Contemporary relations between the European Union and Russia are seriously constrained by a number of fundamental issues. In order to cut the Gordian knot which has formed between the EU and Russia, the parties should focus on collaboration, through which both parties can obtain tangible results already in the short- and mid-term.

TRADE AND TRANSPORTATION

Russia’s foreign trade has tripled over the past 10 years. Even if a part of the trade growth is due to an increase in the prices of natural resources, there has also been an increase in volume. Increasing volumes have led to more transportation, which in turn stresses the importance of functioning borders and safe transport routes. Since the European Union accounts for more than half of Russia’s foreign trade, EU-Russian borders are facing this increased pressure.

If all customs checkpoints between the EU and Russia are taken into account, we have – at every minute around the clock – lines of trucks stretching for tens of kilometers. A common goal should be that no truck is forced to wait more than four hours in a line before customs formalities begin. Technical solutions are available. For instance, an electronic customs declaration could be applied at all of the customs checkpoints between the EU and Russia. The electronic declaration should also be extended to Russia’s borders with non-EU countries, or otherwise the competitive position of EU-based companies deteriorates in the Russian market. With the widespread application of the electronic customs declaration, the Russian state would get rid of double invoicing and gain billions of euros; foreign firms would save valuable time; and ultimately Russian consumers would get cheaper imported goods. Besides, the number of Russian guards at border crossings could be reduced by at least one third, which would ease the labor situation – at least in St. Petersburg and the surrounding Leningrad Region.

The Baltic Sea has become the largest export route for Russian oil. Currently, oil shipments via the Baltic Sea already exceed those of the Black Sea and deliveries through the Druzhba pipeline. In 2007, an estimated 140 million tons of oil was shipped through ports around the Gulf of Finland. By the middle of the next decade, this amount is expected to exceed 250 million tons. Such a dramatic increase in oil shipments between the East and the West, hectic north-south traffic between Helsinki and Tallinn, and the long winter with thick layers of ice has transformed the Gulf of Finland into a cradle for the next major oil hazard – which could possibly pollute the shores of the EU and Russia. Although vessel monitoring and an information system help prevent collisions between ships, this is not enough, since single hull tankers are the major threat in the shallow and narrow fairways near St. Petersburg.

In addition to oil, natural gas has heated the discussion between some EU countries and Russia. Since the Nord Stream pipeline looks like it has divided the EU, it looks feasible to redirect this gas pipeline so that it would go via the Baltic states and Poland to Germany. The redirection of the pipeline would be a fundamental gesture of goodwill from the Russian side, which would definitely find support in continent-wide integration in Europe. Even if the relations of the Baltic states and Poland with Russia are not at their best at the moment, these countries are members of the EU, and hence, they should be regarded as reliable transit countries. Moreover, the land-based pipeline is obviously less risky operationally, more environmentally friendly, and less expensive. However, should the land-based pipeline prove to be more costly, these four transit countries should compensate for the financial gap. Furthermore, these countries should not charge extra transit fees, since the use of the Nord Stream pipeline does not cause any extra administrative transit costs to its owners.

Even if Russia accounts for less than eight percent of the European Union’s foreign trade, the EU is dependent on hydrocarbon imports from Russia. Two-thirds of the EU’s imports from Russia consist of mineral fuels, lubricants and related materials. In fact, Russia accounts for 43 percent of the EU’s imports of gas and 33 percent of oil.

Some EU countries are clearly more dependent on Russian trade and imports of fossil fuels than others. Generally speaking, the former socialist countries – the Baltic States in particular – are the most dependent on Russia. Paradoxically, a correlation seems to exist between high economic dependence and poor relations with Russia. Finland is an exception to this general rule. Finland has the highest Russian trade per capita within the EU (see Table 1) and has relatively well-functioning relations with Russia despite the fact that Finland has also had painful historic moments with Russia.

The Finnish experience shows that one should try to step away from the shadows of history and search for constructive ways to go forward instead of focusing on differences in opinions, systems or values. The EU and Russia are different enough to learn from each other, but similar enough to collaborate with each other. The Finnish pragmatic approach on how to conduct relations with Russia might also be useful to some other EU countries. Even if Finland’s bilateral ties with Russia are the most intensive among EU countries, bilateral relations should never challenge the common approach of the EU toward Russia.

MOVEMENT OF CAPITAL

Russian President Vladimir Putin said during the EU-Russian summit in Portugal that Russian investments in the EU total less than three billion euros. This amount looks doubtful, especially if one keeps in mind that a United Nations report suggests that Russia’s total outward foreign direct investment (FDI) stock, by the end of 2006, was over 100 billion euros. Additionally, my earlier studies indicate that the EU is one of the major destinations for Russian outward FDI.

The question here is not statistical but political, since Russia seems to imply that the EU restricts its investments in the single market, which is not the case – at least not yet. All foreign privately run companies are welcomed by the EU regardless of their country of origin as long as they do not create a monopoly inside the European market, are not regarded as tools of any country’s foreign policy, and obey the rules.

