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15 april 2013

Russia-EU Relations in a Transition State

Yekaterina Kuznetsova is Director of the European Projects at the Center for Post-Industrial Society Studies. 

Andrei Zhuravlev is Director of the Strategic Planning and Analysis  Department, TelecomConsult.

Resume: The synchronization of Russian and EU policies in information and communication technologies can give Moscow and Brussels a major impetus to eliminate bottlenecks in transport and logistics, border and customs control, currency regulation, and struggle against hacker activity and fraud in the Internet.

The situation in relations between Russia and the European Union that has taken shape in recent years resembles a transition state of a chemical reaction where the elements have entered an irreversible interaction but the expected results are not achieved yet.

According to Russia’s Ministry of Economic Development and Trade, Russia-EU trade broke a record in 2011. EU exports to Russia stood at 108 bln euros, or 7 percent of the EU’s total exports, while imports from Russia totaled 199 bln euros, or 12 percent of overall imports. The aggregate EU investment in Russia reached 55.9 bln euros in 2011, and the European investment in Russia, 60.9 bln euros. Russia and the EU have a fairly smoothly functioning system of bilateral contacts and a positive dynamics of trade relations. Although recognizing the strategic nature of their bilateral partnership, the parties have markedly stepped up their foreign policy activity in other regions. Last year, the EU signed a free trade agreement with South Korea and is seeking similar agreements with the U.S. and Japan, as well as closer relations with China and India. Russia in its turn has focused on the integration process in the post-Soviet space, building a Eurasian Union and a rapprochement with economies that are participants in the Asia-Pacific Economic Cooperation forum.

Moscow’s attempts to combine the “Eurasian” vector (building a Eurasian Union) with the West-European one (creating a common economic and humanitarian space from Lisbon to Vladivostok) have hardly been successful so far: Russia’s proposal to give the green light to direct negotiations between two supranational bodies – the Commission of the Common Economic Space and the European Commission – has met with a reserved reaction from Brussels.

The objective flagging of mutual interest and the surrender of complete control over the current agenda to the red-tape has for some time relieved the sides of the burden of searching for breakthrough initiatives and solutions and for an answer to the main question, namely, what they expect of each other in the coming years. If the latter problem can be shelved for a while, the upkeep of the current infrastructure of relations is a thing hard to bypass – the regular summits and governmental conferences should get filled with content and the public quarters should see practical, even if modest, achievements from time to time.

Energy has traditionally been the core of Russia-EU relations, lending a strategic character to them. One of possible solutions to pulling Europe out of the crisis is boosting economic growth through higher energy efficiency and diversification of energy supplies. These internal policy initiatives may entail consequences that would be felt acutely even beyond the EU boundaries. The Europeans’ interests are extremely specific – they dramatically need an open and competitive market of energy resources that would keep price growth in check. This is bad news for Russia, especially if one considers the forecasts of the International Energy Agency for a “shale gas revolution” in the U.S. The EU now imports 270 bln euros worth of crude oil and 40 bln euros worth of natural gas a year, and a reduction of expenses for imports comes as an important measure in preventing an economic decline. The Europeans have a rather moderate interest in Russia’s energy assets. British Petroleum is selling its share in the TNK-BP company, and Total does not show any special despair over the collapse of an experiment at the Shtokman gas condensate field in the Arctic.

In response to this, Russia is reverting to the policy of tough pragmatism. For instance, the President’s decree of May 7, 2012, on the implementation of the foreign policy course apparently brings out mutual benefits and the upholding of positions in key spheres (energy and travel visas) as the guiding principles of collaboration with Brussels. Thus the multi-aspect Russia-EU relations turn into a hostage of two problems – visa-free travel and trade in natural gas. Meanwhile, both sides realize perfectly well that neither of the two problems will be resolved in the near future, since the existing controversies are too big for seeking compromise solutions.

Visa-free travel remains by and large the strongest piece the Europeans have on this chessboard and they are unprepared to exchange it for Russia’s current proposals, especially as the parties have not yet formulated a common position on economic cooperation. Quite possibly, the process might get off the ground if the sides stepped up negotiations on other key issues falling into the realm of exclusive powers of EU institutions (like the protection of investments). However, the parties are unwilling to compromise and are not seeking to update the bilateral agenda by tapping new and promising spheres of cooperation.

The current situation suggests two possible scenarios. Under one of them, the parties provisionally freeze “complicated issues” and focus on other areas of common interest, for instance, joint industrial, humanitarian or other projects. Under the other, conservative, scenario, the parties maintain the status quo. While agreeing to disagree and holding a wait-and-see position, they continue trying to coordinate macro-parameters of their interaction. Each of the options has advantages and shortcomings, as well as limits of possibilities.

