan and Japan, headed up by Deputy Prime Minister Abid Sharifov, its other members including chiefs of key structures of the republicís government. A counterpart commission in Japan is headed by Akira Watari, president of Nichimen Corp., including officials of the Foreign Trade and Industry Ministry9 and the Foreign Ministry as well as representatives of more than 20 major companies interested in trade with Azerbaijan and investment in the country, especially in its oil sector.

Japanese investment has also started flowing into Azerbaijan infrastructure projects. This was expedited, in particular, by the Japanese Foreign Trade and Industry Ministryís 1996 decision to extend insurance of business operations to Azerbaijan. As a rule, Japanese companies prefer to invest in high-risk countries under the governmentís ďfinancial umbrella.Ē At the time Azerbaijan was in fact that kind of country: According to Euromoney, in 1997 it ranked 139th in investment reliability among 180 countries of the world.10 The Japanese Export-Import Bank (Eximbank) opened a $100 million credit line for the purpose. As Japanese businessmen said later, government guarantees were a key factor that enabled them to begin operations in Azerbaijan. Not surprisingly, that decision revitalized trade and economic relations between the two countries. Before 1996, bilateral trade was represented by insubstantial import from Japan, Tokyo ranking 30th among Bakuís main importers.11 Azerbaijan was mainly importing from Japan cars, household electrical appliances, and computers. Yet already in 1997, trade turnover between them increased to $22.3 million.12 Three major Japanese steel producersóNKK Corp., Kawasaki Steel Corp., and Sumitomo Metal Industries Ltd.ówon a contract to supply 11,600 tonnes of 21-inch pipes to Azerbaijan for a gas pipeline project. As the projectís implementation moved ahead, trade turnover was expected to grow further.

The efforts deployed by the two sides to develop bilateral cooperation resulted in a number of large-scale projects in Azerbaijan with participation of Japanese companies. One of these is a large project (worth $310 million) to modernize the Severnaia state regional electric power station, in the Baku suburbs, built in the early 1950s and meeting almost a half of the capitalís energy needs. In 1999, Japanís International Foundation for Economic Cooperation provided a $165 million credit for the project (at a 0.75 percent annual interest rate for 40 years with a 10-year grace period). In the spring of 1998, the second session of the Bilateral Economic Cooperation Commission discussed the extension of a second tranche of the credit ($180 million) to build the Garadag-Digiakh-Severnaia pipeline (90 kilometers with a capacity of 10 million cu m of gas a day), which would ensure stable, uninterrupted gas supplies. The tender for the works was won by the Sumitomo/Nippon Steel alliance.

Nichimen Corp. is involved in a project to modernize the Sumgait ethylene production enterprise, a large petrochemical complex as part of the Azerkimia state concern. The project is worth $95 million, $15 million of which has been provided by Nichimen Corp., the remaining funds coming in the from of a 10-year credit from Japanís Eximbank with a 2.5 percent annual interest rate with a 33-month interest-free period. Under the agreement, the credit is to be repaid with the complexís finished products that the corporation itself is to buy and effect all financial settlements with the creditor bank. This project is the first of a kind that is secured with guarantees from the Azerbaijan government.

The provision of such large credits to the republic points to Tokyoís commitment to thoroughly promote and facilitate cooperation between Japanese companies and Azerbaijani state structures.

Itochu and the JGC presented for consideration to the Azerbaijan State Oil Company a general plan to modernize a large production association, Azneftyanadzhag. The association had been producing up to 300,000 tonnes of gas a year, but in early 1997 (in an effort to avert an energy crisis) Azerbaijanís entire oil refining complex was reoriented to produce heating oil, and Azneftyanadzhag started producing up to 350,000 tonnes of heating oil a month. The project is to be financed under a credit line opened by the Japanese government. The first stage envisions replacement of obsolete equipment, and the second stage, the building of new capacities. Modernization is to be completed by 2005.

Japan actively supports the plan of restoring the Silk Route, in particular the building of an airport network along the route. In this context, the government provides substantial funds to modernize airports in Central Asia and the Caucasus. Thus, negotiations are underway with the Japan Bank for International Cooperation on provision of a loan to modernize an airport in the city of Nakhichevan. Under the credit terms ($30 million at a 3 percent annual interest rate, for 40 years), only Japanese companies may take part in the tender for the project. According to official statements, Tokyo also intends to invest in building sections of the Europe-Caucasus-Asia transcontinental transport corridor.

