EU-Russia Investment Reciprocity: Making it Work

The issue of investment reciprocity will be one of the most crucial issues in Russia-EU relations over the next several years. It was identified as one of the top priorities by Russian and the EU political leaders (both by the EU and by each of the EU member-states), and declared to be so in the majority of Russia-EU strategic and program documents. This issue was also, to a great extent, considered to be one of the prerequisites for the platform of the future stability and integration of all sides.

This report is prepared by CCEIS experts team together, in cooperation and under request of Association of the European Business in Russia. The report was distributed among the participants of the AEB annual conference.

1. The issue of investment reciprocity will be one of the most crucial issues in Russia-EU relations over the next several years. It was identified as one of the top priorities by Russian and the EU political leaders (both by the EU and by each of the EU member-states), and declared to be so in the majority of Russia-EU strategic and program documents. This issue was also, to a great extent, considered to be one of the prerequisites for the platform of the future stability and integration of all sides.

Building Russia-EU relations on the basis of the reciprocity principle, particularly in the area of investments, is especially important in the context of the recent Russia-EU summit in Mafra (Portugal). The summit has tackled and analyzed the issue of investment policies and regulations in both Russia and the EU, and emphasized the current huge misbalance between the volume of European investments to Russian economy (30 billion Euro) an the volume of Russian investments into the EU member-states’ economies (3 billion Euro).

Thus, the leaders of both sides, supported by the Russia-EU business round table, have sought the depolitisation of the foreign investment debate and for elaboration of a form of Russia-EU relations (via new Partnership and Cooperation Agreement), that would exclude protectionist policies, ease investment regulations for the Russian and the EU companies and create virtually reciprocal rules and standards, based on competitive advantages of both sides.

2. Indeed, without mutual support in investment, as well as increase of their volume, construction of the Russia-EU common economic space – the task which was declared in 2003 and since then defines the major policy imperative of all the sides seems impossible. Readiness of the Russian and EU companies to increase their presence in the markets of each other can be viewed as the assets for the construction of such a platform, while responsible position of the authorities and political elites of Russia and the EU can be viewed as a provision and support mechanism.

3. Moving the investment reciprocity issue from the theoretical to the practical and to the field of real activities is related to a series of political and economic factors.

3.1. The necessity of Russia-EU relations transformation from the “seller-customer” pattern to a more sustainable model of balanced equal partnership is becoming more acute. The approach, according to which the current and future Russia-EU relations are discussed, taking their interdependence as a point of departure, seems increasingly outdated. This approach fails to contribute to the elaboration of a mutually beneficial strategy and, as the practice shows, results in a search for alternative strategies and in a decreases in the volume of real cooperation.

3.2. Imperfection in the legal basis of relations both in general and in individual sectors of the economy, often in the most important ones, has also become evident. Thus, the issue of the political and legal baggage revision, the one which has been compiled during the last 15 years and includes the current Partnership and Cooperation Agreement, as well as such multilateral legal instruments as the Energy Charter Treaty, is turning into practice.

3.3. In conditions of globalization and regionalization of the global economy the issue of bilateral trade and economic development and optimization is becoming particularly important. In Russia-EU relation this issue will be turning into practice due to the probable launch of the Free Trade Zone agreement elaboration - as part of the new strategic Russia-EU agreement and a general strategy, which has an integrationist direction, but excludes the issue of Russia’s accession to the European Union.

3.4. Under current circumstances, which are characterized by liberalization of the world economy and related increasing importance of the markets regulators, the issue of investment reciprocity is becoming an inherent component of the public-private relations. It is about finding an optimal model of for business – state relations, of a balance between the European and Russian economies’ openness to external investment and civilized forms of protection against the consequences of such openness. This is why the investment reciprocity issue is gaining primary importance in the Russia-EU business dialogue. Development and strengthening of this dialogue is necessary to further increase the authorities’ debate, for strengthening of the bilateral dialogue, and for guaranteeing realization of the bilateral cooperation plans.

4. However, the issue of the Russian and EU investment strategies reciprocity has become full of myths and misperception. Instead of mutual promotion of investments it is more and more often understood as mutual restrictions and the creation of different barriers, which result in decrease in the competitiveness of the both sides.

4.1. Among the most widespread myths is that of portfolio investments of the so called “sovereign funds” being used as a political instrument. This, in its turn, results in a discussion of measures application, including those of legislative nature, which are aimed at limiting and restricting foreign investments in such strategic sectors of economy, such as energy.

4.2. The EU actions, which are pursued by many in Russia as creation of barriers to free investment, as the introduction of various legislative limitations and restrictions and strengthening of the foreign investment control and monitoring procedures, were triggered by the current Russian energy policy. The latter including the domestic energy policy, energy policy in relation to the former USSR republics, approach towards the Energy Charter Treaty and towards the Russian transcontinental pipelines.

Thus, it would be unwise to view the restrictive measures, proposed for discussion by the EU Commission on September 19th, 2007, in separation from preparation in Russia of the draft Bill on Foreign Investments in the Strategic Sectors, as well as from the new amendments to the Russian Law on Subsoil. Despite their substantial similarity to the relevant regulations in the EU member-states, the approach of these two draft bills contradicts to the cooperation practice, which has been elaborated in the recent years. Adoption of these bills might seriously hamper performance of the EU investors in Russia and trigger reciprocal negative reaction.

4.3. There is a direct link between these tendencies and the suggestions to return to the so-called “golden shares” practice in the strategic sectors, which enable governments to block a purchase of these assets by foreign capital. Especially if it is believed that this capital is directly or indirectly controlled by the government of a “developing” country, whose internal rules of economic governance differ from domestic rules of the “developed” states’ economic governance.

