October October October October 20 20 20 2010101010
THE EU THE EU THE EU
THE EU----RUSSIA CENTRE REVIEW RUSSIA CENTRE REVIEW RUSSIA CENTRE REVIEW RUSSIA CENTRE REVIEW
The EU-Russia Modernisation Partnership
Issue Issue Issue
Issue Fifteen Fifteen Fifteen Fifteen
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CONTENTS CONTENTS CONTENTS CONTENTS
Foreword
Foreword Foreword
Foreword 333 3 Erhard Busek
Introduction Introduction Introduction
Introduction 444 4 Fraser Cameron
The Objectives and the Price of Modernisation in Russia The Objectives and the Price of Modernisation in Russia The Objectives and the Price of Modernisation in Russia
The Objectives and the Price of Modernisation in Russia 666 6 Igor Yurgens
A Moderniser A Moderniser A Moderniser
A Moderniser –––– not a Puppet not a Puppet not a Puppet not a Puppet 11011000 Axel Lebahn
The Canary in the Mine: Western Investment in Russia The Canary in the Mine: Western Investment in Russia The Canary in the Mine: Western Investment in Russia
The Canary in the Mine: Western Investment in Russia 1414 1414 Sir Anthony Brenton
PCA and the Modernisation Partnership PCA and the Modernisation Partnership PCA and the Modernisation Partnership
PCA and the Modernisation Partnership 1818 1818 Adrian Severin
EU EU EU
EU----Russia Russia Russia ERussia EEEconomic conomic conomic Cconomic CCCoooo----operation: a operation: a operation: a operation: a WWWWay ay ay Fay FForwardForwardorward orward 2424 2424 Dennis Kredler and Sergey Afontsev
The EU The EU The EU
The EU----Russia Russia Russia Russia PPPartnership for Partnership for artnership for artnership for MMModernisationModernisationodernisation odernisation 2828 2828 Katinka Barysch
Making the Most of the Partnership for Modernisation Making the Most of the Partnership for Modernisation Making the Most of the Partnership for Modernisation
Making the Most of the Partnership for Modernisation 3333 3333 Marina Larionova and Vitaly Nagornov
VisaVisa
VisaVisa----free: Modernising the Russiansfree: Modernising the Russiansfree: Modernising the Russiansfree: Modernising the Russians 5555 5555 Sergey Utkin
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Foreword Foreword Foreword Foreword
Just over a year ago EU and Russian leaders agreed at their summit in Stockholm to work together on a Modernisation Partnership. This aim was repeated at the June summit this year at Rostock on the Don. The idea of the EU helping Russia to change its lop-sided economy is a good one but regrettably there has been little sign of real change in Russia over the past year.
In 2009 Russia suffered a steep decline in its GDP as a result of the global financial crisis.
President Medvedev spoke out about the need for fundamental reforms of the state and society as well as the economy. Top of the agenda was the rule of law, a pre-requisite for attracting foreign investment, without which the modernisation agenda would struggle to get off the ground. This year, as the economy has recovered, helped by a rise in the oil price, there has been less talk of modernisation although the President remains attached to his own version of Silicon Valley – the Skolkovo project outside Moscow.
In my view modernisation is essential if Russia is to realise its full potential and engage wholeheartedly with the global economy. The EU also has a key role to play but this cannot be at any price. The European Commission has drawn up a ten-point plan on which both sides should work to achieve a win-win situation. This provides a sound basis for action but it has so far received little support from the Russian side.
The collection of articles in this Review represents a broad spectrum of opinion as regards the prospects for the EU-Russia Modernisation Partnership. Some are more optimistic than others but all agree on the need for a modernisation agenda in Russia.
I commend this review as an important contribution to the debate on the Modernisation Partnership.
Erhard Busek
President, EU-Russia Centre
4
Introduction Introduction Introduction Introduction
This review brings out clearly the many issues concerning the EU-Russia modernisation partnership.
Perhaps the most important is the differences within Russia about how far and how fast to proceed with modernisation. President Dmitry Medvedev has spoken of the need to reform Russia’s
“backward” economy, to end its “primitive reliance” on oil and gas. Prime Minister Vladimir Putin, seems not to share this sense of urgency, arguing recently that modernisation was already under way, “but we need to make this development quite gradual”. Mr Putin has also been far less vocal than Mr Medvedev on the need to tackle corruption and take measures to strengthen the rule of law.
Igor Yurgens Igor Yurgens Igor Yurgens
Igor Yurgens, the President of the influential Institute of Contemporary Development (INSOR) outlines some of the main arguments put forward in “Russia of the 21st Century: A Desirable Future Image” which was one of the key publications in the modernisation debate. He argues that the state must reduce its over-mighty grip on the economy and indeed on the state and society. He calls for an ‘efficient state that is accountable to citizens, ensures a fair social order and protects private interests.’
Axel Lebahn Axel Lebahn Axel Lebahn
Axel Lebahn, a long-time Russia watcher, suggests that Medvedev cannot be described as Putin’s puppet. The President, he argues, has set a different tone and made some small but significant changes, especially in the judicial sphere. Although one should not over-estimate the differences between the rival camps in Russia, there is the beginning of a serious debate about the future direction on Russia. The West needs to follow and support the reform process wherever possible.
Anthony Brenton Anthony Brenton Anthony Brenton
Anthony Brenton, a former British ambassador to Russia, argues that Western technology, capital and expertise has a crucial contribution to make to a genuine modernisation of the Russian economy, and to breaking down the barriers which for centuries have divided Russia from the West. He also points out that the Russian state continues to play a key role in the success or failure of Western projects whose fate varies enormously according to the sector concerned. Despite all the problems he believes there is scope for further prudent Western investment.
Adrian Severin Adrian Severin Adrian Severin
Adrian Severin, MEP, outlines the limited progress in EU-Russia relations under the current Partnership and Cooperation Agreement (PCA). He states that the EU and Russia are ‘condemned’
to a close relationship on account of their proximity and close political, historical and cultural ties.
The post-Lisbon EU now needs to develop a more effective approach towards Russia and cement a new partnership that covers all areas from trade and energy to education and the environment. The author concludes that there must be greater trust between the EU and Russia if the new strategic partnership is to be successful for both sides.
Dennis Kredler Dennis Kredler Dennis Kredler
Dennis Kredler and Sergey AfontsevSergey AfontsevSergey AfontsevSergey Afontsev of the EU-Russia Industrialists Roundtable argue that tin light of increasing global competition the EU and Russia should join their efforts to make better use of both economies’ complementary comparative advantage structure. The most important issue is Russia’s WTO accession which, when completed, would help move the stalled EU-Russia strategic agreement negotiations forward. This, in turn, would help provide a reliable legal basis for long-
5 term business and economic relations between Russia and the EU. The authors also highlight the importance of the Innovation Dialogue and the need to move towards the abolition of visas as soon as possible.
