OctoberOctoberOctoberOctober 20 20 20 2010101010

THE EUTHE EUTHE EUTHE EU----RUSSIA CENTRE REVIEWRUSSIA CENTRE REVIEWRUSSIA CENTRE REVIEWRUSSIA CENTRE REVIEW

The EU-Russia Modernisation

Partnership

Issue Issue Issue Issue FifteenFifteenFifteenFifteen

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CONTENTSCONTENTSCONTENTSCONTENTS

ForewordForewordForewordForeword 3333

Erhard Busek

IntroductionIntroductionIntroductionIntroduction 4444

Fraser Cameron

The Objectives and the Price of Modernisation in RussiaThe Objectives and the Price of Modernisation in RussiaThe Objectives and the Price of Modernisation in RussiaThe Objectives and the Price of Modernisation in Russia 6666

Igor Yurgens

A Moderniser A Moderniser A Moderniser A Moderniser –––– not a Puppet not a Puppet not a Puppet not a Puppet 11110000

Axel Lebahn

The Canary in the Mine: Western Investment in RussiaThe Canary in the Mine: Western Investment in RussiaThe Canary in the Mine: Western Investment in RussiaThe Canary in the Mine: Western Investment in Russia 14141414

Sir Anthony Brenton

PCA and the Modernisation PartnershipPCA and the Modernisation PartnershipPCA and the Modernisation PartnershipPCA and the Modernisation Partnership 18181818

Adrian Severin

EUEUEUEU----Russia Russia Russia Russia EEEEconomic conomic conomic conomic CCCCoooo----operation: a operation: a operation: a operation: a WWWWay ay ay ay FFFForwardorwardorwardorward 24242424

Dennis Kredler and Sergey Afontsev

The EUThe EUThe EUThe EU----Russia Russia Russia Russia PPPPartnership for artnership for artnership for artnership for MMMModernisationodernisationodernisationodernisation 28282828

Katinka Barysch

Making the Most of the Partnership for ModernisationMaking the Most of the Partnership for ModernisationMaking the Most of the Partnership for ModernisationMaking the Most of the Partnership for Modernisation 33333333

Marina Larionova and Vitaly Nagornov

VisaVisaVisaVisa----free: Modernising the Russiansfree: Modernising the Russiansfree: Modernising the Russiansfree: Modernising the Russians 55555555

Sergey Utkin

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ForewordForewordForewordForeword

Just over a year ago EU and Russian leaders agreed at their summit in Stockholm to work together

on a Modernisation Partnership. This aim was repeated at the June summit this year at Rostock on

the Don. The idea of the EU helping Russia to change its lop-sided economy is a good one but

regrettably there has been little sign of real change in Russia over the past year.

In 2009 Russia suffered a steep decline in its GDP as a result of the global financial crisis.

President Medvedev spoke out about the need for fundamental reforms of the state and society as

well as the economy. Top of the agenda was the rule of law, a pre-requisite for attracting foreign

investment, without which the modernisation agenda would struggle to get off the ground. This

year, as the economy has recovered, helped by a rise in the oil price, there has been less talk of

modernisation although the President remains attached to his own version of Silicon Valley – the

Skolkovo project outside Moscow.

In my view modernisation is essential if Russia is to realise its full potential and engage

wholeheartedly with the global economy. The EU also has a key role to play but this cannot be at

any price. The European Commission has drawn up a ten-point plan on which both sides should

work to achieve a win-win situation. This provides a sound basis for action but it has so far received

little support from the Russian side.

The collection of articles in this Review represents a broad spectrum of opinion as regards the

prospects for the EU-Russia Modernisation Partnership. Some are more optimistic than others but

all agree on the need for a modernisation agenda in Russia.

I commend this review as an important contribution to the debate on the Modernisation

Partnership.

Erhard Busek President, EU-Russia Centre

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IntroductionIntroductionIntroductionIntroduction

This review brings out clearly the many issues concerning the EU-Russia modernisation partnership.

Perhaps the most important is the differences within Russia about how far and how fast to proceed

with modernisation. President Dmitry Medvedev has spoken of the need to reform Russia’s

“backward” economy, to end its “primitive reliance” on oil and gas. Prime Minister Vladimir Putin,

seems not to share this sense of urgency, arguing recently that modernisation was already under

way, “but we need to make this development quite gradual”. Mr Putin has also been far less vocal

than Mr Medvedev on the need to tackle corruption and take measures to strengthen the rule of

law.

Igor YurgensIgor YurgensIgor YurgensIgor Yurgens, the President of the influential Institute of Contemporary Development (INSOR)

outlines some of the main arguments put forward in “Russia of the 21st Century: A Desirable

Future Image” which was one of the key publications in the modernisation debate. He argues that

the state must reduce its over-mighty grip on the economy and indeed on the state and society. He

calls for an ‘efficient state that is accountable to citizens, ensures a fair social order and protects

private interests.’

Axel LebahnAxel LebahnAxel LebahnAxel Lebahn, a long-time Russia watcher, suggests that Medvedev cannot be described as Putin’s

puppet. The President, he argues, has set a different tone and made some small but significant

changes, especially in the judicial sphere. Although one should not over-estimate the differences

between the rival camps in Russia, there is the beginning of a serious debate about the future

direction on Russia. The West needs to follow and support the reform process wherever possible.

Anthony BrentonAnthony BrentonAnthony BrentonAnthony Brenton, a former British ambassador to Russia, argues that Western technology, capital

and expertise has a crucial contribution to make to a genuine modernisation of the Russian

economy, and to breaking down the barriers which for centuries have divided Russia from the

West. He also points out that the Russian state continues to play a key role in the success or failure

of Western projects whose fate varies enormously according to the sector concerned. Despite all

the problems he believes there is scope for further prudent Western investment.

Adrian SeverinAdrian SeverinAdrian SeverinAdrian Severin, MEP, outlines the limited progress in EU-Russia relations under the current

Partnership and Cooperation Agreement (PCA). He states that the EU and Russia are ‘condemned’

to a close relationship on account of their proximity and close political, historical and cultural ties.

The post-Lisbon EU now needs to develop a more effective approach towards Russia and cement a

new partnership that covers all areas from trade and energy to education and the environment. The

author concludes that there must be greater trust between the EU and Russia if the new strategic

partnership is to be successful for both sides.

Dennis KredlerDennis KredlerDennis KredlerDennis Kredler and Sergey AfontsevSergey AfontsevSergey AfontsevSergey Afontsev of the EU-Russia Industrialists Roundtable argue that tin light

of increasing global competition the EU and Russia should join their efforts to make better use of

both economies’ complementary comparative advantage structure. The most important issue is

Russia’s WTO accession which, when completed, would help move the stalled EU-Russia strategic

agreement negotiations forward. This, in turn, would help provide a reliable legal basis for long-

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term business and economic relations between Russia and the EU. The authors also highlight the

importance of the Innovation Dialogue and the need to move towards the abolition of visas as soon

as possible.

KatinkKatinkKatinkKatinka Baryscha Baryscha Baryscha Barysch, Deputy Director, Centre for European Reform, takes a more pessimistic view of

the modernisation agenda arguing that as conceived it is unlikely to succeed. A top down approach

will not help Russia diversify and remodel its economy; nor will it breathe new life into the stale and

sometimes tense EU-Russia relationship. She notes that the 2009 progress report on the

implementation of the four common spaces suggests that most of them work badly or not at all. It

is not immediately obvious why re-branding them under the umbrella of a modernisation

partnership would breathe new life into them At the same time the EU-Russia partnership for

modernisation could help Russia to become more energy efficient, adopt better technical

standards, create better conditions for small enterprises and other much-needed changes.

Marina LarionovaMarina LarionovaMarina LarionovaMarina Larionova and Vitaliy NagornovVitaliy NagornovVitaliy NagornovVitaliy Nagornov of the Moscow High School of Economics review the

prospects for progress in the five key areas for technological modernization - energy efficiency,

nuclear technology, space technology and communications, medical technology and strategic

information technology. The authors also examine the most important legal changes for

stimulating investment and innovation, such as amendments to the list of strategic enterprises and

acts on special economic zones. They emphasise the importance of higher education reform in

ensuring the success of the modernization agenda. Finally they look at EU-Russia cooperation in

practice taking as examples various cross border initiatives..

Sergei UtkinSergei UtkinSergei UtkinSergei Utkin of the Institute of World Economy and International Relations, makes a powerful plea

for the abolition of visas between the EU and Russia. He notes that while Russia is demandeur for

visa free travel it would also promote more people to people contacts. Utkin perhaps under-

estimates the resistance in some member states towards open borders with Russia. Some argue

that Russia should not be privileged over other Eastern partners. Others point to the problem of

Russia’s open borders with Central Asia and lack of technical standards compatible with Schengen.

It should be remembered that visa free travel does not mean passport free travel. Border

authorities can still refuse entry to undesirable persons.

Fraser Cameron

Director, EU-Russia Centre

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The Objectives and the Price of Modernisation in RussiaThe Objectives and the Price of Modernisation in RussiaThe Objectives and the Price of Modernisation in RussiaThe Objectives and the Price of Modernisation in Russia

bybybyby

Igor YurgensIgor YurgensIgor YurgensIgor Yurgens

Chairman of the Institute for Contemporary Development (ICD)

and a member of Russia's Public Chamber

Modernisation in today’s Russia is not about confrontation between the forces of light and the

forces of darkness. Almost everyone who makes decisions in politics and the economy expresses

agreement with the political and socio-economic ideal that has substantiated the need for a

modernisation. We do not have a shortage of the forces of light, and you can hardly place anyone in

the forces of darkness without the risk of staining your own conscience.

Modernisation is about the price that we are prepared to pay to implement that ideal and about the

efforts we are prepared to put in towards achieving it. And it is here where there is a lack of unity.

The desire to save as much as possible to achieve modernisation and conserving efforts and

resources is invariably present and hinders change. This has led to talk about “spot” modernisation

and attempts to define a narrow framework for the process or to launch it as a “demo” or pilot

version.

We can only see a general ideal. There are no specific objectives or clearly defined tasks and any

disputes about the price of modernisation are exercises in sophistry, both non-specific and endless.

It is only when a definition of consensus objectives and tasks can be reached that talk about the

price of change can become substantive. A recent work from the Institute of Contemporary

Development – “Russia of the 21st Century: A Desirable Future Image” –sought to launch the

process or at least contribute to its launch. This essay about successful modernisation is a forecast

of the possible results, it sums up what has not yet happened and assesses how the public and the

government might act, alongside considering the cost and scope of the efforts needed to achieve

modernisation.

The main criterion of successful modernisation is the way that the country meets the challenges of

modern existence and aligns with the norms of other countries. This covers the standard of living,

which must be comparable to the leading countries of the world; the level of development of the

social system, ensuring equal opportunities from the start and the protection of socially vulnerable

sections of the population. Matching standards in the political and legal sphere: an efficient state

that is accountable to its citizens and a fair social order, ensuring personal freedom to everyone

and the protection of private interests. This requires advanced and dynamic science; modern and

efficient armed forces together with secure and constructive co-operation in the international

arena.

All of these elements are interconnected and correlate with one another. An economic component

also fits naturally here. Successful modernisation results in a competitive economy, which, in turn,

7

ensures a high standard of living and enjoys all the advantages of the country’s natural resources

and human capital, as well as fitting into the international labour market, which demonstrates

sustainable innovation and the ability to meet rival challenges.

The past two years did not become a ‘fatal’ test for our economy, but they have lanced many of the

boils which experts had spoken about well in advance. The domestic version of the world crisis

revealed the instability of forced growth based on the influx of petrodollars and the excessive role

of the state in the economy. It also showed the degree of sensitivity of such problems as export-

oriented raw-materials sectors, weakness in the principle of a private financial system and

dependence on external credit when enormous state financial reserves had been accumulated and

capital exported in significant amounts. The Russian model of forced growth, implemented in

2005-2008 has exhausted itself. Entering the trajectory of balanced development, resistant to

impacts from the outside world and accompanied by modernisation of the financial system and

radical improvement of the regulatory environment, is a priority today.

Transition to balanced development – trading forced development for quality growth – must

become a macroeconomic equivalent of modernisation. I will now go back to the aforementioned

text by the Institute of Contemporary Development, where the components of such a transition are

detailed. First of all, it maintains symmetry between the economy’s need for monetary resources

and the ability of the financial system to provide them. Second, preventing the economy from

overheating by using factors of production, as in 2005-2008, when the growth of aggregate

demand was met by greater imports and price hikes, followed by output increase. The post-crisis

“pause in demand growth” and the movement of public funds towards new technologies must be

used to reduce costs, qualitatively renew basic assets, and increase industrial labour productivity.

Other qualitative characteristics of transition to balanced development include:

— deflation of protected “bubbles” within markets for goods and services that face no competition from imports (such as construction or retail trade) and reduction of tariffs of natural and local monopolies;

— reduction of the dependence of the Russian financial system on the state of the external

environment due to the domestic growth of added value production;

— complementary restructuring of the real economy and within the financial sector, and the

completion of structural reforms in electric energy, gas production and transportation, rail

transportation, housing and utilities; and

— formation of new fundamentals in monetary policy; that is, change of money supply channels,

transition to inflation targeting and a floating rouble rate, the consolidation of the leading role of

interest rates and of bank refinancing in liquidity management, alongside the introduction of

efficient risk management.

8

Such an economy is not oriented toward extortionate growth rates. However, thanks to balanced

development, it will pass through world cyclical and financial crises with much lighter losses than in

2008-2012.

The essay, “Russia of the 21st Century” describes the desired image of the future in the present

tense as something that has already happened, and this sleight of hand can appear credible. Such

a glimpse of the future, of course, states an ambition, but at the same time provides a clear

picture. The picture is as follows:

A modernised Russia is a country where the state has reduced its direct presence in the

economy by at least half, where its share in the GDP does not exceed 30 per cent. At the

same time, its role in ensuring a flexible regulatory system, capable of adapting quickly and

reliably to new challenges, will increase significantly. The main principle of such a reset is

the encouragement of competition, protecting and consolidating corporate and individual

private property, encouraging entrepreneurship and private investment.

Civil society, business, and the state must become equal partners in decision-making on economic

policy. Having replaced the “vertical” government regulation, such an approach will allow the

achievement of a stable balance of interests of all participants and in the predictability of actions in

this sphere. This will, in turn, create a comfortable investment climate and, in general, a

comfortable business climate in Russia.

Modernisation must depend not on specific types of business, sources of funding, or types of

control, but on a harmonious combination of objectives and roles of various types of businesses.

The main role that the state should play in the economy is the role of regulator, ensuring

acceptable business conditions for all. The state as “redistributor” of resources must minimise its

role. Its vertical overgrowth is an obstacle to modernisation. A state capable of addressing current

challenges is a state that is moderate and efficient.

The division of the state into regulator and reformer, consumer and investor, owner and

"redistributor”, must be taken to the stage where the line between those functions and the actions

of private business is not an ambition, but clear in practice, perceptible and honoured by all parties.

With all this in mind, the main criterion for “state optimisation” is not a specific percentage of its

property, not a share in the redistribution of the income of the regions and businesses, but

reasonableness of its functions, predictability of its actions, and a clear separation of its role from

those of business and civil society.

A competitive environment is the most important condition for qualitative organic growth. A

situation when up to 40 per cent of industrial enterprises are outside any competition structures

must become a thing of the past. A strict but predictable antitrust policy, oriented towards

controlling companies’ behaviour on the market, not towards their size. It is the real practice of

antitrust administration that will make it possible to create normal conditions for businesses to

function.

9

As for a structural reform of the banking system, the privatisation of government banks is a very

important measure, in addition to its consolidation. The government must be limited to a blocking

stake to vote in those that remain, as well as in development institutions. The creation of a small

and medium-sized financial businesses sector, (including regional credit organisations with special

status, credit co-operatives, microfinancing organisations, etc.) will solve the problem of

accessibility of financial services to people throughout Russia.

Accessibility of credit resources and financial services and an acceptable level of tax burden will

ensure the balanced development of big, medium-sized and small businesses. The share of small

business in the GDP will amount to 35-40 per cent. Small businesses, in addition to the traditional

sectors of retail trade and services, will concentrate on innovation – more than half of the sector

will work on innovation production. As one of the principal sources of middle class expansion, it will

become the basis of the Russian overseas market.

Removing the difficult and long-standing problem of the legitimacy of large-scale private property is

an important condition for the plans to be implemented. Property must be securely protected, not

only by law and declarations from the country’s highest levels, but by the practice of the

relationship between the state and business – practice that would include suppressing raider

attacks and abandoning concealed nationalisation and interference by authorities in income

distribution as “rentiers” or landlords.

Stronger legal foundations and the stronger protection of businesses will support their transition

from short-term decision-making organisms to achieving strategic positioning on international

markets, the curtailment of attempts by the bureaucracy to elicit “entry fees” and rents, and

participation of people in the economy through the purchase of stocks and bonds. Profit instead of

rent – this is a huge transformation in the minds of businesses, the government, and the Russian

people. Such a transformation will stimulate the people’s active investment in their future and will

become the decisive motivation of economic modernisation from grassroots level.

The “spot” and regulated modernisation, launched last year, is insufficient to achieve large-scale

strategic objectives. The real renewal of the economy will only happen with “horizontal”

modernisation: a “reset” of institutions regulating the national economy, an across-the-board

improvement of economic management conditions, a lowering of administrative barriers, sweeping

de-bureaucratisation, and the rejection of “manual control” in favour of universal measures of

competition support and property protection.

Both the authorities and, by and large, experts see the need for such horizontal modernisation. But

it is important to remember that there also exists a third level of modernisation. The most

comprehensive and purposeful measures to renew the economy are not serious without an equally

comprehensive and purposeful renewal of social and state institutions. Horizontal modernisation

must be implemented against the backdrop of general, integral modernisation – the modernisation

of the political sphere, of social structure, and of civil consciousness. Only then will there be a

guarantee that the result of our actions will be anywhere close to significant, including in the

economic sphere.

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A Moderniser A Moderniser A Moderniser A Moderniser –––– not a Puppet not a Puppet not a Puppet not a Puppet

(How Dmitry Medvedev is quietly changing Russian politics)(How Dmitry Medvedev is quietly changing Russian politics)(How Dmitry Medvedev is quietly changing Russian politics)(How Dmitry Medvedev is quietly changing Russian politics)

bybybyby

Axel LebahnAxel LebahnAxel LebahnAxel Lebahn

Freelance commentator and advisor on Russia1

Just over two years ago Dmitry Medvedev was elected President of Russia. Initially he was greeted

with enthusiasm in the West but many observers are disappointed as he completes the first half of

his tenure in office. But a closer analysis reveals that the power balances established under the

Putin era have been called into question as a result of the President’s reforms.

There were high hopes in the West when Dmitry Medvedev became President of Russia in May

2008. Many hoped that once in office Medvedev would quickly distance himself from his

predecessor and set about achieving the ambitious reforms he had spoken of before moving into

the Kremlin. There was more scepticism among the opposition in Russia. Given that Medvedev was

a major figure for many years while Putin was President, they did not expect more than a few eye-

catching reforms aimed to placate critics in the West. Over the two years there have been more

sceptical voices in the West as well. This is largely due to the continued influence of Putin on the

political scene which has frustrated those who wish to see a ‘Russia without Putin’. The Putin-

Medvedev tandem is a complicated relationship and while there has been no open confrontation,

the two men have taken different positions on a number of issues.

POWER AND MENTALITYPOWER AND MENTALITYPOWER AND MENTALITYPOWER AND MENTALITY

Before taking office Medvedev had stated consistently that a renewal of the state and society in

Russia must be the main policy aim. He criticised the absence of the rule of law. He called for a

fundamental reform of the judicial system and a change in mentality to ensure a successful

transformation in other sectors. In a methodical and didactic manner, Medvedev concentrated on

the judicial system but in parallel pushed for reform in other areas. He stated that those with

responsibility in the state had to change their approach. He also made it known that it was time for

new faces, unburdened by history, in positions of responsibility. This was a signal to those in power

that they would eventually be replaced. But this gradual approach was criticised by those who

expected swifter and more decisive reforms.

