The EU and Russia beyond 2008

Russia Profile and the Centre for European Reform host an event in Brussels



Published in Russia Profile, 1 November 2007

There were no empty seats at Tuesday’s roundtable in Brussels on Russia-EU relations, sponsored jointly by Russia Profile and the London-based Centre for European Reform (CER).

Speakers from both sides agreed that last year was a difficult one for Russia’s relationship with the EU and that the signing of a new Partnership and Cooperation Agreement (PCA) was not even on the horizon. Since experts predict that it may take five or more years for a new PCA to be ratified by the parliaments of the 27 members of the EU once it is formulated and signed, it is clear that Russia-EU relations are in desperate need of a rethink, especially in the energy sphere. The purpose of the roundtable was for the participants from both sides to look for a way forward, both in the energy dialogue and the general framework of relations, rather than simply to make accusations. More or less, the participants lived up to these intentions, concentrating first on a possible energy partnership and, later, shifting their attention to the general political context of relations.

Charles Grant, the director of the Centre for European Reform, opened the discussion by arguing for “new realism” in relations with Russia. Unlike the “realism” advocated by many Russia- watchers from former Soviet bloc countries, this approach does not envisage solely focusing on taking a tough stand on every issue of interest between Russia and the EU, while effectively characterizing Russia as just one more dangerous authoritarian state. Grant’s “new realism” suggests focusing on interests rather than values and is based on three spheres of possible cooperation.

The first and, potentially, the most important sphere of possible cooperation is energy, an area in which Russia and the EU are mutually dependent. The EU receives almost half of its gas imports from Russia and Russia’s gas pipelines run mostly westward. “Europeans want assurances that Russia will develop new gas fields, since a gap between demand and the current levels of Russian supplies is likely to emerge in a few years. Russia, for its part, will need Western technology and expertise to develop reserves in its far north and east,” Grant said.

The second area of cooperation is the integration of Russia into the global financial system, which would pave the way, in Grant’s words, for “making Russian companies truly multinational.” However, if Russian companies and investment funds are allowed to acquire companies inside the EU, Brussels should insist on reciprocal openness from the Russian side.

And, finally, shared interests in Russia and the EU’s “common neighborhood” should be addressed jointly. Both Russia and the EU are interested in the former Soviet republics and countries that were once within the Soviet sphere of influence becoming “stable, prosperous and well-governed.” The same applies to Kosovo, even though Russia and the EU have differing visions of the ways towards achieving that goal. However, in Grant’s opinion, Russia might agree to a “supervised independence” for Kosovo if the United States, at the urging of European governments, postpones its plan to deploy anti-ballistic missiles in Central Europe.

This set of proposals received a detailed and interested response from the Russian side during the roundtable discussion, even though some of the Russian participants questioned the feasibility of this “new realism.”

In his speech, Russian ambassador to the EU Vladimir Chizhov argued for clarity in terms, insisting that juxtaposing “Russia” and “Europe” was wrong since Russia is the largest country in Europe, and the “old continent” should be grateful to many generations of Russians for bringing European civilization to the borders of China and Japan.

Other participants concentrated on every one of the three spheres of possible cooperation, pointing to possible pitfalls in all three of the proposed areas of cooperation.

All participants agreed that the energy dialogue is hampered by the lack of mutual trust. The EU suspects Russia and its companies of trying to monopolize the EU energy market. In return, the Russian side suspects that the recent EU “energy initiative,” whose contents were released on Sept. 19, 2007 by the European Commission, is actually targeted against the Russian companies that are hoping to operate in the EU. The initiative requires a strict separation of the producing and distributing companies in the EU’s energy sector (the so-called “unbundling procedure”) and introduces several measures designed to protect the EU energy supply networks from being bought by foreign companies. This new policy could create problems for Gazprom, which is involved in both supplying natural gas to Europe and delivering this gas to individual consumers.

