Business booms as EU-Russia relations sink

EU officials back from their summer break may feel an early chill setting in as they prepare for a forthcoming EU-Russia summit (26 October).

Lingering ill-will brought on by an ongoing diplomatic row between London and Moscow will make agreement on the prospect of launching negotiations on a new EU-Russia partnership and co-operation even less likely. The current agreement, which expires at the end of the year, covers political, economic and trade relations between the two blocs.

Politically, relations are at a low following last month’s dispute between the UK and Russia, prompted by the latter’s refusal to extradite the chief suspect in the murder of Alexander Litvinenko. The tit-for-tat expulsions of Russian and British diplomats that followed have left a bitter aftertaste. The UK government has since been pushing at EU level for provisions on criminal extradition procedures to be included in a replacement deal with Russia.

Despite the grim prospects, EU officials are determined that political tensions will not undermine existing economic gains. Political spats, they say, must not muddy economic aims; the tone of talks must be kept as positive as possible. "We live in an interdependent world and Russia is a major player in many aspects," says Manuel Pinho, Portuguese economics and energy minister, who met Russian President Vladimir Putin in Moscow in May together with Portuguese Prime Minister José Socrates.

"Russia is transforming rapidly in various areas, it is a power that Europe cannot ignore," he says. "There are many complex issues to resolve, but it is in the interests of everybody to maintain a positive dialogue. We must avoid a deterioration of economic relations. Russia needs Europe, as well as Europe needs Russia."

Enterprise and Industry Commissioner Günter Verheugen is equally optimistic. "Economically, our relations are really booming. I’ve met the EU business community there and they say the conditions on the ground are improving, that they have fewer difficulties with the Russian authorities," he says. "Politically there are some irritants, that is obvious. The perspective must be clear on both sides. On our side the message can only be that Russia is our most important neighbour in Europe. It is in our interests to have Russia as a strategic partner."

But business is getting jittery, perhaps with good reason. For investment bankers in Moscow or engineers out in the Siberian oilfields, there is much at stake. Russia is now the EU’s third trading partner, after the United States and China, thanks to rapid economic growth underpinned by high oil prices. Total trade with Russia in 2005 amounted to €166 billion (compared with €85bn in 2003, for instance). At a time when increasingly strong business links are being forged, EU firms want to be reassured that bread-and-butter issues such as contractual certainty, licensing, regulatory compliance and tariff levels will be addressed at some point during this October’s summit.

Russia’s respect for the rule of law vis-à-vis business has already been found wanting. Earlier this year, for example, Shell and its partners were forced to surrender a majority of their stake in the $20bn (€14.5bn) Sakhalin II gas project to Russian energy monopoly Gazprom on the pretext of non-compliance with environmental rules. Obstacles on a much smaller scale faced daily by European businesses go unreported. In a study released in June, for example, the Confederation of Danish Industries found that EU companies were often hamstrung by needlessly cumbersome customs procedures. Such barriers act as a disincentive to further trade and investment in Russia.

"We do hope we can find a balanced approach. We are not there to judge the political issues," says Philippe de Buck, secretary-general of EU employers’ lobby BusinessEurope. "It’s important that Russia joins the WTO. We all have a large interest in that. You have dispute settlement possibilities. There is always a learning process that creates an awareness."

The diplomatic freeze between London and Moscow over the Litvinenko affair hardly puts negotiators on a good footing to clear the hangovers from the acrimonious EU-Russia summit in May. Problematic issues, such as Russia’s membership of the World Trade Organization, will come back to haunt negotiators in October. As will continued frustration at the Russian ban on imports of Polish meat and the disruption of oil supply to Lithuania. Still, the official line is that Russia and the EU have too much in common to throw it all away.

EU officials back from their summer break may feel an early chill setting in as they prepare for a forthcoming EU-Russia summit (26 October).