15.06.2008
How to Undo the Gordian Knot in EU-Russia Relations
№2 2008 April/June

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.