These critics do not take into account that most positions of power in Russia are still occupied by

the ‘siloviki’ – the representatives of the secret services and military - who are unwilling, at least

voluntarily, to relinquish or even share power in the near future. If Medvedev had simply taken over

as the ‘new Tsar’ he could have substituted the old guard with a new guard.

1 Formerly with the Deutsche Bank

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The expression tandem is confusing as the Putin-Medvedev relationship is really one of two

different political conceptions which sometimes overlap but which also lead to competition. This

has led to some movement in an otherwise sterile political landscape in recent years. Of course

one cannot expect change in the short term through Western-style democratic elections. But there

is an imperceptible move towards rival camps with different political and economic agendas.

NEW PEOPLE, NEW POSINEW PEOPLE, NEW POSINEW PEOPLE, NEW POSINEW PEOPLE, NEW POSITIONSTIONSTIONSTIONS

Medvedev has placed a number of younger and well-qualified reformers in important positions. One

example is the substitution of the military by civilian leaders in the Caucasus who are prepared to

use economic measures to try and achieve more stability. Medvedev has also been willing to take

swift action, including prosecution, against those who have been caught out misusing their office.

The President has also been keen to promote dialogue between government and citizens.

Newspapers have been encouraged to become more critical while there is a lively debate on the

Internet, a medium that Medvedev also uses to good effect. Despite the tight laws on

demonstrations, citizens have also been taking to the streets in spontaneous actions.

But Medvedev does not wish this to develop into full-scale demonstrations with unforeseen

consequences. There is already considerable unrest in the provinces as a result of the economic

crisis. Putin has enjoyed playing the leader in denouncing factory closures, accidents at power

stations and overseeing the firefighters tackling the forest fires around the capital. The population

remains highly critical of the government for failing to tackle corruption. Despite the rhetoric, Putin

did little to deal with corruption during his eight years in office. Medvedev has attempted a more

legalistic approach but with similar poor results.

The unrest and impatience within the population has put pressure on other institutions. Medvedev,

for example, has proclaimed a fundamental reform of the hated militia. Many branches of the

militia have been reformed and a law should be in place by the end of the year that will facilitate a

full-scale reform of the militia. Given that the militia is a pillar of the siloviki, their members are

watching these reforms with suspicion. They are already lobbying to secure their positions and

block any further reforms. Their lobbying efforts were rewarded with a new law extending the

competences of the FSB. At a banquet for the Russian spies expelled from the United States, Putin

gave two clear signals. The spy affair was an unimportant matter, a curious relic of the Cold War;

and Medvedev’s ‘reset’ of relations with the US would not result in a weakening of the siloviki.

Medvedev has continued the military reform begun under Putin as well as reform of the prison and

prison camp system (a legal and moral stain on the nation) which goes back to Stalin’s time. There

are currently around 846,000 prisoners behind bars in often horrendous conditions. The death in

prison of the lawyer, Sergei Magnitsky, caused numerous protests and prompted Medvedev to sack

those responsible and to set up an enquiry into prison conditions throughout Russia. The report of

the state prosecutor in July revealed that the prison system was a good example of ‘legal nihilism’.

This prompted Medvedev to announce a series of reforms designed to modernise the prison system

and finally break with the Stalinist inheritance.

12

Medvedev has also sought to allow more freedom for enterprises as he views business as the

driving force for the modernisation of Russia. He pushed for a new law whereby those accused of

economic crimes would not have to be held in detention. This could lead to the release of Mikhail

Khodorkovsky, charged with a second offence, and still held in detention. His release would

demonstrate a break with Putin who was responsible for the arrest and imprisonment of

Khodorkovsky.

FREEDOM VERSUSFREEDOM VERSUSFREEDOM VERSUSFREEDOM VERSUS PROSPERITY PROSPERITY PROSPERITY PROSPERITY

The key area for reform is the economy. The perestroika introduced by Boris Yeltsin was viewed as

attractive as it promised prosperity along with democracy and a market economy. But the quasi

state bankruptcy of August 1998 was a huge shock to the Russian population. Everyone feared

another economic crisis. In the course of his two terms in office, Putin succeeded in stabilising the

state and the economy. Incomes rose steadily mainly because of the continuing rise in the oil price

during this period. His autocratic approach was respected by the oligarchs and accepted by the

population as a trade-off between freedom and prosperity.

In August 2008, Russia was at the peak of its influence due to bulging coffers from oil and gas

sales and the military victory in Georgia. Gazprom was a symbol of Russia’s new strength. But then

Russia was hit badly by the economic crisis and a plunging oil price which revealed the fragility of

the Russian state and its finances. Since then the population’s trust in the system has been

shattered. A majority believe that there must be change.

It was increasingly clear that the Putin system was ‘yesterday’s system’ and not suitable for the

challenges of the 21st century. Medvedev thus seized the opportunity to promote his

modernisation agenda which pre-supposed a root and branch reform of the state and the economy.

While Putin was responsible for the measures to stabilise the economy after the shock of August

2008, Medvedev began to draw up a strategic concept for Russia’s future. His plans were agreed

with Putin which again demonstrated that despite differences in approach there is no fundamental

opposition between the two camps. The power situation in Russia is indeed quite fluid with

competing groups seeking the ears of both leaders to promote and defend their interests.

Medvedev had set out his stall in numerous interviews and articles. Before his election he set up

the INSOR think tank to come up with new ideas. The output of INSOR reveals a quite different

approach to that of Putin. INSOR has also sought to involve and mobilise the intellectuals and

scientists who had been marginalised under Putin. New institutes and commissions were

established to deal with technology and corruption thus providing a new communications channel

between government and citizens.

The showcase for the modernisation agenda is supposed to be the Skolkovo project – Russia’s

answer to Silicon Valley. Located near Moscow, Skolkovo will have special privileges designed to

keep the best scientists and experts in Russia. Influenced by his visit to California in June,

Medvedev recognises the importance of attracting foreign expertise to assist with Russia’s

modernisation. He announced this new move at a meeting of Russian ambassadors in July

emphasising the importance of co-operation with the most modern countries in the world.

13

Medvedev has also spoken of the need for Russia to show a more smiling face to the outside world.

This contrasts with Putin’s view that the priority should be to ensure the continuation in power of

the current elite.

Of course one cannot avoid some scepticism as to whether these fine words of Medvedev will be

put into practice. There is, however, a whiff in the air that the tarnished Putin era is near its end. If

this new dynamic and the strategic aims of Medvedev can be harnessed to promote a real and

lasting modernisation then it could lead to a quite different Russia. The West should do all it can to

support such a development.

14

The Canary in the Mine: Western Investment in RusThe Canary in the Mine: Western Investment in RusThe Canary in the Mine: Western Investment in RusThe Canary in the Mine: Western Investment in Russiasiasiasia

bybybyby

Sir Anthony BrentonSir Anthony BrentonSir Anthony BrentonSir Anthony Brenton

Former Ambassador to Russia

Overseas investment is about more than money. It is the clearest indicator of a country’s will and

capacity to succeed in the global economy. For Russia in particular, the history of the environment

that it has offered external investors since the fall of Communism has cast a sharp light on the

whole state of economic and political reform.

That history comes in three phases, with a fourth one now under way. The first of these was the

chaotic Russia presided over by President Yeltsin from 1991 to 1999. For much of the period the

country was bankrupt, the rouble in free fall, and its internal legal and property arrangements in

deep disorder. This was a period when Russia badly wanted foreign investment, both because it

needed the foreign exchange and because it wanted the technology and management skills which

it saw as bridging its route into the global economy. Meanwhile most foreign investors (not without

reason) looked askance. Despite what were in principle extremely generous terms, (notably, for the

resources sector, the Production Sharing Legislation of 1999), the capital account remained

massively negative as Russians moved money out much faster than foreigners brought it in. There

were exceptions. A few pioneering consumer brand companies, such as Cadbury and BAT, saw that

Russia must turn into a huge retail market, and in the face of all the difficulties set up

manufacturing operations. And the attraction of Russia’s huge oil and gas deposits brought

significant interest from the Western majors. Shell for example became involved in 1992 in what

was to become the world’s largest hydrocarbon project: Sakhalin 2. But even in this very attractive

looking sector there were real problems. BP’s first billion dollar investment promptly sank into a

financial quicksand from which it took immense efforts to retrieve it.

The second phase came with the turnaround of the Russian economy in President Putin’s first term

– 2000-2004. This was a period of major reform. Legal, tax and property arrangements became

significantly more predictable and business friendly (even while remaining far from best Western

practice). The economy was growing fast, so an increasing array of Western blue chip companies

saw Russia as a market they had to be in. And the Russian administration remained keen to

attract Western investors. Through very sensible tariff arrangements, for example, they encouraged

all the major Western automobile manufacturers to set up operations in Russia. There was growing

Western high tech interest – Intel, Glaxo Smith-Kline, Pilkington. And in the pivotal oil and gas

sector, Western companies were encouraged to buy in, with the Russian administration in

particular facilitating BP’s next $6 billion investment in establishing the TNK/BP joint venture. This

is not to say that the lives of Western companies investing in Russia were easy. They found

themselves tackling a huge range of problems – a massively cumbersome customs regime,

random raids by the tax and other authorities, poor physical infrastructure, unsure property rights,

unpredictable legal processes, and predatory local government. But for the determined investor it

15

was possible to get through all this and establish operations of real benefit both to the company

and to Russia. By the end of the period, inward investment was flowing at a healthy rate and

Russia’s capital account was very nearly in the black.

But the very strength of Russia’s economic resurgence brought a darker climate for Western

investors in the next phase – Putin’s second term 2004-2008. With money coming out of its ears

as a result of high oil prices, Russia was significantly less interested in attracting Western capital.

Economic reform more or less stopped. There was a feeling that business, in particular Western

business, had done too well at the expense of the Russian state. The Yukos/Khodorkovsky affair

gave a disastrous demonstration of how the legal system could be manipulated to massively enrich

a few insiders (as well as renationalising a large chunk of the Russian oil industry). The climate of

easy money and resurgent state power saw Russia rise close to the top of global league tables for

bureaucracy and corruption, and plunge to the bottom for ease of establishing and doing business.

A series of laws (in particular the 2008 Strategic Sectors and Sub-Soil Laws) drastically limited

Western involvement in key sectors of the Russian economy. The Russian state initiated, or

connived in, direct attacks on major Western projects –notably Shell’s Sakhalin 2 and BNK/BP.

Western money kept on flowing in – Russia was, after all, one of the fast growing, much feted,

BRICs – but in a way which, because of the clear difficulties and dangers, priced Russian assets at

about 25% less than comparable assets on other emerging markets.

This third phase came to an abrupt end with the global crash of late 2008. The crash came as a

salutary shock to the Russian authorities. As late as mid-2008 they were confidently expecting,

along with their BRIC peers, to sail through unaffected. In fact they did much worse than any of the

other BRICs. In 2009 the economy contracted by an extraordinary 8%, and only huge expenditure

of reserves prevented a Yeltsin-era style rouble collapse. Capital flight resumed big time. Suddenly

the economic overconfidence of the later Putin years was revealed for what it was. It abruptly

became clear that the Russian economy was excessively dependent on resource exports (the fall in

the oil price was a major transmission mechanism of the crash to Russia) losing ground in the

other industrial and high tech sectors necessary to give Russia a truly diversified and robust

economic base, and subject to a pliable legal system and a corrupt and incompetent bureaucracy

whose reputation had led to a major flight of funds at the first hint of bad weather. The depth to

which the system had sunk was underlined by the mysterious death in a Russian jail of Sergey

Magnitsky, a lawyer working for a British firm, who had exposed a vast fraud organised from within

the Interior Ministry itself. To all impartial observers it became glaringly clear that if Russia was to

retain its prized position as a leading emerging economy, up there with China, India and Brazil,

rather than turning into a corrupt Slavic petroeconomy, then drastic reform was necessary –

including creating an environment much more welcoming for foreign investors.

The single biggest question for those concerned with Russia over the forthcoming, fourth, phase of

post-communist Russia’s relations with Western business is the extent to which the Russian

authorities have taken these lessons to heart. They are certainly now saying the right things.

President Medvedev has condemned “legal nihilism” and introduced some measures intended to

limit corruption and lift some of the administrative burdens on business. Both he and Prime

16

Minister Putin have underlined their commitment to “modernisation” and are putting significant

sums into “innovation cities” and state innovatory organs such as Rosnanotech. And, crucially,

foreign investors are again to be wooed. Medvedev has underlined how important the technology

and management skills that foreign companies can bring to Russia will be to successful

modernisation and has placed First Deputy Prime Minister Shuvalov in charge of dealing with the

tax, customs, bureaucratic, regulatory and other problems which face any company investing into

today’s Russia.

There has been some scepticism about whether the modernisation agenda really will or can meet

the challenge. As post-crash oil prices have risen again, Russian economic growth has resumed

(probably 4% this year) and the fiscal pressure for genuine reform correspondingly diminished.

Commentators argue that corruption - which is in many ways the core problem - goes so far up the

Russian system that there is simply no incentive or political will to deal with it effectively (a point

rather confirmed by the inadequacy of the response, so far, to the Magnitsky scandal). And there

has to be a real question as to how much all this government driven activity can achieve given the

well documented weaknesses of the Russian state (although it was encouraging recently to hear

Medvedev publicly emphasise the evident fact that the success or failure of modernisation

ultimately depends on the private sector).

Nevertheless the welcome mat is again down for Western investors. And it is important to note that

investors are responding. Post-crash, capital flight has again subsided and the level of external

investment into Russia as a proportion of GDP is currently at about the same level as for China. So,

as Western business re-engages, what are the key points for Western companies and governments

going forward? I would emphasise three.

First and foremost, the history unambiguously underlines the key role the Russian state continues

to play in the success or failure of Western projects, both in terms of the general environment and

the particular treatment of particular projects. In Russia, government is much more closely

enmeshed in virtually all business activity than is the case in the West. The most successful

investment ventures I dealt with in my time in Moscow were those which saw it as a core task to

get close to, and stay close to, the relevant bits of central and local government and ensure they

were comfortable with the way they wanted the project to go. This has implications too for the

approach of Western governments, and the EU, to Western business activity in Russia. They need to

be very ready, readier than in the case of investments in Western countries, to deal with problems

at a government-to-government level. And while they cannot expect to significantly influence

Russia’s general legal and administrative systems (Russia is far too big, proud and domestically

preoccupied for that) they should be doing all they can to pull Russia into international

organisations and arrangements which offer legal protection of one sort or another for foreign

business activity. In particular, the credibility of the whole modernisation agenda would be

immensely enhanced if the current negotiations for Russian entry into the WTO and the OECD, and

on the amended EU/Russia Partnership and Co-operation Agreement, could be brought to an early,

successful, conclusion.

17

The second point is that the fate of Western investments in Russia has varied enormously

according to the sector concerned. For most economic sectors – notably consumer goods, retail

and, as noted above, motor assembly – Western companies have put the money in, adjusted with

greater or less pain to the peculiar pressures of the Russian environment, and now have good going

concerns – all without headlines. These success stories are gradually extending to much trickier

sectors – such as agriculture. The investments which have earned the negative headlines, and

which have often run into real difficulties, are heavily concentrated in resources, and particularly oil

and gas – which is, of course, the most visible and internationally significant sector of the Russian

economy. This is the sector where Russia (in common with a number of other major hydrocarbon

producers) has been most determined that the state resume a leading role. Even here, small

Western projects have gone ahead with some success, but it is now quite clear that major projects

will only be able to succeed with significant (and probably majority) Russian involvement.

But the third, and final, point is that Western companies have almost certainly been more cautious

about Russia than is justified by the facts. A lot of “Western investment” at the moment comes

from such sources as Cyprus – ie not Western at all, but Russian money. And the investment that

has taken place is highly concentrated – over 50% in Moscow and the Moscow region alone. Whole

swathes of Russia still await Western interest and involvement. Above all, Russia seems unable to

shake off an exaggeratedly negative image in the West. While Western investors certainly face real

challenges in Russia, there is no reason to believe that these are in a different league from those

offered by other big emerging market investment destinations such as China or India. I lost count

of the number of British businessmen who, when they finally got around to visiting Russia, said to

me “this is not the impossible country I expected – we could certainly do business here”. Of course,

all the problems mentioned above – the corruption, the bureaucracy, the legal uncertainties the

infrastructure – are real, and are a real impediment. But precisely as a result, Russian assets are

relatively cheap, and, as a whole range of British and other projects demonstrate, can be turned

into successful investments. And, to revert to where I started, there is much more to this than the

money. A real inflow of Western technology, capital and expertise has a crucial contribution to

make to a genuine modernisation of the Russian economy, and to breaking down the barriers

which, for centuries, have divided Russia from the West. Governments on both sides have every

interest in helping that happen.

18

PCA and tPCA and tPCA and tPCA and the Modernisation Partnershiphe Modernisation Partnershiphe Modernisation Partnershiphe Modernisation Partnership

bybybyby

Adrian SeverinAdrian SeverinAdrian SeverinAdrian Severin

Vice-President of the S&D Group in the European Parliament

I. INTRODUCTIONI. INTRODUCTIONI. INTRODUCTIONI. INTRODUCTION

The dynamics of the EU-Russia relationship is currently facing a period of repeated attempts at

revitalisation. The talks concerning the future Partnership and Co-operation Agreement (PCA) are

continuing without having produced any significant results on the areas that are of most

importance, namely trade and energy.

The previous Partnership and Co-operation Agreement was built on the idea of integrating the

European Union and Russia using the instrument of the so called four “common spaces”

(economics and energy, foreign and security policy, internal security and justice, and education and

culture). But the “integration” process is far from being a success. In this sense, one of the most

important reasons for the lack of success was, on the one hand, due to Russia’s reluctance towards

the idea of unilateral adoption of EU standards and, on the other hand, due to EU's reluctance

towards the hypothetical idea of converging towards Russian standards.

So, considering the state of play of the relations between the European Union and Russia, as well

as the contemporary challenges, including the lessons we learned in the last two decades, it is

necessary to develop new instruments based on more adequate approaches, in order to establish a

mutual lucrative partnership.

II. BUILDING A CONSTII. BUILDING A CONSTII. BUILDING A CONSTII. BUILDING A CONSTRUCTIVE AND TRUSTRUCTIVE AND TRUSTRUCTIVE AND TRUSTRUCTIVE AND TRUST----BASED RELATION WITH BASED RELATION WITH BASED RELATION WITH BASED RELATION WITH RUSSIARUSSIARUSSIARUSSIA

The Lisbon Treaty that started to produce effects on December 1, 2009 will generate major

changes in the way that the European Union works, and will make the EU more effective in the

foreign affairs arena, in particular,, creating positive results for the Union’s foreign relations, both at

bilateral and multilateral level.

Against this background and with such a starting point, one could say that the European Union and

the Russian Federation are linked by substantive ties of political and cultural nature, by a

substantive partnership in economy, trade, energy, culture, science, education, transport and the

environment. A simple glance at the world map is enough to make it clear to anyone that Russia

and the EU, sharing common security interests and an important common neighbourhood, have

only one choice in our multi-polar globalised international environment – to further develop the

existing partnership. Such an approach towards EU-Russia relations should take into account two

fundamental arguments: "proximity" and "complementarity".

19

With respect to the "proximity" argument, EU-Russia relations have a strong strategic component,

being characterised not only by economic interests, but also by the objective of close co-operation

in various international areas. Geographically, Russia is and will remain the European Union's

closest neighbour and will continue to play a protagonist role in the Euro-Asian and Euro-Atlantic

space. From this perspective, the European Union and Russia are "condemned" to co-exist one in

the proximity of the other and even, in a particular situation, one amongst the other, as it is the

case for the Kaliningrad region, situated inside the EU.

