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The Russia-Ukraine crisis during 2005 as well as the conflict between Russia and Belarus a year later, show the sensitivity of energy as an issue in EU-Russia relations.

Energy constitutes two-thirds of EU-Russian trade and Russia is one of Europes main energy providers. Many EU member states (especially new member states) are heavily dependent on Russian natural gas and oil for their domestic energy consumption needs.

In absolute figures, Germany is the largest importer of both Russian gas and oil. Prior to the uncertainties over Ukraine, Russia and the EU had over 30years of essentially conflict-free energy relations. Indeed, there are signs that Russia has learned from these recent crises when a potential crisis involving Belarus seemed imminent last summer Gazprom quickly gave Brussels a warning and an assurance that supplies to the EU would not be affected. The same happened later with regard to Ukraine. Within the framework of the already existing bilateral Energy Dialogue the EU and Russia have also agreed on a formal early warning mechanism.

Energy does not have to be a confrontational issue. This is an area where mutual dependence is unavoidable and both sides have a long term strategic interest to safeguard. Simply put: Europe wants security of supply Russia wants security of demand. Two thirds of EU imports from Russia consist of energy. Equally, two-thirds of Russias total energy exports are destined for the EU market. Currently 44percent of EU import needs of gas come from Russia, which make up about one quarter of the overall gas consumption within the EU internal market. This number is expected to grow to 60percent in the near future. To put it more simply, the EU is by far Russias largest customer and Russia is the EUs most important energy supplier.

However, again perceptions about energy in EU capitals and Moscow differ. Many in the EU see Russia increasingly employing energy as a weapon against its neighbours, with obvious implications for the security of our supply. Moscow sees the source of the problem as emanating from the transit countries, which do not appreciate the move to market prices. No matter which perception one may have, we should strive to keep politics out of the energy sector and instead accept the Unions and Russias interdependence. On this basis, we should then seek to build a mutually beneficial relationship based upon agreed rules protecting both supplier and consumer interests.

The EUs aim is transparent and non-discriminatory access accompanied by clear rules for investment and transit.

This has led to recent proposals from the European Commission for the creation of a comprehensive European energy policy. The latest such proposal, the Third Legislative Package for the EU electricity and gas markets contains safeguards against majority ownership by foreign businesses of EU electricity and gas networks. A clause of reciprocity in unbundling and other legal requirements is proposed. Furthermore, foreign control of a Community transmission system will be permitted only by way of bilateral agreements between the EU and the third country. Russia has considered these proposals as directly threatening Gazproms intentions to invest in European energy assets.

We also need a positive agenda for energy. The EU can help Russia develop new energy sources and perhaps, even more importantly, help Russia improve its dismal record as regards energy efficiency. This will also have implications for combating climate change.

Economic Relations Despite the concerns over energy security and the investment climate, in particular in the area of natural resources, trade and investment relations with Russia have developed very positively in recent years. This growing interdependence is recognized also in Moscow, although it may not always seem so. In 2006and 2007 Russia was the EUs third most important trading partner behind the US and China. EU exports to Russia have more than tripled, while imports have doubled. The sharp rise of energy prices has resulted in a large trade deficit (70bn in 2006), but the margin has decreased. Energy accounts for two thirds of the EUs imports while the main exports are machinery and vehicles. In the same year, 32% of the total EU exports to Russia came from Germany, by far the largest exporter, followed by Italy and Finland. Germany also occupies the first place in imports from Russia, followed by the Netherlands and Italy. Even in countries with poor political relations with Russia, such as Poland and Estonia, trade relations have gained considerable momentum in the current decade.

70% of all foreign direct investment in Russia comes from the EU and Russian companies are increasingly investing in the EU. Over 50% of all Russian exports go to the EU. There are queues of up to 60kilometres at EU-Russia borders with carriers carrying goods going to Russia. This is a serious and costly problem both for EU and Russian shipping and transport companies. Part of the solution is to expand the capacity of Russian ports and of border crossing points. But also customs reform and advance information on cargo will help address the problem.

Despite these boom-related problems, we can only welcome these positive trends, which will further increase pressure from business for economic integration between the EU and Russia, which both sides stand to benefit from. But we must also be realistic.

Take away hydrocarbons and the EUs trade with Russia is about the same as with Iceland or Mexico. In other words, there is much untapped potential beyond energy.

The internal market of the EU is open to Russian investments in all areas, including energy, provided that transparency and internal market rules that apply to Member States are also observed by Russian economic operators. We cannot preach rule of law in our relations with Russia and then apply a different standard to Russian investments.

Nor should Russia discriminate against foreign investors. Risks such as corruption and an unpredictable legal framework are major challenges for all foreign investors in Russia. Nevertheless, many European investors see the potential gains outweighing the risks and continue to be bullish about Russia as a market place.

The best way for Russia to ensure a continued inflow of investment and growing trade would be to join the WTO as soon as possible. To quote former Commissioner Mandelson: If Russias ambition is to be a hydrocarbon power, then it probably doesnt need the WTO. But a diversified Russian economy, attracting investment and growing trade can only be built on the back of full integration into the international trading system.

WTO membership is also an anchor for domestic reforms, and the foundation for closer economic ties between the EU and Russia.

Once WTO accession is confirmed, the EU should move towards deep and comprehensive economic integration with Russia, including free trade. The combination of Russian WTO membership and a Free Trade Agreement (FTA) will offer more opportunities for small- and medium seized enterprises to benefit from the vast potential in bilateral trade and investment between Russia and the EU. A stronger sector of small and medium-sized Russian companies, what the Germans call der Mittelstand, will also strengthen the still embryonic civil society in Russia.