A marked breakthrough in Russian-European relations that would reflect the willingness of the sides to build a genuine strategic partnership is possible but it will require recognition of the fact that the over-focusing on the ‘energy dialogue’ on both sides objectively presses down the level of collaboration in other spheres. Given the current conditions, the upgrading of the Russian-European agenda will gain pace and efficiency if both sides pay attention to issues bearing no direct relation to the energy markets. This does not mean that the energy sector should lose its priority character, but still it is important to proceed from the assumption that talks on this issue will remain tense over the short term. Hence it is important to formulate an alternative agenda already now, an agenda that can be filled with meaningful problems. The parties need to single out an aspect or a sphere of economic collaboration that does not have a burdensome history of reciprocal claims, that poses mutual economic interest, has a considerable potential for development, and that has not been considered as a priority yet.

SPHERES FOR A BREAKTHROUGH

The sphere of information and communications technology (ICT) matches these criteria in a big measure. The “digital society,” characterized by easy access to the Internet, its wide coverage, cheap Internet services, reliability of the networks, high speed of data transmission, and ease of use, has become a key parameter for measuring the level of economic development and the actual demand for innovations. In Russia, innovative technologies demonstrate a high growth on the background of traditional sectors of the national economy. It amounted to 14.6% in 2011 and the forecast figure to 2012 is no less than 16%. Even though Russia is behind the most advanced European countries as regards the rate of digitization, its positions look quite convincing against the backdrop of countries with a comparable rate – Germany, France or Austria. The Russian market of telecommunications, although almost 90% narrower that the European one, is nonetheless growing at 6% a year and is estimated at 26 billion euro.

The economy of Runet is developing even faster than that. E-commerce occupies a greater share of this economy, the overall volume of which is estimated at 553.79 billion rubles. Individual sectors of Internet services (retail sales and e-payments) run into hundreds of billions of rubles already today and are expected to post a double-digit (about 30%) growth in 2012. Considering Internet-dependent markets, the overall volume of Russia’s Internet economy now amounts to over 2.5 trillion rubles, 4.6% of the GDP. In addition, Russia has fairly strong positions in the ICT sector worldwide. Large competitive Russian players have entered the market and some Russian companies (ABBYY, Kaspersky Lab, etc.) are already operating in Europe.

Several reasons make the ICT the most advantageous sector in terms of the efforts to raise Russian-European ties to a new dimension.

First, the development of information technologies puts both Russia and the EU in the face of common challenges and tasks, as the problems calling for join action in the sphere of global administration of the Internet, access to markets and maintenance of cyber-security are acquiring a pressing character at the international level. The national (regional) level reveals a whole range of similar Russian-European challenges, especially a looming drastic shortage of IT specialists. According to the European Commission, the number of vacancies in the ICT sector in Europe will increase to 700,000 by 2015, and filling them is a highly problematic task given the current level of IT aptitude of European users and the rate of IT specialists’ training. Key players on the Russian ICT market say the sector is also heading for an acute deficit of human resources, which arises from the ‘demographic pit’ of the early 1990s when birthrates in Russia plummeted due to economic decline.

Second, the ICT sector can act as a drive engine for many other spheres of cooperation. A positive impact of interaction with them is hard to overestimate for entrepreneurial, scientific and other quarters. Growth of electronic document exchange (in international transportations, bilateral trade, certification and validation, the issuance of authorizations, etc.) and online payments will make doing business easier and will speed up governmental formalities. Digitizing some public services (for instance, visa application and issuance) and giving foreigners access to them (Internet visas) will reduce costs, ease the obtaining of licenses and permits, and increase mutual tourist flows in the future.

However, the growth of trust in online transactions among individual and corporate users (especially among small and medium-sized businesses) both in Russia and Europe is lagging behind technological capabilities of the services offered. The main reasons are insufficient data protection (particularly in Russia), a language barrier, and problems with intellectual property rights. (The European Commission says 90% of European online purchasers prefer using Internet stores only in their home countries.) Russians and Europeans have a far lower trust in the Internet economy than the global leaders of the ICT industry – the U.S., South Korea and Japan.

Third, this sector is transparent owing to its structure and organization, which reduces the risk of corruption and abuses to the minimum.

