The formidable economic potential of the Russia-Japan trade is an improbable investment story. But it is a promising investment story nevertheless.
Formally, these two countries – whose leaders just finished their fifth summit meeting in the last 10 months – are in a state of war. They also have a serious border problem. Four islands, one of which is only 15 kilometers from Hokkaido, are claimed by Japan and controlled by Russia ever since they were taken by the Red Army in the closing days of WWII.
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You would not guess any of that though by looking at the beaming Russian and Japanese leaders, reaching across a negotiating table for a warm handshake last Friday.
Pursuing his policy of "active pacifism," Japanese Prime Minister Shinzo Abe was one of the 65 heads of state and government who came to celebrate the opening of the XXII Olympic Winter Games in Sochi, Russia's Black Sea resort.
Predictably for those following the Russia-Japan relations, Mr. Abe got a very special treatment. He was hosted to lunch and a friendly discussion in the midst of Russian President Putin's hectic schedule on the opening day of this sports event. And he also got to see the beautiful dog Yume, Mr. Putin's gift from the Japanese government, which, being of a famously stubborn Akita Inu breed, routinely defies the presidential orders.
This was an extraordinary sight of bonhomie no one would expect from leaders dealing with such a heavy burden of historical heritage.
Hard-headed economic calculus
The emotional intelligence experts who would rush to "explain" this by pointing out the alleged Japanophilia of a Russian black-belt judoka may be on to something – but only up to a point.
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Mr. Putin's interest in Japan as Russia's economic partner dates back to the early 1990s when, as deputy mayor of St. Petersburg, he was in charge of bringing business and investments to Russia's northern capital. He pursued the same objective when he went to Japan for a summit meeting in 2005 during his first term as president, and followed that up with another visit in 2009 as prime minister.
The Russian leader wants to develop an economic partnership with Japan based on complementarities offered by his country's natural resources and Japan's technological assets.
Mr. Abe seems to agree. Visibly proud and pleased, he noted, standing next to his Russian counterpart last Friday, that "more than 12 thousand units of Japanese audio and video equipment and large electronic displays" were used for various venues of the Sochi Olympics. Mr. Putin responded by saying that this was just part of the Japanese technological input into this huge sporting event.
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Energy projects, however, are the mainstay of this partnership. Japan is the largest buyer of natural gas and imports more than 80 percent of its energy needs. Increasing oil and gas supplies from Russia are now under active consideration in the aftermath of the destruction of some of Japan's nuclear power plants.
Japan is also looking at large business opportunities offered by Russia's own "pivot to Asia" – the economic development of Siberia and the Far East, representing about two-thirds of Russia's landmass. Seeing attractive business deals for Japan, Mr. Abe calls this "the project of the century."
Russia's Arctic is also an appealing destination for Japanese investments. That is the latest frontier for energy, mineral resources and maritime transportation.
Oil exploration deals in this region are already under way between Russian and Japanese firms.
The Northern Sea Route is of particular importance for Japan's large merchant fleet, because it reduces the travel time between Europe's Atlantic and North Sea ports and Japan by about 40 percent, compared with the passage through the Suez Canal. That puts Japanese ports at a competitive advantage with respect to Hong Kong, Shanghai and Singapore.
But going beyond energy and Arctic treasures, Russia views Japan as a suitable economic partner which can help to diversify its industrial base. Urban development, medical services, electronics and components for aircraft manufacturing are high on Moscow's agenda. That is why Mr. Abe brought with him a group of 120 Japanese businessmen when he visited Russia in April of last year.
Putting the border issue aside
All this does not mean that the two countries are anywhere close to resolving their border problems. Mr. Abe is well aware of that when he warns that "there is no magic wand to reach a rapid solution." But he says that he is personally involved in building up the political will to break the deadlock.
Technical negotiations are continuing, and Moscow and Tokyo have agreed to "move in the direction of strategic partnership." As part of that agreement, the first "two-plus-two" meeting of foreign and defense ministers was held in Tokyo last November – a forum Japan only has with the U.S. and Australia. Similar meetings are scheduled in Russia next April.
Realizing that it will take time to find a mutually acceptable solution to border issues, Russia and Japan have apparently decided to work on a broad range of projects in order to strengthen trust and their weak economic ties.
Last year, for example, Japan's exports to Russia were less than one-tenth of what Japan sells to China, and Russian exports to Japan accounted for only about 13 percent of what Japan buys from China. But with a 40 percent increase in Russian sales to Japan, it seems that Russia's importance as Japan's energy supplier and economic partner is definitely on the rise.
Can a friend of my enemy be my friend?
Looking at all this, it clearly seems that Russia and Japan have gone back to the approach that characterized the Sino-Russian and Sino-Japanese relations since the 1960s.
It took Russia and China 40 years of tough negotiations to solve the border issues along their more than 4,000 km frontier. During that time, relations between China and Russia went through periods of extreme tensions, but major military clashes were avoided. Beijing and Moscow now have very close economic, political and military ties.
China and Japan agreed in the 1970s on a similar approach to a much smaller border problem in the South China Sea. Since then, the two countries have become each other's main trading partners and big destinations for visitors and even immigrants.
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Here is what Mr. Abe says: "With our deep interdependence in a variety of areas, the two countries (i.e., Japan and China) are too closely connected to be separated. Moreover, let me state clearly that, as a matter of reality, the two countries could never clash. We must not let that happen."
I think Mr. Abe is right, and I would guess that his Chinese counterpart agrees with him.
But where does that leave the Russia-Japan relations? Can Russia have friendly relations with Japan while maintaining friendly relations with China, presumably Japan's enemy?
Most analysts think that is impossible. They tend to see Russia-Japan ties as a counterweight to rising China.
I believe that is a simplistic binary reasoning. There is much more to this complex triangle, and I would not exclude the possibility of a more constructive relationship among these three economies.
Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.