Ending the Silent EU War

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There has been little mutual trust lately between the governments of Russia and the European Union. Diplomatic relations between Britain and the Kremlin are at a low since Alexander Litvenenko was murdered -- allegedly by a Russian agent -- in London in 2006.

Such mistrust poses an obvious threat to trade and investment between Russia and the EU. Russia's trade with the EU between January and August 2007 reached $173.3 billion, or 51.6 percent of its foreign trade turnover. More than a half of Russia's goods are sold in Europe, and two of its top three trade partners are European: Germany, with turnover of $31.9 billion, and Holland, $28.3 billion.

Similarly, European countries account for 75 percent of direct investment in Russia. Britain ranks first, pouring in more than $15 billion in the first half of 2007, despite the Litvinenko case and the tit-for-tat expulsion of diplomats during this period.

But the volume of foreign investment falls short of what Russia needs, for 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-based society. EU countries will continue to demand energy, and Siberian deposits are far from exhausted.

As a result, diversification of Russia's economy seems a distant prospect -- all the more so because of its huge bureaucracy, together with the state's interest in "strategic" areas of the economy, repels foreign business. Indeed, Europeans constantly reproach Russia for its growing 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 yet been secured.

At the same time, conditions for Russian investment in the EU are far from perfect. Investors face political discrimination 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.

In September 2007, a move by the European Commission to prevent foreign companies 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 not likely to encourage foreign energy companies working in the EU to seek structural reforms in the Russian economy.

Russia also has to become integrated into the international economic system, accepting the rules applied by the rest of the world. Its eventual accession to the World Trade Organization 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 questioned immediately.

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 Modern Development Institute in Moscow. © Project Syndicate