With respect to the "complementarity" argument, one would speak about the EU - Russia's

complementarities between the needs and resources - the latter being complementary at almost

all levels. On the one hand, the Russian Federation is the main provider of energy for Europe, as

well as one of the most important suppliers for the large majority of the raw materials used by EU

industry. On the other hand, the European Union is the main investor in the Russian economy, as

well as an important provider of technological know-how.

In such a dynamic environment, the existence of these two aforementioned arguments, namely

"proximity" and "complementarity", could develop into two potential scenarios: on the one hand, a

positive scenario, characterised by "partnership" between the two global players that understand

the need to perform together on the international stage, or, on the other hand, into a negative

scenario, characterised by a "conflicting" attitude, where both players are trying to maximise their

position by attacking each other. Nevertheless, in such a "strategic relationship" that may either

take the form of a "partnership" or a "rivalry" between two subjects, the "complementarity"

constitutes an insufficient argument and does not guarantee co-operation. The co-operation

between two global players is a political option and this option must be rational and positive.

In addition to the two arguments of "proximity" and "complementarity", another argument that

contributes to shaping EU-Russia relations arises, namely the solidarity of their interests, at global

and regional level. It is not difficult to identify a multitude of such convergent interests. With

Russia, on the one hand, playing the role of a declining hard superpower and the European Union,

on the other, undertaking the role of an emerging soft superpower, both of them being keen to

develop a multi-polar order. Such a multi-polar order should be characterised by a coherent

symmetry, where the power poles are not peaks of pyramids, but rather the centres of circles

formed by interconnections. By networking those centres, one will assure global inclusiveness and,

through that, global coherent stability.

In conclusion, one could argue that, in relation to Russia, the EU is too weak to opt for confrontation

and too dependent to opt for another partnership than a strategic one. The differences between the

EU and Russia are substantive, thus the cultural, legal, institutional, economic, political

harmonisation process should be transformed into one of their common priorities. The EU and

Russia are too close (geographically, culturally, and economically) to not recognise that their co-

operation offers an opportunity for both their own and the world's prosperity and security.

Considering the "proximity", the "complementarity" and the "convergence" between the EU and the

Russian Federation, the only rational way to proceed is to develop a "strategic partnership" that will

20

help both of them to maximise their own security and their importance in the globalised world,

while consolidating the global security and stability.

III. THE PARTNERSHIPIII. THE PARTNERSHIPIII. THE PARTNERSHIPIII. THE PARTNERSHIP AND CO AND CO AND CO AND CO----OPERATION AGREEMENT OPERATION AGREEMENT OPERATION AGREEMENT OPERATION AGREEMENT ---- NEW DEVELOPMENTS NEW DEVELOPMENTS NEW DEVELOPMENTS NEW DEVELOPMENTS

A Partnership and Co-operation Agreement serves - as the term implies - to organise

communication, consultation, co-ordination and collaboration between two entities acting on an

equal footing, namely EU and Russia, in a comprehensive area of political and economic matters.

After the former Partnership and Co-operation Agreement expired in late 2007, and although it was

extended, the EU and Russia agreed to replace it in the foreseeable future with a new agreement of

a superior political quality. EU-Russia negotiations on the new partnership agreement might be

seen as a mirror, which reflects the most important dilemmas and tendencies in relations between

the two parties.

The negotiations on the new PCA were officially launched on July 4, 2008, in the aftermath of the

EU-Russia Summit in Khanty-Mansiisk (26-28 June 2008), following several years of quite frosty

relations. Soon after, on September 1, 2008, in the aftermath of the Georgia-Russia war in South

Ossetia, an Extraordinary European Council took the decision to suspend the negotiations of the

PCA until the Russian troops had withdrawn to their positions held prior to August 7. Eventually,

even if the general feeling within the EU was that Russia did not accomplish its commitments

towards the international community in relation to Georgia, the negotiations were resumed in

December 2008.

The current negotiation process has revealed a major difference of approach between the EU and

Russia. Thus, while the European Union pushes forward towards a comprehensive agreement,

attempting to upgrade, by better structuring, its current relations with Russia, the latter bids for a

mere framework agreement, which, in its view, should be complemented by sectorial agreements,

selected in accordance with the priorities jointly agreed. The various Partnership and Co-operation

Agreements up to now have been limited in thematic scope and tended to be highly technical in

content. A comprehensive agreement, by covering all topics of strategic interests for both sides,

could consolidate the technical solidity and legal rigour of the bilateral co-operative mechanisms,

whilst at the same time placing them within a clear conceptual frame, that addresses the political

process on a far greater scale demanded by the alleged specificity and closeness of relations

between EU and Russia. If achieved, such an Agreement and the Partnership based on it might

open up new doors for a true pan-European arrangement going beyond the EU, which could

become crucial within the global system of security and stability and that will be able to hold its

own political agenda in the competition with the traditional or emerging global players like China,

India, United States and others. For the time being apparently, Russia is not convinced that this is

the right direction or simply the direction which better suits its vital national interests.

Such a different approach by the Russian side regarding the actual aims of the current negotiations

might be expressed by the following three options: firstly, Russia does not see the EU as a real

global protagonist, thus not a real strategic partner of paramount importance, and therefore looks

for limited sectorial relations with EU, selected in accordance with its particular priorities only,

21

rather than for a coherent network of agreements. Secondly, Russia avoids entering into firm legal

relations with the European Union, instead preferring a wide-open legal frame generating loose

obligations complemented by clearer and more detailed political instruments which offers a non-

legally binding guide which would always be useful but never compulsory. (This is reflected in the

preference given by Russia to the Partnership for Modernisation, which was promoted as a

politically comprehensive but legally non-binding instrument, against the PCA which one tries to

keep at the level of a frame document. If a framework agreement could be interpreted and used in

various ways, a comprehensive agreement does not give space for such a forum shopping.) Thirdly,

Russia prefers legally binding comprehensive bilateral relations with the EU Member States rather

than with the European Union as a whole. Unfortunately, such an approach is being facilitated by

the attitude of some Member States, which are trying to bilaterally solve some of their own issues

with Russia, such as energy, security, transport etc. The conclusion would be that Russia does not

have and it is not ready yet for a real "European policy".

This approach, that currently characterises EU-Russia relations, might possibly be explained, by

what concerns Russia's motivation, as follows: a) Russia’s lack of trust in its partner, a feeling

which could be either a consequence of the misleading and erroneous past policy of the EU towards

Russia or a reaction to the weaknesses and inconsistencies of EU policy or both; b) Russia's

preference to negotiate with each member state rather than with the whole EU, thus enjoying a

more favourable balance of power within the talks, being able to select the national partners with

whom it could have privileged relations while decoupling them from the less friendly member

states and making profit of the more coherent and expeditious national diplomacy as compared

with the EU one.

On the other hand, in trying to convince Russia to embrace the idea of a comprehensive

relationship, the European Union has not only the problem that some of its member states find it

more favourable to discuss solutions to the problems they face with Russia bilaterally, but also the

problem emerging from its incapacity to accommodate all its member states priorities and needs

within a true general "Russian policy". As long as the member states are not convinced that their

interests can be better promoted and defended by the EU, they will keep looking to bilateral exits.

Therefore, the European Union and, implicitly, the European Parliament need to actively promote a

coherent policy towards Russia and to encourage the acceptance by Russia of a coherent and

legally-binding relationship. Likewise, the EU Member States must be encouraged to feel that such

a formula would provide each of them with an increased power and with a better guarantee of their

rights, as opposed to the case where they would be directly involved in negotiating for them within

the bilateral formats.

In order for Russia to accept such a formula, several actions would need to be conducted. Firstly,

the trust between the two partners involved needs to be increased. (The increase of trust can be

obtained if relations between the European Union and Russia are approached from a symmetrical

perspective and not a non-symmetrical one, that is if the EU accepts Russia as an equal partner

and not an inferior one.) Trust will grow proportionally stronger with the increase in the EU’s power

22

and its institutional coherence. Weaknesses and inconsistencies as well as strategic confusion and

shyness of the European Union are not beneficial factors that would encourage Russia to adopt a

coherent policy with respect to the European Union. Secondly, it should be made clear that the

European Union could offer bigger guarantees to Russia than each member state separately.

On the other hand, the member states would be more capable of ensuring their interests by

negotiating with Russia through the European Union and not on a bilateral level. The more the

member states stick together inside the EU in negotiating with Russia, the more powerful the EU

will be; the more powerful the European Union is, the better guarantees it could offer Russia and

therefore Russia becomes more interested in collaborating with it; the more Russia negotiates with

the EU, the more powerful the EU will be and therefore its member states which currently feel

insecure in their relationship with Russia will start to feel better protected; thus the better those

members feel protected, the more friendly they will become towards Russia and the more friendly

they are, the more motivated Russia will be to negotiate with the EU as a whole. Thus a vicious

circle could be transformed into a virtuous circle.

Nevertheless, Russia will be convinced only through acts and facts that the EU offers the advantage

of more important and complex transactions, of solid guarantees with respect to its acquired rights

and, especially, of its capacity to avoid unpleasant situations provoked by the Russo-sceptic

member states. Such an approach would constitute a crucial advantage in the medium term.

IV. FINAL REMARKSIV. FINAL REMARKSIV. FINAL REMARKSIV. FINAL REMARKS

The Soviet Russia decided to unilaterally put an end to both Cold War and the Soviet Union, thus

leaving the Euro-Atlantic West without its main strategic enemy, in exchange for getting an

adequate role within the post bipolar world order. Taking that decision as its own victory the Euro-

Atlantic West, while accepting that Russia is no longer its enemy but being unable to accept it as a

strategic partner, opted for a unipolar world order, which excluded Russia and tried to ensure that

Russia could not fully neutralise its strength or at least tried to contain it in a sustainable manner.

Refused as an ally, Russia was pushed assuming the role of “legitimate opponent” (i.e. a quasi

enemy) within the new world disorder, which followed the collapse of the unipolarism and,

incidentally, facilitated a relative resurrection of the Russian power. Relieving Russia from its role

of bastion of the anti-Islamic fundamentalism and providing it the asset of the high international oil

and gas pricses, the Euro-Atlantic West took upon itself a burden which it is unable to carry alone

thus increasing the strategic importance of the Russian factor. That is why, currently, the EU should

adopt a new Ostpolitik whose aim is to offer Russia the integration refused two decades ago. This

means to abandon the zero sum game logic for a win-win game - one expressed through a strategic

partnership. Such an EU-Russia partnership could be only facilitated and strengthened by an EU-

Russia-US trialogue but this would only weakened by any attempts of the EU Member States to

solve their problems in relation to Russia by way of bilateral arrangements. The bilateralist

temptations only discourage Russia to adopt a European policy, while consolidating the old

Russia’s instinct to move its agenda and increase its own security by dividing the Euro-Atlantic

West. In the medium and long term, this will be detrimental for everybody with Russia and the EU

23

both missing the chance to rely on a strong partner, while the US would miss the opportunity of a

better structured world within which the power is distributed in a balanced way and the burdens are

fairly shared. This Paper defines a possible EU concept in that direction from a social-democratic

prospective.

From the analysis so far, it can be deduced that the European Union must articulate a unitary and

coherent policy towards Russia, thus avoiding the current situation where, on the one hand, several

EU member states prefer conducting bilateral policies with Russia and, on the other, Russia itself

favours punctual relations with the European Union and bilateral ones with the member states.

Such a unitary and coherent approach would not only be beneficial for the EU and its member

states, but also for Russia, since the EU’s political offer is coherent and adequate.

24

EUEUEUEU----RRRRussiaussiaussiaussia EEEEconomic conomic conomic conomic CCCCoooo----operation: a operation: a operation: a operation: a WWWWay ay ay ay FFFForwardorwardorwardorward

bybybyby

Dennis KredlerDennis KredlerDennis KredlerDennis Kredler

Strategy and International Policy Relations Manager, European Round Table of Industrialists; Advisor to EU-Russia Industrialists' Round Table

Sergey AfontsevSergey AfontsevSergey AfontsevSergey Afontsev

Department Director, Institute for World Economy and International Relations; Advisor to EU-Russia Industrialists' Round Table

Although economic experts are still uncertain whether the recent crisis is really over –given growing

public deficits, public and private debt challenges, and exchange rate volatility –there is no doubt

that it has changed the global economic landscape more profoundly than meets the eye. Most

countries of the European continent, including Russia, experienced major difficulties. At the same

time, leading developing economies, while initially hit hard by the crisis, bounced back quickly, and

now continue to catch-up, as illustrated by their improving relative positions compared with the EU,

Russia and others.

Both the EU and Russia must face these competitive challenges. But rather than attempting to face

them individually, Russia and the EU should combine their efforts to make better use of both

economies’ complementary comparative advantage structure. To accomplish this, private business

initiatives should be combined with responsible policies to support bilateral co-operation in trade,

investment, and innovation.

The EU-Russia Industrialists Roundtable (IRT) has a long record of developing policy

recommendations to policy makers. Each spring and autumn, the IRT highlights the priorities

shared by business actors to the EU-Russia Summits, and makes practical proposals to advance

bilateral economic co-operation. In May 2010, it approached the EU-Russia Summit in Rostov-on-

Don with an extensive set of proposals aimed at boosting the growth of our economies.

The most important strategic issues on the IRT agenda are Russia’s WTO accession and conclusion

of the new EU-Russia Agreement, which is currently under negotiation. The slow progress on both

issues is disappointing, especially as it does not reflect the considerable potential gains of the

mutually beneficial co-operation that these agreements would facilitate. IRT strongly believes that

progress in these areas is a key to the formation of a reliable legal basis for long-term business and

economic relations between Russia and the EU.

Both negotiations are closely interrelated, as Russia’s WTO membership would radically simplify

progress on the economic part of the new Agreement: in the absence of WTO membership, all the

basic rules of the Agreement governing trade and investment would need to be spelled out

explicitly, which could further delay the completion of the negotiations. In turn, progress in the

negotiations on the new Agreement (such as consensus on the perspectives of establishing a

25

common economic area based on freedom of trade, investment, and movement of people) would

vitalise both parties’ efforts to achieve Russia’s WTO membership as soon as possible.

In this setting, it is crucially important that the formation of the Customs Union between Russia,

Belarus and Kazakhstan is not interpreted as either an alternative or a barrier to WTO membership.

Provided that the Customs Union is based on WTO principles, the Kyoto convention on the

simplification and harmonisation of customs procedures and best international practice, it can be

an important step towards Russia’s WTO accession. In cases where its rules and regulations

deviate from the terms of Russia’s WTO accession agreed between the EU and Russia (like with

some tariff lines of the Common External Tariff), governments should swiftly address the policies of

the Customs Union that create new barriers to achieving Russia’s WTO membership. Efforts are

underway to address these issues.

Meanwhile, important steps to improve competitiveness and shift to sustainable growth can be

made even before these two strategic goals are achieved. Investment and technological co-

operation are the natural issues to start with. Because of its importance in generating economic

growth, both the EU and Russia have an increasing need to boost private sector investment. EU-

Russia economic co-operation should make full use of their complementary economic structures.

The promotion of bilateral investment flows can be a key to their economic dynamism. Capital,

technologies, and skills from EU investors, coupled with Russia’s natural and human resources and

consumer markets can promote economic growth and reinforce economic integration to mutual

benefit.

In its messages to the Stockholm EU-Russia Summit in November 2009, IRT announced the

Innovation Dialogue initiative. This Dialogue will seek to identify common approaches to an issue

which is a policy priority in Russia (as part of the modernisation agenda) as well as in the EU (as

part of the Europe 2020 Strategy). In an effort to support the effective inclusion of this issue in the

EU-Russia Partnership for Modernisation, the Innovation Dialogue intends to tackle issues in the

area of investment co-operation that are directly related to technological development. This

includes improvements in the legal environment for innovation development and investment in

technological modernisation, and creation of a joint market for the development,

commercialisation and adoption of innovations. In addition, the conditions to promote technology

transfer are to be examined. Accordingly, IRT has already outlined the following priorities for the

official EU-Russia Dialogue on this matter:

• to strengthen the legal framework for innovative development and business-to-business co-

operation

• to boost ties to advance formation of an EU-Russia single market for the creation,

commercialisation and adaptation of innovations

• to develop mechanisms to facilitate co-operation at the project level, especially in areas where

joint activities by Russian and EU partners can bring strategic competitive advantages to our

economies

26

One of the policy fields critical to the success of the Innovation Dialogue is investor protection. In

particular, IRT stresses the necessity for concrete steps to be taken in order to protect intellectual

property rights (including patent law harmonisation, joint guidelines for patent expertise, and

providing adequate legal support for licensing agreements). This would foster the transfer of

technology and know-how. Eliminating discrimination of investors on the basis of nationality is also

an urgent issue, given that both Russian and European companies often feel discriminated against

on partners’ markets. For Russian investors in the EU, the principal concern is a perception of

unequal treatment, especially in the high-tech and energy sectors. For EU investors in Russia,

concerns regarding investment protection, administrative barriers and entry restrictions remain the

principal factors influencing investment decisions.

Given these concerns, IRT argues that in cases where discriminatory treatment of particular

investors on the basis of their national affiliation is suspected, there should be an impartial

investigation through the existing dispute resolution mechanisms and the mechanisms

safeguarding competition. The main priority is to apply non-discriminatory (“national”) treatment to

each other’s investments. IRT also argues that in sectors of specific national concern, where the

transition to full non-discrimination could take longer, the careful use of the principle of reciprocity

to unlock new investment opportunities should be considered. Naturally, reciprocity should only be

pursued if it can lead to market opening, and not used to justify a protectionist response to

‘unwanted’ policies by the partner. In any case, the transition to non-discriminatory treatment

should take place as quickly as possible.

As the Innovation Dialogue is by definition a public-private initiative, IRT started a series of

workshops to discuss opportunities for path-breaking projects involving investment and

technological co-operation between Russian and EU-based companies, and identify policy

innovations needed to implement them.. The first Project Workshop took place in Novocherkassk

(Russia) in May 2010. Its findings will be integrated into the IRT’s messages at the next EU-Russia

Summit in Brussels. Preparatory work for future workshops is underway to provide further insight

into supportive joint policy action.

Another issue where radical policy changes would provide a welcome facilitation of economic co-

operation is the easing of cross-border movement of people. Professional skills are a major driver

of innovation, and thus a precondition for sustained economic growth. In addition, it is essential to

address this issue to make the Partnership for Modernisation a success: facilitating the cross-

border movement of people will foster the exchange of knowledge, better flow of know-how,

technology transfers, and will also facilitate foreign investment which usually requires cross-border

movements of professionals.

Despite several steps in recent years (including recent Russian legislation on hiring foreign

specialists), limited progress has been achieved in effectively reducing obstacles to free movement

and making it less costly. In particular, the current EU-Russia visa facilitation agreement has not

noticeably simplified visa application procedures or reduced the bureaucratic burden and

27

application times on either side. So far, businesses feel little positive effect of these measures.

Both EU and Russian companies face costs and a lack of flexibility as a result.

Taking this into account, IRT makes the case for decisive steps to reduce visa barriers. As a

practical solution that can be implemented without any undue delay, IRT proposes to grant

multiple-entry 5-year visas to repeat travellers (all persons who visited Russia or the EU on any visa

at least twice). As applications for these visas provide sufficient opportunity for scrutiny and allow

the confirmation of a bona fide status for a visa applicant, repeating these procedures every time a

visa is applied for appears unnecessary. This measure would be especially helpful for highly skilled

specialists and professionals who need to travel frequently between the EU and Russia.

In the long term, IRT argues for total elimination of reciprocal visa requirements for travel between

Russia and the EU, including non-Schengen countries. Equally, all existing restrictions on free

movement of EU citizens across Russia, including registration requirements for expatriates, should

be lifted. This will bring new dynamism to business contacts and help join professional

competences to make our economies more competitive.

