Author: Igor Yurgens of the Russian Union of Industrialists and Entrepeneurs 5 May 2008 - Issue : 780

Are Russian-European economic relations to be based on free market principles, mutual trust and understanding? Or will they stagnate as a result of foreign policy obstacles and Russia’s unbalanced economy?
There has been little mutual trust lately between the governments of Russia and the European Union. The results of Russia’s parliamentary and presidential elections were received sceptically by European politicians. Such political reality can clearly threaten the present state of trade and investment between Russia and the EU. The volume of Russian trade with the EU between January and August 2007 was USD 173.3 billion, 51.6 percent of the country’s foreign trade turnover. More than half of Russia’s goods are sold in Europe. Two of Russia’s top three trade partners are European: Germany with a turnover of USD 31.9 billion and the Netherlands with 28.3 billion. China is the third. European countries account for 75 percent of direct investment in Russia. Britain ranks first. During the first part of 2007 it invested more than USD 15 billion. Despite this evidence of good economic relations, Russia still repels foreign business by its bureaucracy and the state’s interest in “strategic” areas of the economy.

Russia’s economy is unbalanced. More than half of its exports are oil and gas, with the rest mainly chemicals and agricultural products. The EU countries will continue to demand energy. Diversification of the economy seems a distant prospect.

Our relationship with the EU is governed by an agreement signed in June 1994. With the passing years economic cooperation between the two sides has become 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. Present conditions for Russian investment in the EU are also far from perfect. Investors face political discrimination and administrative and technical barriers. Some EU tenders, for example, announced as open have turned out to be closed for Russian companies. Foreign investment is limited in economic sectors considered by the EU to be strategically and politically important. Last September, a move by the European Commission to prevent foreign companies from controlling European transport networks served as an example of a skirmish in this “silent war.” The Commission’s order to “unbundle” companies into units producing, transporting and selling is hardly likely to encourage foreign energy companies working in the EU to seek structural reforms in the Russian economy. It is another example of the EU’s over-blown fears for the security of its energy sources. The business elite in Russia and Europe fear the growth of stagnation in political relations between the Kremlin and Brussels that is harming bilateral trade and investments. Business has developed enough ideas to show political leaders a route to the creation of common economic space between Russia and the EU: first towards a free trading zone, and later to even closer integration. But these ideas can only be fruitful if supported by political consent. Elvira Nabyullina, Russia’s new Minister for Economic Development and Commerce, said recently that European business “is Russia’s main partner on international markets” and that in order to secure positive trends the government promised to create a comfortable environment for business by continuing institutional reforms and assist the development of financial markets. But Russian business needs more than a simple reinforcement of the “positive trends”; it needs a comprehensive action plan. This should include cutting bureaucracy, real implementation of administrative reforms, releasing the economy from the excessive control of the state, and radical measures to combat corruption. Russia 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 World Trade Organization will be key to this development. For Russia, such a style of integration would become a practical stimulus for economic and social modernisation. Of course our government will have the final word as the general modernisation of Russia’s economy is central to is own policymaking.