Although much later than in Central Asia, Japan included Azerbaijan among the countries recipients of what is known as Official Development Assistance (ODA) whereby Japan provides free assistance in agriculture, public health, small and medium-sized business support, and so forth. Thus, since 1997, under a series of projects developed with the Japanese International Cooperation Agency, the government provides Azerbaijan annual grants to develop the agricultural sector. These funds are used to buy agricultural machinery that is leased to farmers for a period of four years, subsequently passing into leaseholderís ownership, subject to buyout. For example, the Azerbaijan Agriculture Ministry received 500 million manats from the lease of equipment bought under a 1998 grant.13 The following grant, worth 450 million yen, was made available in 2001.

The Japanese government has prepared a number of other projects to further cooperation in agriculture. One of them envisions the creation in Azerbaijan of a leasing center designed to provide services and assistance in acquisition of equipment while another, in growing seedlings (main contractoróthe Taravaz-tokhum association).

Under a free assistance program in the public health sector (since 1999), $2 million is to be granted to buy modern equipment for the Azerbaijan Scientific Research Institute of Phthisiology and Pulmonology. The Sports and Youth Ministry received $400,000 to promote a martial arts program while the Ministry of Culture got Y46.5 million to buy new musical instruments for the Azerbaijani State Symphony Orchestra.

Under a Japanese government project to assist the development of road building in Azerbaijan within the ODA framework, Azeravtoyl was granted Y372 million to buy road building machinery and equipment in Japan. The tender for the contract was also held among Japanese companies.

Japan-Georgia

Japanís gradual involvement in Azerbaijan oil projects helped extend the European diplomacy concept also to other countries of the Southern Caucasus, including Georgia, which along with Russia can emerge as a key transit territory for the shipment of Azerbaijani oil to world markets. Georgiaís participation in Transcaucasus oil projects is in fact one of the reasons for its growing importance to Japan. In this connection, in 1996, Itochu held consultations with the Georgian International Oil Company on transportation of oil along the Baku-Supsa pipeline. Itochu expressed interest in building the necessary infrastructure, including transport and communications, along the entire route. The company was also reportedly considering the possibility of taking part in a number of other projects in Georgiaóin particular, in developing new oil fields and building hydroelectric power stations. It was planning to spend up to $50 million for the purpose.14

Japanís interest in Georgia was further enhanced by Eduard Shevardnadze. At a meeting with Taro Nakayama, the Japanese foreign minister at the time (August 1997, Tbilisi), he admitted that when he was still the Soviet foreign minister, he ďwanted to return to Japan islands in the southern part of the Kurils, known as Ďnorthern territories,í but failed to get support from the Union leadership.Ē15

That meeting can be seen as a turning point in the development of cooperation between the two countries. Subsequently, over a relatively short period of time, Georgia was visited by the numerous delegations of Japanese ministries and government agencies (the Foreign Ministry, the Foreign Trade and Industry Ministry, etc.), seeking information on the entire spectrum of investment opportunities in the republic. Since private capital always plays a leading role in Japanís cooperation with other countries, delegations of major Japanese companies went to Tbilisi: Marubeni, Mitsui, Mitsubishi, Itochu, and others. A delegation from the Japanese Export-Import Bank also visited the republic, studying opportunities and terms of future credit policy to promote economic cooperation.

After closely studying the countryís economic situation, the Japanese side took an interest in a number of industries, including metallurgy, the chemical industry, alternative energy sources, and agriculture. Yet Japanese business was by far the most attracted to the oil sector. Over time, however, it became increasingly obvious that growth of economic relations was held back by a lack of the necessary legal framework. Eduard Shevardnadzeís first official visit to Japan, in March 1999, was designed to close the legal gap in bilateral relations. In the course of the visit, two fundamental documents were signed: a Joint Declaration on Friendship and Partnership between Georgia and Japan, and a Joint Georgian-Japanese Declaration on Cooperation in Trade and the Economic Sphere.16