As the key player in fostering a constructive EU-Russia business dialogue, IRT works to translate

business perspectives and expertise into recommendations for policy measures that can contribute

to an improved investment climate and the promotion of economic growth. Decisive steps to

complete Russia’s WTO accession and negotiations on the new EU-Russia Agreement, moving

forward with a Dialogue on innovation, and the progressive elimination of visa barriers are crucial

to reap the benefits of the EU and Russia’s complementary economic structures. By working

together more closely, both economies will be better prepared to face competitive challenges in

the future.

28

The EUThe EUThe EUThe EU----Russia Russia Russia Russia PPPPartnership for artnership for artnership for artnership for MMMModernisationodernisationodernisationodernisation

bybybyby

Katinka BaryschKatinka BaryschKatinka BaryschKatinka Barysch

Deputy Director of the Centre for European Reform in London2

The EU and Russia launched a ‘partnership for modernisation’ at their last summit in Rostov on

May 31st / June 1st. The initiative – first muted by Commission President Barroso at the previous

summit in late 2009 – is meant to help Russia diversify and remodel its economy, and breathe

new life into the stale and sometimes tense EU-Russia relationship. It is unlikely to succeed in

either objective.

At first glance, an EU-Russia modernisation partnership looks like a clever attempt to improve EU-

Russia relations. Disagreements and tensions will remain inevitable in the EU’s dealings with

Russia, whether over gas sales, Iranian sanctions or the fate of Ukraine. The modernisation

partnership could encourage co-operation that is independent of politics and instead focuses on

technical, environmental or social issues. Such co-operation could help to stabilise bilateral

relations and create mutual trust. By fostering day-to-day co-operation and exchanges, it could

mitigate the pernicious intellectual isolation in which many Russian bureaucrats and scientists

seem to operate today. That, in turn, could facilitate progress on more contentious political and

economic issues.

Indirectly, a modernisation partnership could contribute to the EU’s ultimate aim: to make Russia

more democratic, accountable and open. Joint projects in business, science and education could

allow the EU to acquaint Russia with European norms and values, not through lecturing – which the

Russians loath – but through day-to-day co-operation. In the medium term, successful

modernisation could help to transform the apathetic Russian middle class into an entrepreneurial

class that demands property rights and civil liberties.

MODERNISATION MODERNISATION MODERNISATION MODERNISATION –––– THE NEW NATIONAL OB THE NEW NATIONAL OB THE NEW NATIONAL OB THE NEW NATIONAL OBSESSION SESSION SESSION SESSION

Politically, the modernisation partnership looks promising. ‘Modernisation’ is what Russia talks

about today. President Medvedev has warned repeatedly that unless Russia radically reforms its

economy, the country will face terminal decline. Russia, he argues, must diversify away from

exporting energy, and create jobs for the 95 % or so of the workforce that does not work in oil and

gas. A survey published by the EU-Russia Centre at the beginning of 2010 showed that Russian

policymakers overwhelmingly believe that Russia needs outside help with modernisation. The EU,

as Russia’s biggest trading partner, foreign investors and source of capital and technology, is the

logical partner for this. This insight seems to be accepted at the highest level. A memo from the

2 www.cer.org.uk

29

Russian foreign minister, leaked in May, called for Russia to forge ‘modernisation alliances’ with

European countries.

The EU has found that lecturing Russia on the need to reform does not work. So why not speak in

Russia’s own interest by offering help with what has become – according to its leaders – a national

priority? Moreover, some EU policy-makers hope that since it is mainly President Medvedev who is

pushing for modernisation, a refocusing of EU-Russia relations on this topic may strengthen his

hands leave vis a vis he more statist and authoritarian Putin clan

Last but not least, the EU has a big stake in Russia’s future economic success. Russia’s fast-

growing domestic market has become the destination of €100 billion worth of goods and services

made in the EU (although that figure dropped significantly during the 2009 recession). Scores of

European companies are doing good business within Russia, from building cars to selling groceries.

A successful modernisation partnership would generate new business opportunities for companies

from the EU, which would, for example, be able to sell energy savings technologies to Russia or

help with the development of pharmaceuticals.

GRANDIOSE PROJECTS WGRANDIOSE PROJECTS WGRANDIOSE PROJECTS WGRANDIOSE PROJECTS WILL NOT DELIVER CHANILL NOT DELIVER CHANILL NOT DELIVER CHANILL NOT DELIVER CHANGEGEGEGE

However, while the modernisation partnership looks promising at first glance, it is likely to run into

a host of difficulties in practice.

First and foremost, what most people in the EU mean by modernisation is very different from the

notion held by the Russian leadership. Although President Medvedev likes to talk about the need

for broad change, from civil society to the military, the main focus of his modernisation agenda is

innovation. Russia, he says, must be transformed from a petrostate into a dynamic, knowledge-

driven economy through the spread of technology, preferably home-grown. (Putin’s notion of

Russia’s renewal is fuzzier still. He likes to prefix words like modernisation with ‘conservative’ and

highlights the need for stability.)

The idea that Russia could leapfrog from an economy that relies on oil, gas and heavy industry

towards a cutting edge, high-tech one is spurious. Russia should first try to move existing industrial

sectors up the value chain by using imported technology and know-how. Large-scale indigenous

innovation may come later.

Furthermore, the Russian leadership’s concept of innovation is an odd one, being predominantly

top-down and focused on grandiose projects. A publicly financed nanotechnology institute, state-

owned development banks, a brand-new ‘innovation city’ outside Moscow set up by government

fiat – these are the building blocks of Medvedev’s innovation economy.

In today’s dynamic global economy, picking winners is not something that governments can do. A

truly innovative economy needs open markets, venture capital, free-thinking entrepreneurs, fast

bankruptcy courts and solid protection of intellectual property. Russia’s business environment is

30

characterised by wide-spread monopolies, ubiquitous corruption, stifling state interferences,

contradictory laws and slow-moving, biased courts.

The Putin-Medvedev administration has announced a new anti-corruption drive, a reduction in

import tariffs on high-tech goods and the sale of €30 billion worth of state companies (or stakes

therein). Yet there is no sign that it is embarking on the kind of thorough reform that would be

needed for a radical improvement in the business environment. In the World Bank’s latest survey of

the ease of doing business in 183 countries, Russia ranks 120th, far behind other emerging

economies such as South Africa, Turkey or China, and just ahead of Nigeria. When Insead, the

business school, looked more specifically at the components of the business environment that

matter for nimble, inventive companies, Russia scored just as poorly. In Insead’s ‘innovation index’,

Russia ranks in the middle of the 130-odd countries included, some ten places behind India and 20

behind China. The challenge is massive.

ARE RARE RARE RARE RUSSIA’S BUREAUCRATS USSIA’S BUREAUCRATS USSIA’S BUREAUCRATS USSIA’S BUREAUCRATS UP TO IT?UP TO IT?UP TO IT?UP TO IT?

A state-led approach to economic change is particularly problematic in today’s Russia with its

hierarchical, corrupt and slow-moving bureaucracy. Sergei Guriev, a Moscow-based economist, has

compared the quality of Russia’s state administration and legal system of today with that of South

Korea 12 years ago, before it embarked on its impressive growth spurt. He concluded that South

Korea’s institutions were quite simply in a different league and that Russia’s chances of catching

up with the world’s most developed countries were slim.

The Russian leadership hardly trusts its own bureaucracy to implement a road building programme.

How is it supposed to construct a replica of Silicon Valley? To its credit, the Russian government is

seeking a bigger role for private business in the transformation of the economy. It has persuaded

Cisco, Siemens, Nokia and Google to set up shop in Skolkovo, the, yet-to-be-built ‘innovation city’

outside Moscow, and invited Western companies, from pharmaceuticals to venture capital, to start

up joint projects with Russian organisations.

However, even if such isolated initiatives were successful, their impact on the wider economy would

be limited so long as competition is restricted and successful ventures fear being cut down by

kleptocratic officials. There is even a risk that the billions of dollars that the Russian government is

now pumping into selected sectors and high profile projects will not only be wasted; they could

damage Russia’s future growth prospects. Cliff Gaddy and Barry Ickes, two US economists, warn

that subsidies for new industries and institutes will create a constant, future demand on public

resources that might better be spent elsewhere.

In short, the modernisation and diversification of the Russian economy does not need vertical state

intervention but a horizontal improvement of the business environment. The Russian leadership

would have to clamp down on corruption, improve competition, reform the education and science

sector and strengthen the rule of law. Igor Yurgens and his colleagues at the Insor think tank go

further. They argue that real modernisation does not only need comprehensive economic reform

but also political opening and social change. While full democratisation is not on the cards in

31

Russia today, (Putin may well decide to reoccupy the presidency in 2012), more political

competition, decentralisation and accountability would indeed be a prerequisite for building a

modern economy.

HOW TO MEASURE SUCCEHOW TO MEASURE SUCCEHOW TO MEASURE SUCCEHOW TO MEASURE SUCCESS?SS?SS?SS?

The question the EU needs to ask itself is whether it should accept and support Russia’s flawed

concept of modernisation. Or whether it should make support conditional on Russia implementing

at least some of the changes needed to strengthen the rule of law, property rights and competition.

In the past, EU attempts to cajole or persuade Russia to implement reforms have had limited

success or no impact. The modernisation partnership is unlikely to be very different.

The savage economic downturn that Russia had to endure in 2009 fuelled some Western hopes

that Moscow may get serious about reform. But with the oil price back above $70 per barrel and

Russian growth recovering fast, complacency has returned to the Russian leadership. Russia’s

political system may well have become too rigid and too dominated by vested interests to achieve

radical reform from within the current regime. Brezhnev-era stagnation looks like a more plausible

scenario than successful modernisation.

The EU may therefore be setting itself up for failure. The modernisation partnership is yet another

EU policy the success of which is predicated on positive change within Russia. If Russia does not

manage to improve its economy, how can the EU ever claim its new initiative is working?

The initial joint statement from the Rostov summit papers over such fundamental questions stating

lamely that the partnership for modernisation will be a “flexible framework for promoting reform”.

Then it lists more than a dozen “priority areas” for the new co-operation – expanding trade and

investment, helping small companies, making Russia’s economy greener, supporting research and

development, fighting corruption, improving the judiciary, bringing civil society on board – while

stressing that “other areas of co-operation can be added as appropriate”. The modernisation

partnership is also supposed to build on progress that the EU and Russia have already achieved

through their existing programmes - most notably the four ‘common spaces’ for mutual co-

operation and integration in economics, energy, security, foreign policy, education and culture

established in 2003. But progress here has been limited – which raises fundamental questions

about the new modernisation partnership.

Through the four spaces programme, the EU and Russia already operate joint committees and

working groups on information technology, energy efficiency, basic research, the car industry and

much more. However, the 2009 progress report on the implementation of the four spaces suggests

that most of them work badly or not at all. It is not immediately obvious why rebranding them

under the umbrella of a modernisation partnership would breathe new life into them.

32

SOME LESSONS FROM GESOME LESSONS FROM GESOME LESSONS FROM GESOME LESSONS FROM GERMANYRMANYRMANYRMANY

Now that the EU has decided to go down the route of a modernisation partnership, it should

perhaps draw some lessons from the German-Russian modernisation partnership that had already

been launched back in 2008. Unlike the EU concept, which, so far, consists of a shopping list of

vague targets, the German initiative is focused on five well-defined areas: health, energy efficiency,

logistics, training and a horizontal programme on improving the legal system (which in practice

mainly targets better business regulations). The EU’s temptation to link the modernisation

partnership to a plethora of broader objectives, such as fostering Russia’s civil society, is

understandable. But it may well kill off the new initiative before it gets going. The EU would be

better off selecting a small number of areas where it has genuine competence, such as improving

the customs administration, encouraging academic exchanges and tightening energy efficiency

standards – and leave more political questions to the existing EU-Russia dialogues on these issues.

A narrower focus would allow the EU to move the modernisation partnership away from the

political level. In the German-Russian partnership, the two governments usually kick off projects

and then quickly hand them over to academies, industry bodies and the like, who are also expected

to find their own money. The EU should resist the temptation to keep too much control over the

process and encourage the Russian government to ‘let go’ of bilateral projects too.

Less political involvement would have various advantages. It would allow the scientists, managers

and professors to ‘own’ their co-operation projects and develop them flexibly. It would get round the

inevitable resource constraint (in Moscow the same economics ministry official who is in charge of

the German-Russian modernisation partnership will presumably also look after the EU-Russia one.

France, Denmark and a growing number of other EU countries have their own bilateral

modernisation partnerships with Russia now). And it would help the EU to deflect Russian

accusations of unfairness and double standards that frequently stymie progress in other policy

areas. Despite the rather pragmatic nature of the German-Russian modernisation partnership,

Moscow is complaining about a lack of ‘reciprocity’, according to Justyna Gotskowska from

Poland’s Centre for Eastern Studies. The Russians are reportedly upset that the partnership has not

resulted in more Russian investment in German industries – as if the Berlin government could

command German companies to sell stakes to Russian investors.

If it is done well, the EU-Russia partnership for modernisation partnership could result in useful

projects at the level of industry, bureaucracy and civil society. It could broaden contacts between EU

countries and Russia beyond ministries and officials. It could help Russia to become more energy

efficient, adopt better technical standards and create better conditions for small enterprises and

other much needed changes. What the new partnership will not do, however, is transform the

Russian economy into a knowledge-driven one or restore momentum to EU Russia relations.

33

Making the Most of the Partnership for ModernisationMaking the Most of the Partnership for ModernisationMaking the Most of the Partnership for ModernisationMaking the Most of the Partnership for Modernisation

bybybyby

Marina LarionovaMarina LarionovaMarina LarionovaMarina Larionova

Dr. of Political Science, Head of International Organisations Research Institute of the State University – Higher School of Economics

VitVitVitVitaly Nagornovaly Nagornovaly Nagornovaly Nagornov

PhD in Economics, Deputy Director of the Centre for International Comparative Studies of the International Organisations Research Institute of the SU-HSE

2009 witnessed Russia’s uphill struggle to overcome the consequences of the global economic and

financial crisis in national, regional, and international settings. The crisis exposed, even more

sharply than ever before, the fact that sustainable economic growth will not be feasible without the

modernisation of Russian democracy and the establishment of a new economy. This paper

explores Russia’s government push for modernisation in several interconnected spheres:

technological and economic; political system, governance and society; and reforming international

political and economic institutions.

The authors review the main instruments employed for technological modernisation of the five

priority areas identified by the Presidential Commission on Modernisation and Technological

Development of Russia's Economy, namely energy efficiency, nuclear technology, space technology

and communication, medical technology and strategic information technology. They focus on the

programmes, amendments to existing laws, projects, funds allocated for their implementation, and

instruments aimed at attracting both domestic and foreign investment.

In considering economic modernisation, the paper highlights the most important legal changes for

stimulating investment and innovation, such as amendments to the list of strategic enterprises and

acts on special economic zones. The authors believe that the support of higher education

institutions, co-operation with enterprises and measures to support innovative infrastructure at the

federal higher educational institutions; as well as the programme to attract leading scientists to

Russian educational institutions will prove instrumental in promoting innovative development.

The analysis then turns to “work in progress” on modernising the political system, governance and

society, where most recent developments include introducing amendments to the federal law on

the status of judges in the Russian Federation, amendments to the federal law on political parties,

and amendments to the law on the rights of citizens to participate in referendums.

Having reviewed Russia’s modernisation agenda and its ups and downs, the authors explore how

Russia’s engagement with partners in international fora can promote modernisation processes.

The paper focuses on exploring initiatives and cases of success in the EU – Russia’s co-operation,

such as the Environment Partnership of the Black Sea Synergy initiative, agreements for five cross-

34

border co-operation programmes, negotiations on a partnership agreement for the peaceful usage

of nuclear energy and the fledgling Northern Dimension Partnership on Transport and Logistics.

Building upon these modest successes, it concludes with a set of proposals for a work plan on

some of the priority areas of the Partnership for Modernisation.

INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

At the “Meeting at Rostov-on-Don for their 25th Summit on May 31-June 1, 2010, the European

Union and Russia launched a Partnership for Modernisation to the mutual benefit of their Citizens”.

The key words in the Joint Statement are: “to the mutual benefit of their Citizens”.

Another point which makes sense to the reader of the statement is the mandate to the co-

ordinators of the partnership of the parties to develop a work plan, and the intention to subject the

dialogue to continuous monitoring, which should enhance its effectiveness and relevance. These

three dimensions raise hopes that the partnership can be made into a working tool. Otherwise, the

document is too unfocused in terms of departure, the means of delivery, and very vague in defining

the final destination. The objectives of promoting reform, enhancing growth and raising

competitiveness are indeed shared ones, but they are shared widely beyond the EU and Russia.

The Four Spaces and sectoral dialogues intended for use as key implementation instruments have

not been very productive so far; and the New EU – Russia Agreement has been long forthcoming.

The policy areas list includes 11 items and is called not exhaustive, with more to be added as

appropriate. There is a risk that it may duplicate the system of sector dialogues.

There can be no doubt that the dialogues are an essential mechanism for sharing information,

building understanding, bridging differences, comparing attitudes and forging common

approaches. They embrace a wide spectrum of EU-Russia relations, differing in their degree of

intensity and effectiveness. Several of them may become instrumental in the Partnership for

Modernisation and elements of institutional framework can be used3. This will require a change of

pace and pattern, bringing in other interested actors and amendments to or the development of

new work programmes.

3 PPCs, certain agreements and working groups, Agreement on Cooperation and Science between the EC and the

Government of the Russian Federation, Joint EU-Russia Steering Committee and Permanent Joint EU-Russia WGs

on a number of themes of joint scientific interest, including the ICT, the WGs within the Space dialogue;

coordinated calls of the 7th EC FP and Russian FTS@TProgramme 2007-2012; Agreement for cooperation

between the European Atomic Energy Community and the Government of the Russian Federation PPCs, certain

agreements and working groups, Agreement on Cooperation and Science between the EC and the Government

of the Russian Federation, Joint EU-Russia Steering Committee and Permanent Joint EU-Russia WGs on a number

of themes of joint scientific interest, including the ICT, the WGs within the Space dialogue; coordinated calls of

the 7th EC FP and Russian FTS@TProgramme 2007-2012; Agreement for cooperation between the European

Atomic Energy Community and the Government of the Russian Federation in the Field of nuclear safety, joint

Euratom-Russia WG on nuclear fission energy research in the Field of nuclear safety, joint Euratom-Russia WG on

nuclear fission energy research.

35

One possibility to make the next steps more tangible would be, first to link them to the immediate

and undoubted priorities of the partners, such as energy, energy security, energy efficiency, even if

there are differences in approaches. Second, make them project based. Third, accept that small

step by step progress can be a surer way to fast forward that towards a grander scheme. Fourth, try

to regard the Russia and EU member states successful projects as foundations upon which the EU-

Russia modernisation partnership can be built. Fifth, relate to shared objectives where the EU and

Russia co-operate proactively in international settings, such as the G8/G20 summitry, with the

latter already demonstrating positive dynamics.

RUSSIA’S MODERNISATIRUSSIA’S MODERNISATIRUSSIA’S MODERNISATIRUSSIA’S MODERNISATION PRIORITIES AND PRON PRIORITIES AND PRON PRIORITIES AND PRON PRIORITIES AND PRACTICAL WORK UNDERWAACTICAL WORK UNDERWAACTICAL WORK UNDERWAACTICAL WORK UNDERWAYYYY

THE FIVE TECHNOLOGICTHE FIVE TECHNOLOGICTHE FIVE TECHNOLOGICTHE FIVE TECHNOLOGICAL AREASAL AREASAL AREASAL AREAS

As the global economic crisis hit the world in 2008, imbalances in the structure of Russia’s

economy were felt ever more acutely. In March, the Russian government put forward for discussion

a draft programme of anti-crisis measures by the Government, which was subsequently adopted in

April 20094. In May, the President outlined a plan of action aimed at modernisation. The process

was launched by an Executive Order, establishing a Presidential Commission on Modernisation and

Technological Development of Russia's Economy, which, in fact, set up an institutional framework

for the process5. It is an important measure and is characteristic of the process’s top to bottom

nature. The pace of the Commission’s activities is indicative of the intense need to act and keep

the pressure on. The Commission meetings were held seven times over the course of 2009,

another seven had taken place by August 2010. In the first five meetings (by October 2009),

agreement was reached on the priority areas and the process of project selection was launched. By

the time of the Address to the Federal Assembly in November 2009, the President reported on the

decisions made and actions undertaken and announced plans for their implementation6.