The development of network infrastructures, where space communications will be playing a key role in the coming years (if you take Russia), deserves special attention. This sector has gone through a range of losses recently in the wake of faulty launches of Russian telecom satellites and this necessitated an urgent search for a European partner. Against the backdrop of a threat of technological decline caused by the shrinking of staffs in Russian aerospace manufacturing companies, the European Aeronautic Defense and Space Company (EADS) and Russia’s Kosmicheskaya Svyaz (Space Communication) federal enterprise have endorsed an innovative partnership program that envisions the manufacturing of high-tech equipment (two telecom satellites), a transfer of advanced European technologies to the Russian party, and stage-by-stage training of Russian specialists on EADS premises. Deeper Russian-European collaboration in space communications can produce a tangible effect already in the short term.

The European Union’s determination to effectively implement its anti-crisis strategy through pro-active promotion of digital technologies, on the one hand, and the existence of a booming ICT sector in Russia, on the other, are objective prerequisites for mutually beneficial cooperation. To encourage the European economy within the Multi-Annual Financial Framework for the years 2014-2020 a special fund called Connecting Europe with a budget of 50 billion euros was established at the initiative of the European Commission. The share of telecommunications and the related industries within the fund stands at about 9.2 billion euros. The fund is to become a key instrument for targeted investments in the energy, transport and telecommunications infrastructures.

The synchronization of Russian and EU policies in information and communication technologies can give Moscow and Brussels a major impetus to eliminate bottlenecks in transport and logistics, border and customs control, currency regulation, and struggle against hacker activity and fraud in the Internet.

The first steps in resolving the outstanding problems can be taken already now: for this it will be enough to complement the ongoing dialogue over information society issues with tasks of drafting joint proposals for the global governance of the Internet by the G20 summit in 2013, for the prevention of the expected personnel shortage in the ICT industry by 2015 and for ensuring cyber security and resistance to crime, including the protection of children in the Internet.

THE BENEFITS OF MAJOR PROJECTS

Major industrial or infrastructure projects, likely to yield tangible political or economic effects, have not yet been considered as a tool to advance strategic partnership. In the meantime, the priorities declared in the Partnership for Modernization agenda as a guideline for developing bilateral relations (wider opportunities for investing into key industries that encourage growth and innovation; creation of a favorable environment for small and medium businesses; attention to regional aspects of economic restructuring and other) implicitly propel cooperation into the practical dimension. Implementing projects at such a level, provided they are clear to businesses and spark no popular protests, would be feasible under the auspices of the leaders of Russia and the EU, and their intermediate results should be reported to summits twice a year.

It is noteworthy that the Russia-EU Partnership for Modernization program, according to official figures, incorporates about 100 various joint projects, first and foremost in Russian regions. However, most of them are being implemented within the framework of bilateral declarations with EU member-states and, consequently, are not entirely Russian-European. Besides, many of the projects on the list were launched independently of the partnership program and were attached to it post factum, so the criteria of their selection and the economic effects of their presence on the modernization list remain unclear.

As a matter of fact, Partnership for Modernization is rather a framework format, designed to focus attention on the previously accumulated positive experience of economic cooperation between Russia’s regional authorities and European companies. However, it would be an exaggeration to say at this point that the partnership program is an effective tool to translate into reality a comprehensive strategy for upgrading the Russian economy with assistance from united Europe. Firstly, because effectiveness cannot be gauged without a national modernization strategy and without clearly identified goals, expressed in economic growth rate figures, the level of employment, or the share of this or that product on the world markets. Secondly, because most “modernization-geared” cross-border projects are being implemented without direct support from the partnership program. True, the import of European industrial equipment and machinery (over 52.2 billion euros was spent on both in 2011) has been very helpful to Russia in forming individual industrial enclaves boasting European quality workmanship. Without removing negative factors on the national level – limited access for Russian goods to the European market, embryonic social infrastructures, and a weak institutional environment – the modernization of the Russian economy will remain patchy, and successful projects, exceptions to the rule.

At present, the creation and development of an up-to-date transport and logistics hub in the Kaliningrad Region objectively may play the role of a Russian-European mega-project. Every condition for this is already in place: the region and some areas of Poland already have an effective agreement on visaless trips; negotiations are in progress on a similar arrangement with Lithuania; a major automobile cluster is under construction in Kaliningrad with the leading world companies taking part; the city has gained the right to host some of the 2018 World Soccer Cup matches. However, the task facing Kaliningrad and Moscow in reality is far more complex than building more bridges and interchanges or completing the ill-fated Khrabrovo airport upgrade project, which has lasted for so many years now.

Kaliningrad has a good and dense road network (302-305 kilometers per 1,000 square kilometers), which is twice or even thrice Russia’s average, and the country’s sole port on the Baltic Sea that is open round the year. The task is to pool the existing infrastructure elements – some of them not bad at all but very bitty and scattered – into an integral complex that would work as an independent point of economic growth and enhance the competitiveness of that part of Russia, which, according to experts, is absent even from the top thirty most productive regions.