In the course of negotiations, the sides recognized that realistic prospects that existed for the restoration of the historical Silk Route served as a foundation of mutual interest of the two countries, rather remote geographically and greatly differing in the level of development. According to the Georgian president, ďreopening of the Silk Route will not only link distant Eurasian regions, but will also expedite economic integration and cultural rapprochement between the nations, which will lay the foundation of security and prosperity across a vast area.Ē17 Thus, the documents signed in the course of Eduard Shevardnadzeís visit also reflect the issue of stability in the Caucasus. During the talks, the Georgian president sent a highly significant signal, saying that Japan ďshould become a permanent member of the U.N. Security Council.Ē18

The sides also discussed a program of further deepening bilateral cooperation in the economic sphereóprimarily on projects of mutual interest, such as, e.g., the building of a new mooring berth (No. 15) at Poti seaport. A feasibility study on the project was prepared by Mitsubishi Corp. with the question of funding effectively settled. Other projects were also discussed, including development of the Zestafani-Chiatura industrial complex, carbamide production at the Rustavi chemical combine, and reconstruction of the Batumi-Tbilisi-Sadakhlo railway stretch.

According to Eduard Shevardnadze, another promising sphere of cooperation can be the export of wine, especially red wine, to Japan. Marubeni and Mitsubishi Corp. expressed readiness to take part in rebuilding Georgiaís wine-making industry and facilitate the export of its products to Japan.

A number of Japanese organizations showed interest to participate in a program to develop the republicís mining industry while the Japanese government is considering providing a grant under the program. Another key area is the Georgian tourism industry, which Japan sees as an important source of the republicís economic development.

Giving high priority to expediting Georgiaís transition to a market economy, Japan decided to intensify economic and technical assistance to the republic. Moreover, concrete steps were taken in that direction. Thus, it was announced that the Japanese government had decided to grant the most favored status to its firms and companies cooperating with Georgian partners. In particular, in an effort to encourage joint ventures, it was decided to start insuring Japanese private investment. It will be recalled that in 1991 the Japanese government abolished the mechanism for reimbursement of damage for investment in all FSU countries except Russia. Eventually the mechanism was restored for Central Asian countries and then for Azerbaijan.

On 9 October, 1999, pursuant to a presidential edict, a Georgian-Japanese economic committee was created, which was headed up by Trade and Foreign Economic Relations Minister T. Beruchashvili. At present the committee is working on several joint programs. In particular, since Japan is quite interested in the Silk Route project, it expressed the intention to take an active part in developing the Georgian section of this transport corridor, e.g., by providing creditsófor the most part soft, long-term credits. Thus, the Japanese Bank for International Cooperation intends to finance modernization of Tbilisi airport, to which end Georgia could be granted a large, long-term, soft credit.

So, within a relatively short time, some promising areas of cooperation were mapped out, and in late 2001, the republicís Foreign Ministry spoke about the need to open a Georgian embassy in Japan.

Back in August 1997, two-year negotiations were completed, resulting in a $250 million contract signed between a consortium of three Japanese companies (Marubeni, the JGC, and Transandina) and the Georgian side for modernization of the Batumi oil refinery whose projected capacity was to be upped to 2.5 million tonnes a year. Furthermore, the consortium pledged to build a 20-mW heat and electric power station for the city. The project was to be funded with a credit provided by the Japanese government, conditional on Georgian government credit guarantees. At present, however, the project has been effectively frozen since the Georgian National Bank refuses to provide such guarantees.19 The Georgian side argues that foreign investments are already guaranteed by the republicís Constitution and relevant laws.

In September 1997, Itochu signed a memorandum on mutual understanding with the Georgian government, providing for its participation in building a new oil refinery in the city of Supsa with a capacity of 3 million tonnes a year. Itochu was ready to invest up to $300 million in the project. The project is to be implemented in two stages: At the first stage the refinery will produce diesel fuel and at the second, gasoline, kerosene, and other light fractions. As mentioned earlier, Itochu is one of the main participants in two large consortiums that are going to pump oil from the Azerbaijani Caspian shelf. The plan to build a refinery apparently reflects the corporationís intention to refine a part of oil not far from the oil field. Experts believe that this project is made all the more attractive by the fact that Supsa is the terminal point of the trans-Georgian pipeline for transportation of Azerbaijani oil, from where oil products can be shipped to European countries via the Black Sea. It is noteworthy that according to Iprinda news agency, in early 1998, Turkey declared readiness to buy oil products from this refinery.