The selection of the “technological breakthrough areas” was defined by four criteria. First, they

should possess significant momentum and potential for Russia’s international competitiveness.

Second, these sectors of the economy should possess the capacity to produce a significant

multiplier effect and act as a catalyst for modernisation in related industries. Third, they include

4 Russian Government’s Anti-Crisis Programme for 2009. URL: http://premier.gov.ru/eng/anticrisis/1.html (date of

access: 29.08.2010) 5 Dmitry Medvedev issued an Executive Order establishing a Presidential Commission on Modernisation and

Technological Development of Russia's Economy – 21 May 2009. URL:

http://archive.kremlin.ru/eng/text/news/2009/05/216661.shtml (date of access: 29.08.2010) 6 Presidential Address to the Federal Assembly of the Russian Federation – 12 November 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/11/12/1321_type70029type82912_222702.shtml(date of access:

29.08.2010)

36

areas concerned with defence requirements and the nation’s security. Fourth, they should have

relevance to the social well-being of the people7.

The five areas of the technological focus are energy efficiency and conservation, including the

development of new fuels; nuclear technologies; space technology, primarily related to

telecommunications, including the Global Navigation Satellite System and the programme for

development of ground infrastructure; medical technologies, especially diagnostic equipment and

pharmaceuticals. Finally, the fifth is strategic information technology, including the creation of

supercomputers and software development.

Each of these areas has high potential for the EUEach of these areas has high potential for the EUEach of these areas has high potential for the EUEach of these areas has high potential for the EU----Russia partnership. The EU has a track record of Russia partnership. The EU has a track record of Russia partnership. The EU has a track record of Russia partnership. The EU has a track record of

experience and technologies, which could help Russia reach the goal of raising energy efficiency experience and technologies, which could help Russia reach the goal of raising energy efficiency experience and technologies, which could help Russia reach the goal of raising energy efficiency experience and technologies, which could help Russia reach the goal of raising energy efficiency

anananand reducing energy intensiveness by 40 per centd reducing energy intensiveness by 40 per centd reducing energy intensiveness by 40 per centd reducing energy intensiveness by 40 per cent8888 . The Russian government selected six projects

in this priority area: Count, Save and Pay, New Light, Energy Efficient District, Small-Scale Complex

Energy Systems, Energy Efficient Social Sector, and Innovative Energy to attain the objective. The

projects have been selected based on the criteria that they must be able to be replicated

throughout the whole country, produce their first measurable results within the next two or three

years, be economically feasible and able to be implemented with a minimum of budget money9.

The first project involves installing power meters. This project’s main objective is to change

consumer behaviour patterns. The Ministry of Economic Development estimates that this project’s

successful implementation would make it possible to reduce energy consumption in the housing

and commercial sectors by around 20 per cent. The target is to have 80 per cent of consumers

using meters within the next three years. This project will require efforts to co-ordinate and develop

production of modern meters in Russia.

The second project provides for gradually phasing out technologically outdated lighting systems in

Russia. According to the Ministry of Economic Development calculations, replacing all of the energy

wasteful light bulbs in the country would free up as much as 10 per cent of energy generating

capacity and reduce electricity and lighting costs by up to 60 per cent. To achieve this, the project

proposes setting restrictions on the sale of outdated light bulbs, starting with a ban on public

procurement of incandescent light bulbs. This measure should create demand for energy efficient

7 Opening Address at Meeting of Commission for Modernisation and Technological Development of Russia's

Economy – 18 June 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/06/18/2019_type82913_218096.shtml (date of access:

29.08.2010) 8 Dmitry Medvedev held a joint meeting (fourth) of the Commission for Modernisation and Technological

Development of Russia's Economy and the Presidium of the Presidential Council for Science, Technology and

Education – 30 September 2009. URL: http://archive.kremlin.ru/eng/text/news/2009/09/221946.shtml (date of

access: 29.08.2010) 9 Excerpts from Transcript of Beginning of Joint Meeting of the Commission for Modernisation and Technological

Development of Russia’s Economy and the Presidium of the Council for Science, Technology and Education – 30

September 2009. URL: http://archive.kremlin.ru/eng/eng/speeches/2009/09/30/1951_type82913_221945.shtml

(date of access: 29.08.2010)

37

replacement light bulbs and would demonstrate their economic effectiveness and consumer

qualities to the public.

The Energy Efficient District project aims to raise people’s quality of life by bringing down energy

costs and improving the quality of heating and lighting supply. The second objective is to reduce

municipal budget expenditure. The Ministry of Economic Development expects that spending could

be decreased by up to 25 per cent. It provides for putting in place standard mechanisms for

financing energy efficiency improvement measures that can then be replicated throughout the

country’s regions.

The Energy Efficient Social Sector project aims to draw up standard solutions for different types of

social sector buildings, schools, hospitals and medical centres. This will result in the development

of a comprehensive programme for making the social sector more energy efficient, based on the

experience gained through the implementation of several pilot projects in schools and medical

centres. A key part of the project’s implementation is that social sector facilities will be able to

keep the money saved through reduced energy consumption and put it to other uses. A second key

mechanism is long-term energy service contracts, which should make it possible to attract

professional energy companies involved in energy saving technologies. The social sector facilities

will benefit from lower utilities costs, and the energy companies will receive earnings in the form of

a share of the savings made.

The Small-Scale Complex Energy Systems provides for replacing centralised heating supply with a

decentralised system. The aim is to lower energy consumption, cutting it by 20 million tons of fuel

by 2020 by replacing 4,500 of the 18,000 gas generation facilities currently in operation with more

modern technology.

The Innovative Energy initiative will pursue real innovative development and technological

advances in energy production and transmission: wind energy, tidal energy, biomass processing,

solar energy, geothermal energy, and also superconductors.

Nuclear energy has low carbon levels and relatively stable costs, which makes it attractive from the

point of view of security of supply and fighting climate change, defining its importance in the

energy mix. Safeguards, safety and security of nuclear infrastructure are principles shared by the

EU and Russia, and confirmed by them in international institutions, such as the IAEA and G8.

Russia intends to meet the challenge of occupying at least a 25 per cent share of the global

market. This objective can be met on condition of access to the latest technologies and

opportunities to carry out the entire production cycle, from mining uranium to routine maintenance

and retiring old nuclear power plants. Hence the modernisation plan includes three major

objectives. In the next two or three years, the operating characteristics of pressurised water

reactors must be substantially optimised through the use of modern industrial and science

intensive technologies. In the medium term, the objective is to create a new technology base for

producing nuclear energy using a closed fuel cycle based on breeder reactors. The Government of

Russia has approved a Programme, “The Nuclear Power Technologies of New Generation” where

38

the central place is accorded to the development of fast neutron reactors and closed nuclear fuel

cycle. It is open to international co-operation. In the long term, the imperative is to develop and

apply controlled thermonuclear fusion as the foundation for the energy of the future10. The coThe coThe coThe co----

operation with the EU partners is underway: it is the construction of the experimental thermoperation with the EU partners is underway: it is the construction of the experimental thermoperation with the EU partners is underway: it is the construction of the experimental thermoperation with the EU partners is underway: it is the construction of the experimental thermal al al al

nuclear reactor implemented in Cadarache, France, conuclear reactor implemented in Cadarache, France, conuclear reactor implemented in Cadarache, France, conuclear reactor implemented in Cadarache, France, co----operation on the ITER Project. It can operation on the ITER Project. It can operation on the ITER Project. It can operation on the ITER Project. It can

apparently be expanded.apparently be expanded.apparently be expanded.apparently be expanded.

To meet the objectives, the government plans to enhance the conditions for research as the

foundation for these future advances. The government has also allocated over 2.5 billion rubles

(62.5 million Euros) for developing supercomputers which would allow testing the reliability of a

nuclear complex or nuclear shield, as Russia is committed to the global ban on nuclear testing.

Information technologies are another area where there is a range of options for the EU – Russia co-

operation. This ranges from working on satellite navigation systems to the implementation of joint

research projects and closer co-ordination on internet governance. Russia’s objectives in the area

are defined in the Information Society Development Strategy11. The priorities include development

of digital networks and infrastructure, including supercomputers and grid systems; effective

electronic governance, electronic provision of public services, computerising healthcare, education

and training, urban management; ensuring computer literacy of the citizens and internet access12.

Hence, the first task is rapid development of technology to ensure world standards of speed and

quality of data transmission, as the average speed of transmission in Russia is still about 512

kbit/s; there is a digital gap with Europe, the US, Japan, despite the fact that a fair amount of

progress has been made over the last few years. The second task is to modernise outdated

telephone stations, to be able to offer high quality interactive services. The third task is to extend

digital television and radio broadcasting to the entire country, and expand the frequency range. One

of the key priorities remains the GLONASS system’s development. It is expected that once the

infrastructure is in place, the information services market should become the main resource for its

further development13.

Finally, there is certainly an unrealised scope for co-operation between the EU and Russian

pharmaceutical companies and medical equipment producers. Demand for both medicine and new

10

Speech at Meeting of Commission for Modernisation and Technological Development of Russia's Economy – 22

July 2009. URL: http://archive.kremlin.ru/eng/speeches/2009/07/22/1848_type82913_220088.shtml (date of

access: 29.08.2010) 11

Information Society Development Strategy http://www.scrf.gov.ru/documents/87.html (date of access:

29.08.2010) 12

Opening Remarks at Meeting of the Commission for Modernisation and Technological Development of Russia’s

Economy – 31 August 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/08/31/2052_type82913type127286_221377.shtml (date of

access: 29.08.2010) 13

Opening Remarks at Meeting of the Commission for Modernisation and Technological Development of Russia's

Economy – 28 October 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/10/28/2113_type82913_222394.shtml (date of access:

29.08.2010)

39

technologies is great and growing. The pharmaceuticals and medical equipment markets are

showing rapid growth thanks in large part to the state programmes and the money that has started

to flow into the sector. The national project on Health has pushed the process forward. Specialists

estimate, that sales of medicines will reach around 1.5 trillion rubles (more than 37.5 billion Euros)

in the next ten years. Sales of medical equipment are also expected to grow rapidly14.

Currently, according to data from the federal executive agencies, annual sales of medicines and

medical equipment in Russia amount to approximately 600 billion rubles (about 12.5 billion Euros).

Budget expenditures at all levels for this purpose are constantly growing and are now

approximately 250 billion rubles (more than 6 billion Euros). At the same time, over the past three

years the share of public procurement of domestic medical products has decreased in value from

20 to 5 per cent. In spite of the fact that imported medicines can be replaced with domestic ones

in more than 6,000 instances, and in the area of medical equipment by a third15. For instance, in

2008 about 60 billion rubles (1.5 billion Euros) of budgetary funds were inefficiently spent on the

public procurement of imported drugs that have domestic equivalents. The audit of the results and

procedures for the procurement of medicines and medical equipment through inter-budget

transfers made from the federal budget carried out by Presidential Control Directorate and the

Federal Antimonopoly Service revealed that executive bodies of the Russian Federation's regions

have not been making full use of domestic manufacturers' capacity for supplying medical products,

despite the fact that prices of domestic products are on average 20-30 per cent lower than those of

foreign-made ones16.

The drugs market is unique, as the amounts of medicines sold do not depend on the decision of the

final customers, but rather on doctors’ prescriptions and their choice of manufacturer. Foreign

pharmaceutical companies often use deceptive marketing and various methods of unfair

competition in order to promote their products in the Russian market. According to the audit

results: the practice of donations by foreign firms to regional health authorities, medical institutions

and patient organisations is widespread. This takes the form of donating medicines, targeted

financial resources, property, paying for doctors' training, as well as paying for goods and services.

It is common to pay medical personnel for advertising and promoting foreign drugs (often this

takes the form of lectures, articles, speeches at seminars, participation in various events). The

amounts some companies pay to doctors significantly exceeds their official salaries – in some

cases it amounts to 4 million rubles a year17.

14

Opening Remarks at Meeting of the Commission for Modernisation and Technological Development of Russia’s

Economy – 31 August 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/08/31/2052_type82913type127286_221377.shtml (date of access:

29.08.2010) 15

Memorandum to Presidential Instructions Following Meeting of Commission for Modernisation and

Technological Development of Russia's Economy - 1 December 2009. URL:

http://archive.kremlin.ru/eng/text/docs/2009/12/223133.shtml (date of access: 29.08.2010) 16

Ibid. 17

Ibid.

40

In international practice this collusion between the medical community and pharmaceutical

companies is prohibited by law. For example, just this year in Korea and the United States, a

number of companies engaged in these practices were fined a total of about 20 billion USD, and

some doctors were prosecuted18.

In Russia, legislative requirements applicable to domeIn Russia, legislative requirements applicable to domeIn Russia, legislative requirements applicable to domeIn Russia, legislative requirements applicable to domestic and foreign pharmaceutical and medical stic and foreign pharmaceutical and medical stic and foreign pharmaceutical and medical stic and foreign pharmaceutical and medical

equipment manufacturers are still different, and the same is true for the issue of permits. This equipment manufacturers are still different, and the same is true for the issue of permits. This equipment manufacturers are still different, and the same is true for the issue of permits. This equipment manufacturers are still different, and the same is true for the issue of permits. This

legal gap will need to be addressed, and the EU legislative provisions and practices in the area legal gap will need to be addressed, and the EU legislative provisions and practices in the area legal gap will need to be addressed, and the EU legislative provisions and practices in the area legal gap will need to be addressed, and the EU legislative provisions and practices in the area

could, apparently,could, apparently,could, apparently,could, apparently, be used which would allow for approximation of the EU be used which would allow for approximation of the EU be used which would allow for approximation of the EU be used which would allow for approximation of the EU----Russia antiRussia antiRussia antiRussia anti----corruption corruption corruption corruption

legislation and legislation on consumer protection.legislation and legislation on consumer protection.legislation and legislation on consumer protection.legislation and legislation on consumer protection. Meanwhile, a draft legislative bill for the

procurement of medicines and medical equipment for government and municipal needs is being

prepared aiming to ensure that priority is given to Russian producers when fulfilling orders for such

supplies19. The objective is to ensure that budget funds are spent effectively, help Russian

companies grow, commercialise their best research results and make domestic medical products

more accessible. This should ultimately translate into a better quality of life20 for the Russian

population. The law will apparently include a protectionist character, and though it will not be in

breach of Russia’s WTO commitments as Russia is not entering the WTO Plurilateral Agreement on

Government Procurement yet, it will still be non-compliant with the spirit of G8-G20 commitment to

refrain from raising barriers to investment or trade in goods and services. Thus, addressing the

legislative provisions to equalise requirements to domestic and foreign manufacturers would be

necessary. EUEUEUEU----Russia coRussia coRussia coRussia co----operation on the issue would enhance opportunities of the EU companies operation on the issue would enhance opportunities of the EU companies operation on the issue would enhance opportunities of the EU companies operation on the issue would enhance opportunities of the EU companies

on the Russian market. Nevertheless, the current con the Russian market. Nevertheless, the current con the Russian market. Nevertheless, the current con the Russian market. Nevertheless, the current conditions still provide a good opportunity for onditions still provide a good opportunity for onditions still provide a good opportunity for onditions still provide a good opportunity for

establishing joint production, as well as research and development.establishing joint production, as well as research and development.establishing joint production, as well as research and development.establishing joint production, as well as research and development.

ECONOMIC AND REGULATECONOMIC AND REGULATECONOMIC AND REGULATECONOMIC AND REGULATORY MEASURES TO PROMORY MEASURES TO PROMORY MEASURES TO PROMORY MEASURES TO PROMOTE MODERNISATIONOTE MODERNISATIONOTE MODERNISATIONOTE MODERNISATION

However important in Russia, no number of commissions, working groups, orders and regulations,

even with budget allocated to their implementation can produce the miracle of modernisation.

Measures aimed at creating an environment that stimulates investment and innovation,

entrepreneurship of citizens and development of small and medium enterprises are sine qua non

for the advancement of the process. The acts in this area focus on modernising the state owned

industries, developing venture capital funds, special economic zones and technology parks,

providing tax breaks and incentives, improving technical standards and public procurement, as well

as targeted support for research and educational programmes. The system of measures was

18

Ibid. 19

Ibid. 20

Opening Remarks at Meeting of the Commission for Modernisation and Technological Development of Russia’s

Economy – 31 August 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/08/31/2052_type82913type127286_221377.shtml (date of

access: 29.08.2010)

41

outlined in the Presidential Address to the Federal Assembly21, following which a series of

instructions on drafting respective laws were given22. Both took place on the eve of the EU – Russia

24th summit in November 200923. What are the steps made so far?

The government is allocating 620 billion rubles (15.5 billion Euros) to the most important areas for

the country’s technological modernisation. The objective is to ensure they are spent effectively, but

also, “to put in place a co-financing system for research and development projects that corresponds

to our priorities, and creates incentives for private business to invest in these projects and makes

active use of the possibilities they offer”24.

The immediate and obvious need is to reform the country’s very large public sector, which is almost

40 per cent of the total economy. The state corporations’ reform process is one of the key activities

underway. The state corporations which work on the market, such as Rosnano25, will be

transformed into shareholding companies by the end of 2010. The Agency, which ensures deposits

and performs a public function, will retain its current organisational form. Two corporations have a

lifecycle defined by the purpose of the establishment, the Fund for aid to reforming housing and

communal services activities will terminate in 2013, and Olympic construction in 2015.

Rostechnologies, Vnesheconombank26 and Rosatom which combine public and commercial

functions will be transformed with commercial functions and assets separated and grouped into

shareholding companies. A federal law on enhancing the state corporations’ transparency is being

drafted, which will provide for responsibilities to adopt development strategies and an

effectiveness indicator, a system of checks on large scale deals for conflict of interest, independent

directors on the Boards, obligatory audit by the Accountancy chamber and regulation of the

procurement activities in line with the federal law27.

Another imperative is putting in place adequate legislative provisions for anti-corruption, thus a

draft National Anti-Corruption Plan, to be renewed every two years, was approved by the President

21

Presidential Address to the Federal Assembly of the Russian Federation – 12 November 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/11/12/1321_type70029type82912_222702.shtml (date of access:

29.08.2010) 22

Dmitry Medvedev issued a number of instructions on implementing the Presidential Address to the Federal

Assembly – 15 November 2009. URL: http://archive.kremlin.ru/eng/text/news/2009/11/222818.shtml (date of

access: 29.08.2010) 23

News Conference following EU-Russia Summit – 18 November 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/11/18/1422_type82914type82915_222883.shtml (date of access:

29.08.2010) 24

Speech at Meeting of the Commission for Modernisation and Technological Development of Russia’s Economy -

25 November 2009. URL: http://archive.kremlin.ru/eng/speeches/2009/11/25/2110_type82913_223009.shtml

(date of access: 29.08.2010) 25

Amendments to the laws on the RUSNANO and Rosatom corporations have been made – 1 June 2010. URL:

http://eng.kremlin.ru/acts/329 (date of access: 29.08.2010) 26

Signing the Federal Law On Amending the Federal Law On the Federal Budget – 4May 2010. URL:

http://eng.kremlin.ru/news/360 (date of access: 29.08.2010) 27

President checked implementation of his instructions – March 2010. URL: http://kremlin.ru/news/7114 (date of

access: 29.08.2010)

42

in April28. It builds on the National Strategy for Countering Corruption and specifies measures for

the federal, regional and municipal authorities, which are not provided for in any other statutes and

which are of direct relevance to countering corruption, and are also in line with the

recommendations by the Group of States Against Corruption (GRECO). Equally important is the call

to the Public Chamber, the Chamber of Commerce and Industry, the Association of Russian

Lawyers, political parties, self-regulated organisations, non-governmental organisations of

industrialists and entrepreneurs, as well as other public associations to promote social intolerance

of corrupt practices. There is a long way to go on this road, but every step matters, as poor federal

and local governance, ineffective law enforcement, corruption, economic crime, excessive

administrative, technical, and information barriers, are counterproductive to an investment

environment, a crucial factor of innovative development, and one of the main variables for

successful modernisation for Russia, which is still accorded 120th place on the quality of business

environment.

