Japanese firms investing in Sakhalin, an island off the easternmost coast of Russia, are finally expressing optimism over the business climate in the region.

A major energy development project off Sakhalin began commercial operations last summer, while the local government is presently reinforcing efforts to modernize forestry and other core industries in the region.

Many Japanese firms are still unsure what the future holds, many having survived bitter experiences doing business in Russia.

One diplomatic source went as far as to say that it will be a while before capitalism takes root in Russia.

Some people, however, are more optimistic.

“Once the production of oil and natural gas is going full scale, there will be a massive flow of Japanese companies surging into Sakhalin,” said a major trading firm official.

The local government has also made efforts to demonstrate its willingness to create a better business environment for Japanese firms.

Calling for more private sector investment and economic cooperation from Japan, Miron Kremin, a Sakhalin official overseeing a forestry firm, said the local government will provide a 100 percent guarantee to protect any capital investment by Japanese companies.

The remarks come as something of a surprise to Japanese investors, as the local government has for many years failed to take any meaningful action to ease concerns stemming from failed investments in Sakhalin. In the early 1990s, many Japanese firms set up joint ventures with Russian firms, but the majority of them were later seized by the Russian partners.

Sakhalin’s forestry industry has experienced a sharp increase in exports of machined lumber products, a departure from the days when logs were the staple product.

Kremin attributes positive developments in the forestry business to the introduction of high-quality Japanese machines in local lumber mills.

“We’d like to produce more lumber, which can fetch far higher prices than logs,” he said. “With that in mind, it is vitally important for us to seek technological cooperation from Japan.”

A lumber mill operated by an Aomori-based leasing firm in Yuzhno-Sakhalinsk, the capital of Sakhalin, began to turn a profit this year, despite the firm’s Russian partner going bankrupt.

Sapporo-based discount shop Cowboy, which opened an outlet in Yuzhno-Sakhalinsk in 1997, is now recovering from the Russian financial crisis and has reduced its floor space to one third of what it used to be, renting out the remaining area.

The business of renting property has become a success in Sakhalin, where commercial buildings are still scarce, and Cowboy earns about $10,000 in rent each month from 13 tenants, according to the shop operator. With a waiting list of 65 more clients hoping for a vacancy, the company is considering expanding the rental space five-fold.

Russian President Vladimir Putin underlined the need for foreign investment to develop oil and gas resources off Sakhalin Island when he met with Prime Minister Yoshiro Mori earlier this month.

The development of energy is widely seen as being the key to improving the economy of the entire Russian Far East,and the Russian government has been introducing a range of administrative measures to help Japanese firms explore local business opportunities.

The Foreign Ministry is also planning to upgrade its representative office in Sakhalin to a consulate general.

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