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International relations

Russia to tighten grip on islands claimed by Japan with economic zone

Putin strikes a conciliatory with Tokyo, calling the lack of a peace treaty 'nonsense'

Russian President Vladimir Putin speaks at the Eastern Economic Forum in Vladivostok on Sept. 3.   © Reuters

VLADIVOSTOK, Russia -- Russia will grant extensive tax breaks to a chain of Pacific islands to lure international investment, President Vladimir Putin said Friday, a move that would include the Northern Territories off Japan's Hokkaido which the Soviet Union invaded in the waning days of World War II.

Companies will be exempt from profit, property, land and transport taxes for 10 years and will pay reduced insurance premiums across the Kurils, Putin told the Eastern Economic Forum in Vladivostok, referring to the chain of islands that include the Northern Territories.

Japan's position is that the Northern Territories are an inherent part of its territory and have never been held by a foreign country.

Tax breaks and other incentives are already available in parts of the Kurils to promote economic growth in the region. But the new proposal goes one step further by establishing a free customs zone across the islands and exempting companies from the value-added tax.

"Foreign investors will also be able to use these tax, customs and administrative benefits, not just domestic companies," Putin said. "This certainly applies to our neighbors, including our Japanese partners."

Russian Prime Minister Mikhail Mishustin had proposed creating a special zone in the Kurils during a visit to the Northern Territories in July, just days after Putin said Russia would be making a unique and unprecedented proposal.

Putin on Friday also congratulated Japan for hosting the Olympic and Paralympic Games "at such a high level in difficult conditions," and decried the countries lack of a bilateral peace treaty as nonsense, striking an unusually conciliatory tone toward Tokyo.

Still, while Russia is hoping that this move will attract more foreign investors in Asia, the move will likely face pushback in Japan.

In December 2016, Japan and Russia agreed to start negotiations for joint economic activity in the Northern Territories under a "special arrangement" that would not compromise either of their positions regarding the sovereignty of these islands.

But the countries have struggled to make progress since. Japanese companies will likely have a difficult time participating in the proposed free customs zone, which does not align with Japan's position regarding the islands.

For Tokyo, the Russian proposal appears to be an attempt to strengthen its control over the islands. Yuri Trutnev, Russia's acting deputy prime minister who is in charge of Far East and Arctic affairs, has expressed an interest in attracting business from China and South Korea in addition to Japan.

Russia banned the ceding of its territory to foreign countries as part of a constitutional amendment in July 2020. Putin said that while he is still interested in signing a peace treaty with Japan, he would need assurances that Japan would not allow the U.S. to deploy missile systems and other military capabilities near the Russian border.

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