Itochu and Marubeni are also showing interest in exploration for and production of oil in Georgia itself, especially in the adjoining part of the Black Sea shelf with probable oil reserves of up to 200 million tonnes. Back in 1997, these companies signed a corresponding protocol of intent with the Georgian International Oil Corporation, recording their readiness to invest the necessary resources without state guarantees from the republicís government, which is a usual requirement by Japanese companies.

Japan also provides the republic assistance in developing its energy industry. Thus, the Japanese Bank for International Cooperation granted it a $45 million soft credit for modernization of the countryís energy system. This money is to be used for repair and replacement of obsolete equipment at two hydroelectric power stationsóthe Khram hydroelectric power station-2 and the Landzhanuri hydroelectric power station as well as controller and dispatch stations in Tbilisi and Kutaisi. The loan was provided for 30 years at a 2.3 percent annual interest rate, the first 10 years being interest-free. Implementation of this five-year program will provide the republicís energy system an additional 250 million kw/h of electricity.

An ODA-funded program of governmental grants plays an important role in economic cooperation. Thus, the Japanese government provides regular grants to Georgiaís agrarian sector. The program was launched in 1996; currently, the fifth grant is being used to buy agricultural machinery and equipment, fertilizer, and chemicals. Only Japanese companies, chosen by tender, may supply said products and goods.

The programís implementation, however, came up against some unexpected difficulties, arising from corruption and embezzlement of funds provided under the grant. Thus, Guram Didbaridze, former first agriculture minister, and Alexander Kakashvili, former chief of the Agriculture Ministry International Relations Department, were arrested on charges of gross embezzlement of state property. The republic Prosecutor Generalís Office does not rule out that other ministry officials could be prosecuted. It was decided to set up a joint Georgian-Japanese commission, called upon to oversee the use of grants. It is noteworthy that implementation of a similar program in Azerbaijan has been far more successful.

Grants are also extended to other sectors of the economy. Thus, in 2000, the Japanese government granted $3 million to modernize the republicís highways. The money will be used to buy up to 30 units of road-building equipment from a Japanese firm that will have won a tender. The Russian-made equipment that is used at present is long past its service life while no new equipment has been bought in the past 10 years. The Japanese government got involved in the project because motor transport accounts for 63 percent of all shipments in Georgia while more than 8,000 kilometers of the republicís 20,000 kilometers of highways are in need of urgent repairs.

As far as the socio-cultural sphere is concerned, in the 1997-1999 period the country received seven government grants from Japan for these purposes, worth a total of $18 million, including to modernize the State Philharmonic Society building, buy equipment for the Central Clinical Hospital, furnish the Tbilisi Mardzhnishvili State Drama Theater and the Philharmonic Society Grand Concert Hall, reform the republicís public health system, and support the Tbilisi specialized secondary school offering the Japanese language as one of the subjects.

Japan-Armenia

Initially, bilateral relations between these two countries were confined mainly to implementation of ODA programs in the Armenian economy.

This includes a food production development program, launched in 1997. The republicís Agriculture Minister Zaven Gevorkian points out that the Japanese government has been regularly providing Armenia funds to deal with its agricultural problems. In the 1997-2000 period, Japan granted Y420 million in non-returnable funds, which were used to buy agricultural machinery and equipment and approximately 45,000 tonnes of nitric fertilizer; establish a partnership fund, and support other programs facilitating the development the republicís agrarian sector.

In late 1998, Tokyo expressed the intention to provide assistance in reforming the energy sector, in particular building new capacities and modernizing existing infrastructure, by granting a $40 million credit, on preferential termsóat a 1.8 annual interest rate to be paid out within 20 years with a 10 year grace period while Japanese experts provide consultation services.

Armenia received two grants for development of culture and the public health system. The Japanese government deemed the republicís State Philharmonic Orchestra the best music collective, granting it $500,000, which was used to buy musical instruments and build a state-of-the-art recording studioóthe only one of a kind in the Transcaucasus.