Christian Cleutinx, director general of the European Commission’s department on energy and transport, tried to allay the Russian participants’ fears by saying that the “the emergence of a single energy market of 27 countries is good news for Russia, too” and that “unbundling vertically integrated producing and distributing companies in Europe creates new opportunities for third-party access.” Cleutinx also stressed that the purpose of the unbundling is to create “a level playing field for everyone,” including Western European energy giants E.On and Gaz de France.

“The problem is, however, that E.On and Gaz de France are never cited as a ‘threat to Europe’ in the Western European press, while Gazprom is often cited as such,” commented Alexander Rahr, program director for Russian and CIS Affairs at the German Council on Foreign Relations in Berlin. “So when the European Commission says that it wants to ‘unbundle’ both the EU companies and the foreign ones, only the second part of that formula may stay in the long run. Unbundling inside the EU may fail, but ‘unbundling’ of Gazprom, cutting it from the EU market, may work.”

The presentations of other participants pointed to another fact that is often overlooked in the media: the energy industries in both Russia and the EU are dependent on one another. For example, Russia supplies 35 percent of the uranium for the EU’s nuclear power stations. Additionally, the Nordstream pipeline, which is currently being constructed under the Baltic Sea, will not only bring the much needed 55 billion cubic meters of natural gas annually to the EU by 2015, but will also require $20-30 billion in investments, which cannot come from Russia alone. According to the estimates of Joan MacNaughton, senior vice president for environmental policies at Alstom (a company that provides support for power generation), the Russian energy sector will need $1 trillion of investment by the year 2030. This problem can be resolved only if the second sphere of common interests – financial interpenetration – starts working.

Is it possible to overcome the high levels of distrust and combine Russia’s resources with the EU’s investment potential? One of the ways to resolve the issue is to have Russia sign the Energy Charter, a document signed by 52 countries that, among other things, liberalizes access to pipelines in transit countries and removes energy price disparities. Russia continues to refuse to sign the Energy Charter, however, claiming that its internally low energy prices are determined by the country’s huge energy resources and their relative proximity to Russia’s cities, which is a “natural advantage.” This position is unlikely to change any time soon.

“Our main priority is the domestic consumer,” explained Stanislav Naumov, director of the analysis and planning department at the Ministry of Industry and Energy in Moscow. “If energy is a political weapon, so be it. We use this political weapon in order to supply our economy with energy and our households with warmth and light in a pretty cold country. As for the rest of our energy, we are ready to offer it to the market, which will continue to be primarily the European market for many more years.”

Alstom’s MacNaughton suggested that the EU should avoid pressuring Russia to ratify the Energy Charter and wait for the moment when Russia realizes that agreeing to the charter is in its interests.

Such a conciliatory approach was a welcome respite for the Russian side and set the tone for the second part of the discussion, which focused on non-energy related political issues.

Konstantin Kosachev, the chairman of the committee on international affairs of the State Duma, suggested “unbundling” human rights and political freedoms from the other issues on the political agenda – a move that could pave the way for cooperation on Kosovo and missile defenses in Europe better than any exchange of geopolitical influence.

“The best way for the EU to promote democracy in Russia is to contribute to the creation of a strong middle class in Russia, which will be able to resolve the problem of democracy by itself,” said Kosachev. This idea, obviously unpalatable to some of Russia’s critics inside the EU, generally fits the “new realism” framework as viewed by Grant. Interestingly, some of the roundtable participants’ remarks on economic matters revealed a solid economic base for such an approach inside Russia itself. For example, Naumov made known that all energy production in Russia, with the exception of hydroelectric stations and nuclear power facilities, is now privately owned. This situation obviously leaves little room for speculation about a “return of totalitarianism” in Russia.

Richard Spies, the president of BP Russia, suggested an interesting way of “depoliticizing” Russia-EU economic relations: “Every case of one company inside Russia or the EU buying into its partner beyond the Russia-EU border should be viewed as an opportunity and not as a subject for governmental concern and regulation. Every such move creates jobs and increases the well-being of people. In this way, it also promotes democracy.”