Katink Katink Katink
Katinka Baryscha Baryscha Baryscha Barysch, Deputy Director, Centre for European Reform, takes a more pessimistic view of the modernisation agenda arguing that as conceived it is unlikely to succeed. A top down approach will not help Russia diversify and remodel its economy; nor will it breathe new life into the stale and sometimes tense EU-Russia relationship. She notes that the 2009 progress report on the implementation of the four common spaces suggests that most of them work badly or not at all. It is not immediately obvious why re-branding them under the umbrella of a modernisation partnership would breathe new life into them At the same time the EU-Russia partnership for modernisation could help Russia to become more energy efficient, adopt better technical standards, create better conditions for small enterprises and other much-needed changes.
Marina Larionova Marina Larionova Marina Larionova
Marina Larionova and Vitaliy NagornovVitaliy NagornovVitaliy Nagornov of the Moscow High School of Economics review the Vitaliy Nagornov prospects for progress in the five key areas for technological modernization - energy efficiency, nuclear technology, space technology and communications, medical technology and strategic information technology. The authors also examine the most important legal changes for stimulating investment and innovation, such as amendments to the list of strategic enterprises and acts on special economic zones. They emphasise the importance of higher education reform in ensuring the success of the modernization agenda. Finally they look at EU-Russia cooperation in practice taking as examples various cross border initiatives..
Sergei Utkin Sergei Utkin Sergei Utkin
Sergei Utkin of the Institute of World Economy and International Relations, makes a powerful plea for the abolition of visas between the EU and Russia. He notes that while Russia is demandeur for visa free travel it would also promote more people to people contacts. Utkin perhaps under- estimates the resistance in some member states towards open borders with Russia. Some argue that Russia should not be privileged over other Eastern partners. Others point to the problem of Russia’s open borders with Central Asia and lack of technical standards compatible with Schengen.
It should be remembered that visa free travel does not mean passport free travel. Border authorities can still refuse entry to undesirable persons.
Fraser Cameron
Director, EU-Russia Centre
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The Objectives and the Price of Modernisation in Russia The Objectives and the Price of Modernisation in Russia The Objectives and the Price of Modernisation in Russia The Objectives and the Price of Modernisation in Russia
byby byby Igor Yurgens Igor Yurgens Igor Yurgens Igor Yurgens
Chairman of the Institute for Contemporary Development (ICD) and a member of Russia's Public Chamber
Modernisation in today’s Russia is not about confrontation between the forces of light and the forces of darkness. Almost everyone who makes decisions in politics and the economy expresses agreement with the political and socio-economic ideal that has substantiated the need for a modernisation. We do not have a shortage of the forces of light, and you can hardly place anyone in the forces of darkness without the risk of staining your own conscience.
Modernisation is about the price that we are prepared to pay to implement that ideal and about the efforts we are prepared to put in towards achieving it. And it is here where there is a lack of unity.
The desire to save as much as possible to achieve modernisation and conserving efforts and resources is invariably present and hinders change. This has led to talk about “spot” modernisation and attempts to define a narrow framework for the process or to launch it as a “demo” or pilot version.
We can only see a general ideal. There are no specific objectives or clearly defined tasks and any disputes about the price of modernisation are exercises in sophistry, both non-specific and endless.
It is only when a definition of consensus objectives and tasks can be reached that talk about the price of change can become substantive. A recent work from the Institute of Contemporary Development – “Russia of the 21st Century: A Desirable Future Image” –sought to launch the process or at least contribute to its launch. This essay about successful modernisation is a forecast of the possible results, it sums up what has not yet happened and assesses how the public and the government might act, alongside considering the cost and scope of the efforts needed to achieve modernisation.
The main criterion of successful modernisation is the way that the country meets the challenges of modern existence and aligns with the norms of other countries. This covers the standard of living, which must be comparable to the leading countries of the world; the level of development of the social system, ensuring equal opportunities from the start and the protection of socially vulnerable sections of the population. Matching standards in the political and legal sphere: an efficient state that is accountable to its citizens and a fair social order, ensuring personal freedom to everyone and the protection of private interests. This requires advanced and dynamic science; modern and efficient armed forces together with secure and constructive co-operation in the international arena.
All of these elements are interconnected and correlate with one another. An economic component also fits naturally here. Successful modernisation results in a competitive economy, which, in turn,
7 ensures a high standard of living and enjoys all the advantages of the country’s natural resources and human capital, as well as fitting into the international labour market, which demonstrates sustainable innovation and the ability to meet rival challenges.
The past two years did not become a ‘fatal’ test for our economy, but they have lanced many of the boils which experts had spoken about well in advance. The domestic version of the world crisis revealed the instability of forced growth based on the influx of petrodollars and the excessive role of the state in the economy. It also showed the degree of sensitivity of such problems as export- oriented raw-materials sectors, weakness in the principle of a private financial system and dependence on external credit when enormous state financial reserves had been accumulated and capital exported in significant amounts. The Russian model of forced growth, implemented in 2005-2008 has exhausted itself. Entering the trajectory of balanced development, resistant to impacts from the outside world and accompanied by modernisation of the financial system and radical improvement of the regulatory environment, is a priority today.
Transition to balanced development – trading forced development for quality growth – must become a macroeconomic equivalent of modernisation. I will now go back to the aforementioned text by the Institute of Contemporary Development, where the components of such a transition are detailed. First of all, it maintains symmetry between the economy’s need for monetary resources and the ability of the financial system to provide them. Second, preventing the economy from overheating by using factors of production, as in 2005-2008, when the growth of aggregate demand was met by greater imports and price hikes, followed by output increase. The post-crisis
“pause in demand growth” and the movement of public funds towards new technologies must be used to reduce costs, qualitatively renew basic assets, and increase industrial labour productivity.
Other qualitative characteristics of transition to balanced development include:
— deflation of protected “bubbles” within markets for goods and services that face no competition from imports (such as construction or retail trade) and reduction of tariffs of natural and local monopolies;
— reduction of the dependence of the Russian financial system on the state of the external environment due to the domestic growth of added value production;
— complementary restructuring of the real economy and within the financial sector, and the completion of structural reforms in electric energy, gas production and transportation, rail transportation, housing and utilities; and
— formation of new fundamentals in monetary policy; that is, change of money supply channels, transition to inflation targeting and a floating rouble rate, the consolidation of the leading role of interest rates and of bank refinancing in liquidity management, alongside the introduction of efficient risk management.
8 Such an economy is not oriented toward extortionate growth rates. However, thanks to balanced development, it will pass through world cyclical and financial crises with much lighter losses than in 2008-2012.
