Eu-us-russia Relations: Moving from a Solid Foundation into the Challenges of the 2010s

The EU, US and Russia: facing common challenges

During the Cold War era, the US–Europe–Soviet Union triangle was the centre of attention and a hub for setting the global agenda. These three centres of world politics were also the major contributors to the global economy and dominated in science and technology. While global politics changed gradually in the 1990s and 2000s, the recent economic turmoil has sped up the transformation of the global arena.

The global financial crisis reached its lowest point last year. It is evident that the financial crisis and responses to it have precipitated major changes in world politics, including movement towards a multipolar world order. The crisis has had widespread repercussions in trade and investment flows, development financing, the operations of international institutions and, indirectly, on the capacity of states to manage various political crises.

If global development comes to be determined primarily by the largest countries, the position of small countries will grow weaker. Exerting influence via the EU will not necessarily be easy, either. Since the EU is not a nation state, trying to adjust to the new situation and arrangements may prove difficult. For both the US and Russia, the situation is uncomplicated because both are nation states and firmly established members of the G-8 and G-20. The G-20 reflects how international politics have changed, but it is obvious that the changes have not yet come to an end.

The structural changes in international politics will only continue and deepen in the 2010s. Although many countries have weathered the depression and returned to economic growth, progress is regionally uneven. The see-saw movements of the economy make forecasting difficult. At the moment it seems that the EU may recover faster than the US will. In transitional regions, Asia is stepping up its recovery while Eastern Europe is slowing down. Russia has also returned to the growth track.

At the same time, governments are being forced to tackle difficult structural problems, such as public economy issues. The repercussions of the crisis go beyond Europe and affect the entire Western world. The debt-to-GDP ratio of the G-7 countries is currently at about 100%—higher than at any time in the past 60 years. Many Western economic heavyweights are now also heavyweights of debt. In terms of public debt, Russia has weathered the storm better, largely thanks to reserves accumulated during the good years.

Many emerging economies continued to grow economically at a time when almost all EU countries, the US and Russia dipped into a recession. Obviously, the relatively good performance of many emerging economies only accelerated their growing strength in the global economy and politics. The countries that have pulled through the financial crisis better than Europe and the US now have a stronger faith in their own social systems. Western economic models do not appear attractive to others. In the medium and long term, the weight of the emerging economies will continue to increase, and the only way the EU, US and Russia will be able to maintain their global positions will be to ensure that their economies are competitive.

Both the EU and Russia must deal with one more factor undermining their relative strength: an ageing population. Even if the predictions that the US population will reach 400 million by 2050—as Joel Kotkin [3] argues in his recent book—are accurate, the total share of the US, EU and Russia in the world's population will decrease. We will need to adapt to a new world order in which we no longer dominate.

We are thus facing a big twofold change. In a multipolar world, the international political playing field will become wider and more diversified. Acute problems relating to incurred debt, climate change and natural resources will be put on the same global agenda.

The EU's point of departure in this situation is challenging. The 10 years of the Lisbon Strategy, during which the EU was to become the most competitive economy in the world, ended last March. The plan did not bear fruit. During the coming10 years, the EU's 2020 Strategy will be implemented. However, national economies just recovering from the financial and economic crisis will not provide a very firm starting point for this decade. Similarly, the US is still recovering from its worst recession in decades.

Although Russia, the EU and US are certainly not similar in terms of competitiveness, they all face the low-cost challenge presented by the—mostly Asian—emerging economies. An effort to compete with the emerging economies by producing goods more cheaply is doomed to fail. Neither would it guarantee the standard of living to which our citizens are accustomed. We must leave no stone unturned in working to boost our competitiveness. I argue that there is still untapped potential in EU–US–Russia relations to support our economic development.

The EU and US: modernising forces for Russia

We all have to critically assess how competitive our economies are and what we can do together to support our future in global competition. The EU is the largest economy and exporter of manufactured goods and services in the world, while the US is the home base of the world's largest companies and a truly dynamic and global economy. Russia is one of the leading producers of energy and raw materials; it also possesses one of the largest currency reserves and is eager to improve its productivity and competitiveness. There should be more we could do together to boost our economies. There should be more potential for cooperation, which can only be a win–win–win proposition.

Compared to the US and EU, Russia requires the most fundamental changes to its economy. Its debt burden is modest, but several fundamental weaknesses in the economy are evident. The funds accumulated during the good years have smoothed over the effects of the financial crisis, but something other than money is required to carry out the required structural changes.