Cooperation in the economic sphere did not officially begin until August 2000, when a relevant Japanese-Armenian committee was set up. In June 2001, the first joint session of the Armenian-Japanese and Japanese-Armenian Economic Committees was held in Tokyo. The sides discussed possible areas of cooperation, including high technology, the processing industry, and tourism. The sides agreed to put in place a legal framework as a key to revitalizing trade and economic relations, in particular two agreements: On Avoidance of Double Taxation on Income and Property, and On Mutual Protection and Stimulation of Investment. It was stressed that the advance of bilateral relations was impeded by the absence of embassies and that it was therefore necessary to open a permanent Japanese mission in Armenia and an Armenian embassy in Japan.

In late 2001, President Robert Kocharian made an official visit to Japan, marking a new stage in the relationship between the two countries. Although the visit was a purely formal affair since Armenian-Japanese relations can hardly be described as close or dynamic, it was dominated by economic issues. Robert Kocharian met with Economy, Trade and Industry Minister Takeo Hiranuma. At the end of the talks, Robert Kocharian noted with satisfaction that in its relations with Armenia, Japan was determined to move from assistance programs to cooperation and development programs, highly assessing the role of Tokyo as Erevanís largest sponsor. ďWe are extremely interested in Japanese private investment in Armenia,Ē the president said, pledging to provide maximum support to small and medium-sized businesses in the republic. According to him, Armenia, being the most organized and stable country in the Southern Caucasus, can become Japanís reliable partner.20 The Japanese Agency for International Cooperation and the Armenian Industry and Trade Ministry signed a two-year program to develop Armeniaís mining industry.

Robert Kocharianís meeting with Japanese Prime Minister Junichiro Koizumi resulted in the signing of a joint statement, On Friendship and Partnership between Armenia and Japan. The document says in particular that Armenia supports Japanís aspiration to become a permanent member of the U.N. Security Council. This recognition seems to be an indispensable requirement for all post-Soviet states wishing to cooperate with Japan. Yet this is apparently not too high a price for the free aid and easy credits from Japan. Meanwhile, Japan continues to enlist the support of a growing number of countries in this matter as changes in the international situation increasingly necessitate a reform of the U.N. Security Council.

According to the Mediamax agency, in the course of negotiations the Armenian and Japanese leaders stressed the importance of reopening the Silk Route. In this connection, the Japanese Bank for International Cooperation is considering financial assistance for modernization of Erevanís Zvartnots airport.

Thus, development of relations with Japan is becoming a high priority in Armeniaís foreign policy. According to V. Gabrielian, press secretary for the republicís president, successful political and economic cooperation with Tokyo is important for Erevan, especially as a vehicle for attracting donor countries, revitalizing the private sector, and securing financial resources to advance the countryís economic reform.21 In this connection, Armenia is to open its embassy in Japan.

* * *

So, despite the fact that diplomatic relations between Japan and the republics of the Southern Caucasus were established as early as 1992, bilateral cooperation did not begin to get into gear until the second half of the 1990s, as Tokyo reviewed its interests in the region. For the same reason, all the three republics have different levels of relationship with the Country of the Rising Sun, but all of them are getting substantial humanitarian aid from it notwithstanding.

Japan promotes by far the most close relationship with Azerbaijan, a country rich in hydrocarbon resources. Within a relatively short historical period, it has invested approximately $200 million in the Azerbaijani economy. Furthermore, five Japanese companies participate in a number of Caspian oil development projects in Azerbaijan, with a total worth of more than $15 billion.

According to some estimates, Japanese investment in the republicís economy could eventually reach several billion dollars. Development of economic cooperation presupposes an upgrading in the level of political relations, which, according to some sources at the Azerbaijan Foreign Ministry, could become an important area of the countryís foreign policy while their importance will be growing as the Silk Route program forges ahead.

Some Azerbaijani political analysts believe that economic cooperation with Japan is devoid of political expediency (since it does not have serious geostrategic interests in Azerbaijan), and so it could turn out to be even more stable than, say, with Russia or the United States.22

Nonetheless, prospects for development of economic relations are not entirely rosy. Lately there have been increasing reports to the effect that Azerbaijanís purportedly vast raw materials reserves are but a myth. It seems that there is good reason for this, given that the ongoing development of some deposits in the Azerbaijani sector of the Caspian by foreign companies has thus far failed to come up to expectations. It is not clear just how successful the implementation of other oil contracts is going to be as the Japanese consortium has not as yet even conducted test drilling. The results of the drilling will to a very large extent be critical also to the level of interstate relations between Japan and Azerbaijan.

