15.06.2008
Economics as a Catalyst for Politics?
№2 2008 April/June

Recently Vlad Ivanenko in an article
“Russian
Global Position After 2008”
(Russia in Global Affairs, No.
4/2007) argued in favor of cooperation between Russian and European
firms in third countries such as Ukraine. On the one hand, this
idea flies in the face of the prevailing consensus in the Western
literature that the EU and Russia are destined for confrontation
with respect to the neighboring countries. On the other hand, his
proposal springs from the fact that economic relations between the
EU and Russia are in considerably better shape than political ones.
This points to the possibility of using accumulated experience in
the economic realm to stimulate developments on the political
level. How realistic is this possibility?

It has become fashionable to speak of a
“crisis” in relations between the EU and Russia. However, this
language obscures the fact that developments in the political and
economic spheres have been proceeding in quite different
ways.

In the political sphere there have been
a number of (near-)fiascoes in the past year or so, which have been
most evident at a series of high-profile political events.
President Putin set the tone for the new, more difficult phase of
relations in his speech at the Security Conference in Munich in
February 2007. While Putin criticized the U.S., NATO and the OSCE,
he also expressed a willingness to cooperate in such fields as
disarmament and non-proliferation, thus indicating Russia’s concern
with traditional issues of security. However, these cooperative
aspects were largely overlooked by many of his listeners, and
primarily the confrontative remarks remained in the minds of
Western observers.

The EU-Russia summit in Samara in May
2007 was characterized by harsh dialog which carried over into the
public sphere and by the inability of the two sides to agree on a
final document. While the tone at the most recent summit in Mafra
in October 2007 was less abrasive, little substantial progress was
made. This is in part due to the fact that the EU has entered a
“holding pattern” while waiting for the outcome of the Russian
parliamentary and presidential elections. Furthermore, the EU has
been preoccupied with internal matters, in particular with
achieving preliminary agreement on a new treaty in October 2007,
just one week prior to the EU-Russia summit.

Furthermore, there have been bilateral
problems between Russian and certain EU member states (tensions
with Poland, Estonia and Great Britain are the egregious examples),
which have carried over into the field of EU-Russia
relations.

Finally, larger issues of international
politics such as the future of Kosovo, missile defense, the CFE
treaty and the potential for nuclear weapons in Iran have increased
the tension between Russia and the EU.

Thus in the political sphere relations
between Russia and the EU are stagnant and even
deteriorating.

In the economic sphere, however, the
picture is considerably more encouraging. Over the past years
President Putin has been consistent in his rhetorical references to
the need to integrate the Russian economy into the global one.
While the process of Russia’s entrance into the World Trade
Organization has encountered many hurdles and is only progressing
slowly, it is advancing. The data clearly indicate that the EU is a
crucial partner for Russia in terms of both exports and imports,
while the EU relies on Russia as a major energy supplier. Foreign
direct investment to Russia has skyrocketed over the past three
years, although one of the reasons for the record increase in 2007
appears to be the return of Russian capital from certain European
countries. Still, even this phenomenon is an indication of the
importance of European financial institutions for the Russian
business community.

There is a clear difference in the
difficulties experienced and the potential benefits to be gained
for large enterprises on the one hand and small- and medium-sized
firms, on the other. Larger companies, especially those in the
energy sector, face significant existing or potential hurdles to
access. There have been several cases of foreign investors in
Russia being forced to abandon their participation in major
energy-related projects on less than convincing grounds. At the
time of writing, the Western business community was eagerly
awaiting the passage of a Russian law regulating the participation
of foreign partners in strategic branches of the Russian economy.
Russian investors in the energy market in the EU were also facing
uncertainty in the form of the European Commission’s suggestion to
require an “unbundling” of energy firms to separate production from
transport and distribution, as well as certain limitations to
foreign investment imposed on the national level.

Small and medium-sized firms,
especially those outside of strategic sectors, are confronted with
fewer obstacles to access, but suffer from a variety of other
problems. The main complaints from European companies active in
Russia concern poor infrastructure, massive corruption, an overly
developed bureaucracy and inadequate legal mechanisms. Despite
these difficulties, however, the consensus among foreign investors
seems to be that conditions have improved over the past years in
terms of stability and predictability of the Russian business
climate. Furthermore, Russian industries are becoming ever more
integrated into Western European markets, although not as quickly
or thoroughly as some Russian firms would like. As the example of
Germany shows, trade with Russia has increased quickly, although a
climate of mistrust on the ground has prevented Russian investors
from becoming as active as they would prefer, and Russian
businesses often have to struggle to be considered on a par with
German enterprises.

