Russia and Europe hit the fast forward button

By bne IntelliNews June 9, 2010

Ben Aris in Moscow -

Russia has already hit the reset button with America, but European leaders want to go further. EU dignitaries flocked to the Russian town of Rostov-on-Don on June 1 to press the fast forward button to closer ties to Russia, and were met by a willing Kremlin that wants the same.

The summit was remarkable for the change in mood. EU-Russian relations have been in a tailspin for several years, reaching their nadir during the disastrous eight-day Russo-Georgia war in August 2008. However, since then the world has been ravaged by the international economic and financial crisis, and Europe is casting about for new business opportunities that will allow it to grow its way out of the debt pit in which it finds itself. Russia fits the bill, and more importantly, is also looking for new partners as a result of the crisis.

EU President Herman Van Rompuy told reporters at the close of the meeting that the 27-member bloc wanted to be a close partner in Medvedev's drive for a more competitive and diversified economy, and hinted that the Europeans are better suited for this than the Americans.

"With Russia, we don't need a reset. We want a fast-forward," he said, referring to the "reset" of relations between Moscow and Washington last year.

Flush with hundreds of billions of petrodollars, Russia's reform zeal wilted in recent years and the state was actively excluding some investment into what are considered strategic sectors of the economy. However, after oil prices tumbled from record highs of around $150 per barrel to a low of $42 last February, the economy came to a stand still, and the Kremlin is now running its first deficit in nearly a decade. The experience has also convinced the Kremlin that it has no choice but to diversify the economy away from natural resources - and that means real reforms and actively wooing foreign investors.

"Russia will collapse unless its social structure and economy are modernized," Russian president Dmitry Medvedev told senior members of parliament on the eve of the EU summit. "We have no other alternative. If we fail to modernize, the country will collapse and the economy will degrade."

Thus the improvement in relations - which has been building over the last year - became explicit at the 25th EU-Russian summit. This was no surprise. The Kremlin's adoption of a pragmatic and business friendly foreign policy this year, had already been 'leaked' to the press in May. Penned by Foreign Minister Lavrov, the new approach proposes to form 'alliances for modernisation' with at least 14 EU Member States.

On the flip side the leading members of the EU have been reassessing their relationship with Russia. Germany has long been Russia's best friend in the EU, but France is a more recent addition to the club; whilst since the change of government in Poland, rapprochement is gathering momentum, and a similar change of administration in the UK has also raised hopes for a fresh start in relations. The Baltic States remain prickly, but their economic problems have also made them more pragmatic in dealing with Moscow, while countries in southern Europe have thrown themselves at Moscow in an attempt to attract Russian capital.

With this in mind, it was no surprise that the summit was grounded in pragmatism, and focused on trade and economic issues. However, even in these arenas the issues are tricky and no one is expecting fast results. Brussels is not happy after Russia's increased import duties that have cost Europe €600m, whilst Russia is irked that it's application to join the World Trade Organisation is more than 16 years old now, and that it is the only major global economy not yet a member.

Medvedev used the summit to try to get Europe behind its renewed effort to accede to the international trade club, openly criticising America for holding up its bid. "Everyone, including our American partners, should agree that Russia's membership in the WTO is not a carrot they are offering us all the time as a prize for our good behaviour," the president said. "WTO membership is simply a necessary step for us to become a fully-fledged integral player in international economic processes."

For their part, EU leaders said that they continue to support Russia's early accession to the WTO in a statement which also laid out the framework for future cooperation. That framework includes strengthening the rule of law, fighting corruption, improving Russia's investment climate and supporting it's transition to European technical regulations.

"Russia wants to present itself as a dynamic business partner offering lucrative opportunities for EU businesses by putting particular emphasis on the modernization drive. None of the items on the agenda led to a binding agreement, but that was not the point. Rather the goal was to put an end to all the bad blood between east and west and start building a working relationship," says Lilit Gevorgyan an analyst with Global Insight.

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