In Georgia, Japanís interests (and the latter makes no secret of the fact) are connected with, above all, oil and its transit across the republicís territory, so prospects for bilateral relations are to a very large degree contingent on successful implementation of Azerbaijani oil projects, especially those in which Japanese companies have a share. Tbilisi puts a high priority on its relationship with Tokyo, which has over a relatively short period emerged as one of the leading donors. Humanitarian and technical assistance given to Georgia since it declared its independence has, according to the Georgian president, reached several dozen million dollars. In his address on the national radio in the wake of his visit to Japan, Eduard Shevardnadze stressed that ďa new area in Georgiaís foreign policy has emerged.Ē23

It is too soon to assess the Japanese-Armenian relations as Tokyo has yet to move from assistance programs to bilateral cooperation.

Regardless of how successful Caspian oil projects may be, all the three republics believe that by developing bilateral contacts with Japan they will be able to effectively tap their geopolitical potential, arising from their geographic location on the border between Asia and Europe, along the Silk Route. They are pinning high hopes on this project: job creation, transit fees, and foreign investment in their national economies. It must be said, however, that first results have yet to be produced in this area. Thus, in 1999, the volume of transit rail shipments along the Azerbaijani stretch of the Silk Routeóa key section of the Eurasian transport arteryówas under 5 percent of total transit: In other words, almost the entire cargo flow is the result of foreign trade operations in the republic itself. Neither was transit shipment expedited by Azerbaijanís decision, after Turkmenistan, to impose a 20 percent VAT. Road transit on the Azerbaijani section accounts for less than 1 percent of the countryís total cargo traffic.

Thus, the positive dynamics of Japanís economic and foreign political relations with countries of the Southern Caucasus suggests that they have good potential for mutually beneficial cooperation. Its realization, however, is impeded by some serious objective difficulties, which cannot be overcome unless these countries redouble their efforts. Only time will show how good the results are going to be.


1 See: N.  ŗsenova, ďIaponia vstaet na Shelkoviy putí,Ē Delovaia nedelia, 10 October, 1997.

2 ITAR-TASS, 11 August, 1998.

3 See: Nihon Keizai, 17 January, 1998.

4 Until 2000, Japanese interests in Azerbaijan were represented by the Japanese Embassy in Russia.

5 See: Sankei Shimbun, 27 February, 1998.

6 See: Sankei Shimbun, 23 December, 1998.

7 See: [http://news.hit.md/cgi/news.pl?id=690].

8 See: Bakinskiy rabochiy, 16 March, 1999, p. 2.

9 Now the Economy, Trade and Industry Ministry of Japan.

10 World Economic Analysis, Special Report Published with the September 1997 Issue of Euromoney.

11 See: ďVneshniaia torgovlia stran SNG i ES,Ē Ievropeyskie soobshchestva, 1998, p. 87.

12 See: Nikkey Weekly, 13 April, 1998, p. 21.

13 See: Bakinskiy rabochiy, 16 March, 1999, p. 2.

14 See: D. Nissman, ďAzerbaijan and Japan: New Allies?Ē Caspian Crossroads Magazine, Vol. 3, No. 3, Winter 1998.

15 ITAR-TASS, Mezhdunarodnaia ekspress informatsia, 27 October, 1997.

16 See: Svobodnaia Gruzia, 5 March, 1999, p. 1.

17 Svobodnaia Gruzia, 9 March, 1999, p. 3.

18 ďIaponiia vydeliaet znachenie Gruzii na Velikom shelkovom puti,Ē Prime News, No. 62 (88), 11-18 March, 1999.

19 See: Svobodnaia Gruzia, 12 November, 1999, p. 3.

20 See: ņ. Volk, ďPuteshestvie za gazom i investitsiiami,Ē GazetaSNG.ru, 27 December, 2001.

21 ARKA News Agency, 14 December, 2001.

22 See: Zerkalo, 28 February, 1998, p. 5.

23 Svobodnaia Gruzia, 11 March, 1999, p. 1.


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