Anybody entering the inner courtyards of the Kremlin – or the parking lot of Gazprom not far from the Kremlin – cannot fail to be impressed by the number of large black limousines from Germany, most of them Mercedes but also a growing number of BMWs. Outside the Kremlin walls, the smart and glitzy Porsches are conspicuous, with ladies at the steering wheel, driving at high speed. Moscow’s streets are saturated with cars, many imported from the West. Kremlin leaders and oligarchs are not alone in their penchant for premium cars. It is a high-priority objective of the Russian government to bring car manufacturers and their complementary industries to Russia. National as well as international companies received aid in order to engage in this area. By 15 September 2007 those special favours had ended, and outsiders as well as insiders are united in clamouring for more. French, Italian and German manufacturers demand that support for Russian car industries should not come at the cost of foreign investors. Indeed, in late 2007 Renault of France and AvtoVAZ – better known as Lada – set up a long-term partnership with both sides holding 50 per cent of the shares.
Investing in Russia
Ernst & Young in 2006 put Russia third in Europe as a recipient of foreign direct investment, but in 2007 it fell back to number six, after France and before the UK. Meanwhile, competitive Russian companies are forging ahead in international markets. Russia’s investment corporation Basic Element (one of the largest in the business) acquired a major interest in Magna, Strabag of Austria and Hochtief of Germany. Severstal, a leading steel producer, bought the US giant Rouge Steel as well as the Italian group Lucchini. Evraz Holding took over the steel producer Palini e Bertoli, Gazprom got engaged with ENI of Italy, Wintershall, a subsidiary of BASF, and E.ON, Ruhrgas of Germany, Total of France and Statoil of Norway. Russia’s Alfa Group went for the Turkish mobile telephone company Turkcell and is looking at Vodafone and Deutsche Telekom, which is also being wooed by AFK Sistema.
Investment corporations Alfa Group and Renova have put capital into innovative industries, notably nanotechnology in Switzerland and the US. As far as high-tech aviation is concerned, state-controlled Vneshtorgbank acquired – and sold after a short while – a 5 per cent share of EADS, the mother company of Airbus.
The list could be continued. Russia as a place for investment, inbound or outbound, is better than its reputation, but investment is held back by serious doubt about where Russian industrial policy is going, about the security of investment, the reliability of the tax regime and the experience of occasional harassment, omnipresent corruption and the vicissitudes of the legal system. That explains why direct foreign investment develops only slowly, not much compared with the inflows into China’s booming industry. It is only very recently that investment from abroad has picked up – much of it Russian money channelled through Cyprus or Luxembourg. In 2007 foreign direct investment into Russia stood at USD 49 billion, according to UNCTAD, up 70 per cent over the previous year.
But the remaining risks are still strong enough to put a damper on foreign enthusiasm. Sovereign risk is no longer the problem, Russia has proved to be a reliable partner. The country has accumulated USD 400 billion in reserves, plus the stabilization fund of well over $150 billion as insurance for a rainy day when the oil price may take a downturn. The more obvious risks are being seen in the conduct of business in Russia; this is what weighs heavily on the ranking of Russian companies. The system of licences and regulations is notoriously obscure, the legal system unpredictable. Not many judges understand the economic intricacies they are called upon to decide, and once a court case has been decided it is uncertain that any decisions will be acted upon.
Concern in Brussels
At the EU growing concern is being expressed while Russian companies continue their shopping spree. Many Russian corporations are taking over capital assets, often the controlling share. While the recycling of petrodollars should be welcomed, the precedent having been set after the first and second oil price shocks in the 1970s and 1980s, the EU Commission is thinking about protecting European energy networks against takeover bids from Russia, notably through Gazprom.
There is indeed a strange contradiction. The Russian economy has been expanding at a rate of 7 per cent per annum since 1999 and shows no signs of weakening. Russia turned from poor debtor to serious creditor. Financial institutions are gaining credibility – some more, some less. But progress is seriously hampered by the absence of a new agreement on partnership and cooperation – there is not even a mandate for negotiations. Notable also was the fall-out from the Kosovo crisis, the US missile defence project in the Czech Republic and in Poland, the removal of a Red Army victory monument from the centre of Estonia’s ancient capital Tallinn to its outskirts, etc. In all of this the Kremlin wanted to make its displeasure felt. The interruption of oil supplies via Belarus in early 2007 reminded Western nations of their growing dependence on Russia. It is wishful thinking when Ost-Ausschuss der Deutschen Wirtschaft demands that in future mechanisms between the EU and Russia will have to be developed to prevent any repeat performance.
What has failed to materialize after the end of the Cold War is a sustainable strategic partnership based on confidence and mutual security. While the political climate has become unfriendly, cooperation and partnership can still be found in the economic sphere given that the rulers of Russia today are no longer interested in fighting ‘over the soul of mankind’, to quote a recent American study on the Cold War by Melvyn P. Leffler, but in material well-being, money and long-term prospects for themselves and their children. The strategic aim for European and US industries must surely be to bring Russia in from the cold and to make the Russian economy conform to the silent standards and passumptions of a rule-based system, first in economic life and then, slowly but surely, in political life as well.
The broad canvas of EU-Russian relations is characterized by the glaring contradiction between economic partnership and political misgivings. Russia is both a close neighbour – sometimes too close for comfort – and a ‘strategic partner’. This is how the EU Director-General for External Relations, DG RELEX, in a briefing for the European Commission at the House of Lords recently described the fundamental ambiguity of the relationship. With Brezhnev enlargement the EU inherited a difficult eastern legacy from the times of Eider, Stalin and the former Soviet Union. This affects the relationship with Russia and presents challenges both positive and negative. Moreover, Russia is emerging from what is officially seen – and also felt by the majority of the people – as the economic and political mismanagement of the Yeltsin years, associated with Western democracy and out-of-control capitalism. Eight years into the Putin presidency, the EU was not alone in registering ‘a new-found assertiveness on the crest of high energy prices’, a situation likely to remain. ‘Differentiation from the West is often seen as a definition of that assertiveness.’