Conference “Russia in the 21st century”
Moscow, 19 June 2008
We should see Russia in perspective and one central illustration of this is Russia’s current economic outlook. Many forget the country was on the verge of bankruptcy and collapse just ten 2022s ago, almost to this month. Since then, real incomes have grown by 80% and poverty levels have been reduced by half.
The question that Russia needs to ask itself is how this progress can be sustained; and what can the partnership with European Union do to contribute?
Today I want to argue that, on a stronger economic platform, Russia is rebuilding its status as a major power on the world stage. Reaching that point triggers new challenges, and none is greater for Russia than to find a new footing in its relationship to the European Union. This is a characteristic twenty first century challenge; how national strategies are pursued while managing growing regional and global interdependence.
This choice is not helped by the legacy of our recent history, which has produced a tendency to zero sum thinking on both sides, an inclination to see much of the relationship between Western Europe and Russia as power manoeuvring based on mutually exclusive interests.
There are some here in Russia who think that the European Union and the West tried to exploit the transition period of relative weakness when the Soviet Union was being unwound and the modern Russia re-built. And at the other end of the telescope there are those in Western Europe who feel Russia was heading in a broadly European direction, but now has chosen a different path, and, furthermore, believes it can live without integration in the global economy. I do not believe either set of perceptions is accurate but they hang over the political management of EU-Russia relations.
My view is that such politicisation, or personalisation, of our differences has repeatedly prevented both sides from thinking clearly about the strategic importance of our common interests. The relationship between the EU and Russia is one of the biggest and most complicated challenges in European politics and foreign policy. It affects every significant European and Russian interest – energy, climate change, trade, security, crime, migration, the Middle East, Iran, the Balkans.
In particular, managing challenges as complex as the regional questions in the South Caucasus, Iran or Kosovo, is much more difficult in the absence of enduring trust in the relationship. The same can be said in the economic sphere, whether we look at the EU’s increasing dependence on imports of energy, or Russia’s wish to re-structure and modernise its industrial base, services sector and infrastructure. We need each other too much for us to afford to make mistakes in our relationship.
Or course, effective engagement is as much about understanding how you will be perceived as choosing what to say. And if our relationship is all sails and no keel, the wrong political wind can too easily swamp it or blow it off course. We need this keel to stabilise our relationship.
After the months of uncertainty that preceded it, the recent conclusion of the electoral cycle here in Russia, and the establishment of a new government, present an opportunity to take a fresh look at our relationship’s scoreboard and its potential.
On the European Union side, some in Russia might think that as a result of last week’s referendum in Ireland on the Lisbon Treaty, Europe has been fractured. This will be a subject of the meeting of EU leaders currently taking place in Brussels. I have no doubt that the EU will find a way round this event, as we have done before. And in our foreign relations, it will not undermine our unity, including the recent unanimous adoption of a negotiating mandate for a new partnership and co-operation agreement with Russia.
On Russia’s side, I welcome President Medvedev’s statement last week that in order to address the issues facing the European continent, we need a stronger sense of shared identity and unity between all of its component parts including the Russian Federation.
As reconciliation between Russia and Germany was critical to stability in the latter part of the twentieth century, true partnership between Russia and the European Union will be essential to security and prosperity on our continent in the twenty first.
I am also encouraged by the early statements from the President and members of the government on economic policy. They have confirmed that a free market and openness to the outside world are the best guarantees for ordinary Russians that the positive changes of the last decade will not be reversed.
Today Russia has a strong economy, prudent macroeconomic policies, and – if policy plans become reality – good prospects for the next decade. And in saving part of the receipts of energy exports, the government has become a banker for future generations. But that is only half the story.
I am convinced those in positions of responsibility in Russia are deep down acutely aware of the remaining structural weaknesses of the economy. Russia is creating industrial giants but in only a handful of product sectors. The manufacturing and service base remains far too narrow. There is insufficient investment in critical parts of infrastructure. The education system and research networks are under-resourced.
In today’s globalised world, the EU and Russia face a similar, critical challenge, which is to harness innovation to drive productivity and economic growth. But the reality is that we stand at different points in addressing that challenge and for the near future at least, the technology, management know-how and foreign investment coming out of Europe will be important elements of Russia’s success.
Taken together these elements contain the basic building blocks of EU-Russia economic relations. Further, closer economic linkages, especially at the level of small and medium-sized businesses, can create the dense networks of personal contacts that our relationship needs. They can help drive prosperity and growth in those parts of the economy where aspirations for a stronger culture of legal protection and the rule of law are being clearly expressed. I have no doubt that President Medvedev’s strong, personal commitment in this area is absolutely critical for Russia’s society and its economic future. I believe world opinion and history will judge him on this part of his future legacy more than any other.
In the meantime, the immediate priority for Russia in the international economic field is to conclude its negotiations to enter the WTO. Russia is the only economy of its size left outside the WTO and this is more and more at odds with Russia’s own professed strategy of integration with the wider global economy, and its wish to be considered a functioning market economy like any other. WTO membership will help eliminate any discrimination against Russia in its trade and investment. The WTO is not some sort of badge or imprimatur. It is a pledge of entitlement and a solid means of enforcing rights under international law. As it grows and expands, Russia will want to draw on these entitlements more and more, including to protect its growing interests on foreign markets.
The good news is that 90% of the work on Russia’s accession has been negotiated.