The essay, “Russia of the 21st Century” describes the desired image of the future in the present tense as something that has already happened, and this sleight of hand can appear credible. Such a glimpse of the future, of course, states an ambition, but at the same time provides a clear picture. The picture is as follows:
A modernised Russia is a country where the state has reduced its direct presence in the economy by at least half, where its share in the GDP does not exceed 30 per cent. At the same time, its role in ensuring a flexible regulatory system, capable of adapting quickly and reliably to new challenges, will increase significantly. The main principle of such a reset is the encouragement of competition, protecting and consolidating corporate and individual private property, encouraging entrepreneurship and private investment.
Civil society, business, and the state must become equal partners in decision-making on economic policy. Having replaced the “vertical” government regulation, such an approach will allow the achievement of a stable balance of interests of all participants and in the predictability of actions in this sphere. This will, in turn, create a comfortable investment climate and, in general, a comfortable business climate in Russia.
Modernisation must depend not on specific types of business, sources of funding, or types of control, but on a harmonious combination of objectives and roles of various types of businesses.
The main role that the state should play in the economy is the role of regulator, ensuring acceptable business conditions for all. The state as “redistributor” of resources must minimise its role. Its vertical overgrowth is an obstacle to modernisation. A state capable of addressing current challenges is a state that is moderate and efficient.
The division of the state into regulator and reformer, consumer and investor, owner and
"redistributor”, must be taken to the stage where the line between those functions and the actions of private business is not an ambition, but clear in practice, perceptible and honoured by all parties.
With all this in mind, the main criterion for “state optimisation” is not a specific percentage of its property, not a share in the redistribution of the income of the regions and businesses, but reasonableness of its functions, predictability of its actions, and a clear separation of its role from those of business and civil society.
A competitive environment is the most important condition for qualitative organic growth. A situation when up to 40 per cent of industrial enterprises are outside any competition structures must become a thing of the past. A strict but predictable antitrust policy, oriented towards controlling companies’ behaviour on the market, not towards their size. It is the real practice of antitrust administration that will make it possible to create normal conditions for businesses to function.
9 As for a structural reform of the banking system, the privatisation of government banks is a very important measure, in addition to its consolidation. The government must be limited to a blocking stake to vote in those that remain, as well as in development institutions. The creation of a small and medium-sized financial businesses sector, (including regional credit organisations with special status, credit co-operatives, microfinancing organisations, etc.) will solve the problem of accessibility of financial services to people throughout Russia.
Accessibility of credit resources and financial services and an acceptable level of tax burden will ensure the balanced development of big, medium-sized and small businesses. The share of small business in the GDP will amount to 35-40 per cent. Small businesses, in addition to the traditional sectors of retail trade and services, will concentrate on innovation – more than half of the sector will work on innovation production. As one of the principal sources of middle class expansion, it will become the basis of the Russian overseas market.
Removing the difficult and long-standing problem of the legitimacy of large-scale private property is an important condition for the plans to be implemented. Property must be securely protected, not only by law and declarations from the country’s highest levels, but by the practice of the relationship between the state and business – practice that would include suppressing raider attacks and abandoning concealed nationalisation and interference by authorities in income distribution as “rentiers” or landlords.
Stronger legal foundations and the stronger protection of businesses will support their transition from short-term decision-making organisms to achieving strategic positioning on international markets, the curtailment of attempts by the bureaucracy to elicit “entry fees” and rents, and participation of people in the economy through the purchase of stocks and bonds. Profit instead of rent – this is a huge transformation in the minds of businesses, the government, and the Russian people. Such a transformation will stimulate the people’s active investment in their future and will become the decisive motivation of economic modernisation from grassroots level.
The “spot” and regulated modernisation, launched last year, is insufficient to achieve large-scale strategic objectives. The real renewal of the economy will only happen with “horizontal”
modernisation: a “reset” of institutions regulating the national economy, an across-the-board improvement of economic management conditions, a lowering of administrative barriers, sweeping de-bureaucratisation, and the rejection of “manual control” in favour of universal measures of competition support and property protection.
Both the authorities and, by and large, experts see the need for such horizontal modernisation. But it is important to remember that there also exists a third level of modernisation. The most comprehensive and purposeful measures to renew the economy are not serious without an equally comprehensive and purposeful renewal of social and state institutions. Horizontal modernisation must be implemented against the backdrop of general, integral modernisation – the modernisation of the political sphere, of social structure, and of civil consciousness. Only then will there be a guarantee that the result of our actions will be anywhere close to significant, including in the economic sphere.
10
A Moderniser A Moderniser A Moderniser
A Moderniser – – – – not a Puppet not a Puppet not a Puppet not a Puppet
(How Dmitry Medvedev is quietly changing Russian politics) (How Dmitry Medvedev is quietly changing Russian politics) (How Dmitry Medvedev is quietly changing Russian politics) (How Dmitry Medvedev is quietly changing Russian politics)
by by by by Axel Lebahn Axel LebahnAxel Lebahn Axel Lebahn
Freelance commentator and advisor on Russia1
Just over two years ago Dmitry Medvedev was elected President of Russia. Initially he was greeted with enthusiasm in the West but many observers are disappointed as he completes the first half of his tenure in office. But a closer analysis reveals that the power balances established under the Putin era have been called into question as a result of the President’s reforms.
There were high hopes in the West when Dmitry Medvedev became President of Russia in May 2008. Many hoped that once in office Medvedev would quickly distance himself from his predecessor and set about achieving the ambitious reforms he had spoken of before moving into the Kremlin. There was more scepticism among the opposition in Russia. Given that Medvedev was a major figure for many years while Putin was President, they did not expect more than a few eye- catching reforms aimed to placate critics in the West. Over the two years there have been more sceptical voices in the West as well. This is largely due to the continued influence of Putin on the political scene which has frustrated those who wish to see a ‘Russia without Putin’. The Putin- Medvedev tandem is a complicated relationship and while there has been no open confrontation, the two men have taken different positions on a number of issues.
POWER AND MENTALITY POWER AND MENTALITY POWER AND MENTALITY POWER AND MENTALITY
Before taking office Medvedev had stated consistently that a renewal of the state and society in Russia must be the main policy aim. He criticised the absence of the rule of law. He called for a fundamental reform of the judicial system and a change in mentality to ensure a successful transformation in other sectors. In a methodical and didactic manner, Medvedev concentrated on the judicial system but in parallel pushed for reform in other areas. He stated that those with responsibility in the state had to change their approach. He also made it known that it was time for new faces, unburdened by history, in positions of responsibility. This was a signal to those in power that they would eventually be replaced. But this gradual approach was criticised by those who expected swifter and more decisive reforms.
