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In Poronaisk, rows of apartment buildings, miserably dilapidated even by post-Soviet standards, stand crumbling in the wind. Mangy stray dogs and weather-beaten drunks roam the streets, and the rusting shells of cars and assorted litter lie strewn across the windswept beach. A few hardy fishermen stand knee-deep in the icy water and cast out a net.

Yet this is Sakhalin, Russia’s far-eastern outpost, where many of the natural resources behind the country’s recent economic boom are found. Just offshore lie huge reserves of gas and oil – an estimated 45bn barrels – and, after long preparatory work, production started in earnest last year. But in Poronaisk, or anywhere else on the island, there’s not much sign of the huge wealth being ­extracted from the nearby seabed.

The island, a streak of land almost 1,000km long, is seven time zones and more than 6,000km away from Moscow, while its southern tip is just a stone’s throw from Japan’s northern island of Hokkaido. Indeed, between 1905 and 1945, the southern half of the island – the territory below the 50th parallel – was ruled by the Japanese, and was known as Karafuto Prefecture. Today’s capital of Yuzhno-Sakhalinsk was then a Japanese town called Toyohara.

But today, with the exception of a few handsome buildings in the capital and seven crumbling paper mills dotted across the south of the island, signs of the Japanese period are few and far between, and in many cases this seems to be part of a conscious effort to forget.

“Which period did you say you were interested in? The Japanese period?” asks a confused babushka guide at the Sakhalin Regional Museum. “No, we don’t have anything on that here.” Ironically, the museum is housed in perhaps the finest example of Japanese architecture to ­survive on the island, completed in 1937 with a pagoda-style roof and formerly the Museum of Karafuto Prefecture.

Today, the official Japanese presence on Sakhalin is limited to its smiling consul general, Shigeo Natsui, and his 12-strong team, housed in a stylish office suite on the fifth floor of a bank building in Yuzhno-Sakhalinsk. Natsui says the historical situation causes little tension, but is frustrated that business links between the two islands have not taken off.

“Big business will always be fine, but for smaller and medium businesses, it’s difficult,” he says in lightly accented Russian, acquired during three diplomatic stints in the Soviet Union and Russia. “We are planning a meeting soon between Sakhalin and Hokkaido businessmen, but there are a lot of problems. There’s still little mutual trust that would allow either side to set up business relationships.”

The most noticeable reminder of Japan’s proximity is the widespread use of second-hand imported cars – a good 80 per cent of Sakhalin’s cars are right-hand drive, shipped in by legal or not-so-legal means from its southern neighbour, often via the mainland port city of Vladivostok.

The Japanese government runs ­a scholarship programme that enables a few islanders to study in Japan for a year, but it’s clearly not enough. “It’s very difficult to find translators here – the level of Japanese is far worse than in Moscow or St Petersburg,” says Natsui. And the few translators who do live on the island are all working for the big oil projects, leaving smaller businessmen with a problem if they want to set up on the island.

One Japanese entrepreneur who has managed to find his feet is Kendzi ­Itinoseki, from Sapporo, the biggest city on Hokkaido. He first came to Sakhalin in 1993, “to see what it was like” and two years later he opened what is possibly the best Japanese restaurant in Russia. He talks us through a lunch of exquisite sashimi, and proudly proffers for inspection a gold medal he received for “culinary artistry” at a Sakhalin festival. In the coming months, his plans include flying to Kiev and Sochi to act as a consultant for Japanese friends planning to open restaurants. On New Year’s Eve, he prepared a feast for 250 Japanese oil workers on the island. (To read about the popularity of sushi in Russia, see Monocle issue 3).

The energy reserves offshore from Sakhalin are not as vast as Russia’s Siberian ones, but by any normal standards they are huge. “They’re also important ­because of being located so close to Asian energy markets,” says Roland Nash, head of research at Renaissance Capital in Moscow. “Additionally, it’s the first time that such sophisticated offshore technology has been used in Russia, and shows that the country is capable of extracting resources in such conditions.”

But the developments in Sakhalin have not been free of troubles. The most publicised of these have surrounded the Sakhalin II project – the world’s largest combined oil and gas development which, when it comes to full production levels, is expected to produce 350,000 barrels of oil and gas equivalent a day. Royal Dutch Shell, Mitsubishi and Mitsui were the original main shareholders in what was the largest-ever foreign investment project in Russia. But after months of Russian ­government pressure, Gazprom seized a controlling stake in the project in April 2007 at what analysts said was a below-market rate – a move that sent jitters through big western investors in Russia.

“Russia was a very different country when the agreements were signed in the early 1990s,” says Nash, explaining the Gazprom buy-in. “It needed foreign ­investment at any cost. Now Russia wants to be in control of its own resources.” Additionally, environmental groups accuse the Sakhalin II project of a whole host of violations that could damage Sakhalin’s ecosystem, including threatening the last few western grey whales. The WWF says Sakhalin Energy, the project consortium, is “in denial” over the damage it is doing to the environment. A spokesman for Sakhalin Energy laughed off the problems, saying: “We don’t have any problems and there’s nothing we need to solve.” The company refused to provide anyone from senior management for interview.

