Small and Midsize Japan Firms Buffeted by Tightened Economic Sanctions Against Russia

By Yoichiro Tanaka and Sunao Yorozuya / Yomiuri Shimbun Staff Writers

17:14 JST, October 22, 2023

The government’s economic sanctions against Russia — tightened almost three months ago — have dealt a heavy blow to small and midsize Japanese companies that export goods to that country.

Some companies in Hokkaido and prefectures in the Hokuriku region, both of which are relatively close to Russia, have seen large drops in sales, raising concerns regarding the health of domestic regional economies.

Experts say the government must extend support to such firms, such as by introducing measures aimed at helping them expand their sales channels.

Three decades of history

“Prospects for us resuming exports to Russia are dim at present,” said an official of Furatt Gosei Co., a Sapporo-based manufacturer of salmon and trout incubators. “We’ve no other choice than to call it a day [in terms of dealing with Russia].”

At a Cabinet meeting on July 28, the government opted to ratchet up its economic sanctions on Russia, which continues to mount aggression against Ukraine. The tighter measures came into force on Aug. 9.

Under the new measures, “plastic products” prohibited from being exported from Japan, including incubating devices. Previously, the ban only covered items such as communication equipment that could be leveraged for military use.

As a result of the tighter rules , the Sapporo-based company has been unable to export two incubators, despite having inked sales contracts worth ¥6 million.

Furatt Gosei began exporting incubators in 1989 — when Russia was still a Soviet Union republic — supplying over 60 plants in the state of Sakhalin in the Russian Far East.

The company’s annual sales usually totaled between ¥600 million to ¥700 million, and about 20% of sales came from Russia. Following the introduction of the stricter sanctions, however, the company does not foresee dispatching any more goods to Russia.

“The central government won’t extend support to us, despite our current plight,” the official said. “All we can do now is seek out alternative trading partners.”

According to Teikoku Databank Ltd., 295 Japanese companies conducted business with Russian firms as of March 2023, representing a 13% dip from March 2022, shortly after Russia invaded Ukraine. And, with the recent tightening of sanctions, this figure is expected to decline further.

Heavily dependent

Sales of used cars have suffered greatly due to the latest sanctions, with gasoline-powered and diesel-driven vehicles with engine displacements exceeding 1,900 cc newly added to the list of embargoed products. This has hit small and midsize Japan-based used car dealers particularly hard.

“In Russia, used cars bring in more cash than they do in Japan, and we’d been exporting about 30 cars a month, said a 57-year-old Pakistani national who runs a used car dealership in Imizu, Toyama Prefecture. “But since August, we’ve only exported five or so vehicles, and sold the remaining cars domestically by cutting their prices.”

Previously, about 30 local companies had exported used cars to Russia, as there is a dedicated cargo ferry service between the prefecture and Vladivostok.

However, according to the Fushiki Branch of the Osaka Customs, exports by sea to Russia of used cars from Toyama Prefecture fell to 5,921 in August, representing a more than 50% fall on the 12,125 cars registered the previous month.

An official of The Institute for Russian and NIS Economic Studies — a Tokyo-based institute that researches Japan’s trade with Russia — said: “Used car dealers in the districts along the Sea of Japan coast are highly dependent on exports to that country, and the impact [of the sanctions] will continue for some time.”

Support for firms

Some local governments have been working to assess the impact of the sanctions and formulate support for businesses in their respective areas.

In Hokkaido, many firms that deal with Russia have expressed concerns regarding their future business outlooks.

The prefectural government of Hokkaido is considering extending support measures to related firms in the area, with an eye on Russian-speaking regions in Central Asia as alternative export destinations, for example.

“There are many companies in Hokkaido that have business relations with Russia,” said an official. “We hope we can come up with effective ways to provide them with backup.”

In April last year, the Kochi prefectural government requested the central government to study the impact of the sanctions on small and midsize enterprises and consider offering them support. Russian vessels had occasionally called at ports in the prefecture seeking repairs.

The prefectural government has been receiving inquiries from companies that do business with Russia — before and after the introduction of the stricter sanctions — including companies that operate within the paper manufacturing industry. “We’re trying to gather relevant information, “ an official said. “If necessary, we’d like to consider extending our support.”

Takeshi Takayama who specializes in the European economy at NLI Research Institute, said: “When small and midsize companies’ main products are embargoed, it can result in great damage. The government needs to provide information aimed at supporting firms, such as data on the development of new export channels to other countries.”