Russia is the second-largest producer of natural gas and the largest producer of oil in the world. It is also the largest exporter of gas and second-largest exporter of oil. These volumes offer a constant and solid flow of income. Any global discussion of energy issues without Russia is irrelevant. Still, the Russian administration has concluded that the current economic structures are not sustainable and do not ensure a bright economic future for Russia. The crisis revealed that the impressive growth, which attracted billions of dollars in foreign investments and improved living standards, ended suddenly when the price of oil plummeted and the inflow of capital virtually ceased. The fundamental weaknesses were not cured, and the improvements in some sectors of the economy were not sufficient to soften the impact of decreasing oil prices and capital inflow. Although Russia is truly integrated into the world economy, some aspects of its integration are weak and thin. Russia's economy has not achieved its full potential globally, and the impressive growth of the 2000s has not yet resulted in global competitiveness in many crucial sectors of the economy.

As one example, consider Russia's current modest role in the global market of high-value-added goods such as machinery, equipment and transport vehicles.

These accounted for only 5.8% ($17.6 billion) of Russia's total exports ($303 billion) in 2009. By comparison, the export of similar goods from Finland to the world market was ∊18 billion in 2009 (40% of total exports). There is also still huge untapped potential in some raw materials, especially in forest resources—Russia's forest resources are the largest in the world. Still, the value of exports of forestry goods from Russia is roughly the same (2.9% of total exports, $8.7 billion) as that of forestry goods exports from Finland (21.5% of total exports, ∊8.6 billion) [2].

Another example demonstrates that the size of Russia's GDP has not resulted in a significant number of large global companies. There are relatively few Russian companies among the largest companies of the world. The Forbes ‘Global 2000’ list identifies the 2000 largest companies of the world. Certainly such a listing has its limits, and it does not provide the whole picture of a country's role in the global economy, but it is nevertheless worth considering. The list includes 28 Russian companies, of which 15 are in the oil and gas business, mining, ferrous and non-ferrous metals; 13 are in other areas. There are several smaller countries which have an equal or greater number of companies operating globally and listed in the Forbes Global 2000 rating: 29 companies from Spain, 39 from Taiwan, 44 from Australia, 51 from South Korea, 27 from Sweden and 23 from the Netherlands. In other words, there are several countries smaller than Russia in terms of GDP but which have a stronger presence globally because of major companies. A successful modernisation of Russia's economy will improve these figures, and it is hard to imagine that modernisation could be carried out without strengthening the external component of Russia's economy. In that sense, the US–EU–Russia triangle is a crucial and important element in strengthening the external relations of Russia's economy [1].

There is no doubt that during the good years Russia took remarkable steps towards becoming a more modern economy. Everyone who visited Moscow or St Petersburg could see the booming service sector and consumer society, the inflow of foreign investments and the emerging middle class. In many ways Russian and Western societies are now closer to each other than they have been for decades, which is a precondition for increased cooperation.

There were significant trends in the Russian economy before the onset of the economic crisis. First, foreign direct investments in Russia—the lion's share coming from EU countries—were modernising the economy and corporate world before the word modernisation was even used. European and US companies became a real power in transforming Russia's economy; there are now thousands of foreign companies operating in Russia. Both the American Chamber of Commerce and the Association of European Businesses represent the interests of hundreds of members and stand for strengthening economic ties with Russia. In establishing a partnership for modernisation, we do not have to start from scratch. There is already a strong transatlantic corporate presence in Russia.

Second, the expansion of Russian companies with operations and acquiring assets abroad had progressed gradually and was becoming more common before the economic crisis hit Russia in late 2008. Going global was not the ambition of most of the Russian corporate world, but something undertaken only by the strongest companies in the raw materials sector. It is worth noting that for many Russian companies acquiring assets abroad, the US and EU countries were especially attractive. Russian steel, oil and mining industries have been the pioneers of expansion abroad, buying assets in the US and EU countries in particular. A couple of examples demonstrate this trend. One of the flagships of Russian steel industry—Severstal—has acquired assets in both the EU and US. Severstal acquired a 49% stake in Lucchini (Italy), becoming the second-largest producer of steel in Italy. Having acquired several assets in the US—the first being Rogue Industries (once the in-house steel unit for Ford Motor) in 2004—Severstal North America is now the fourth-largest steelmaker in the US.

Another steelmaker, the Evraz Group, followed in the US market with the acquisition of Oregon Steel Mills and Claymont Steel Holdings. In the EU market, Vitkovice Steel became a part of the Evraz Group as Evraz Vitkovice Steel in 2005. In 2008, it was estimated that Russian companies owned 10% of the US steel industry.

There are similar examples in other industries. The largest-ever takeover (valued at $6.4 billion) by a Russian company abroad to date was conducted by Norilsk Nickel in 2007, when it acquired about 90% of Canada's LionOre Mining International Ltd., the world's tenth-largest nickel producer at the time. It made Norilsk Nickel the world's largest nickel producer.

Lukoil has acquired refineries in Bulgaria, Italy, the Netherlands and Romania, and it owns filling stations in the US and several European countries. Other Russian oil companies are also aiming to participate in exploration and production abroad. Both Norilsk Nickel and Lukoil also have assets in Finland.