This goal can be achieved only if there emerges a full-fledged logistics hub (aerotropolis) around the airport (the driver and the center of economic growth) complemented with a dense network of railways and motor roads, office clusters, industrial facilities for research-intense sectors, shopping centers and hotel infrastructures.

Last year the term aerotropolis was applicable solely to Amsterdam Airport Schiphol and Chek Lap Kok airport in Hong Kong. Now such complexes are being built at least in two other cities: in Atlanta (Atlanta Aerotropolis) in the United States, and in Seoul – Songdo near Incheon (South Korea). It is noteworthy that according to various estimates the overall number of jobs Atlanta Aerotropolis has created will reach 10,000. Porsche has moved to Atlanta Aerotropolis its North American head office, previously located at Sandy Springs for about thirteen years, and also invested 34,000 million dollars into that complex. Russia does not pay the proper attention to this practice, although comprehensive development of territories around some center of attraction, be it a sports stadium, an airport, or a leisure and recreation zone, has long become a world trend.

In considering the possibility of such an infrastructure hub in Kaliningrad, one should give thought to selecting a European partner, for instance, a consortium of European companies having the technologies and capabilities for implementing such a project, on the one hand, and strong extra-economic motivation complementing financial interest, on the other. Possibly, some German companies (such as Fraport and Lufthansa) might play the role of leaders in such a consortium in the best possible way. Kaliningrad could turn into a center of transit air traffic flows from Russia to Europe (as an alternative to Moscow and St. Petersburg), and business tourists from Europe to Russia. It is necessary to study the possibility of introducing a transit visa for tourists staying in the territory of Kaliningrad for less than 24 hours; in that sense Singapore is an example.

UPGRADING THE FORMAT

The diversity of formats of negotiations, relations and cooperation, which the bureaucratic thought has produced, serves as a good indication of attempts to achieve a breakthrough.

Conceived in 2003 and implemented in 2005, the new format of four “common spaces” and matching “road maps” in fact achieved only one important aim: the parties began to learn more about each other and gradually sorted out the spheres of competence of the bodies in charge: ministries, agencies, directorates and sections. Industrial dialogues within the “road maps” framework became the basis for the Partnership for Modernization, while the four “spaces” served as corner stones of the respective sections of a future New Russia-EU Agreement.

However, the process of negotiating the New Agreement is paused and the purposes of Partnership for Modernization often have different interpretation in Moscow and in Brussels: Russia is certain that within the partnership program Europe regards it as an equitable partner in developing and creating new technologies and innovative products, while the Europeans ever more often refer to Partnership as an instrument of lending assistance to Russia in upgrading its economy.

The existing structure of negotiating formats causes no strategic influence on the content of Russian-European cooperation, while the formats themselves are being gradually turned into an autonomous mechanism of intra-bureaucratic communications, unable to generate ideas or react to external challenges adequately and promptly. While recognizing the “infrastructural” importance of this system one should remember that it lacks an inherent function of prompt reaction and on-line responses to the emerging internal and external challenges. Some sort of assistance in performing that function (as a possibility) might come from a joint permanently operating Russian-European think-tank, maintaining on-line contact with the political leadership, on the one hand, and with interest groups in Russia and the EU, on the other. Otherwise Russian-European relations may be reduced to the level of bilateral relations with individual states.

The European Union has been and remains Russia’s key partner in the cause of comprehensive economic modernization. Amid the global crisis Russia and the European Union need to urgently seek new spheres for cooperation and formats that would ensure systemic flexibility, on-line joint decision-making and, consequently, new opportunities for eliminating bottlenecks in the customarily sensitive matters of Russian-European interaction. Global digitization, which is opening unlimited access to information and the related advantages and risks, is booming. Russia should effectively use the growth of its ICT sector by entering the global structures that control this industry and by forming strategic alliances with the advanced economies. Otherwise the country in two or three years’ time will run the risk that its competitors in the BRICS group will force it out of the club of digitization leaders. A profound Russia-EU dialogue over digitization, in particular, over state support measures, would help bring relations to the modern level.

Russia will be unable to materialize its infrastructure ambitions on its own, without tapping the best practices or attracting stronger and more experienced partners, capable of bringing into the country new technologies, first and foremost, managerial ones. The “from-specific-project-to-strategic cooperation” approach should be employed in implementing joint Russian-European projects, and these, be regarded as engines pushing the parties’ positions on strategic issues closer together.

Russian and European diplomats and politicians have been able to build a very viable infrastructure of official consultations and opinion exchanges. But truly strategic partnership, based on common values, mutual trust and a common vision of socio-economic and cultural development is still to be created on the basis of new formats and new content.

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