Foreign Policy Increasing Tensions The 1990-s were a period of internal turmoil in Russia when the former super power was unable to project its foreign policy interests beyond most of its borders.

Much of current positioning of Russia as a major foreign policy actor seems to be responding to what for many Russians appeared as a humiliating phase of Russian history and Russias role in world affairs. A strong, united and confident Russia which plays a constructive role and upholds the system of international rules is in everyones interest. The EU has to work with the fact that as a member of the Security Council Russia has the power of veto. In the 1990-s the EU spent much time worrying about the internal weakness of the Russian state and the negative effects this may have on the proliferation of weapons of mass destruction and the fight against terrorism. Ipso facto, it would seem that a stronger Russia can deal better with such threats.

Just like any other sovereign state, Russia has a right to defend its national interests.

It is perhaps in the area of foreign policy we have witnessed the sharpest deterioration in relations between the West and Russia over the last couple of years. The effect of Russias hardening position on a number of foreign policy issues has had in many European capitals has perhaps been underestimated by Moscow. Conversely, Russias intention to stand firm on its position with regard to Kosovo and missile defence seems to have been equally underestimated in many Western capitals.

Russia has shown little interest in the CFSP/ESDP. There has been no consensus within the EU, however, to grant Russia any special status. Many member states have also pointed to the difficulties of cooperating with Russia in this sensitive area when there are a number of issues where both sides take very different views (e.g. Kosovo), on the frozen conflicts. Nevertheless, given the importance of Russia as a global actor, the EU wishes to intensify efforts to work with Russia in foreign and security policy.

The frozen conflicts can only be resolved with Russian involvement. Russia is a key player with regard to Iran, an important player in the Middle East and is keen to strengthen the multilateral system. The EU should discuss with Russia possible changes to strengthen international institutions, and seek to cooperate with Russia more in crisis management, peacekeeping operations and humanitarian and civil rescue missions.

One problem, however, is that Russia still sees the EU primarily as an economic actor and the US as the only strategic partner on foreign and security policy issues.

Russian Views of the EU How does Russia see the EU? The official line is that Russia is eager to work with the EU. But the state media rarely provide any positive coverage of the EU. According to EU-Russia Centre research undertaken earlier this year, 71% of Russians do not consider themselves to be European and just over half view the EU as a threat to Russian interests. The EU, therefore, has a major task ahead in engaging with Russians across the spectrum to inform them about the EU, to emphasise the importance of European values and to strengthen democratic forces in Russia. That engagement needs to take place among the leaders of tomorrow and will only be achieved by developing an understanding and appreciation of one anothers cultures.

There needs to be a vast increase in the number of student exchanges and serious consideration should be also given to abolishing visas, encouraging more visits to EU countries by Russians from all walks of life, giving them exposure to different values and societal systems. This would have an immediate and positive impact on people to-people contacts. The previous EU cooperation and assistance programmes (TACIS) had only a marginal effect in Russia and one should not have over-high expectations of the new instruments.

Is Russia a Strategic Partner?

Some voices in the EU question Russia as a strategic partner because of the lack of real democracy as opposed to the existence of formal democracy. Size, proximity, history, economic interdependence as well as a simple comparison with some of the EUs other strategic partners would seem to lead to the opposite conclusion. But there are also voices in Russia, which often perceive EU not as a fully strategic actor unable to get its act together. They fail to grasp the EUs increasing world wide soft power projection, its magnetic attraction to its neighbours. They consider the EU as being used by Member States to project their individual bilateral grievances against Russia.

A recent study by the EU-Russia Centre revealed how individual EU Member States continue to pursue a bilateral agenda with Russia in parallel to the common EU agenda in dealing with Russia. Moscow does not shy away from exposing these differences and rivalries. But it should ask itself the question whether its long-term interests are served better by a strong EU or a weak EU?

In this authors view, there is no alternative to constructive engagement which should ultimately lead us to fulfil our strategic objectives: deep economic integration and close political cooperation. But this requires that the EU and its Member States have both the capacity to act together and preserve unity as well as the will to achieve results and solve problems.

Member States must realize that EU solidarity is a two-way street, also in external relations.

Conclusions The EU has a major interest in a stable, peaceful, prosperous, democratic Russia that is a reliable trading partner, friendly neighbour and a supporter of an effective rules-based international system. No one can predict which way Russia will go in the coming years. Russia is still far freer today than for most of its history. But the authoritarian trends are worrying. EU-Russia relations are at a crossroads. While it is tempting for some EU member states to strike bilateral deals with Russia, the EU should seek to promote a united front towards Russia and ensure that its values remain at the forefront of any negotiations. A sound and long-term relationship cannot be built between two actors who do not share common values and mutual respect. Both sides suffered greatly as a result of two hot wars and one cold war during the twentieth century. The EUs primary interest should be to help promote a stable, democratic and prosperous Russia that enjoys the same civil liberties and rule of law as EU citizens.

There is an enormous potential in EU-Russia cooperation, but Russia is likely to remain a difficult partner for the foreseeable future. We need to meet the challenge of doing business with Russia through a mixture of firmness and creative ideas.

George Kennan used to argue that the only way to live with Russia was to let the Russians be Russian. While there may be an element of truth in this, it is not an adequate answer in this day and age. The shared European continent, and the forces of globalisation, will continue to push us together. Our goal should be a relationship that does not deny our differences, but that tries to address them constructively, and work around them where necessary. To achieve this we need to bring as many as possible of our peoples into contact with each other and not remain within the certainty of our perceptions about each other.


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