The projects have created thousands of low-paid jobs, and in Yuzhno-Sakhalinsk a few signs of the new oil wealth are sprouting up. In the tastefully decorated Cafe No 1, smart locals read the Moscow newspapers and a Scottish oilman regales a local beauty with tales of daring escapades in the Niger Delta.

But while Russia might not be ­Nigeria, it’s hardly Norway either, as day-to-day life in Sakhalin shows. Poronaisk, for instance, has an irrevocable feeling of decay about it. On the outskirts stand the crumbling ruins of a huge paper mill. Built by the Japanese when Poronaisk was a Japanese town named Sikuka, the mill continued to work into the Soviet era, ­employing 3,000 workers.

“We were an industrial centre for the whole island,” says Alexander Radomsky, a quietly spoken bespectacled bureaucrat who, as deputy head of the town administration, speaks with a mixture of pride and sorrow about his home town. “We hope that the oil money might start making a small difference to our lives here in the next few years,” he says. “But, probably, it will just all go to Moscow and we won’t see any of it,” he sighs, looking wistfully over the town’s deserted main square from his bare office.

In the nearby village of Leonidovo, which is next to a major natural gas pipeline, the villagers live without gas, using wood-fired stoves for their cooking. “We’ve told our children to get out of the village and get out of Sakhalin,” says Leonidovo resident Natasha. “There’s no point in staying here – it’s miserable. There’s no work and nothing to do.” To get by, she grows cabbages and potatoes; her husband ­harvests the abundant salmon from a nearby stream and sells their salty red caviar on the black market.

Resurrecting economic possibilities for the entire population is a long process, but even simple improvements have not been undertaken. The one main road, running from the capital in the south of the island to Okha, the centre for offshore oil operations at the opposite end of the island, is asphalted for the first 150km before lapsing into bone-crunching cracked concrete and then fading to a dirt track. The airport terminal is a ramshackle hut, abysmal even by the low standards of regional Russian airports.

One sign that things are slowly improving came on a cold November morning in the port town of Nevelsk, on the island’s southwestern coast. In August 2007 an earthquake rippled through the town, leaving 2,000 people homeless. It was a reminder of the 1995 quake that left 2,000 dead in the town of Neftegorsk.

Three months after the Nevelsk earthquake, a ceremony was held to hand over the keys to 24 new prefab houses built for some of those who had lost their homes. Alexander Khoroshavin, the governor of Sakhalin, a broad-set giant with the appearance of a lower-league football manager, told the new homeowners that nobody had believed the houses would be built so quickly, but that Sakhalin today is a place where dreams come true.

The event was also a reminder that, even if Sakhalin’s time zone is closer to that of Los Angeles than Moscow, and even if the ferry to Japan is three hours faster than the plane to Moscow, there’s no doubting that Sakhalin is very much Russian. The keys to the new houses were blessed by an Orthodox priest, while ­patriotic Russian music blared out from speakers, and Khoroshavin thanked ­President Putin and the Moscow government for enabling such a quick response. “We remember Neftegorsk in 1995, and how long it took to help those people,” he said. “But today we live in a different country, with a different president.”

That president has overseen an economic boom largely driven by high oil prices. But in Sakhalin, even though the oil is flowing, the boom still seems a long way off.

View from Japan

Russo-Japanese relations have been dogged by an ongoing territorial dispute since 1945 over the sovereignty of four islands in the Sakhalin region – Kunashiri, Etorofu, Shikotan and the Habomai islets – which were seized by the Soviet Union in the immediate aftermath of the Second World War. Japan demands the return of all four islands, while Russia insists that only Shikotan and Habomai will be returned, and only when a peace treaty has been signed. Japan’s northernmost island, Hokkaido, is only 43km from Sakhalin but there is little contact between the two islands. Japan imports some seafood from the island. Exchange students from Sakhalin study in Hokkaido and a handful of Japanese engineers and oil workers live in Sakhalin.

In 1990 the Sakhalin Hokkaido-Jin Kai was founded, an association for people from Hokkaido who stayed in Sakhalin after the war, and in 1998 the islands signed the Hokkaido-Sakhalin Agreement for Friendship and Economic Co-operation. There will soon be stronger links between Sakhalin and Japan. Resource-poor Japan is the world’s biggest liquid natural gas (LNG) buyer and Sakhalin is set to become the world’s top producer. Sakhalin II – a gas field off the coast of Sakhalin controlled by the Russian energy company Gazprom – will start producing LNG later this year. “If the export of LNG starts, the Sakhalin government could use the money to develop the airport, ports and roads, which will create business possibilities for Japan,” says Professor Nobuo Arai of Hokkaido University.

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