These critics do not take into account that most positions of power in Russia are still occupied by the ‘siloviki’ – the representatives of the secret services and military - who are unwilling, at least voluntarily, to relinquish or even share power in the near future. If Medvedev had simply taken over as the ‘new Tsar’ he could have substituted the old guard with a new guard.
1 Formerly with the Deutsche Bank
11 The expression tandem is confusing as the Putin-Medvedev relationship is really one of two different political conceptions which sometimes overlap but which also lead to competition. This has led to some movement in an otherwise sterile political landscape in recent years. Of course one cannot expect change in the short term through Western-style democratic elections. But there is an imperceptible move towards rival camps with different political and economic agendas.
NEW PEOPLE, NEW POSI NEW PEOPLE, NEW POSI NEW PEOPLE, NEW POSI NEW PEOPLE, NEW POSITIONSTIONSTIONSTIONS
Medvedev has placed a number of younger and well-qualified reformers in important positions. One example is the substitution of the military by civilian leaders in the Caucasus who are prepared to use economic measures to try and achieve more stability. Medvedev has also been willing to take swift action, including prosecution, against those who have been caught out misusing their office.
The President has also been keen to promote dialogue between government and citizens.
Newspapers have been encouraged to become more critical while there is a lively debate on the Internet, a medium that Medvedev also uses to good effect. Despite the tight laws on demonstrations, citizens have also been taking to the streets in spontaneous actions.
But Medvedev does not wish this to develop into full-scale demonstrations with unforeseen consequences. There is already considerable unrest in the provinces as a result of the economic crisis. Putin has enjoyed playing the leader in denouncing factory closures, accidents at power stations and overseeing the firefighters tackling the forest fires around the capital. The population remains highly critical of the government for failing to tackle corruption. Despite the rhetoric, Putin did little to deal with corruption during his eight years in office. Medvedev has attempted a more legalistic approach but with similar poor results.
The unrest and impatience within the population has put pressure on other institutions. Medvedev, for example, has proclaimed a fundamental reform of the hated militia. Many branches of the militia have been reformed and a law should be in place by the end of the year that will facilitate a full-scale reform of the militia. Given that the militia is a pillar of the siloviki, their members are watching these reforms with suspicion. They are already lobbying to secure their positions and block any further reforms. Their lobbying efforts were rewarded with a new law extending the competences of the FSB. At a banquet for the Russian spies expelled from the United States, Putin gave two clear signals. The spy affair was an unimportant matter, a curious relic of the Cold War;
and Medvedev’s ‘reset’ of relations with the US would not result in a weakening of the siloviki.
Medvedev has continued the military reform begun under Putin as well as reform of the prison and prison camp system (a legal and moral stain on the nation) which goes back to Stalin’s time. There are currently around 846,000 prisoners behind bars in often horrendous conditions. The death in prison of the lawyer, Sergei Magnitsky, caused numerous protests and prompted Medvedev to sack those responsible and to set up an enquiry into prison conditions throughout Russia. The report of the state prosecutor in July revealed that the prison system was a good example of ‘legal nihilism’.
This prompted Medvedev to announce a series of reforms designed to modernise the prison system and finally break with the Stalinist inheritance.
12 Medvedev has also sought to allow more freedom for enterprises as he views business as the driving force for the modernisation of Russia. He pushed for a new law whereby those accused of economic crimes would not have to be held in detention. This could lead to the release of Mikhail Khodorkovsky, charged with a second offence, and still held in detention. His release would demonstrate a break with Putin who was responsible for the arrest and imprisonment of Khodorkovsky.
FREEDOM VERSUS FREEDOM VERSUS FREEDOM VERSUS
FREEDOM VERSUS PROSPERITY PROSPERITY PROSPERITY PROSPERITY
The key area for reform is the economy. The perestroika introduced by Boris Yeltsin was viewed as attractive as it promised prosperity along with democracy and a market economy. But the quasi state bankruptcy of August 1998 was a huge shock to the Russian population. Everyone feared another economic crisis. In the course of his two terms in office, Putin succeeded in stabilising the state and the economy. Incomes rose steadily mainly because of the continuing rise in the oil price during this period. His autocratic approach was respected by the oligarchs and accepted by the population as a trade-off between freedom and prosperity.
In August 2008, Russia was at the peak of its influence due to bulging coffers from oil and gas sales and the military victory in Georgia. Gazprom was a symbol of Russia’s new strength. But then Russia was hit badly by the economic crisis and a plunging oil price which revealed the fragility of the Russian state and its finances. Since then the population’s trust in the system has been shattered. A majority believe that there must be change.
It was increasingly clear that the Putin system was ‘yesterday’s system’ and not suitable for the challenges of the 21st century. Medvedev thus seized the opportunity to promote his modernisation agenda which pre-supposed a root and branch reform of the state and the economy.
While Putin was responsible for the measures to stabilise the economy after the shock of August 2008, Medvedev began to draw up a strategic concept for Russia’s future. His plans were agreed with Putin which again demonstrated that despite differences in approach there is no fundamental opposition between the two camps. The power situation in Russia is indeed quite fluid with competing groups seeking the ears of both leaders to promote and defend their interests.
Medvedev had set out his stall in numerous interviews and articles. Before his election he set up the INSOR think tank to come up with new ideas. The output of INSOR reveals a quite different approach to that of Putin. INSOR has also sought to involve and mobilise the intellectuals and scientists who had been marginalised under Putin. New institutes and commissions were established to deal with technology and corruption thus providing a new communications channel between government and citizens.
The showcase for the modernisation agenda is supposed to be the Skolkovo project – Russia’s answer to Silicon Valley. Located near Moscow, Skolkovo will have special privileges designed to keep the best scientists and experts in Russia. Influenced by his visit to California in June, Medvedev recognises the importance of attracting foreign expertise to assist with Russia’s modernisation. He announced this new move at a meeting of Russian ambassadors in July emphasising the importance of co-operation with the most modern countries in the world.
13 Medvedev has also spoken of the need for Russia to show a more smiling face to the outside world.
This contrasts with Putin’s view that the priority should be to ensure the continuation in power of the current elite.
Of course one cannot avoid some scepticism as to whether these fine words of Medvedev will be put into practice. There is, however, a whiff in the air that the tarnished Putin era is near its end. If this new dynamic and the strategic aims of Medvedev can be harnessed to promote a real and lasting modernisation then it could lead to a quite different Russia. The West should do all it can to support such a development.