Despite current and potential future
concerns, the state of economic relations between Russia and the EU
is quite vibrant and the types and levels of interaction are
increasing, although this certainly applies to some EU countries
more than others.

Can the economic sphere serve as a
catalyst for its political counterpart?

There are several reasons to believe
that this question can be answered in the affirmative.

First, there is a long and
stable tradition of (Western) European economic cooperation with
Russia and the USSR, despite the ideological differences of the
Soviet era. The continuity of this tradition indicates that it is
unlikely to be interrupted even if political differences increase.
This means that there is little for economic actors to lose in any
attempt to help “jump-start” relations in the political
sphere.

Second, since the political
and economic spheres are interconnected, there should be
opportunities to influence the political side of the relationship
through common issues, relevant actors which straddle both spheres,
or processes in which both political and economic realms are
involved.

Third, it is easier and more
common to set clear, quantitatively defined standards in the
economic than in the political sphere. Experience already gained in
discussing, setting and adhering to standards in the economic
sphere can potentially be transferred to the political
realm.

At the beginning, it is necessary to
think small. While there are frequent complaints from analysts that
neither Russia nor the EU has a broader vision of how the
relationship between the two should develop, any such vision will
need to be converted into a series of small steps.

Hiski Haukkala, a researcher at the
Finnish Institute of International Affairs, has recently presented
a fascinating argument in this journal (“The Tomorrow Is Now”, No.
4/2007) that Russia and the EU need to start cooperating much more
intensively in order to be able to develop into a joint force which
will be able to play a significant global role despite the probable
rise of China and the continuing importance of the U.S. on the
world stage.

However, even if one accepts such a
vision of the future and agrees with the need for increased
cooperation, there is a need for a game plan to get there. The
enactment of a series of steps in the economic realm to rejuvenate
developments on the political level could be a part of such a game
plan.

First, well-established areas
of economic cooperation should be selected to ensure a strong basis
and continuity of relationships. These are also areas in which
confidence-building is most likely to have occurred.

Second, skilled individuals
from these areas could be sought – those who occupy key positions
and have the will to go beyond their immediate roles and push for
improvements on the political level, inter alia because of their
awareness that better political cooperation will bring benefits in
the economic sphere as well. Economic actors are likely to have
more experience dealing with both EU and Russian contexts than
political ones, thus giving them an advantage when taking on tasks
of moderation and coordination.

Third, areas where common
standards would be desirable and where both EU and Russian economic
actors could exert pressure on their various governments to
cooperate on devising and adhering to such standards should be
pinpointed. These could be areas where the interests of political
and economic actors potentially coincide, such as fighting
corruption or establishing fair and efficient mechanisms of legal
recourse.

Certainly, economic actors have quite
different priorities from political ones, as the profit motive
overshadows other concerns. Furthermore, corruption in the economic
realm could sabotage the attempted results, such as the
introduction of common standards involving transparency of
transactions, which may run contrary to the interests of some
actors. The approach can be interpreted as an attempt to refocus
EU-Russia relations solely on the economic sphere, rather than as
using it to catalyze developments on the political level. Indeed,
without some steering by political actors, this refocusing presents
a genuine danger to the political side of the
relationship.

While one cannot expect that economic
actors will refrain from defending their own interests in the
political realm, it is reasonable to expect that political actors
will seek to retain the initiative, as it is not in their interest
to become permanently marginalized. Furthermore, the process should
be guided so as to utilize mechanisms of cooperation from the
economic sphere, rather than adopting its agenda.

It is possible, if not necessarily
likely, that the new constellation of the political elite in Russia
will take a more cooperative line toward the EU and the West in
general. Political actors on both sides should be open to this
possibility rather than ruling it out from the start. However, if
this is not the case, then using relations in the economic realm as
a catalyst to improve political cooperation should be considered.
This should not imply, however, that economic actors dictate policy
in their exclusive interests.

The idea is to import cooperation
mechanisms, which have been successful in the economic or business
sphere, into the political realm. It is obvious that politics is
not economics, and that some of these mechanisms will be
inappropriate. However, it is the politicians’ prerogative to pick
and choose, or to adapt the mechanisms to political
needs.