Many are afraid that the EU will start exercising protectionism in order to slow down the expansion of Russian gas giant Gazprom in the single market. I am more concerned about the Russian investment environment taking a more restrictive turn toward foreign firms, as well as the possible Law on Strategic Sectors or the Mineral Resource Act. And I am worried about the future development of the so-called ‘national champions policy,’ which in my understanding involves the unpredictability of the Russian investment environment. Foreign investors cannot predict what the sectors will be where champions are created with the help of the Russian state. Here one should not assume that state support would be financial only. The non-transparent ‘national champions policy’ is more damaging to the Russian investment climate than is the restrictive legislation toward foreign firms.

I would like to stress that both the EU and Russia should keep their investment milieu as liberal as possible, and even more importantly, as predictable as possible, since that same predictability is one of the key determinants driving investments both domestically and internationally. Furthermore, I would like to underline the importance of competitiveness in attracting foreign investments and modernizing economic structures. However, one cannot achieve improved competitiveness without intense competition, and, therefore, a ‘national champions policy’ fostering oligopolization and legislation restricting foreign competition does not help Russia become more competitive.

Reciprocity is generally a good principle of how to treat neighbors regardless of their size or political power. The EU and Russia are on the leading edge of a new era of reciprocity, which I would term as the reciprocity of restrictions. Russia will obviously restrict the operations of foreign firms in defense-related industries, and probably then in some natural resource sectors. Correspondingly, the EU plans to restrict the operations of foreign state-run companies in energy sectors in order to avoid the overwhelming concentration of production, transit and distribution of energy in the hands of any single company.

In order to avoid the vicious circle of restrictions, one should create an independent expert team of policymakers, businessmen and academics to analyze how to create a free and predictable investment environment in the EU-Russia context. The EU-Russia Industrialists’ Roundtable (IRT), accompanied by leading policymakers and researchers, could be a convenient way to form an objective research team. The IRT could produce a biannual report on the EU-Russian investment climate and the main barriers hindering its further development.

At the end of the day, one should not forget that foreign investments are not only the cheapest way to obtain capital, modern technology and advanced management techniques – foreign enterprises per se are valuable since their business contacts build additional bridges between the EU and Russia, and hence support European integration continent-wide. Due to differing opinions at the political level, all additional actors are needed to keep the dialog constructive. I cannot say if there are any parties outside the EU and Russia who would benefit from our poor relations, but I am sure that there are only few marginal groups inside the EU and Russia, which would gain from an investment and trade war between us.

MOVEMENT OF PEOPLE

Unnecessary technicalities preventing the free movement of people should be identified and abolished, when explicitly specified conditions are met. Foreign travel problems by Russian citizens living in Kaliningrad could be resolved, for instance, by establishing a conditional visa-free zone between the EU and Kaliningrad for a period of 10 years. If this zone proves to be mutually acceptable, the visa-free regime could be made permanent after this tentative period, and the EU and Russia could consider the extension of the zone to the Russian mainland.

Here one should not forget the integrating power of people-to-people contacts. As I have said before, I regret that grassroots level contacts between the EU and Russia are clearly below their potential. The EU-Russia Center in Brussels indicates that only 18 percent of Russians have visited a non-CIS country at least once in their life. Most likely, the proportion of EU citizens who have visited Russia is even lower.

If the decision-makers at the top cannot decide on a common path for the EU and Russia, let the ties between the EU and Russia strengthen at the grassroots level.

When we talk about the free movement of people, we should not forget that already in the foreseeable future the EU faces a labor shortage unless EU member states ease their immigration policies. A Russian labor force would definitely adjust to EU conditions and cultures easier than those immigrants arriving from far-away countries.

Several million ethnic Russians already live within the EU, particularly in Germany, Spain, the UK, and the Baltic states. Although it is difficult to comprehend accusations that the ethnic Russian minority is discriminated against in the Baltic countries, such allegations are so serious that they should not be neglected. In order to objectively clarify the situation, an independent group of specialists – representing the parties concerned and third countries – should study the case extensively.

In all, common research efforts are necessary to pinpoint sore areas in EU-Russian relations. I support the idea of Russia opening and funding an institution in Brussels to monitor the rights of ethnic minorities, immigrants and media in the EU as long as the studies are conducted jointly. This idea should be applied in a reciprocal way – in other words, common research efforts should be made in EU-funded research centers in Russia as well. Independent research teams consisting of scientists from both sides and perhaps from third countries could provide fresh ideas on how to improve mutual relations.

I do not ignore the significance of grand visions, but if the major leap cannot be done under present conditions, we should focus on smaller steps, since these small victories could help us prepare the soil where grand ideas can flourish. Therefore I suggest that both the EU and Russia should agree on a list of operational targets, which can be met by the middle of the next decade, instead of aiming at a rhetoric strategic partnership. These small steps would allow us to avoid the ancient opening mechanism of the Gordian knot.