Europe and Russia: Moving to Win-Win

Saturday, 21 November 2009
When EU and Russian leaders meet in Stockholm for their regular summit this week it might be a useful occasion for a stock-taking exercise. This will be the last such summit for Javier Solana and Benita Ferrero-Waldner, the EU’s two top foreign policy chiefs. Next year, under the Lisbon treaty, their jobs will be merged thus giving the EU more coherence, continuity and visibility in external relations – or so it is hoped.

The Stockholm summit will take place just after Sweden and Finland have granted permission for the controversial Nordstream project to go ahead. It will also take place less than a month before the Copenhagen climate change conference. But unlike the EU, climate change is almost a non issue in Russia. Their major focus is on the economy and restoring Russia’s influence in its neighbourhood. The summit will hopefully give a push to the faltering PCA negotiations although little can be expected in the remainder of 2009. Russia is already looking to Spain, the next EU Presidency, to push the reset button.

What can the summiteers learn from the past five years and where should EU-Russia relations be heading? An obvious win-win area is economic cooperation. Russia has been hit more severely than the EU or most large countries by the global financial crisis. While China expects to grow at 8.5% this year, Russia faces a dramatic 11% drop in its growth rate. The IMF expects only a modest recovery of 1.5% growth in 2010.

Talk of Russia relying on its own resources to shield it from the swings of global markets has faded and Vladimir Putin has embarked on a new charm offensive to win back foreign investors. Despite Mr Putin’s exhortations, there has been no rush back to the Russian market. Indeed the well publicised cases of BP, Shell, Telenor and IKEA underline how much Russia still has to do in terms of fighting corruption and establishing the rule of law. Two other major problems are the monograds – the many cities across Russia reliant on one industry – and the banking system which is increasingly under state control and clogged by bad debts.

Perhaps the strongest critic of the past years is President Medvedev who last week stated that Russia had to tackle its "ineffective economy, semi-Soviet social structure and weak democracy." In his state of the union speech, Medvedev named five priority areas for Russia to focus on: energy efficiency technology, the nuclear sector, information technology, space and pharmaceuticals. The President reiterated his attack on huge state corporations, created by his predecessor Vladimir Putin, saying they would have to reform into commercial companies or disappear. He also ordered the government to reduce the share of the state-controlled sector, now exceeding 40 per cent, by the time of the next presidential election in 2012. But his speech did not address the key issue of what would be the driving force behind innovation.

The President has also been trenchant in his criticism of ‘legal nihilism,’ recognising that without independent courts Western investors, essential for the transformation of Russia, will remain highly cautious about further investment. There are some positive signs with the Ministry of Justice working to update the bankruptcy laws and other legislation affecting business. But Medvedev’s remarks demonstrate that what is needed is no less than a fundamental reform of the political system. It is not obvious, however, that the man in the Kremlin has sufficient support to bring about such change in the near future.

Against this background how can the EU help Russia to modernise its economy? The EU is already the top trading partner for Russia – 55% of Russian exports go to the EU – and the top investor – 65% of FDI comes from the EU. The EU has the finance, technology and know-how to help Russia modernise its increasingly outdated infrastructure, especially in the energy sector. For its part, the EU is heavily dependent on Russian energy. But as a result of recent ‘gas wars’ – and the threat of more to come - it is looking to diversify its energy supplies and speed up the introduction of renewable energy. Russia itself wastes an enormous amount of energy - it loses more gas each year than France consumes.

The EU and Russia need to consider a new deal whereby the EU offers to help modernise the Russian economy and guarantees security of demand for Russian energy. In return, Russia would ease its restrictive new laws on foreign ownership and take real steps to improve the court system. Russia should also consider recognising the importance of early membership of the WTO and drop its insistence on joining only with Belarus and Kazakhstan. This would then pave the way for a free trade agreement between the EU and Russia.

Pragmatic cooperation on the economic front could contribute to greater understanding on other issues, including the common neighbourhood and foreign policy issues such as Iran and Afghanistan. It could also be accompanied by moves to abolish visas and greatly expand educational and scientific exchanges.

It will not be easy to move from an atmosphere of suspicion to one of mutual cooperation. But both sides stand to gain from a new approach. A strong, stable, prosperous and increasingly liberal Russia is very much in the interests of the EU.