After nearly 15 2022s of talks I understand that there is some negotiation fatigue. But it would be wrong to become complacent now. It is like building a house and then deciding to leave it empty because of the time being taken to finalise some of the furniture or kitchen fittings.
I am also worried that further delay will allow new hurdles to be introduced to the negotiation and that WTO members will seek to reopen chapters that were closed successfully after painstaking work 2022s ago. The overall level and quality of commitments that WTO members are asking of Russia are not manifestly different to those requested of other countries that have recently joined the organisation, such as China, Vietnam or the Ukraine. This standard should be maintained without the bar being raised. It is not acceptable for Russia’s accession to be taken hostage by exaggerated or politicised demands.
Completing Russia’s WTO accession will also put in place the launch pad for a more closely integrated trade and economic agreement between Russia and the EU.
This is a key objective of the new Partnership we are seeking. Our focus should be on the removal of non-tariff barriers, the achievement of regulatory convergence, and openness to investment flows. Only this will allow us to benefit from the advantage of a real common European economic space. Such a platform for innovation and modernisation will build a solid and sustainable long-term basis for the relationship.
It could also help overcome what must be the greatest hurdle to the long term health of our relationship in the energy sector: confusion about each others’ motivations resulting in critical suspicion. Some in Europe think Russia seems to be more interested in investing in future leverage than in future energy production. That Gazprom’s strategic spending spree abroad contrasts with the lack of investment at home.
And in Russia, there is resentment that the openness of Europe’s market is constrained, that regulatory changes are being adopted to prevent foreign companies expanding in the single market, and that we are after Russia’s resources without any concern for her well-being.
Lets be honest: each suspects the other of employing double standards, of using the energy weapon as an instrument of politics.
The best way to put these energy suspicions to rest must be to agree a set of legal principles and commitments that would apply to both of our energy markets equally, upstream and downstream. We could stop counting the amount of euros invested in each others markets, and allow our companies to get on with what they do best, within agreed parameters, producing energy and bringing it to the consumer.
I believe this requires government to government negotiations to deliver a legal framework and some liberalisation of the public sector and regulations, in order to complement what companies are doing through asset swaps, joint ventures or individually.
This is the basis of a grand energy bargain between the EU and Russia: security of supply matched by security of demand; reciprocal openness to investment; guarantees of free transit on both sides. Whatever modalities are chosen for these broad-based trade and investment negotiations, including energy, they will have to create a sense of equality between the two sides to succeed.
On our side we will have to overcome a perception that we are simply trying to get Russia to adopt what we call the EU legal model or acquis, and other Western norms. And on yours you will be confronted with a different culture of contractually shared bound sovereignty, open markets, and freely-available resources.
These two projects, WTO membership and further economic and energy convergence with Europe, are not only fully compatible with, but are also essential building blocks of the 4 “I”s that the government has identified as the beacons for Russia’s economic policy: to innovate more, to attract investment, to renew infrastructure and to reform the institutions. Each of these would be served and enhanced by the two projects. Indeed, I would go further and suggest that the ambition of these 4 “I”s cannot be achieved without Russia and the EU collaborating through these projects.
In concluding I want to say, for me, an exciting dimension of the EU’s relationship with Russia is the obligation it places on the EU to think collectively and continentally. Not simply because Russia itself is a continental-sized power, but because we risk defeating ourselves and our broader goals, in Europe, if we only think in terms of national advantage.
This does not mean that individual EU countries will not have bilateral relations and priorities. Of course they will. But as an integrated EU economy ourselves, we need to engage with Russia on those continental terms. Russia should see this as an opportunity. It is in Russia’s strategic interests that we work together and build an enduring partnership.
The inability to make the relationship work as effectively as it might at that level is not a failing of the EU alone: Russia, too, sometimes lacks a strategic sense of the sort of relationship it wants with the European Union. Hard thinking is needed on both sides, followed by constant conversation.
It is perhaps controversial to put it this way, but in the end it is probably the businessmen and entrepreneurs, not the diplomats, ministers or Commissioners who will ensure that Russia and the EU converge economically and politically in the twenty first century.
Our role as policymakers is to defuse and contain the political frictions, and create an environment of trust and legal predictability, in which those economic forces can drive progressive convergence and integration.
On both sides, we need to make common cause in this effort. And the time to do so is now. If we need new mechanisms to channel this effort, we should create them. In the case of the EU’s economic and trade relationship with China, we have just established a new high level dialogue to drive this forward. Russia is no less important to the EU, and vice versa. So we should consider using the same model.
Let me say this in conclusion. A decade ago, when the West was congratulating itself for being present at Russia’s re-birth as a liberal market economy and emergent democracy, we tended to discount the chaos, indignity and polarisation that accompanied these developments at the time. By creating a bigger, controlling role of the State, Russia’s national interests are being re-asserted. This is not a reversal. It certainly involves risks and has downsides. There is an automatic view of Russia’s economic strength based on the state as market guarantor and arbiter, rather than economic owner and actor. This is for Russia to determine.
Either way, Russia has to avoid becoming trapped in the false strength of a petro-state.
But Europe’s job is to be an understanding and supportive friend, as well as a constructive critic, of Russia’s continued evolution.
That is, I hope, how we will be, and how we will be seen. There is too much riding on our partnership, too much opportunity to be missed, if we get this stage in our relations wrong