In spite of the anti-crisis measures, measures to attract investment and actions to improve

financial regulation in line with the G20 decisions, the overall volume of capital investments into

the Russian economy decreased by 17 per cent in 2009 when the real rate is adjusted for inflation.

With the overall drop in the volume of direct foreign investments in the global economy, the influx

of investments into Russia fell by 41 per cent. Venture capital infrastructure and the scale of

venture capital remain very modest. Out of 108 venture funds operating in Russia, only 43 are

active, with the total volume of capital amounting to about 1.5 billion Euros. So, clearly, reducing

the corporate profit tax rate to 20 per cent, liberalising foreign exchange regulations and lifting

restrictions on flow of capital29, is not enough to attract and retain investment, either foreign or

domestic. Further steps aim to reduce the administrative burden on investment funds; put in place

relevant tax incentives; simplify customs clearance to promote exports, liberalisation for innovative

products and develop financial markets.

One of the tools to promote business initiatives in a science-intensive sphere and to reduce

administrative load is the development of special economic zones, which was launched in 2005,

and is being developed further. SEZs are eligible for special business regulation. They offer a

simplified procedure of land assignment, free customs regime and a number of tax preferences for

SEZ residents. Russia had two industrial and development zones, four technological

implementation zones and seven tourist and recreational zones30. In 2010, one more SEZ in

Primorsky Krai and three Port zones in Krasnoyarsk, Ulyanovsk, Khabarovsk were created31. The

success of these efforts is yet to be assessed. On 28 December 2009, an amended Law “On

28

Dmitry Medvedev signed an executive order approving the National Strategy for Countering Corruption and a

new draft of the National Anti-Corruption Plan for 2010-2011 - April 14, 2010. URL:

http://eng.kremlin.ru/news/87 (date of access: 29.08.2010) 29

Opening Remarks at Meeting on Investment Climate in Russia – 2 February 2010. URL:

http://archive.kremlin.ru/eng/speeches/2010/02/02/1734_type82913_224092.shtml (date of access: 29.08.2010) 30

Special Economic Zones of the Russian Federation. URL:

http://invest.gov.ru/en/government_support/privileges/sez/ (date of access: 29.08.2010) 31

Special Economic Zones. URL: http://www.rosez.ru/ (date of access: 29.08.2010)

43

Special Economic Zones in Russian Federation’ went into force. It extended a list of industrial

activities in SEZs, and made it easier for foreign and domestic investors to enter into a SEZ32. One

of the territories where EU and Russian companies’ co-operation has every chance for success is

the Kaliningrad recreational zone under the upgraded legislation.

Progress on tax incentives to stimulate investment is still modest. Recommendations by the

Russian Union of Industrialists and Entrepreneurs (RSPP) proposed33 universal measures to

stimulate investment activities by companies, innovation specific measures, and use of a project

based approach. The universal incentives would imply a reduction of the taxed base by the sum of

investments; exemption of property tax on energy saving equipment in the first three years of its

use, or tax breaks on all technological equipment. The innovation specific measure would include

reform of the social insurance system or the introduction of compensatory and/or transition

conditions; stimulating the export of high technology products and the elimination of barriers in this

field (a green corridor for the innovative companies and their goods). The project based approach,

of which the Skolkovo innovation centre is a model, would integrate a full range of incentives and

resources in one cluster.

So far the government is working on a package of tax exemptions and incentives, including

procedures for granting VAT deductions on costs; 30 per cent bonus depreciations on newly

commissioned fixed assets; tax exemptions for dividends of individual strategic investors and tax

exemptions for incomes derived from sale of securities of long-term investors34.

At present, the list of tax preferences provided for innovation companies is relatively limited. Such

benefits can be divided into two categories, those applicable to all taxpayers implementing

innovation activity and specifically provided for residents of techno-parks. Standard tax incentives

and preferences include:

• VAT exemption on the implementation of research and development (R & D) works

• VAT exemption for R & D.

• VAT exemption on the rights of intellectual activity

• Benefits, taking into account R & D expenditure

• Non-recurring costs for computers’ purchase

32

On 28.12. an amended Law “On Special Economic Zones in Russian Federation’ went into force. URL:

http://www.economy.gov.ru/minec/activity/sections/specialEconomicAreas/news200912281 (date of access:

29.08.2010) 33

RSPP's position on innovation and the modernisation policy - 24 March 2010. URL:

http://www.рспп.рф/Default.aspx?CatalogId=7971 (date of access: 29.08.2010) 34

Dmitry Medvedev held a meeting of the Commission for Modernisation and Technological Development of

Russia's Economy – 11 February 2010. URL: http://archive.kremlin.ru/eng/text/news/2010/02/224268.shtml

(date of access: 29.08.2010)

44

• Expedited procedure for depreciation of fixed assets in scientific and technical activities

• Tax exemption on profits of the trust funds

• Investment tax credit

Tax incentives and privileges of techno-parks’ residents include:

• Reduced tax rate on profits with the lowest income tax rate of 13,5 per cent . The effect of a

reduced tax rate is fixed for a period of existence of the SEZ or for a specified activity period of SEZ

residents.

• Tax exemption on property (currently the maximum rate is 2.2 per cent), land and vehicles

is by residents for conducting activities’ purposes in the SEZ.

• Application of reduced rate of insurance premiums is 14 per cent (versus 26 per cent in

general).

Thus the tax incentives system is a “work in progress”, though some advances have been made.

The major achievement so far is considered to be the implementation of the provisions on

accounting companies’ R&D expenditure at a 1.5 coefficient for the purposes of calculating profit

tax, thus providing some tax relief35.

Development of the financial market and plans for creating an international financial centre in

Russia has also stalled for a while, due to unfavourable economic conditions36. Nevertheless, the

Presidential Council for Financial Market Development, established in October 2008 on the

outbreak of the crisis, continued its work on implementation of Russia’s Financial Market

Development Strategy to 2020. Russia has fully complied with the G20 Pittsburgh commitment on

commencing financial and regulatory reform37. The Central Bank of Russia approved a revised

framework for the calculation of capital requirements for banks in accordance with the Basel II

Accord. A new approach to credit risk evaluation (based on OECD Country Risk Classification, and

varying with the currency of denomination) and an allowance for operational risks were introduced

to improve the quality and quantity of bank capital38. On 25 November 2009, at the Russian

35

Opening Remarks at Meeting of the Commission for Modernisation and Technological Development of Russia’s

Economy - 25 December 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/12/25/1532_type82913_223542.shtml (date of access: 29.08.2010) 36

Opening Remarks at Meeting of Presidential Council for Financial Market Development – 9 February 2010. URL:

http://archive.kremlin.ru/eng/speeches/2010/02/09/2059_type82913_224232.shtml (date of access:

29.08.2010) 37

2009 Pittsburgh G20 Summit Compliance Report. URL:

http://www.g20.utoronto.ca/analysis/Pittsburgh_G20_compliance_report.pdf (date of access: 29.08.2010) 38

Information on Bank of Russia regulation aimed at implementation of Basel Committee on Banking Supervision

document “International Convergence of Capital Measurement and Capital Standards. A Revised Framework”.

09.11.2009. URL: http://cbr.ru/press/Archive_get_blob.asp?doc_id=091109_161630bazel.htm (date of access:

29.08.2010)

45

Financial Forum, the Minister of Finance of Russia, Alexei Kudrin stated his intention to submit a

bill on higher bank capital requirements by the end of 2010, obliging banks to increase capital up

to at least 1 billion rubles (25 million Euros) in five years39. Measures to streamline compensation

structures in banks and state companies in accordance with FSB recommendations and

international best practices are being prepared40. The Duma adopted amendments to the Federal

Law “On securities market” in the part of regulation of the derivatives market. It regulates

settlement procedures, and specifies rights and obligations of the parties41. In January 2010, the

State Duma passed a bill “On clearing and clearing services”, setting a mechanism and regulation

framework for clearing operations with commodities and financial instruments, including

derivatives, on exchanges and OTC markets. It also defines capital and disclosure requirements for

clearing organisations, and rules for clearing operations through central counterparty42. In April

2010, the Ministry of Finance published a bill amending the Federal Law “On Banks and Banking

Activities” and the Federal Law “On the Central Bank of the Russian Federation (Bank of Russia)”.

The bill clarifies the terms “a banking holding” and “a banking group”, and will align consolidated

supervision in Russia with international practices. The bill is expected to raise the quality of risk

management in banks, and make banking supervision more efficient due to the timely

identification of high-risk areas43.

President Medvedev emphasised the priority of co-operating with the G20 and Financial Stability

Board partners to create the new global financial architecture44, and creating in Russia “a financial

system that is consistent with the interests of the domestic financial market and national

businesses”. An important requirement for the financial market is that it should facilitate the flow

of innovation and the modernisation of the economy in general, and should boost economic

efficiency. Another requirement is that the financial market must promote as much co-operation as

possible within the framework of the common customs space of Russia, Belarus and Kazakhstan,

and encourage economic integration with other integration associations in which Russia

participates. Thus this is another policy area where EU-Russia co-operation should apparently be

enhanced both within the framework of the financial services and macroeconomic policy dialogue,

and in international settings.

39

Within a year Kudrin will submit a bill on raising bank capital requirements up to RUB 1 billion in 5 years. 25.11.

2009. URL: http://www1.minfin.ru/ru/press/speech/index.php?pg4=5&id4=8796 (date of access: 29.08.2010) 40

A list of instructions following the outcomes of the meeting of Presidential Council on Financial Market

Development.17.02.2010. URL: http://news.kremlin.ru/news/6889 (date of access: 29.08.2010) 41

Federal Law No. 281-FZ “On Amending Part I and II of the Russian Tax Code and Certain Legislative Acts of the

Russian Federation” dated 25.11. 2009. URL: http://www.rg.ru/2009/11/30/nalog-dok.html (date of access:

29.08.2010) 42

State Duma passed in the first reading a bill “On clearing and clearing services”. 22.01.2010. URL:

http://duma.consultant.ru/page.aspx?8550;1049356 (date of access: 29.08.2010) 43

Bill for amendment of the Federal Law “On Banks and Banking Activities” and Federal Law “On the Central Bank

of the Russian Federation (Bank of Russia)”. 07.04.2010. URL:

http://www1.minfin.ru/common/img/uploaded/library/2010/04/projFZ_banki.zip (date of access: 29.08.2010) 44

Opening Remarks at Meeting of Presidential Council for Financial Market Development – 9 February 2010. URL:

http://archive.kremlin.ru/eng/speeches/2010/02/09/2059_type82913_224232.shtml (date of access:

29.08.2010)

46

Changes to the legislation granting access to strategic enterprises have been pioneered by the

Federal Antimonopoly Agency. In June 2010, President Medvedev signed the Order amending the

list of strategic enterprises45 adopted six years ago and criticised the list for its restrictive nature.

The document excludes a number of enterprises with a share of capital by the state lower than 51

per cent from the list, except several companies where the state acts as the majority shareholder.

The changes foresee that, for a foreign investor who already owns shares in a company, and

acquires additional shares through the issuance of new stock, no agreement will be needed, so

long as the proportional ownership of all the owners does not change. The law is still criticised for

lack of transparency46. There is apparently scope for further work47.

Harmonisation of technical regulations is one of the achievements of the modernisation process,

amendments were made to the law on technical regulation in December 200948. The law is aimed

at the renovation of the normative and technological framework, laying down requirements on the

products and processes. It provides for the possibility of acknowledging and employing the best

world standards, as well as the introduction of two regimes of technical regulation used as the

choice of the applicant of the regime, one of which is based on the Russian standards, the other on

the requirements of foreign technical regulations and standards. The Government is authorised to

introduce, on an alternative basis, the technical regulations of the states-members of the customs

union, norms and regulations of the EU in the spheres where national regulations have not been

developed or adopted. The decision by the Russian Government to support the use of European

technical standards as a basis for national ones is a significant step towards the further

harmonisation of the EU-Russia regulatory framework. The reduction of non-tariff barriers to trade

and investment can become a major step towards the creation of an integrated EU-Russia common

economic area.

Changes in the visa obtaining procedures and work permits rules are another important positive

development. The Law on Amendments of the Legal Status of Foreigners in the Russian Federation

creates a more favourable working environment for highly-qualified foreign specialists invited to

work in Russia. It became effective in July 201049. The law introduces a new category of “highly

qualified specialist”, which is defined as a foreign national (coming to Russia with or without visa)

having experience, skills and achievements in a certain sphere and earning 2 million rubles

(approximately 50 000 Euros) or more per annum. According to the Regulations, a work permit and

an invitation to enter Russia are issued regularly without quotas established by the Russian

45

The list is available at URL: http://www.kremlin.ru/text/docs/2004/08/75174.shtml (date of access: 29.08.2010) 46

Russia. URL: http://www.ustr.gov/sites/default/files/uploads/reports/2010/NTE/2010_NTE_Russia_final.pdf

(date of access: 29.08.2010) 47

Lack of Transparency in Russian Energy Trade. URL:

http://csis.org/files/publication/100702_Smith_LackOfTransparency_Web.pdf (date of access: 29.08.2010) 48

Changes made to the law on technical regulation. December 30, 2009. URL: http://news.kremlin.ru/news/6556

(date of access: 29.08.2010) 49

On 1 July, 2010 the Federal Law dated 19 May, 2010 #86-FZ “On amendments to the Federal Law “On the legal

status of foreign nationals in the Russian Federation” and other normative acts of the Russian Federation” will

come into force. URL: http://www.hg.org/article.asp?id=19247 (date of access: 29.08.2010)

47

Government. They cover the validity of a set-term employment (civil) contract with an employer

inviting such a specialist, but for no more than three years. The immigration authorities must issue

a work permit within 14 days of the submission of an application, and it can be renewed for three

year periods within the validity of an employment (civil) contract. Mobility is substantially enhanced,

if the specialist plans to work in several regions of Russia, one work permit covering these regions

can be issued. The employers should assess the qualification of specialists themselves according

to his/her documents/education credentials, references and other information demonstrating

professional experience and skills. The employer bears responsibility for ensuring that the

specialist and his family are covered by voluntary medical insurance from the first day of entering

Russia. The organisations which can employ such specialists include both Russian commercial

entities, scientific and educational institutions. So universities and other academic institutions will

enjoy this simplified procedure which they have been seeking for several years.

Education and research have been at the forefront of the modernisation process as the drivers of

modernisation. In the post-crisis reality of constrained resources, a system of initiatives has been

undertaken to respond to the ever more pronounced imperative for building national industrial,

technological and scientific capabilities adequate for the modernisation objectives. These include

the establishment of the federal universities, thus consolidating resources and strengthening

engagement of educational institutions in the economic and social sphere of the federal districts.

To date, seven federal universities have been set up, the first two in Southern and Siberian federal

districts on the basis of functioning universities and academic centres in Rostov-on-Don and

Krasnoyarsk. In 2009, the decision was made to establish five more federal universities: Arctic

University in Arkhangelsk, Ural University in Yekaterinburg, Kazan University, North Eastern

University in Yakutsk and Far Eastern University in Vladivostok. The new legal status of these

universities as autonomous institutions broadens their financial and research autonomy. The

government has allocated at least 400 million rubles (10 million Euros) to each university in 2010

in line with the development plans50. Another vital measure is the national project, “Core National

Research Universities”51 launched in 2008 to build research infrastructure in the key areas, and not

only through support for the procurement of laboratory equipment, the development of information

resources, the development of a new generation competencies - based education programmes,

retraining and training programmes for academic staff, and modernisation of education and

research quality management systems. The Federal Target Programme “Research and Pedagogical

Cadre for Innovative Russia” for 2009-2013 with a budget of 90 454 billion rubles, aims to create

conditions for enhancing the qualitative structure of research and pedagogical cadre and to create

a system of mechanisms for renovation of research and pedagogical cadre52.

50

Prime Minister Vladimir Putin chairs a meeting on modernising the higher education system 08.04.2010. URL:

http://premier.gov.ru/eng/events/news/10151/ (date of access: 29.08.2010) 51

National research universities. URL: http://eng.mon.gov.ru/pro/ved/niu/ (date of access: 29.08.2010) 52

“Scientific and Scientific-Pedagogical Personnel of the Innovative Russia in 2009-2013”. URL:

http://www.kadryedu.ru/ (date of access: 29.08.2010)

48

The 2010 initiatives include support of higher education institutions co-operation with enterprises

working in high technologies development and production for 2010 – 2012. This is carried out

through grants of up to 2,6 million Euros per year for research, development and technological

projects, implemented jointly by the enterprises and Russian HEIs, whereas the grant holders are

enterprises. The total budget for the programme is 19 billion rubles (490 million Euros)53. The

support of an innovative infrastructure within federal higher educational institutions in 2010-2012

aims to expand the practice of setting innovative spin-off companies, through grants of up to 1,3

million Euros over three years, where the grant-holders are the universities. The amount allocated

for the programme is 8 billion rubles (205 million Euros)54. Finally, to attract leading scientists to

Russian universities, the government has allocated 12 billion rubles (308 million Euros) for 2010-

2012. The grant-holders are universities and the grants are up to 3.9 million Euros from one to two

years for implementation of scientific projects under the supervision of leading foreign scientists.

The researchThe researchThe researchThe research----educationeducationeducationeducation----innovation neinnovation neinnovation neinnovation nexus can underpin advances in the EUxus can underpin advances in the EUxus can underpin advances in the EUxus can underpin advances in the EU----Russia universities and Russia universities and Russia universities and Russia universities and

innovation enterprises coinnovation enterprises coinnovation enterprises coinnovation enterprises co----operationoperationoperationoperation55555555. These initiatives expand opportunities for developing further . These initiatives expand opportunities for developing further . These initiatives expand opportunities for developing further . These initiatives expand opportunities for developing further

the practice of cothe practice of cothe practice of cothe practice of co----ordinated calls and synchronised actions within the EU and Russian research ordinated calls and synchronised actions within the EU and Russian research ordinated calls and synchronised actions within the EU and Russian research ordinated calls and synchronised actions within the EU and Russian research

pppprogrammes. rogrammes. rogrammes. rogrammes.

One of the projects with a high potential for coOne of the projects with a high potential for coOne of the projects with a high potential for coOne of the projects with a high potential for co----operation is the Innovations Center in Skolkovo. operation is the Innovations Center in Skolkovo. operation is the Innovations Center in Skolkovo. operation is the Innovations Center in Skolkovo. The

centre is being established as a designated area, with specific conditions for research and scientific

developments in the five technological priority areas of energy efficiency and energy saving,

innovative energy technologies; nuclear technologies; space technologies, first and foremost in

telecommunications and navigation systems and corresponding infrastructure on the ground;

computer technologies and software; and medical technologies, both equipment and

pharmaceuticals. According to the draft law, the centre’s special conditions include a wide range of

benefits available to organisations working there, the most advanced solutions in urban planning

and special status for the projects’ participants. The law regulating land and property relations

within the territory of the Innovation Center in Skolkovo foresees that the Federal Fund for

Facilitating Housing Construction Development may by a decision of the President, transfer land in

its possession free of charge, along with the real estate located on it, to the ownership of legal

entities designated by the Government. This was the first law which came into force in a package of

draft laws drawn up by the government on instructions from the President as part of the efforts to

establish the Skolkovo Innovation Center56.