14
The Canary in the Mine: Western Investment in Rus The Canary in the Mine: Western Investment in Rus The Canary in the Mine: Western Investment in Rus The Canary in the Mine: Western Investment in Russia sia sia sia
byby byby
Sir Anthony Brenton Sir Anthony Brenton Sir Anthony Brenton Sir Anthony Brenton Former Ambassador to Russia
Overseas investment is about more than money. It is the clearest indicator of a country’s will and capacity to succeed in the global economy. For Russia in particular, the history of the environment that it has offered external investors since the fall of Communism has cast a sharp light on the whole state of economic and political reform.
That history comes in three phases, with a fourth one now under way. The first of these was the chaotic Russia presided over by President Yeltsin from 1991 to 1999. For much of the period the country was bankrupt, the rouble in free fall, and its internal legal and property arrangements in deep disorder. This was a period when Russia badly wanted foreign investment, both because it needed the foreign exchange and because it wanted the technology and management skills which it saw as bridging its route into the global economy. Meanwhile most foreign investors (not without reason) looked askance. Despite what were in principle extremely generous terms, (notably, for the resources sector, the Production Sharing Legislation of 1999), the capital account remained massively negative as Russians moved money out much faster than foreigners brought it in. There were exceptions. A few pioneering consumer brand companies, such as Cadbury and BAT, saw that Russia must turn into a huge retail market, and in the face of all the difficulties set up manufacturing operations. And the attraction of Russia’s huge oil and gas deposits brought significant interest from the Western majors. Shell for example became involved in 1992 in what was to become the world’s largest hydrocarbon project: Sakhalin 2. But even in this very attractive looking sector there were real problems. BP’s first billion dollar investment promptly sank into a financial quicksand from which it took immense efforts to retrieve it.
The second phase came with the turnaround of the Russian economy in President Putin’s first term – 2000-2004. This was a period of major reform. Legal, tax and property arrangements became significantly more predictable and business friendly (even while remaining far from best Western practice). The economy was growing fast, so an increasing array of Western blue chip companies saw Russia as a market they had to be in. And the Russian administration remained keen to attract Western investors. Through very sensible tariff arrangements, for example, they encouraged all the major Western automobile manufacturers to set up operations in Russia. There was growing Western high tech interest – Intel, Glaxo Smith-Kline, Pilkington. And in the pivotal oil and gas sector, Western companies were encouraged to buy in, with the Russian administration in particular facilitating BP’s next $6 billion investment in establishing the TNK/BP joint venture. This is not to say that the lives of Western companies investing in Russia were easy. They found themselves tackling a huge range of problems – a massively cumbersome customs regime, random raids by the tax and other authorities, poor physical infrastructure, unsure property rights, unpredictable legal processes, and predatory local government. But for the determined investor it
15 was possible to get through all this and establish operations of real benefit both to the company and to Russia. By the end of the period, inward investment was flowing at a healthy rate and Russia’s capital account was very nearly in the black.
But the very strength of Russia’s economic resurgence brought a darker climate for Western investors in the next phase – Putin’s second term 2004-2008. With money coming out of its ears as a result of high oil prices, Russia was significantly less interested in attracting Western capital.
Economic reform more or less stopped. There was a feeling that business, in particular Western business, had done too well at the expense of the Russian state. The Yukos/Khodorkovsky affair gave a disastrous demonstration of how the legal system could be manipulated to massively enrich a few insiders (as well as renationalising a large chunk of the Russian oil industry). The climate of easy money and resurgent state power saw Russia rise close to the top of global league tables for bureaucracy and corruption, and plunge to the bottom for ease of establishing and doing business.
A series of laws (in particular the 2008 Strategic Sectors and Sub-Soil Laws) drastically limited Western involvement in key sectors of the Russian economy. The Russian state initiated, or connived in, direct attacks on major Western projects –notably Shell’s Sakhalin 2 and BNK/BP.
Western money kept on flowing in – Russia was, after all, one of the fast growing, much feted, BRICs – but in a way which, because of the clear difficulties and dangers, priced Russian assets at about 25% less than comparable assets on other emerging markets.
This third phase came to an abrupt end with the global crash of late 2008. The crash came as a salutary shock to the Russian authorities. As late as mid-2008 they were confidently expecting, along with their BRIC peers, to sail through unaffected. In fact they did much worse than any of the other BRICs. In 2009 the economy contracted by an extraordinary 8%, and only huge expenditure of reserves prevented a Yeltsin-era style rouble collapse. Capital flight resumed big time. Suddenly the economic overconfidence of the later Putin years was revealed for what it was. It abruptly became clear that the Russian economy was excessively dependent on resource exports (the fall in the oil price was a major transmission mechanism of the crash to Russia) losing ground in the other industrial and high tech sectors necessary to give Russia a truly diversified and robust economic base, and subject to a pliable legal system and a corrupt and incompetent bureaucracy whose reputation had led to a major flight of funds at the first hint of bad weather. The depth to which the system had sunk was underlined by the mysterious death in a Russian jail of Sergey Magnitsky, a lawyer working for a British firm, who had exposed a vast fraud organised from within the Interior Ministry itself. To all impartial observers it became glaringly clear that if Russia was to retain its prized position as a leading emerging economy, up there with China, India and Brazil, rather than turning into a corrupt Slavic petroeconomy, then drastic reform was necessary – including creating an environment much more welcoming for foreign investors.
The single biggest question for those concerned with Russia over the forthcoming, fourth, phase of post-communist Russia’s relations with Western business is the extent to which the Russian authorities have taken these lessons to heart. They are certainly now saying the right things.
President Medvedev has condemned “legal nihilism” and introduced some measures intended to limit corruption and lift some of the administrative burdens on business. Both he and Prime
16 Minister Putin have underlined their commitment to “modernisation” and are putting significant sums into “innovation cities” and state innovatory organs such as Rosnanotech. And, crucially, foreign investors are again to be wooed. Medvedev has underlined how important the technology and management skills that foreign companies can bring to Russia will be to successful modernisation and has placed First Deputy Prime Minister Shuvalov in charge of dealing with the tax, customs, bureaucratic, regulatory and other problems which face any company investing into today’s Russia.
There has been some scepticism about whether the modernisation agenda really will or can meet the challenge. As post-crash oil prices have risen again, Russian economic growth has resumed (probably 4% this year) and the fiscal pressure for genuine reform correspondingly diminished.
Commentators argue that corruption - which is in many ways the core problem - goes so far up the Russian system that there is simply no incentive or political will to deal with it effectively (a point rather confirmed by the inadequacy of the response, so far, to the Magnitsky scandal). And there has to be a real question as to how much all this government driven activity can achieve given the well documented weaknesses of the Russian state (although it was encouraging recently to hear Medvedev publicly emphasise the evident fact that the success or failure of modernisation ultimately depends on the private sector).