4.4. It is worth emphasizing, that even despite the abundance of myths, inspired by these fears, the proposed protectionist measures are not directed at restricting of investments per se, as their final purpose. Rather, they are aimed at changing the rules of the game in “developing” countries and their turning them into those familiar in the “developed” state. First and foremost, it is about harmonization of the investor-states’ standard of internal economic governance with those of the standards and governance of the recipient countries.

4.5. On the part of the EU this problem is aggravated by the preservation of the member-states’ national control of over the energy sector. Absence so far of the common opinion of the member-states on the issue of internal energy market liberalization and unbundling of the production, transport and distribution assets also does not contribute to elaboration of a unified and responsible approach to cooperation.

4.6. The situation, where the issue of investment has become subject to myths, has now triggered reciprocal measures in “developing” and energy exporting countries.

5. The ability to realize and overcome the reasons behind emergence of these myths and misperceptions would strengthen and foster Russia-EU partnership, facilitate integration of their economies, including that in the investment field.

5.1. The first reason is related to the fact that the problem of investments started to be viewed though the prism of security and control issues. Sometimes economic strengthening of the “developing” countries inspired their increased foreign policy activity and a tendency of using the emerging economic resources for exclusive political purposes. Since externally there appeared an impression that this process merged into one, some fears started to emerge on the part of the “developed” countries, that the “developing” countries’ companies are motivated in their performance by entirely political and even geopolitical goals.

5.2. First and foremost, this was the case with perception of the Russian companies and Russian capital, which were quite often perceived as pursuing not commercial, but foreign policy goals. A significant part was played here by the Central, Eastern European and Baltic countries, which have traditionally been apprehensive of all the Russian activities, including those of exclusive economic and even commercial nature, have approached them through the prism of security, and tried to promote this perception within the EU in general.

5.3. In this sense it seems important to seek to get rid of this biased perception of the business goals through the prism of security and geopolitics. As the Russian economy develops, its companies are increasingly pursuing the same goals, as the companies of the traditional “developed” countries, including the EU member-states. That goal is profits maximization. Realization of the fact that the Russian companies are not a tool of influence at foreign policy of the EU member states seems a key to further increase of mutual Russia-EU investments.

5.4. The second reason for the biased perception in the investment reciprocity issue is related to reaction to the changes in globalization processes. The latter have recently become more democratic in their nature. The subjects of globalization became not only the “developed”, but also some “developing”, including energy exporting countries. Their rapid emergence and quite assertive behavior triggered concern among the “developed” states. In some cases the traditional players did not have enough time to adjust (both mentally and psychologically) to emergence of the neophytes. Similar processes took place in world economy in the 1970-s – 1980-s due to Japanese economic boom and expansion of the Japanese capital to the European and to a greater extent to the American markets.

6. The benefits and opportunities, that gradual increase of mutual investments volumes in the energy sectors and of energy integration through the assets exchange open to Russia and the EU, can hardly be overestimated .For Russian companies integration of Russian and EU energy sectors  will provide direct access to the promising and wide market. For European companies it would offer access to the energy resources and partly to the pipeline system. There are important projects of positive cooperation in this direction. They include the North European gas pipeline, the Burgas – Alexandropolis pipeline, assets exchange between the Russian and German, Russian and Italian, Russian and Austrian companies. However, the potential for further increase of investment interaction in the energy field is still huge.

One of the priority tasks for bilateral political dialogue is creation of the new framework conditions for the Russian and EU companies’ performance at each side’s markets. It is worth trying to make these conditions free of the biased perception of the new situation and rules of the game both at the Russia-EU level, and at the world markets in general.

7. The issue of the new Strategic Agreement preparation between Russia and the European Union and, perhaps, a package of bilateral agreements on cooperation in particular sectors of economy, is gaining more and more importance. One of such agreements could become an international legal instrument, securing opportunities for the largest-scale investment of the Russian and EU companies even in such strategically important sectors, as mining and the transportation of resources, as well as of security of supply to consumers. Moreover, an opportunity of such measure is integrated in the newest proposals on the issue of the European energy market liberalization.

8. Nowadays extension of the mutual support of investments practice in the fields of energy recourses mining, transportation and distribution seems the most promising direction for Russia-EU cooperation in the energy field. If Russia and the European Union, in parallel to introduction of new transportation systems, which would reduce the transit country problem, would be able to guarantee promotion and safety of their energy companies’ investments at the state level and on the basis of reciprocity, this could lay the foundation of more sustainable relations in the future.

9. It seems necessary to promote an open and sincere Russia-EU dialogue about common principles and rules of investments in such spheres of the energy sector, as resource fields, transport lines and distribution networks. In particular, it is worth pursuing a concrete and to the point dialogue over the terms that would grant and regulate the EU member-states’ capital access to the transcontinental pipelines, owned by Russia.

10. However, Russia-EU mutual investment attractiveness does not end with the traditional energy sphere. Among quite promising directions there lies atomic energy. Russia is one of the world leaders in the nuclear field, while inside the EU the role of nuclear energy is certain to grow.

11. Vast opportunities exist in the civil aviation sphere. This is the area, where Russia and the EU are natural partners. Russia possesses one of the most attractive routs for the European companies – the Trans-Siberian route. At the same time, Russian air carriers show growing interest both to increasing the number of flights and routs to the EU member-states, and to beginning flying from the EU countries’ territories to the third states.

12. Another promising sector for mutual investments is metallurgy. This is the field, where Russia is traditionally among the world leaders. Joining Russian resource and production capabilities with the European technologies would bring tangible benefit for both sides.