The centre will operate in a legislative regime which integrates the latest amendments on tax

breaks, rules of migration, “green corridor” customs, and support to intellectual property rights

53

Development of cooperation between educational institutions and industrial enterprises. URL:

http://mon.gov.ru/pro/ved/koop/ (date of access: 29.08.2010) 54

Development of innovative infrastructure in Russian universities. URL: http://eng.mon.gov.ru/pro/ved/infr/

(date of access: 29.08.2010) 55

Attracting leading scientists to Russian universities. URL: http://eng.mon.gov.ru/pro/ved/uch/ (date of access:

29.08.2010) 56

Dmitry Medvedev signed a law regulating land and property relations within the territory of the innovation

centre in Skolkovo. URL: http://eng.kremlin.ru/acts/260 (date of access: 29.08.2010)

49

protection57. This research and innovations cluster is conceived as a driver of the modernisation This research and innovations cluster is conceived as a driver of the modernisation This research and innovations cluster is conceived as a driver of the modernisation This research and innovations cluster is conceived as a driver of the modernisation

agenda and should not become localised. It would certainly benefit from the experience of creatiagenda and should not become localised. It would certainly benefit from the experience of creatiagenda and should not become localised. It would certainly benefit from the experience of creatiagenda and should not become localised. It would certainly benefit from the experience of creating ng ng ng

the European Institute of Innovation and Technology, and could make use of the model of the EIT the European Institute of Innovation and Technology, and could make use of the model of the EIT the European Institute of Innovation and Technology, and could make use of the model of the EIT the European Institute of Innovation and Technology, and could make use of the model of the EIT

establishment and operations. The Skolkovo centre’s cooperation with the EIT and its knowledge establishment and operations. The Skolkovo centre’s cooperation with the EIT and its knowledge establishment and operations. The Skolkovo centre’s cooperation with the EIT and its knowledge establishment and operations. The Skolkovo centre’s cooperation with the EIT and its knowledge

and innovations communities’ members is a definite candidate fand innovations communities’ members is a definite candidate fand innovations communities’ members is a definite candidate fand innovations communities’ members is a definite candidate for the EUor the EUor the EUor the EU----Russia modernisation Russia modernisation Russia modernisation Russia modernisation

work plan.work plan.work plan.work plan.

POLITICAL SYSTEM ANDPOLITICAL SYSTEM ANDPOLITICAL SYSTEM ANDPOLITICAL SYSTEM AND SOCIETY SOCIETY SOCIETY SOCIETY

We would all subscribe to the statement that “scientific and technological progress is inextricably

linked to the progress of political systems”58. In his address to the Federal Assembly, President

Medvedev put forward a plan of action to improve the quality of the political system59, including all

of the state’s fundamental institutions, courts, law enforcement agencies and government

agencies, civil society institutions and political parties60. Some changes were enacted before the

November address. Such as reduction to five per cent of the much criticised barrier which parties

had to overcome to enter the Duma; or transition from the equally criticised system of

endorsement by the regional Duma of governor candidates nominated by the President to one

where they are granted power by the local legislative assemblies, based on proposals by parties

supported by the President and submitted by him to the assembly. At the end of January, a

meeting of the State Council devoted to developing Russia's political system, progress on “the

quality of democratic institutions” was debated by representatives of all parties61, focusing mostly

on the need to ensure that the principles underlying the political system and the system of

government, fit with the society’s complex makeup and ideological and cultural diversity.

What were the key tasks and proposals agreed? First, the regions in Russia differ substantially in

their social structure and the diversity of political preferences of the population. However, the

system of representation is completely arbitrary and sometimes leads to results that are hard to

justify in terms of the proportion of the population represented and the number of factions.

Therefore, there is a need to introduce a single criterion for establishing the number of deputies in

the regional legislatures of the Russian Federation. To ensure that all citizens’ political preferences

are represented, all parties in regional parliaments should have the opportunity to form factions. A

57

Dmitry Medvedev submitted to the State Duma draft federal laws making provisions for the establishment and

operation of the Skolkovo Innovation Centre - May 31, 2010. URL: http://archive.kremlin.ru/eng/news/294 (date

of access: 29.08.2010) 58

Dmitry Medvedev’s Article, Go Russia! - 10 September 2009. URL:

http://archive.kremlin.ru/eng/text/speeches/2009/09/10/1534_type104017_221527.shtml (date of access:

29.08.2010) 59

Presidential Address to the Federal Assembly of the Russian Federation – 12 November, 2009. URL:

http://archive.kremlin.ru/eng/speeches/2009/11/12/1321_type70029type82912_222702.shtml (date of access:

29.08.2010) 60

Speech at State Council Meeting on Developing Russia’s Political System – 22 January 2010. URL:

http://archive.kremlin.ru/eng/speeches/2010/01/22/2000_type82913_223914.shtml (date of access:

29.08.2010) 61

Ibid.

50

draft law setting the procedures for deciding the size of legislatures in the regions and a draft law

guaranteeing representation in all regional parliaments for parties that received more than five per

cent of the vote, as at the federal level have been submitted to the Duma. All regions of the

Federation should enact laws to assure equal coverage in the media for parties that are

represented in regional parliaments. Furthermore, parties not represented in the Duma, but with a

faction in the regional legislative assembly, should be exempt from having to collect signatures to

participate in regional elections in their respective territories. The President proposed that the

same principle could be established for municipal elections.

To bring order to early voting in local elections, federal and regional legislation will be amended

using the laws on the election of the President and State Duma deputies as a basis. Finally, the

statutes and constitutions of Russia's regions will be supplemented with articles requiring heads of

executive authorities to report to local parliaments on an annual basis, similar to the practice

introduced at the federal level. The President asked the Federal Assembly to examine all of the

draft laws on implementing the proposals formulated in the Address during the 2010 spring

parliamentary session.

In May, the law guaranteeing equality of all political parties represented in regional legislative

assemblies with regard to coverage of their activities by the mass media was signed62. In June,

political parties that are not represented in the State Duma or regional legislative assemblies were

granted the right to take part, at least once a year, in plenary sessions of the State Duma or the

respective regional legislative assemblies63. Following which, the President signed the law

stipulating that a faction consisting of a sole deputy has the right to exist, if such a deputy is the

only person among the candidates of a particular political party who receives a mandate following

vote counting and seats distribution among all contender parties. The law ensures the rights of

deputies representing ‘minor parties’ to adequate participation in regional legislatures64.

In order to improve the procedures for candidates’ nomination and registration in single-seat and

multi-seat constituencies at regional elections, the law on the basic guarantees of electoral rights

and the right to participate in referenda, introduces unified requirements to attesting such lists, as

well as a foundation for refusal of attestation65.

Other developments in the sphere of governance include measures to improve the quality of the

judicial system, enhance the transparency of government structures’ activities, and protect

62

Dmitry Medvedev signed Federal Law On Amendments to Article 32 of the Federal Law On Political Parties. URL:

http://eng.kremlin.ru/news/380 (date of access: 29.08.2010) 63

Law granting parties not represented in parliament the right to attend its sessions has been signed. URL:

http://eng.kremlin.ru/news/347 (date of access: 29.08.2010) 64

Law allowing single deputy factions in regional legislative assemblies has been signed. URL:

http://eng.kremlin.ru/news/348 (date of access: 29.08.2010) 65

Law on guarantees of electoral rights and the right to participate in referendums has been amended. URL:

http://eng.kremlin.ru/news/550 (date of access: 29.08.2010)

51

business from excessive supervision. The federal law on the status of judges66 adopted by the

Duma in June 2010 provides for special regular training of judges to maintain the qualification and

competencies needed for performing their functions. Amendments to the Russian Federation Code

of Administrative Offences set administrative liability for violating citizens’ and organisations’ rights

to information on state bodies’ activities67. To improve procedures regulating the inspection of

business by state or municipal control authorities, the law on protecting the rights of legal entities

and individual entrepreneurs requires supervisory authorities at both levels to co-ordinate all

unscheduled inspections or audits with prosecution authorities68.

There have been no major breakthroughs in legislation on human rights or civil society. However, in

June 2009, the State Duma adopted amendments to Federal Law No. 7-FZ of January 12, 1996,

“On Non-Commercial Organisations” (NGO Law). The law became effective in August. It introduces

several changes which facilitate registration, simplify reporting and cut down on the number of

audits69.

On 18 February 2010, Duma ratified Protocol No. 14 to the Convention for the Protection of Human

Rights and Fundamental Freedoms, amending the control system of the Convention70, which

entered into force on 1 June 2010. Given the fact that the Protocol opens the opportunity to the

Committee of Ministers to decide by a two-thirds majority to bring proceedings before the Grand

Chamber of the Court against any State which refuses to comply with the Court’s final judgment is

politically relevant and the fact that 30,000 cases out of the 120,000 awaiting review by the court

originate from the Russian Federation71. This is an important signal.

Thus, however modest and inconspicuous, work to improve the quality of political system has been

advanced. Enforcement practice will show how effective the acts are.

EU EU EU EU ---- RUSSIA: ENGAGEMENT RUSSIA: ENGAGEMENT RUSSIA: ENGAGEMENT RUSSIA: ENGAGEMENT FOR THE MUTUAL BENEFFOR THE MUTUAL BENEFFOR THE MUTUAL BENEFFOR THE MUTUAL BENEFIT OF THE CITIZENSIT OF THE CITIZENSIT OF THE CITIZENSIT OF THE CITIZENS

In the press conference after the summit in Rostov-on-Don, the leaders put forward a long list of

the areas for co-operation from energy efficiency and energy security to regulatory convergence. It

is vital that the partnership is a success. Indeed, the EU and Russia share a continent. Security and

66

Amendments to the Law "On Status of Judges in Russian Federation" - 3 June 2010. URL:

http://news.kremlin.ru/news/8250 (date of access: 29.08.2010) 67

Dmitry Medvedev signed Federal Law On Amendments to the Russian Federation Code of Administrative

Offences. URL: http://eng.kremlin.ru/news/330 (date of access: 29.08.2010) 68

Federal Law on Amending Article 10 of the Federal Law on Protecting the Rights of Legal Entities and Individual

Entrepreneurs in the Process of State or Municipal Control (Supervision) has been signed. URL:

http://eng.kremlin.ru/acts/116 (date of access: 29.08.2010) 69

International center for non-for-profit law. URL: http://www.icnl.org/knowledge/ngolawmonitor/russia.htm

(date of access: 29.08.2010) 70

Ratification of Protocol No. 14 by the Russian Federation – 4 February 2010. URL:

http://www.kremlin.ru/news/6786 (date of access: 29.08.2010) 71

The approval of Protocol 14 opens the way to the EU adhesion to the European Convention on Human Rights.

URL: http://afsj.wordpress.com/2010/01/19/the-approval-of-protocol-14-opens-the-way-to-the-eu-adhesion-to-

the-european-convention-on-human-rights/ (date of access: 29.08.2010)

52

prosperity of their peoples are interconnected. They bear responsibility for making the partnership

work for the future of their economies and societies. Their success will contribute to global

development as well as their own growth. Thus the task is overwhelming, but it is manageable.

There are certainly a lot of foundation blocks of diverse nature to build upon. To name a few, the

European Union is the top investor in Russia with a foreign direct investment of 25 billion Euros.

Russia is the EU’s third biggest trade partner with an annual volume of 180 billion Euros. There is a

firmly established institutional framework for co-operation, including the regular summits, 20

sector dialogues, four common spaces and the Northern Dimension partnerships. Recent

developments include signing financing agreements on the five cross-border co-operation

programmes, new working groups on “banking and securities” and “exit strategies and sustainable

growth” launched in response to the G20 decisions within the financial services and

macroeconomic policy dialogue and negotiations on satellite navigation cooperation. Russia has

aligned its technical regulations and standards with those of the EU. The EU and Russia share

commitments in a wide range of policy areas made in international organisations, the G8 and G20,

inter alia. A factor of success would be to narrow down the list of priority policy areas on the basis

of shared interests and “ensure it goes ahead according to plan”72. A pragmatic approach would be

to start with very specific issues and then expand into other and broader areas. Thus, the

propositions for the work plan will try to keep the focus.

The “next steps” on the energy dialogue in the EU-Russia common spaces progress report 2009 of

March 2010 are surprisingly unambitious73. However, the modernisation objectives of raising

energy efficiency and reducing energy intensiveness offer opportunities for enhancing EU-Russia

cooperation in energy. There is a need for both investment and new technologies. EU companies

work in Russia and with Russian partners. There are several systemic bilateral and multilateral

projects. An EU and Russia partnership in energy could draw on the experience of the Russian-

German Energy Agency74 or Memorandum in energy efficiency and renewable energy with

Finland75. Key aspects of the former include common work for energy efficiency in the building

sector, in industry and an increase of efficiency in the infrastructure by use of district heating,

combined heat and power as well as the use of renewable energy. One of the main purposes of the

latter is to enhance co-operation between companies by improving operational conditions in both

countries and the implementation of pilot and investment projects. The Russia – Finland projects

also include research institutions, as well as local and regional governments, and co-operation in

the development of policy measures at the federal, regional and municipal levels. Nord Stream is

72

President Medevedev. News Conference following EU-Russia Summit - June 1, 2010. URL:

http://archive.kremlin.ru/eng/transcripts/322 (date of access: 29.08.2010) 73

EU-Russia Common Spaces Progress Report 2009, March 2010. European Commission. URL:

http://ec.europa.eu/external_relations/russia/index_en.htm (date of access: 29.08.2010) 74

Launch of the Russian-German energy agency - 16 July 2009. URL: http://www.buildup.eu/news/4957 (date of

access: 29.08.2010) 75

Finland and Russia boost cooperation in energy efficiency, renewablesт - 4 February 2010. URL:

http://www.energy-enviro.fi/index.php?PAGE=2&NODE_ID=4&LANG=1&ID=3008 (date of access: 29.08.2010)

53

an example of very effective multilateral energy sector co-operation with the special status of the

trans-European energy network76.

Both the EU and Russia recognise the importance of working together towards a strategic EU-

Russia energy partnership. The potential for an EU-Russia agreement in this area is especially

great, as well as possible gains in terms of technologies and production efficiency, energy saving,

supply reliability and environment protection. Presently “both Russian and European investors

increasingly express concerns about formal and informal investment barriers. For Russian investors

in the EU, the principal concern is unequal treatment, especially in the high-tech and energy

sectors. For EU investors in Russia, concerns regarding investment protection, administrative

barriers and entry restrictions remain the principal factors influencing investment decisions”77. No

doubt there is a need for transition to non-discriminatory treatment, which will take time. To unlock

new opportunities, an EU-Russia energy co-operation and investment protection agreement can be

considered with a focus on the priority projects. It can be negotiated by the new EU-Russia

Innovation Dialogue proposed by the EU-Russia Industrialists’ Round Table. Even more ambitiously,

an EU-Russia Energy Agency can be formulated as a long term objective.

EU-Russia cooperation in nuclear energy is well established, has both a firm legal framework in the

agreements with the European Atomic Energy community, and several co-operation formats. This

line of partnership just needs further consolidation both through Russia’s participation in the 7th

EC and Euratom Framework for Research and Technological development, and EU participation in

the Russia’s targeted programme “The Nuclear Power Technologies of New Generation”. Both

opportunities should be pursued.

In the areas of information technology and space, co-operation on satellite communications and

navigation should be strengthened, including work on GLONASS and Galileo, co-operation between

space agencies and other actors, both commercial and governmental, for development of joint

applications and services, co-operation in the fundamental space science and applied space

science and technology areas, as well as co-operation on space launchers and on a future crew

space transportation system, as agreed by the EC-ESA-Russia Steering Board78. A new long term

project which should be pursued for mutual benefit is the construction of the new spaceport,

“Vostochny” in the Far East of Russia, which was begun in 2010 with the objective to start

spaceship launches in 2015. Similarly with nuclear energy, this is another policy area where EU-

Russia co-operation meets the modernisation agenda priorities, both partners’ interests and needs

further consolidation and development.

76

Dmitry Medvedev took part in a ceremony marking the start of construction of the Nord Stream gas pipeline's

underwater section - April 9, 2010. URL: http://archive.kremlin.ru/eng/news/16 (date of access: 29.08.2010) 77

EU – Russia Industrialists’ Round Table (IRT) recommendations for the EU-Russian summit in Rostov-on-Don.

URL: http://www.eu-russia-industrialists.org/index.php (date of access: 29.08.2010) 78

EU-Russia Common Spaces Progress Report 2009, March 2010. European Commission. URL:

http://ec.europa.eu/external_relations/russia/index_en.htm (date of access: 29.08.2010)

54

The modernisation objectives on pharmaceuticals and medical equipment provide an opportunity

to change the slow pace of the EU-Russia dialogue on the approximation of the legislation and

regulatory practices, as it is apparent that the harmonisation of legislation and its application are

needed to both protect the customers and support domestic producers.

EU could make a substantive contribution to the implementation of Russia’s long-term plan on the

establishment of an international financial centre in Russia, carried out under the auspices of the

Presidential Council for Financial Market Development. Co-operation could be carried out within the

financial services / macroeconomic policy dialogue, but also beyond it; expanding to co-ordination

in various international organisations. As creating a more favourable investment climate is one of

the major objectives of the plan, its success will be vital for other areas of EU-Russia co-operation.

Co-operation between the EU member states and Moscow financial centres would be an important

feature not only of the future regional, but of the global financial architecture.

An early start of EU-Russia co-operation on the establishment and work of the Skolkovo Innovation

Center would allow for analysis and use of the European Institute of Innovation and Technology

experience and achievements of its Knowledge and Innovations Communities’ members, as well as

a model of operations, advance plans for future joint research and development projects in the five

priority areas, and beyond. Co-operation in education should be enhanced, as education is a shared

value and its development comprises both major objectives and instruments of the Europe 2020

Strategy for Smart, Sustainable and Inclusive growth79 and the concept of long-term social-

economic development of Russia to 202080.

Finally, the Partnership should involve enhanced co-operation on shared priorities in the key

multilateral institutions, whose collective decisions define the rules of international relations in the

multipolar world of increasing interdependence. Both the EU and Russia promote effective

multilateralism and reform of international architecture. A global reform is in the interests of both

the EU81 and Russia. Positive dynamics of co-ordination within the G2082 gives hope that Russia

and the EU can act in a concerted way on such complex issues as strategies for recovery and

growth, financial sector reform, climate and energy, effectiveness of the international institutions,

to guarantee security, prosperity and well-being of their citizens and sustainable development of

international society.

79

Europe 2020: Strategy for Smart, Sustainable and Inclusive growth. URL:

http://ec.europa.eu/eu2020/index_en.htm (date of access: 29.08.2010) 80

Concept of Long-term Socio-Economic Development of the Russian Federation for the Period up to the year

2020. URL: http://www.economy.gov.ru/minec/activity/sections/strategicPlanning/concept/ (date of access:

29.08.2010) 81

Th. Renard and S. Biscop. A Need for Strategy in a Multipolar World: Recommendations to the EU after Lisbon.

Egmont Royal Institute for International relations. Security Policy Brief # 5. January 2010. 82

From a mere one consultation with the German Chancellor A. Merkel and none with the EU in the run up to the

London summit, to a series of meetings, which featured coordination on the G20/G8 issues on their agendas

prior to Muskoka-Toronto. These included the EU-Russia summit, Russian-German summit talks on June 5, 2010;

Russian-French talks on June 19, 2010; Trilateral meeting between Dmitry Medvedev, Federal Chancellor of

Germany Angela Merkel, and President of France Nicolas Sarkozy on June 27, 2010.

