EU Russia - Plus ça change

I am just back from a very interesting conference hosted by the Carnegie Endowment for International Peace in Brussels this morning, where I had the privilege to speak too. The conference was held in the run-up to the upcoming EU Russia Summit to be held in Rostov-on-Don.

Both sides failed to achieve a “Strategic Partnership”, a project launched a few years ago to replace the expired Partnership Agreement. The new fad now is “Partnership for Modernization”. Here some useful background. Shaken but not broken by the economic and financial crisis, the leadership in Russia under President Medvedev has embarked on new projects to try to tackle its problems of the economy’s over-dependency on oil and gas. Medvedev late 2009 launched the idea that Russia needed to modernize. But what does modernization mean? Only economic modernization? Can it work without political and social modernization? And can it be engineered from the top? By the same people who, in the last years, have given an asset-stripping roller-coaster ride to foreign investors, monopolised the economy, increased oil and gas rent-seeking and generalized cronyism at the highest levels?

Realizing this could be a Pandora’s box, after a few months Medvedev narrowed down the concept – it is about “technological innovation”. That’s prestigious and flattering, but avoids difficult topics. This was followed by the launch of pet projects such as a high-tech town in Skolkovo outside Moscow, overseen by one of Russia’s usual-suspect oligarchs, and which has already recruited a few high-flying Western scientists and high tech firms. Both Putin and Medvedev have generally shifted their rhetoric, saying they want to attract back foreign investors, even into the “strategic sectors” a law of 2008 had shielded from foreign investment. Oh....., really?

One of the panellists this morning,  Sergei Aleksashenko, former deputy minister of finance of the Russian Federation and former deputy governor of the Russian central bank,  who also worked with a major foreign investment bank, and is now an academic as well as scholar at Carnegie, left the audience without any illusions about what all this means. He insisted on the fact that there is always an enormous gap between the rhetoric of the top men and the reality of action. What Russia needs in order to attract technology and investment is "not money", he said (loads of cash is available indeed for projects like Skolkovo) but the rule of law, a sound business environment and intellectual property right protection.  Strictly nothing is happening on this front, he said. Asked if there is any scope for cooperation with the EU, his answer was a one-word: “no”.

This made the rest of the panel seem like optimists, someone joked afterwards. My message was – if there is to be cooperation on commercial issues, or any negotiations on a future "Strategic Partnership" treaty, "Free Trade Agreement", "Common Economic Space", you name it, then the following conditions should be met. Firstly, finalization of the EU’s single market in gas. The last Energy Package failed to do so (more here). This is the only pre-condition for the EU to start talking to Russia in a coherent way. Until then, the Russian government will continue to play divide-and-rule between the member states by pulling the strings of gas dependency and strategic relationships between Gazprom and Western European gas majors. Russia is actively campaigning against reforms of the EU’s energy markets. We know why. Secondly, guarantees of investor protection through strong dispute settlement, including in the energy sector. Potentially investor-state arbitration. The EU should build on the new powers given to DG Trade to deal with Foreign Direct Investment (FDI) in the Lisbon Treaty. All this of course only if and when Russia joins the WTO first. Given that Russia hasn’t made up its mind about joining the WTO yet,  a cynical view could be that at least this leaves ample time for the EU to finally sort out its gas markets and its current internal squabbles about Bilateral Investment Treaties and related foreign investment policy....

In the meantime, let's expect yet another empty summit in Rostov-on-Don.