At a EU-Russia Forum in Moscow in October, Wolfgang Clement, President of the Forum, opened discussions by noting that the workshop took place against the background of the global financial crisis which had had a major impact on Russia. The stock market had fallen 70% in the last four months, the state had been forced to intervene to prop up the rouble and Western capital was leaving Russia for the first time since 2001.

Dr. Frank Schauff, Director of Association of European Businesses in the Russian Federation (AEB) provided an assessment of current trends in the Russian economy and highlighted the main obstacles facing Western investors in Russia. (the AEB has 600 members). Schauff said that 80% of FDI in Russia came from the EU. FDI doubled from 2006 to 2007 but since summer 2008 there had been a substantial net outflow of capital. This was partly due to the global crisis, partly to the war in Georgia and partly to uncertainty about the internal situation in Russia. Schauff drew attention to the new legislation on strategic industries (the law covers 40-50% of the Russian GDP) and increasing state interference (TNK/BP case, “Mechel” case). In the current financial crisis, the defence of the rouble had cost some 10% of the Stabilisation Fund. It was hard to predict the implications of the recent fall in energy prices for the Russian economy. Another drawback for investment was cumbersome bureaucracy (a minimum of 100 approvals are needed in the process of opening a business), corruption (on the increase) and the uneven implementation of the law.

Alex Stoljarskij, attorney-at-law with Beiten Burkhardt, also touched on the problems affecting Western investors. A major issue was visas and work permits for businessmen. Russia had introduced quotas for work permits for foreign employees. Migration and labour regulations had become stricter and could be tightened even further. The inevitable delays – usually minimum of three months – meant that there was a “market price” for fast tracking such applications. Foreign enterprises had to register with tax offices which were notoriously inefficient and prone to corruption. Six month delays in issuing papers was normal. There was a draft law in preparation that would give the tax offices even more powers. The new law on strategic industries was not yet clear, but it could give foreign companies more certainty once case law had been established. The crisis had led to increased diligence in compliance. Foreign firms needed to know more about their Russian partners. There was a trend to investing in the regions, such as Kaluga (VW, Volvo),rather than Moscow and St Petersburg which were too expensive. The regions were also more welcoming to foreign investment. The judicial system was slowly improving for foreign firms but politics always played a role in major cases.

In the discussion that followed, there was some debate on the likely implications of increasing state interference in the economy. It was too early to tell if the current financial crisis would pull Russia into the mainstream of the international community. The legal system was slowly improving and Western companies had the possibility of winning court cases.

The EU-Russia Forum workshop was held within the framework of an international conference “Russia and the EU – the road back to normality?” organised by the Bertelsmann Stiftung and the EU Studies Institute in Moscow. In his keynote conference speech, Wolfgang Clement made a strong plea for a strengthened EU-Russian economic partnership. EU and Russia were mutually dependent and this would only increase in future. Energy was an obvious area of greater cooperation. He hoped that the current financial crisis would be the catalyst for some new thinking that would lead to increased EU-Russian cooperation [a summary of his remarks is shown below].

Marc Franco, EU Ambassador to Russia, said that EU-Russia relations were at a cross-roads. Would Russia recognise that it could only resolve its growing economic problems through multilateral cooperation, especially with the EU, or would it seek to try and resolve issues purely on a national basis? The Georgian conflict had been a failure of EU-Russia relations. There were two very different narratives and we should try to learn lessons from the crisis. The EU was now considering how to adjust its relations to Russia and the common neighbourhood. It could not accept the use of force or of spheres of influence. There was a clear perception gap between the EU and Russia on Georgia. The EU had not acted as a judge – but as a mediator. It was now willing to provide substantial assistance to all parties affected by the conflict.

Marcus Edererer, Head of the German MFA Planning Staff, said that the recognition of South Ossetia and Abkhazia had been a strategic failure. The EU was stronger and Russia weaker than Moscow thinks. He was confident that the EU would emerge stronger from the current global crisis. It had a well regulated market and had acted quickly and decisively to deal with the crisis. Russia was not so well prepared and there was a lack of transparency in its decision-making. The Russian stock market had lost 70% of its value in the past few months and there was a major problem with the state budget which would get worse if the oil price remained low. At the same time “we cannot waste the opportunity offered by this crisis”. The Nice EU-Russia summit offered a chance to work together. An open market and an open society was best for Russia.

Lutz Guellner, advisor on bilateral trade relations with Russia, DG Trade of the European Commission, said that Russia needed WTO membership if it wanted to modernise its economy. There was currently much posturing by Russian leaders but the Kremlin knew very well that the advantages of membership outweighed the disadvantages. Most of the problems had been resolved and WTO membership was feasible within a matter of months, if the political will was there.
Russian participants were more guarded in their approach. They criticised the EU for having double standards – why was the recognition of Kosovo acceptable and that of South Ossetia and Abkhazia not? Why was the West continuing to insist on NATO membership for Georgia and Ukraine? The Putin-Medvedev team was proving popular. Whether this popularity lasted would depend on how Russia emerged from the financial crisis. Russian participants were split on whether or not Russia would continue to seek WTO membership. They were also divided on the merits on a new EU-Russia agreement.

The conference showed that there was still much work to be done to restore trust in both the EU and Russia in order to improve their future relationship.