Nevertheless the welcome mat is again down for Western investors. And it is important to note that investors are responding. Post-crash, capital flight has again subsided and the level of external investment into Russia as a proportion of GDP is currently at about the same level as for China. So, as Western business re-engages, what are the key points for Western companies and governments going forward? I would emphasise three.
First and foremost, the history unambiguously underlines the key role the Russian state continues to play in the success or failure of Western projects, both in terms of the general environment and the particular treatment of particular projects. In Russia, government is much more closely enmeshed in virtually all business activity than is the case in the West. The most successful investment ventures I dealt with in my time in Moscow were those which saw it as a core task to get close to, and stay close to, the relevant bits of central and local government and ensure they were comfortable with the way they wanted the project to go. This has implications too for the approach of Western governments, and the EU, to Western business activity in Russia. They need to be very ready, readier than in the case of investments in Western countries, to deal with problems at a government-to-government level. And while they cannot expect to significantly influence Russia’s general legal and administrative systems (Russia is far too big, proud and domestically preoccupied for that) they should be doing all they can to pull Russia into international organisations and arrangements which offer legal protection of one sort or another for foreign business activity. In particular, the credibility of the whole modernisation agenda would be immensely enhanced if the current negotiations for Russian entry into the WTO and the OECD, and on the amended EU/Russia Partnership and Co-operation Agreement, could be brought to an early, successful, conclusion.
17 The second point is that the fate of Western investments in Russia has varied enormously according to the sector concerned. For most economic sectors – notably consumer goods, retail and, as noted above, motor assembly – Western companies have put the money in, adjusted with greater or less pain to the peculiar pressures of the Russian environment, and now have good going concerns – all without headlines. These success stories are gradually extending to much trickier sectors – such as agriculture. The investments which have earned the negative headlines, and which have often run into real difficulties, are heavily concentrated in resources, and particularly oil and gas – which is, of course, the most visible and internationally significant sector of the Russian economy. This is the sector where Russia (in common with a number of other major hydrocarbon producers) has been most determined that the state resume a leading role. Even here, small Western projects have gone ahead with some success, but it is now quite clear that major projects will only be able to succeed with significant (and probably majority) Russian involvement.
But the third, and final, point is that Western companies have almost certainly been more cautious about Russia than is justified by the facts. A lot of “Western investment” at the moment comes from such sources as Cyprus – ie not Western at all, but Russian money. And the investment that has taken place is highly concentrated – over 50% in Moscow and the Moscow region alone. Whole swathes of Russia still await Western interest and involvement. Above all, Russia seems unable to shake off an exaggeratedly negative image in the West. While Western investors certainly face real challenges in Russia, there is no reason to believe that these are in a different league from those offered by other big emerging market investment destinations such as China or India. I lost count of the number of British businessmen who, when they finally got around to visiting Russia, said to me “this is not the impossible country I expected – we could certainly do business here”. Of course, all the problems mentioned above – the corruption, the bureaucracy, the legal uncertainties the infrastructure – are real, and are a real impediment. But precisely as a result, Russian assets are relatively cheap, and, as a whole range of British and other projects demonstrate, can be turned into successful investments. And, to revert to where I started, there is much more to this than the money. A real inflow of Western technology, capital and expertise has a crucial contribution to make to a genuine modernisation of the Russian economy, and to breaking down the barriers which, for centuries, have divided Russia from the West. Governments on both sides have every interest in helping that happen.
18
PCA and t PCA and t PCA and t
PCA and the Modernisation Partnership he Modernisation Partnership he Modernisation Partnership he Modernisation Partnership
byby byby Adrian Severin Adrian Severin Adrian Severin Adrian Severin
Vice-President of the S&D Group in the European Parliament I. INTRODUCTION
I. INTRODUCTION I. INTRODUCTION I. INTRODUCTION
The dynamics of the EU-Russia relationship is currently facing a period of repeated attempts at revitalisation. The talks concerning the future Partnership and Co-operation Agreement (PCA) are continuing without having produced any significant results on the areas that are of most importance, namely trade and energy.
The previous Partnership and Co-operation Agreement was built on the idea of integrating the European Union and Russia using the instrument of the so called four “common spaces”
(economics and energy, foreign and security policy, internal security and justice, and education and culture). But the “integration” process is far from being a success. In this sense, one of the most important reasons for the lack of success was, on the one hand, due to Russia’s reluctance towards the idea of unilateral adoption of EU standards and, on the other hand, due to EU's reluctance towards the hypothetical idea of converging towards Russian standards.
So, considering the state of play of the relations between the European Union and Russia, as well as the contemporary challenges, including the lessons we learned in the last two decades, it is necessary to develop new instruments based on more adequate approaches, in order to establish a mutual lucrative partnership.
II. BUILDING A CONST II. BUILDING A CONST II. BUILDING A CONST
II. BUILDING A CONSTRUCTIVE AND TRUSTRUCTIVE AND TRUSTRUCTIVE AND TRUST----BASED RELATION WITH RUCTIVE AND TRUSTBASED RELATION WITH BASED RELATION WITH RUSSIABASED RELATION WITH RUSSIARUSSIA RUSSIA
The Lisbon Treaty that started to produce effects on December 1, 2009 will generate major changes in the way that the European Union works, and will make the EU more effective in the foreign affairs arena, in particular,, creating positive results for the Union’s foreign relations, both at bilateral and multilateral level.
Against this background and with such a starting point, one could say that the European Union and the Russian Federation are linked by substantive ties of political and cultural nature, by a substantive partnership in economy, trade, energy, culture, science, education, transport and the environment. A simple glance at the world map is enough to make it clear to anyone that Russia and the EU, sharing common security interests and an important common neighbourhood, have only one choice in our multi-polar globalised international environment – to further develop the existing partnership. Such an approach towards EU-Russia relations should take into account two fundamental arguments: "proximity" and "complementarity".
19 With respect to the "proximity" argument, EU-Russia relations have a strong strategic component, being characterised not only by economic interests, but also by the objective of close co-operation in various international areas. Geographically, Russia is and will remain the European Union's closest neighbour and will continue to play a protagonist role in the Euro-Asian and Euro-Atlantic space. From this perspective, the European Union and Russia are "condemned" to co-exist one in the proximity of the other and even, in a particular situation, one amongst the other, as it is the case for the Kaliningrad region, situated inside the EU.
With respect to the "complementarity" argument, one would speak about the EU - Russia's complementarities between the needs and resources - the latter being complementary at almost all levels. On the one hand, the Russian Federation is the main provider of energy for Europe, as well as one of the most important suppliers for the large majority of the raw materials used by EU industry. On the other hand, the European Union is the main investor in the Russian economy, as well as an important provider of technological know-how.