If we want examples closer to the ordinary person's interests, we should not forget that Roman Abramovich owns the Chelsea Football Club, Alisher Usmanov is the second-largest shareholder in the Arsenal Football Club and Mikhail Prokhorov owns the New Jersey Nets.

There are pioneers of globalising Russian companies, but the road is not easy or level. The modest amount of truly global Russian companies is understandable given that as recently as 20 years ago Soviet ‘companies’ were perhaps exporting their products but not operating abroad.

Certain suspicious attitudes towards the investment and expansion of large Russian companies abroad are groundless. We should simply welcome these investments and not forget that establishing the European Coal and Steel community was one of the first steps of European integration. I think that the modern way to act is to own these resources privately and allow each others’ companies to have assets in other countries. Russia and Russian companies should be no exception.

In addition to the mergers and acquisitions, there is another noteworthy pillar in Russia's economic integration. Russia became increasingly involved in international financial flows, and its private-sector borrowing increased substantially during the good years before the crisis. We also observed a wave of Russian companies making initial public offerings (IPOs), mostly on the New York and London Stock Exchanges. We should not underestimate the importance of these examples of Russia's growing integration within the world economy. Companies either making IPOs or otherwise acquiring capital from the international financial markets have committed to transparency and to playing by the same rules as the other companies listed in the London and New York Stock Exchanges.

Building on a solid foundation

Since the crisis, the prevailing issue in Russia's socio-economic agenda has been modernisation. It is encouraging that Russia seems to acknowledge the importance of foreign companies in modernisation. As I argued above, US and European companies have been and will continue to be the major modernising force in Russia. They aim for profit and will bring with them elements of modernisation.

The efforts to modernise consist of numerous policy measures. The obvious flagship of this process is Russia's ‘Silicon Valley’ in Skolkovo. It is encouraging that, apart from Russian companies, the founders of Skolkovo seem especially keen to attract US and European companies to become residents in Skolkovo. We also know that high profile decision-makers have visited MIT and Silicon Valley to learn from the US experience. Both the US and EU seem to be the models to learn from. This is a good starting point for joint economic efforts.

There are existing ties between the EU, the US and Russia, forming a strong foundation for economic partnership. My argument is that integration is already deep and that both our citizens and our companies cross borders as part of their everyday lives. They have similar wishes and aims. Companies aim to make a profit and citizens wish to work, travel and consume. Trade flows across borders every day, Western companies have assets in Russia and vice versa.

I have already argued that our societies have become more similar, thanks to the steps taken to move Russia's economy forward. We speak different languages and use different currencies. But it seems to me that we are increasingly similar in terms of how we consume our incomes, where we travel and the films we watch. Before the economic crisis, Russia was becoming one of the largest consumer-goods markets in Europe, with Russians buying two million cars and up to 35 million mobile phones annually. The blockbuster film of 2009 in both the EU and Russia was Ice Age 3, a product of the US film industry. Go to any tourist destination favoured by EU citizens and you are almost certain to hear Russian being spoken. And it is easy to notice the draw of EU countries when Russian citizens choose their travel destinations. Every year about 3.2 million Russian citizens receive a Schengen visa, demonstrating the strong interest of Russians in EU countries.

In a recently published article which I co-authored with my Hungarian colleague Jànos Martonyi, we argued that we need to facilitate interaction between our people. Visa-free travel—hopefully in place well before 2020—would benefit tens of millions of people. The EU and Russia agreed to pursue visa freedom as a long-term goal in 2003 and are committed to reaching it. However, all of the technical and social criteria have to be met. Russian and EU experts need to continue the discussions and examine where sufficient progress has been made and where steps still need to be taken. This will pave the way for negotiations on a visa waiver agreement. We can only welcome Russia's recent moves to rethink the requirements for foreign professionals who wish to work in Russia.

Similarly, our article argued for tightening economic integration. To facilitate economic integration, the ultimate goal is a free trade area between Russia and the EU. We should not see our economies as rivals but make them more attractive by means of enhanced integration. Currently, the most pressing issue is Russia's accession to the World Trade Organization. Another key factor that would integrate our markets further is the harmonisation of technical standards. Russian companies would benefit the most from harmonised regulation, because it would bolster their competitiveness in the European market. These measures could open a new window of opportunity for both sides in the increasingly competitive global market. These are not easy targets, but the stakes are also high.

Conclusion

We must see EU–US–Russia integration as an instrument in maintaining the positions we have in international economy and politics. The competition will get harder and the potential of the triangle cannot be left idle. We must see Russia's aim to modernise its economy as a good platform for increased economic cooperation. The foundations are already in place and there is a momentum to start doing more. We have more in common now than we have had for decades. We need to take concrete action to promote the movement of people and lower the barriers between our economies.