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Japan Inc feels the heat over Russia ties as rivals shun Moscow -Breaking

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© Reuters. FILE PHOTO : An LNG tanker (Liquefied Natural Gas), can be seen behind a port near Yokohama in Yokohama on September 4, 2015. REUTERS/Yuya Shino

Yuka Obayashi and Maki Shiraki by Yoshifumi Tomoto

TOKYO (Reuters – Japanese businesses are facing increasing pressure due to Russia’s ties and they are now scrambling for an assessment of their operations. This comes after Western rivals halted business and condemned Moscow for its invasion in Ukraine.

Japan Inc was previously targeted for using fossil fuels by environmental, social, and governance (ESG), investors. However, Russia may be under intense scrutiny. Privately, executives say they worry about the reputation of Japan Inc. This is an indication that corporate Japan is becoming less responsive to social pressures – though reluctantly.

Russia has strong ties with Japan’s trading houses. These commodities-giants have been long considered quasi-governmental arms that are integral to Japan’s energy supply. Japan had Russia as its second largest supplier of thermal coal last year, followed by China and Russia’s fifth largest of both liquefied (LNG), and of both.

According to one insider of a trading company, “The energy question has consequences for the national and general interest. It must be addressed properly with government,” he said.

We also need to consider our corporate value, and how this is communicated to shareholders. It is not an easy position.

Mitsui & Co and Mitsubishi Corp have stakes in the giant Sakhalin-2 LNG project Shell (LON:) is now exiting. Marubeni Corp and Itochu Corp invested in Sakhalin-1. Exxon Mobil (NYSE: ) has pulled out.

Mitsui said Mitsubishi and Mitsubishi would be looking into the matter, along with Japanese officials and their partners. Itochu, Marubeni refused to discuss their plans for Sakhalin-1.

Japanese companies have generally stated that they will be monitoring the situation. The reason for halting activity was more supply-chain disruption than human rights.

According to a senior executive from an automaker, management meets daily in order to determine the effect of financial sanctions.

The executive stated that they are also discussing the reputational risks and the best way to handle the news, from the perspective of ESG and human rights.

“But, we cannot just decide immediately that we are going to withdraw because we don’t know how long this Ukraine crisis will last.”

Japanese companies are not subject to the same scrutiny as Western firms, according Jana Jevcakova (international head of ESG, shareholder services company Morrow Sodali).

“Most Japanese businesses don’t have the majority of international institutional investor. The pressure will be on those who do have international institutional investors, either soon or already.

RELIEVE ON RUSSIA

An executive in manufacturing stated that his company feels a sense of responsibility for Russian workers, but was concerned about saying nothing.

Japanese companies are slow to respond. It was too slow. He said, “I can’t disagree with that.” If we continue selling and manufacturing, then we’ll likely be in danger of losing our reputation.”

Fumio Kishida, Prime Minister of Japan has announced steps to cushion higher oil prices. However it remains unclear what government policy will be regarding Russia’s greater dependence. Japan imported around $11 million from Russia in 2020.

Officials from the Japanese government insist that Japan can’t just abandon Russian energy. They acknowledge this peril.

A Kishida official said that Japan should not remain invested in Russia.

The head of Japan Bank for International Cooperation declared last week, in rare public outburst for a leader of a state-owned lender that it was wrong for Russian companies to continue doing business in Russia.

Toyota Motor (NYSE:) Corp, Nissan (OTC) Motor Co, and Motor (NYSE:) Corp have stopped Russian exports citing logistic issues. Toyota has also stopped local production.

Nissan, Mazda Motor (OTC:) Corp and Mitsubishi Motors (OTC:) Corp are all likely to stop local production when parts inventories run out, they say. Japan’s largest companies will feel greater heat from Western investors who are cutting ties with Russia.

Anders Schelde is chief investment officer of AkademikerPension in Denmark. The pension fund has $21.3B under management with exposure of $342M to Japanese stocks.

While this could lead to short-term losses in financial terms, Russia will be stigmatized long-term, so the overall cost of Russia-related economic damage won’t change.

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