In such a dynamic environment, the existence of these two aforementioned arguments, namely
"proximity" and "complementarity", could develop into two potential scenarios: on the one hand, a positive scenario, characterised by "partnership" between the two global players that understand the need to perform together on the international stage, or, on the other hand, into a negative scenario, characterised by a "conflicting" attitude, where both players are trying to maximise their position by attacking each other. Nevertheless, in such a "strategic relationship" that may either take the form of a "partnership" or a "rivalry" between two subjects, the "complementarity"
constitutes an insufficient argument and does not guarantee co-operation. The co-operation between two global players is a political option and this option must be rational and positive.
In addition to the two arguments of "proximity" and "complementarity", another argument that contributes to shaping EU-Russia relations arises, namely the solidarity of their interests, at global and regional level. It is not difficult to identify a multitude of such convergent interests. With Russia, on the one hand, playing the role of a declining hard superpower and the European Union, on the other, undertaking the role of an emerging soft superpower, both of them being keen to develop a multi-polar order. Such a multi-polar order should be characterised by a coherent symmetry, where the power poles are not peaks of pyramids, but rather the centres of circles formed by interconnections. By networking those centres, one will assure global inclusiveness and, through that, global coherent stability.
In conclusion, one could argue that, in relation to Russia, the EU is too weak to opt for confrontation and too dependent to opt for another partnership than a strategic one. The differences between the EU and Russia are substantive, thus the cultural, legal, institutional, economic, political harmonisation process should be transformed into one of their common priorities. The EU and Russia are too close (geographically, culturally, and economically) to not recognise that their co- operation offers an opportunity for both their own and the world's prosperity and security.
Considering the "proximity", the "complementarity" and the "convergence" between the EU and the Russian Federation, the only rational way to proceed is to develop a "strategic partnership" that will
20 help both of them to maximise their own security and their importance in the globalised world, while consolidating the global security and stability.
III. THE PARTNERSHIP III. THE PARTNERSHIP III. THE PARTNERSHIP
III. THE PARTNERSHIP AND CO AND CO AND CO AND CO----OPERATION AGREEMENT OPERATION AGREEMENT OPERATION AGREEMENT OPERATION AGREEMENT ---- NEW DEVELOPMENTS NEW DEVELOPMENTS NEW DEVELOPMENTS NEW DEVELOPMENTS
A Partnership and Co-operation Agreement serves - as the term implies - to organise communication, consultation, co-ordination and collaboration between two entities acting on an equal footing, namely EU and Russia, in a comprehensive area of political and economic matters.
After the former Partnership and Co-operation Agreement expired in late 2007, and although it was extended, the EU and Russia agreed to replace it in the foreseeable future with a new agreement of a superior political quality. EU-Russia negotiations on the new partnership agreement might be seen as a mirror, which reflects the most important dilemmas and tendencies in relations between the two parties.
The negotiations on the new PCA were officially launched on July 4, 2008, in the aftermath of the EU-Russia Summit in Khanty-Mansiisk (26-28 June 2008), following several years of quite frosty relations. Soon after, on September 1, 2008, in the aftermath of the Georgia-Russia war in South Ossetia, an Extraordinary European Council took the decision to suspend the negotiations of the PCA until the Russian troops had withdrawn to their positions held prior to August 7. Eventually, even if the general feeling within the EU was that Russia did not accomplish its commitments towards the international community in relation to Georgia, the negotiations were resumed in December 2008.
The current negotiation process has revealed a major difference of approach between the EU and Russia. Thus, while the European Union pushes forward towards a comprehensive agreement, attempting to upgrade, by better structuring, its current relations with Russia, the latter bids for a mere framework agreement, which, in its view, should be complemented by sectorial agreements, selected in accordance with the priorities jointly agreed. The various Partnership and Co-operation Agreements up to now have been limited in thematic scope and tended to be highly technical in content. A comprehensive agreement, by covering all topics of strategic interests for both sides, could consolidate the technical solidity and legal rigour of the bilateral co-operative mechanisms, whilst at the same time placing them within a clear conceptual frame, that addresses the political process on a far greater scale demanded by the alleged specificity and closeness of relations between EU and Russia. If achieved, such an Agreement and the Partnership based on it might open up new doors for a true pan-European arrangement going beyond the EU, which could become crucial within the global system of security and stability and that will be able to hold its own political agenda in the competition with the traditional or emerging global players like China, India, United States and others. For the time being apparently, Russia is not convinced that this is the right direction or simply the direction which better suits its vital national interests.
Such a different approach by the Russian side regarding the actual aims of the current negotiations might be expressed by the following three options: firstly, Russia does not see the EU as a real global protagonist, thus not a real strategic partner of paramount importance, and therefore looks for limited sectorial relations with EU, selected in accordance with its particular priorities only,
21 rather than for a coherent network of agreements. Secondly, Russia avoids entering into firm legal relations with the European Union, instead preferring a wide-open legal frame generating loose obligations complemented by clearer and more detailed political instruments which offers a non- legally binding guide which would always be useful but never compulsory. (This is reflected in the preference given by Russia to the Partnership for Modernisation, which was promoted as a politically comprehensive but legally non-binding instrument, against the PCA which one tries to keep at the level of a frame document. If a framework agreement could be interpreted and used in various ways, a comprehensive agreement does not give space for such a forum shopping.) Thirdly, Russia prefers legally binding comprehensive bilateral relations with the EU Member States rather than with the European Union as a whole. Unfortunately, such an approach is being facilitated by the attitude of some Member States, which are trying to bilaterally solve some of their own issues with Russia, such as energy, security, transport etc. The conclusion would be that Russia does not have and it is not ready yet for a real "European policy".
This approach, that currently characterises EU-Russia relations, might possibly be explained, by what concerns Russia's motivation, as follows: a) Russia’s lack of trust in its partner, a feeling which could be either a consequence of the misleading and erroneous past policy of the EU towards Russia or a reaction to the weaknesses and inconsistencies of EU policy or both; b) Russia's preference to negotiate with each member state rather than with the whole EU, thus enjoying a more favourable balance of power within the talks, being able to select the national partners with whom it could have privileged relations while decoupling them from the less friendly member states and making profit of the more coherent and expeditious national diplomacy as compared with the EU one.
On the other hand, in trying to convince Russia to embrace the idea of a comprehensive relationship, the European Union has not only the problem that some of its member states find it more favourable to discuss solutions to the problems they face with Russia bilaterally, but also the problem emerging from its incapacity to accommodate all its member states priorities and needs within a true general "Russian policy". As long as the member states are not convinced that their interests can be better promoted and defended by the EU, they will keep looking to bilateral exits.
