There has been little mutual trust lately between Russia and the EU. European politicians viewed Russia’s recent parliamentary and presidential elections skeptically. Diplomatic relations between Britain and the Kremlin are at a low since Alexander Litvinenko, a critic of the Russian government, was murdered — allegedly by a Russian agent — in London in 2006.
This mistrust poses a threat to trade and investment between Russia and the EU. Russia’s trade with the EU between January and August last year reached US$173.3 billion, or 51.6 percent of its foreign trade turnover. More than half of Russia’s goods are sold in Europe, and two of its top three trade partners are European: Germany, with turnover of US$31.9 billion, and the Netherlands with US$28.3 billion.
Similarly, European countries account for 75 percent of direct investment in Russia. Britain ranks first, pouring in more than US$15 billion in the first half of last year, despite the Litvinenko case and the tit-for-tat expulsion of diplomats during this period.
Nevertheless, the volume of foreign investment falls short of what Russia needs because its economy is unbalanced. More than half of its exports are oil and gas, with the rest mainly chemicals and agricultural products. Petrodollars are Russia’s main resource for the development of an information society. EU countries will continue to demand energy, and Siberian deposits are far from exhausted.
Diversification of Russia’s economy thus seems a distant prospect — all the more so because Russia’s bureaucracy, together with the state’s interest in “strategic” areas of the economy, repels foreign business. Indeed, Europeans constantly reproach Russia for the increasing level of state interference.
Russia’s relations with the EU are governed by an agreement signed in June 1994 concerning trade, business and investment, competition issues, protection of intellectual, industrial and business property, and financial cooperation. Over time, economic cooperation between the two sides has grown more complex, and a new legal framework is needed. But the European Commission is unable to start working on a new agreement until it has a mandate from the 27 EU member states. Such a mandate has not been secured.
At the same time, conditions for Russian investment in the EU are far from perfect. Investors face political discrimination and administrative and technical barriers, especially concerning the power industry. Some EU “open” tenders have turned out to be closed to Russian companies. Economic nationalism is growing. Foreign investment is limited in sectors that the EU considers to be strategically and politically important. Russian companies have had to face anti-dumping claims. European branches of Russian banks face over-regulation and expensive certification procedures.
Last September, a move by the European Commission to prevent foreign firms from controlling European energy transport networks was an example of a skirmish in this “silent war.” The commission’s order to “unbundle” energy companies into transport and distribution units is hardly likely to encourage foreign energy companies working in the EU to seek structural reforms in the Russian economy.
Business leaders in Europe and Russia are beginning to seek a bold way out of this impasse: a common economic space between Russia and the EU. But free trade and closer integration can be achieved only if supported by national governments.
Russia’s new minister for economic development and commerce, Elvira Nabiullina, said recently that European business “is Russia’s main partner on international markets,” and that cooperation “is one of the cornerstones of Russian foreign economic policy.” She points to the government’s promise to create a comfortable environment for business by continuing institutional reforms and assisting in the development of financial markets.
Such statements are encouraging. But Russian business needs a comprehensive action plan, which should include cutting bureaucracy, implementing real administrative reform, freeing the economy from excessive state control, and radical measures to combat corruption.
Russia also has to become integrated into the international economic system, accepting the rules applied by the rest of the world. Russia’s eventual accession to the WTO will be crucial to this development, and its accession needs to be promoted more actively by Europe as well as by Russia. The long-delayed new trade and investment agreement will be less relevant once Russia is in the WTO, whose rules take precedence over those of regional economic organizations. The legitimacy of European laws limiting the scope of Russian business activity in Europe and contradicting WTO regulations would be immediately questioned.
Russia’s business leaders are ready to work for the creation of a common economic space between Russia and the EU.
For Russia, such integration would provide a real spark for economic and social modernization. Russia’s government will, of course, have the final word in this matter. But it is unlikely to balk at a policy that treats Russia fairly.
Igor Yurgens is chairman of the board of the Modern Development Institute.
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