55

VisaVisaVisaVisa----free: Modernising the Russiansfree: Modernising the Russiansfree: Modernising the Russiansfree: Modernising the Russians

bybybyby

Sergey UtkinSergey UtkinSergey UtkinSergey Utkin

PhD, Head of Section for Political Aspects of European Integration,

Institute of World Economy and International Relations, Russian Academy of Sciences

Russians adore globetrotting. This is the conclusion that one may draw from seeing increasing

numbers of Russian tourists and immigrants of Russian origin. For decades our people were held

hostage by a disgusting regime, separated from other countries by the Iron Curtain. Even states of

the Communist bloc were far from easily accessible for citizens of the USSR. The very word

“zagranitsa” (abroad, beyond the border) had a magical flavour of forbidden fruit. Imported goods

from “zagranitsa” that rarely appeared in Soviet shops were believed to be of high quality and

without question (in any case, better than anything that the Soviet industry could provide). The

overwhelming majority of Russians were well aware of the simple fact that they would never have a

chance to cross the country’s border. “I must go to Paris for an urgent business” – a phrase coined

by a Soviet satirist – was welcomed by audiences with laughter: except for a very thin layer of

diplomats and highest executives, a trip to Paris was as unthinkable as a trip to the moon. No

wonder that since 1991, Russians have been remarkably keen to discover the world.

Nevertheless, the change is coming at a relatively slow pace. According to the Federal Migration

Service, no more than 20 per cent of Russian citizens have obtained an international passport83.

STREAMLINE THE WALLSSTREAMLINE THE WALLSSTREAMLINE THE WALLSSTREAMLINE THE WALLS

Russian travellers had to apply for a visa to travel to EU countries in the ‘90s, and they still have to

do so today. But progress has been made, even if this has gone almost unnoticed by the

international media. Things that were broken have been fixed, and existing mechanisms have been

streamlined.

The passport system has undergone some serious changes over the last ten years. Applying for a

passport in 2000, I had to find a typewriter to fill a paper-only application form and the passport

that I got still had the title “Union of Soviet Socialist Republics” and the Soviet coat of arms on the

cover, and all of the data seemed to be typewritten manually. The nine-year old new Russia

understandably had a lot of things to get done, other than finding a substitute for once printed

Soviet passport forms. I travelled with this document until 2005. By the middle of the decade

things had moved on. An application form could be filled using a PC and passport forms with a

Russian double-headed eagle on the cover were provided. More importantly, a number of changes

in printing methods protected the new passports from fraud. Finally in 2006, a passport containing

83

Less than 20% of Russians can go abroad // Travel.ru. 19.04.2010

(http://www.travel.ru/news/2010/04/19/179182.html)

56

a micro-chip with biometric data84 was introduced. Now in 2010, Russians may apply for an

international passport that is valid for ten years instead of five. Passports are being issued in their

millions per year at an average speed of 12 thousand per day85.

While the Iron Curtain has fallen and the barricades of Russian old-style bureaucracy have been

dismantled, another wall still stays firm, designed to deter an uncontrolled influx of migrants into

the prosperous European Union. The wall is usually called “Schengen” which is both right and

wrong. It should be remembered that the Schengen area does not match the EU, leaving the UK

and Ireland outside, while non-EU Norway, Iceland and Switzerland are inside, and Bulgaria,

Romania and Cyprus are yet to enter. And a Schengen visa is for short-term visits of up to 30 days,

and does not include a work permit. For years, the Schengen agreement has made the life of a

number of people outside the EU much easier. They need no more than one visa to arrange a trip

around several countries, and application procedures are less diverse than they would have been

without Schengen. However, people still mostly choose a single EU country as their destination, and

they don’t have much time for the others as the majority only gain single-entry visas just for a few

days. Given these reservations, Schengen doesn’t change much for many people, either for better

or worse.

Things are changing for Russia, which is about to feel that Schengen rules get in the way of

developments that would be possible without them. Visa barriers were seen as inevitable in

relations with poorer countries, including Russia for a long time. The specific arrangements that

came out of a community of states, like Schengen, would hardly be more severe than those

imposed by a single country. The brand new biometric technologies, along with the seamless

exchange of digital information between border guard services change the picture dramatically.

The visa system becomes redundant wherever proper identity verification and readmission

agreements might be introduced. This is the view shared by many Schengen states but not all of

them, and visa-free travel agreed by all of them may take time. Those who are ready to get rid of

visas will have to wait for those who are not.

The perilous influence of the Schengen’s “lowest common denominator” has been secondary to

date. The steps necessary to bring us closer to visa free travel were only completed this summer.

The readmission agreement between the EU and Russia was signed in 200686. It ensures that

people, who illegally reside within one party country after entering from another that is party to the

agreement, will be admitted to where they come from. For Russian citizens the agreement entered

into force in 2007, but Russia was given three additional years (until June 2010) to negotiate

similar deals with its neighbours, so that the EU could send illegal migrants back to Russia even if

they are third country nationals.

84

Biometrics is limited to a high-resolution digital photo. 85

1.5 million Russians have international passports valid for 10 years // Travel.ru. 19.08.2010

(http://www.travel.ru/news/2010/08/19/182461.html) 86

Agreement between the European Community and the Russian Federation on readmission. Sochi, 25.05.2006

57

The readmission agreement was a part of a more general visa facilitation effort87. This facilitation

provided benefits for frequent travellers, who can acquire multi-entry visas more easily, as well as

for tourists, who have to pay a smaller fee (35 Euros). The agreement clarified requirements for

visa application and the length of visa processing (no more than ten days in most cases). When the

agreement entered into force in 2007, it received a lukewarm welcome88. Observers grumbled

about new EU members raising visa fees, since the new deal replaced existing conditions that each

country had negotiated with Russia. Moreover, EU consulate bureaucracy needed time to absorb

the changes, making the visa procedures somewhat more chaotic than usual. All in all the

agreement has helped Russia to agree terms with the enlarged EU. But the changes are

psychologically impalpable. People still have to search for visa requirements; to fill in forms; collect

documents; stand in line at an embassy, returning several times if they are unfortunate enough to

forget a minor detail of a complicated procedure even after the facilitation.

What altered the visa processing in a more profound way was the establishment of “visa centres”

run by commercial companies contracted by a number of European embassies. The new

mechanism alleviated the irksome process of getting up in the middle of the night in order to reach

the consulate before a long queue was formed, or standing outdoors the consulate for hours,

sometimes in low temperatures or in heavy rain. Now people could apply in advance for an

appointment at a visa centre or, at least wait in a warm room with somewhere to sit and an

electronic queuing system. The downside is that the service provided by visa centres has to be paid

for by its clients, i.e. those willing to get visas. The overall fee is rising as a result and is no longer

limited by the EU-Russia visa facilitation agreement. As underlined by the Russian Ministry of

Foreign Affairs, people must still have the opportunity to apply directly to the consulate, so that the

fee determined by the agreement will be respected89. The benefit provided by visa centres is

evident, but additional payments, including those for phone calls to the centres, sometimes make

people feel robbed90.

The difficulties described above are multiplied for dozens of millions of Russian citizens living in

places other than those few cities that are lucky to accommodate some EU consulates91. For these

people, a trip to the EU first requires a trip to a regional capital where a longed for visa might be

acquired. Russia’s enormous territory may well make this journey some thousand kilometres long,

and its costs may consequently be significant.

87

Agreement between the European Community and the Russian Federation on the facilitation of the issuance of

visas to the citizens of the European Union and the Russian Federation. Sochi, 25.05.2006 88

Gridneva N. EU countries have toughen the visa regime for Russians // “Izvestiya” newspaper, 18.06.07 89

Russian MFA: Visa centres have to respect the EU visa code // Rosbalt. 8.04.2010

(http://www.rosbalt.ru/2010/04/08/726825.html) 90

Merinov S. A toll road // ”Rossijskaya gazeta”. 14.04.2010 (http://www.rg.ru/2010/04/14/vizy.html) 91

E.g.: Along with Moscow and Saint-Petersburg Germany has consulates in Kaliningrad, Yekaterinburg and

Novosibirsk, France – in Yekaterinburg, Finland – in Petrozavodsk and Murmansk. Italy has a network of visa

centres in Kazan, Krasnodar, Lipetsk, Nizhniy Novgorod, Novosibirsk, Samara, Spain – in Rostov-on-Don,

Yekaterinburg, Novosibirsk.

58

A MATTER OF PREFERENA MATTER OF PREFERENA MATTER OF PREFERENA MATTER OF PREFERENCECECECE

The Russian cultural background has always been essentially European. The Russian royal family

and aristocracy were linked to relations from all over Europe by centuries of cross-border

marriages, and Russian intellectuals found a source of inspiration and knowledge in the West. The

Soviet government could blame Western capitalism, it could ban communication with foreigners

but it never seriously attempted to wipe away an appealing image of European cultural and

historical heritage. At the end of the day, Marxism came from the West, and Marx could not be

properly understood without European experience being taken into account. Staying behind the Iron

Curtain Soviet, the Russian people were still immersed in European civilisation. European countries

would have been an obvious choice for a foreign trip, if it had been allowed by the regime.

Two decades after the Soviet system collapsed, the reality of the Russian traveller’s wish list is

somewhat more complex. The primary destinations for Russian tourists are Turkey, Egypt and

China92. Turkey is by far in the lead while Egypt outstripped China only a year ago. EU members

come next with Finland being the most popular and it receives about half the number of Russian

tourists that visit China. Without doubt Turkey, Egypt and China are worth visiting, and they all offer

rich exotic cultures. China’s spectacular numbers also reflect the shuttle trips of numerous trade

agents bringing Chinese goods to Russia. When custom rules are tightened, the flow of Russian

visitors drops93. The numbers also reflect the fact that Russians prefer to spend their vacations in

countries that do not require visa-related efforts94 of them.

Finland’s first place as an EU destination for Russian visitors also has much to do with visas.

Finnish consulates are famous for their liberal attitude towards visa procedures in neighbouring

Russian regions, including Saint-Petersburg. People from Russia’s North-West love going to Finland

and use the country as a hub for travelling around the EU. Finnish airports allow the operation of

low-cost companies still kept away from the Russian market.

Germany, Italy, Spain, Greece and the Czech Republic follow Finland. These five countries

combined still fall short of the 1.6 million Russians that visited Egypt in 2009. France lags behind,

welcoming twice as many Russian visitors as the UK, which has visa arrangements of its own.

Stricter rules don’t allow Schengen states to compete with Russian preferred destinations.

The EU tourist industry may look at the numbers of Russian visitors with regret about the loss of

profit, but visas are double-edged, and the real disaster affects the tourist sector of Russian

economy. Two million people arrived in Russia for tourism purposes from all over the world in

92

Rostourism has published statistics for nine months without Rosstat data // RATA-news. 18.11.2009

(http://www.ratanews.ru/news/news_18112009_1.stm). 93

Egorsheva N. Climbed up the pyramid // ”Rossijskaya gazeta”. 22.03.2010

(http://www.rg.ru/2010/03/22/turizm.html) 94

Turkey introduced a visa-free regime with Russia in July 2010. Until that time Turkish visas were given right at an

arrival airport for 20 USD, as Egypt still does for 15 USD. China allows visits of tourist groups without personal

visa applications and offers special conditions for people from neighbouring regions of Russia: they don’t need an

invitation for getting visa.

59

2009, the same number as Russians that went to Turkey the same year95. Russia may be able heat

up its development with oil and gas now but other trades, including tourism, are increasingly

important.

TEAR DOWN THIS WALLTEAR DOWN THIS WALLTEAR DOWN THIS WALLTEAR DOWN THIS WALL

Anyone may be banned from entering a foreign country while there is a passport check on the

border. This is a matter of common sense similar to your right to arbitrarily shut your own front

door. Unlike a stand-alone house though, a country inevitably lets in millions of people it will know

little about. Prohibition from entering a country may come as a result of some violation of law.

Visas don’t change much in this regard. Getting a visa is boring but it is possible, whatever the real

intentions of your visit. No one is able to provide a thorough investigation of the myriad of big and

small employers that applicants claim to work for. No one can be sure that a bank account

presented by an applicant to confirm his/her solvency has sufficient funds at the time his/her EU

trip begins. A strict visa system eventually deprives a country’s economy of the money that a visitor

could spend by staying a couple of extra days rather than allaying the burden of police services.

Russia was recently successful in pushing through the idea of visa-free travel. It reached agreement

with Israel, Thailand, Serbia, Montenegro, Argentina, Brazil and Venezuela. Croatia and Macedonia

become visa-free for Russians each time that their governments realise that their desired EU

membership is not in sight. These are just a few improvements that make the world more open for

Russia96. Step by step, the Schengen wall becomes an exception.

Visa-free travel is also adhered to by the Commonwealth of Independent States (CIS)97. This is

criticised by Russian nationalists whose obsession is to get rid of migrants. Meanwhile, as in many

developed countries, the migrants do a large amount of underpaid, unpleasant but indispensible

work. Russia is doing economically much better than its CIS neighbours. It is performing better

than EU members Bulgaria, Romania and Latvia (also a member of the Schengen area), and EU

candidates Macedonia and Turkey98. Russia is still poorer per capita than the poorest states of

Western Europe but it won’t need much time to catch up.

EU leaders are well aware of the progress being made by Russia. One by one they openly speak in

favour of visa-free travel99. The majority of the European expert community shares this view100.

Nevertheless, reservations remain. Poland is prepared to speak first about further visa facilitation

for the Kaliningrad region of Russia, with talks on a visa-free regime for all Russian citizens and

(necessarily) for Ukraine coming later. For a long time the Russian government was reluctant to

95

Statistics of arrival in/departure from Russia, 2002-2009. (http://profi.travel.ru/stats/inout.html) 96

Details on each country (in Russian) to be found at http://archive.travel.ru/ 97

Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Ukraine, Uzbekistan 98

The CIA World Factbook: Country comparison – GDP (PPP) per capita. 99

Italy, France, Spain, Greece, Belgium, Luxemburg, Slovakia, Cyprus support the move. Germany, Finland and

Estonia are favorable but expect some delay until everything is ready. 100

EU Fears and Expectations of Russia, The EU-Russia Centre Review, Issue 13, 2008, p. 12. (http://www.eu-

russiacentre.org/wp-content/uploads/2008/10/Review_XIII_english.pdf)

60

give the Kaliningrad region preferential treatment that would discriminate against other Russians.

Whether it is a more realistic vision for the region squeezed between Poland and Lithuania, or to

influence public protests against Russian taxation policies, the government has now changed its

mind. An unprecedented appeal by Russian and Polish foreign ministers called on the EU to change

its legislation to simplify cross-border travel between neighbouring regions101. However, Lithuania

doesn’t support the idea102.

The Lithuanian attitude to visa-free travel, as well as other possible improvements in EU-Russia

relations, is among the most ambiguous. Official statements from Lithuania are mostly cautious,

allowing for a visa-free regime for Russia sometime in the future, along with other Eastern

neighbours of the EU103. The Lithuanian President, Dalia Grybauskaitė, has stated that any

decisions on a visa regime are to be taken by the EU, and Lithuania will not speak out against

them104. But the EU decisions are formed and approved by the Union’s members, and rumours

suggest that Lithuania might be the leading sceptical voice when the EU talks about Russia. The

“Homeland Union – Lithuanian Christian Democrats” party, led by the incumbent Prime Minister,

Andrius Kubilius, is famous for its three-year-old strategy on the containment of Russia105 - still

believed to be valid106. Visas are seen as a tool of containment, at least, by some conservatives.

Lithuanian worries about Russian foreign policy and the nature of the Russian political regime will

definitely find some supporters in other countries. Indeed, Russia’s democracy is still under

construction. The 2008 conflict with Georgia, whatever its reasons and outcome, helped Russia’s

opponents in the EU to make their case. The question is whether visa-free travel may be seen as a

prize for a good behaviour?

A Visa-free regime with the EU, if achieved, will inevitably look like a major victory for the Russian

government, a triumph for Dmitry Medvedev and Vladimir Putin. Democratic mechanisms do not

work properly in Russia but an authoritarian state still has to obey the basic rules of politics,

seeking legitimacy and being obliged to listen to people’s demands, at least sporadically. When

Russians hear about the EU, they inevitably think about Schengen visas. Any attempt to put the

visa issue on the agenda of an EU-Russia meeting gets a warm reception from the media. Even

those who are rich and who get multi-entry visas easily don’t like begging embassies for the

service.

101

On joint appeal of ministers of foreign affairs of Russia and Poland to the European Commission. Russian MFA,

435-06-04-2010, 6.04.2010. 102

Lithuania doesn’t want visa-free regime with Kaliningrad // Rosbalt. 9.08.2010

(http://www.rosbalt.ru/2010/08/09/760618.html) 103

Lithuanian MFA: Visa free regime EU-Russia – a long term perspective // Regnum. 11.05.2010

(http://www.regnum.ru/news/1282470.html) 104

Grybauskaitė: The idea of visa-free regime for Kaliningrad region – a PR stunt // ”Litovskij kurjer”. 25.08.2010

(http://www.kurier.lt/?r=100000&n=10156) 105

Russia Containment Strategy. Draft Agreement between Political Parties. 9.05.2007

(www.tsajunga.lt/uploads/files/dir20/dir1/15_0.php) 106

A. Ažubalis: I look at Russia without illusions but with optimism "Delfi.lt".

(http://rus.ruvr.ru/2010/05/01/8823758.html)

61

Russian authorities are persistent in their efforts to push the country towards a visa-free paradise.

They repeatedly underline the fact that that Russia is ready to abolish visas for EU citizens107 but, at

the same time, Russian diplomats stick to the reciprocity principle and keep the visa system in

order to make EU people know how it feels for Russians. The annoying system of registration for

incoming foreigners will be dismantled before long, if the decision is taken to abolish them. Beefing

up a Russian bid to host the football World Cup in 2018, Vladimir Putin promised to allow both

participants and guests a visa-free entry to Russia108. The idea may be implemented four years

earlier, when Russia hosts the 2014 Winter Olympic Games in Sochi. Desperate for an EU

response, President Medvedev unexpectedly used the EU-Russia summit in Rostov-on-Don to offer

EU leaders a draft agreement on visa-free travel for their consideration109. Presumably the draft

was modelled after Russia’s agreements with Israel or Argentina that are already in force.

If the Russian government is so interested in the issue, one could hope that the course of Russian

politics might be influenced by a loose list of conditions for a visa-free regime that would force

Russian officials to do what the EU expects from them. The catch is that Russian authorities have

no intention of throwing all aspects of EU-Russia relations into a single pot and if the visa issue

stays on the agenda forever, they can live with it. They are not worried about losing the presidency

or seats in the parliament. Russian policies cannot be changed by a visa tool but, surprisingly, its

absence may bring about change in Russian politics.

A stable democracy requires a viable civil society. This cannot be constructed from above. People

at the top become autocratic if the majority of citizens let them. Russia’s experience of apathy

coming after great turmoil is not unique. The apathy is slowly receding but the new era remains

uncertain. We may end up with more turmoil but the task is to achieve an open society and an

accountable government. An authoritarian state may try to modernise Russia’s economy and

infrastructure, but it cannot force modernisation onto the Russian people. Citizens themselves have

to become more dynamic, tolerant, competitive and educated.

Visas hamper this process. They make people feel handicapped, deprived of rights that are taken

for granted in “normal” countries. A land where people may choose freely to spend a few days in

Paris or Rome may not retain the remnants of Soviet mentality. The EU has an opportunity to

trigger the political modernisation of Russia with visa-free travel.

107

Lavrov: Russia is ready to abolish visas for the EU and waits for reciprocal steps // RIA”Novosti” 15.04.2009

(http://www.rian.ru/politics/20090415/168224277.html) 108

Alekseev A. “We’ll abolish visas for the cup” // Gazeta.ru, 17.08.2010

(http://www.gazeta.ru/sport/2010/08/a_3408270.shtml) 109

Press-conference on the results of the EU-Russia summit, Rostov-on-Don, 1.06.2010

(http://www.kremlin.ru/transcripts/7932)