Therefore, the European Union and, implicitly, the European Parliament need to actively promote a coherent policy towards Russia and to encourage the acceptance by Russia of a coherent and legally-binding relationship. Likewise, the EU Member States must be encouraged to feel that such a formula would provide each of them with an increased power and with a better guarantee of their rights, as opposed to the case where they would be directly involved in negotiating for them within the bilateral formats.
In order for Russia to accept such a formula, several actions would need to be conducted. Firstly, the trust between the two partners involved needs to be increased. (The increase of trust can be obtained if relations between the European Union and Russia are approached from a symmetrical perspective and not a non-symmetrical one, that is if the EU accepts Russia as an equal partner and not an inferior one.) Trust will grow proportionally stronger with the increase in the EU’s power
22 and its institutional coherence. Weaknesses and inconsistencies as well as strategic confusion and shyness of the European Union are not beneficial factors that would encourage Russia to adopt a coherent policy with respect to the European Union. Secondly, it should be made clear that the European Union could offer bigger guarantees to Russia than each member state separately.
On the other hand, the member states would be more capable of ensuring their interests by negotiating with Russia through the European Union and not on a bilateral level. The more the member states stick together inside the EU in negotiating with Russia, the more powerful the EU will be; the more powerful the European Union is, the better guarantees it could offer Russia and therefore Russia becomes more interested in collaborating with it; the more Russia negotiates with the EU, the more powerful the EU will be and therefore its member states which currently feel insecure in their relationship with Russia will start to feel better protected; thus the better those members feel protected, the more friendly they will become towards Russia and the more friendly they are, the more motivated Russia will be to negotiate with the EU as a whole. Thus a vicious circle could be transformed into a virtuous circle.
Nevertheless, Russia will be convinced only through acts and facts that the EU offers the advantage of more important and complex transactions, of solid guarantees with respect to its acquired rights and, especially, of its capacity to avoid unpleasant situations provoked by the Russo-sceptic member states. Such an approach would constitute a crucial advantage in the medium term.
IV. FINAL REMARKS IV. FINAL REMARKS IV. FINAL REMARKS IV. FINAL REMARKS
The Soviet Russia decided to unilaterally put an end to both Cold War and the Soviet Union, thus leaving the Euro-Atlantic West without its main strategic enemy, in exchange for getting an adequate role within the post bipolar world order. Taking that decision as its own victory the Euro- Atlantic West, while accepting that Russia is no longer its enemy but being unable to accept it as a strategic partner, opted for a unipolar world order, which excluded Russia and tried to ensure that Russia could not fully neutralise its strength or at least tried to contain it in a sustainable manner.
Refused as an ally, Russia was pushed assuming the role of “legitimate opponent” (i.e. a quasi enemy) within the new world disorder, which followed the collapse of the unipolarism and, incidentally, facilitated a relative resurrection of the Russian power. Relieving Russia from its role of bastion of the anti-Islamic fundamentalism and providing it the asset of the high international oil and gas pricses, the Euro-Atlantic West took upon itself a burden which it is unable to carry alone thus increasing the strategic importance of the Russian factor. That is why, currently, the EU should adopt a new Ostpolitik whose aim is to offer Russia the integration refused two decades ago. This means to abandon the zero sum game logic for a win-win game - one expressed through a strategic partnership. Such an EU-Russia partnership could be only facilitated and strengthened by an EU- Russia-US trialogue but this would only weakened by any attempts of the EU Member States to solve their problems in relation to Russia by way of bilateral arrangements. The bilateralist temptations only discourage Russia to adopt a European policy, while consolidating the old Russia’s instinct to move its agenda and increase its own security by dividing the Euro-Atlantic West. In the medium and long term, this will be detrimental for everybody with Russia and the EU
23 both missing the chance to rely on a strong partner, while the US would miss the opportunity of a better structured world within which the power is distributed in a balanced way and the burdens are fairly shared. This Paper defines a possible EU concept in that direction from a social-democratic prospective.
From the analysis so far, it can be deduced that the European Union must articulate a unitary and coherent policy towards Russia, thus avoiding the current situation where, on the one hand, several EU member states prefer conducting bilateral policies with Russia and, on the other, Russia itself favours punctual relations with the European Union and bilateral ones with the member states.
Such a unitary and coherent approach would not only be beneficial for the EU and its member states, but also for Russia, since the EU’s political offer is coherent and adequate.
24
EU EU EU
EU----R R Russia R ussia ussia E ussia E Economic E conomic conomic C conomic C C Co o o o----operation: a operation: a operation: a operation: a W W W Way ay ay ay F F F Forward orward orward orward
byby byby Dennis Kredler Dennis Kredler Dennis Kredler Dennis Kredler
Strategy and International Policy Relations Manager, European Round Table of Industrialists;
Advisor to EU-Russia Industrialists' Round Table Sergey Afontsev
Sergey AfontsevSergey Afontsev Sergey Afontsev
Department Director, Institute for World Economy and International Relations;
Advisor to EU-Russia Industrialists' Round Table
Although economic experts are still uncertain whether the recent crisis is really over –given growing public deficits, public and private debt challenges, and exchange rate volatility –there is no doubt that it has changed the global economic landscape more profoundly than meets the eye. Most countries of the European continent, including Russia, experienced major difficulties. At the same time, leading developing economies, while initially hit hard by the crisis, bounced back quickly, and now continue to catch-up, as illustrated by their improving relative positions compared with the EU, Russia and others.
Both the EU and Russia must face these competitive challenges. But rather than attempting to face them individually, Russia and the EU should combine their efforts to make better use of both economies’ complementary comparative advantage structure. To accomplish this, private business initiatives should be combined with responsible policies to support bilateral co-operation in trade, investment, and innovation.
The EU-Russia Industrialists Roundtable (IRT) has a long record of developing policy recommendations to policy makers. Each spring and autumn, the IRT highlights the priorities shared by business actors to the EU-Russia Summits, and makes practical proposals to advance bilateral economic co-operation. In May 2010, it approached the EU-Russia Summit in Rostov-on- Don with an extensive set of proposals aimed at boosting the growth of our economies.
The most important strategic issues on the IRT agenda are Russia’s WTO accession and conclusion of the new EU-Russia Agreement, which is currently under negotiation. The slow progress on both issues is disappointing, especially as it does not reflect the considerable potential gains of the mutually beneficial co-operation that these agreements would facilitate. IRT strongly believes that progress in these areas is a key to the formation of a reliable legal basis for long-term business and economic relations between Russia and the EU.
Both negotiations are closely interrelated, as Russia’s WTO membership would radically simplify progress on the economic part of the new Agreement: in the absence of WTO membership, all the basic rules of the Agreement governing trade and investment would need to be spelled out explicitly, which could further delay the completion of the negotiations. In turn, progress in the negotiations on the new Agreement (such as consensus on the perspectives of establishing a
