Bid to bridge the reality gap with Putin

Date: 26/10/00

The bear-hugs at next week's EU-Russia summit in Paris may be a bit arms-length, despite Vladimir Putin's policy of 'real' engagement. Tim Jones explains why

THEY may not know him, and what they know they may not trust, but Union leaders are desperate to lock Russian President Vladimir Putin into the EU's orbit.

Diplomats and prime ministers suspect that Putin's heart still beats to a KGB rhythm and fear that thoroughgoing economic reform will be provided at the expense of individual freedoms. But they may recall what US President Harry Truman once said of Nicaraguan leader Anastasio Somoza: "Sure he is a bastard, but he is our bastard."

A new policy of real 'engagement' with the Union and the World Trade Organisation appears to be afoot in Moscow, in an effort designed to instil investor confidence in the 'wild east'. This, combined with the most positive Russian economic outlook since the Soviet Union died (the Duma endorsed the country's first post-Communist balanced budget last week), make serious bridge-building with Moscow timely.

So if European bear-hugs at the Paris EU-Russia summit next Monday (30 October) are just a bit arms-length, it will not be because of distaste at a policy of assassination in Chechnya nor the enforced sale by troublesome television baron Vladimir Gusinsky of his critical media outlets to politically-connected energy giant Gazprom.

No. When French President Jacques Chirac and European Commission chief Romano Prodi decline to pander to Putin's every whim in Paris, it will be

simply because they cannot deliver.

For example, at the top of the agenda for the Russians will be their desire to be involved in the nascent European Security and Defence Policy (ESDP). Fresh from their late-in-the-day role in pacifying Kosovo, the Russians want to agree ESDP principles and have a say in when the planned European rapid-reaction force is deployed.

This is vital "to avoid possible questions and difficulties developing into serious problems, and continuously to carry out preventive work", Russian Deputy Prime Minister Viktor Khristenko told the Russian news agency ITAR-TASS after a meeting last month with Javier Solana, the Union's high representative for its common foreign and defence policy.

Khristenko, who has just been appointed to head the Russian government's new EU-relations commission, said his country could bring military specialisms to ESDP such as avionics navigation systems Glonas and Galileo, and experience in peace-keeping. Given Moscow's track record in places like Afghanistan since 1979, the Union is likely to baulk at the latter offer, but the main problem is that the European defence initiative is still in its infancy. "They want more than we can deliver," said an EU official. "This is work in progress."

The Europeans would prefer Moscow to focus on what it does best and use its heavyweight diplomatic influence to back up Union resolutions. They cite Russian Foreign Minister Ivan Ivanov's recent proposal to link up the Black Sea Economic Cooperation forum with the Union's Balkan stability pact to promote security and peace in south-east Europe.

There is a general feeling in EU foreign-policy circles that Yugoslav strongman Slobodan Milosevic could have been driven from power and politics faster and put on the first plane to the International Court of Justice in The Hague had Ivanov been prepared to lay down the law. "It may sound strange but we often feel that they do not throw their weight about enough, at least when it comes to regional security, where they have huge influence," said one Union diplomat.

But EU leaders will suggest diplomatically next week that in Chechnya, the Russians' weight should be thrown around less. Despite the installation of a regional administration more to Moscow's liking, thousands of rebels are still holding out, and Moscow is responding with an open policy of "elimination" of Chechen field commanders and leaders. In Paris, Putin will sidestep the issue by insisting that both Russia and the EU must address the "problem of international terrorism".

Similar reality gaps will arise as Prodi pursues his plan to agree a long-term energy programme with the resource-rich Russians in a bid to reduce the Union's reliance on Middle Eastern oil and North African gas.

The EU's aims are clear and the Russians are prepared to deliver a doubling of gas imports, extra oil and electricity. But the payback will have to wait. The Russians have the same cocktail of deep reserves and decaying oil infrastructure they had back in 1992-93, when former President Boris Yeltsin appeared to open his arms to western developers. Yet, despite the creation of huge part-private energy combines such as Lukoil and Gazprom, little has changed.

"We will increase and guarantee stable supplies of oil and gas, given active investment by EU countries in the exploration and development of deposits and the transportation of fuel," said Khristenko. Unfortunately, this investment will have to be carried out by western oil majors and they are hardly likely to leap at the chance, given the recent experience of BP-Amoco.

Three years ago, the firm bought a 10% stake in oil firm Sidanco from banking oligarch Vladimir Potanin for 650 million euro, largely because of the huge potential in the company's Kovyktinskoye gasfield and Chernogorneft subsidiary, and an influential management team led by Potanin. BP-Amoco promised to invest 196 million euro to evaluate Kovyktinskoye and, in exchange, gave Sidanco a 44% stake in BP's Russian operations.

But, within a year, a new manager was appointed without BP approval, massive hidden debts and unpaid taxes were revealed, the company's capital value collapsed, Chernogorneft was sold to well-connected oil company Tyumen Oil, and the investment turned to dust. The Commission wrote to the Russian government warning that such treatment of western companies was a guaranteed way of discouraging investment, and so it is proving.

A strong cabal within the Putin government realises this is a general problem in Russia which can be addressed by an agreement to submit to the same kind of commitments given by China in return for membership of the World Trade Organisation. This was a move none of Yeltsin's many governments took seriously and the EU team will be seeking a firm timetable.

But the economic reform signals are positive. The 2001 budget includes a commitment from the government to earmark half of all windfall revenues to service foreign debt. The Russian cabinet has also just approved a new five-year trade deal with China concentrating on banking, insurance and transport access.

The most popular government figure among international investors, Economic Development and Trade Minister German Gref, is promising deep-seated economic change. His latest plans are to allow 100% ownership of Russian banks by foreign creditors, force the Central Bank of Russia to sell off its holdings abroad, and end the monopoly status of Sberbank in the market for private deposits. So far, the share of foreign investment in the combined capital of Russia banks is just 12.5%.

But Gref is the latest such would-be economic innovator in a long line which includes Boris Nemtsov, Anatoly Chubais, Boris Federov and Yegor Gaidar. All the others, except the politically astute Chubais, foundered due to the reluctance of their bosses to take on the considerable vested interests at work in Russia.

Advisors to Chirac and Prodi are reminding them of these pitfalls every day, but these are two of life's great enthusiasts. "It is too early for commitments and promises but you never know with these two," says one diplomat. "They are so keen to bring Putin on board and reward him for not being Yeltsin that we might still have to follow up an initiative we did not expect."

Major preview of EU-Russia summit, Paris, 30.10.00.