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EU-Russia positive energy

Investors want less confrontation, more pragmatism. The Cold War may be over but the relationship between the European Union and Russia was not warm by any means during the previous summit held in Samara in May.

But the tone of the meeting appeared to be better at the EU-Russia summit on October 26 in Mafra, Portugal, as pragmatism prevailed over differences in the relationship. The issues of greatest importance for the investment case in Russia are a new trade deal, investment access for Russian companies looking to expand in the EU, the “Gazprom clause” in the EU’s energy plan, and Russia’s stalled energy projects. The headline issues are still mainly about energy, US missiles, disputes with Poland and Finland and the question of Kosovo’s future.

The EU and Russia were expected to sign an agreement on steel products, and also a memorandum on drug control, according to the EU’s Portuguese presidency. The current EU-Russia Partnership and Cooperation Agreement (PCA) was signed in 1997 and expires in December this year. Both sides agree that there should be an agreement to replace it, but talks on the future deal have been blocked by Poland, against which Russia imposed a ban on meat imports. Poland’s new leader and candidate for prime minister Donald Tusk will, it is assumed, be helpful going forward but it is too soon to assume any immediate improvement in relations with Moscow.

British Prime Minister Gordon Brown has toned down the aggressive rhetoric of his predecessor Tony Blair and, at a recent Russia- UK investment forum, major British companies openly talked of their wish to invest more heavily in Russia. The recent visit of French President Nicolas Sarkozy to Moscow did convey the message that there is an open dialogue between the two governments under which business can be done and, at a recent meeting between Putin and Angela Merkel, the Russian president and German chancellor discussed extending cooperation.

“Investors will hope for less confrontation and more pragmatism this time, particularly given the recent softening of dialogue on Kosovo and energy cooperation. If so, more substantive progress on key trade and energy issues could be made before the end of Putin’s presidency. Any evidence of improved relations would help allay investor worries about Russian economic and political risks. That would help asset valuations by easing the risk premium. Progress in cross-border investment issues and in the energy talks would directly benefit Gazprom and would improve the outlook for the country’s largest enterprises harboring ambitions to expand globally,” Chris Weafer, chief strategist at UralSib Bank, wrote in a note to investors.

On energy, the EU and Russia were expected to announce an agreement on an early warning mechanism. The backdrop to the improved tone in the relationship is that Russia has included some of the EU’s major energy companies in a strategic partnership role in several major energy projects or has allowed EU companies to buy strategic stakes in Russian companies. Total, France’s biggest oil company, is Gazprom’s strategic partner on the Shtokman gas deposit, while BP has an option to acquire a similar role in the Kovykta gas deposit, Shell has such a role in Sakhalin II and BASF is operating a JV with Gazprom on the Nord Stream pipeline.

ENI is close to extending its relationship with Gazprom, while ENEL paid $1.5 billion for a 25% stake in OGK-5 in June. E.ON is a shareholder in Gazprom and is also active in the electricity privatisation process. One day before the summit, Putin phoned Norwegian Prime Minister Jens Stoltenberg to inform him that Statoil Hydro had been awarded a 24% stake in the development of the Shtokman gas field. This move improved the business climate even further. “The upshot is that Europe’s major energy companies are already well represented in major Russian energy projects.

But many of those projects, such as Shtokman and Kovykta, have yet to be given the goahead for development from the Kremlin and that next phase is likely dependent on progress in securing a new trade and investment deal with the EU. Effectively, the Kremlin now has several major companies in each of the major EU capital cities that have access to their respective governments and in whose interest it is now to lobby on behalf of the Kremlin. Otherwise those potentially lucrative energy deals might just stay on the drawing board,” Weafer said. Putin criticised on October 26 EU plans to limit foreign investment in its energy networks.

Speaking at the start of an EU-Russia summit, Putin said European investment in his country far outstripped Russian investment in Europe. “When we hear from some European capitals that ‘the Russians are coming with their horrible money to buy everything’, that makes me laugh,” Putin told Portuguese Prime Minister Jose Socrates and European Commission President Jose Manuel Barroso. “A total sum of European investment in Russia is €30 billion. I don’t know whether it is big or not, but Russian investment in the European Union is 10-fold lower, just three billion Euro.”

At an EU-Russia business meeting on October 25, Russian Economy Minister Elvira Nabiullina urged Brussels to back Russia’s bid to join the World Trade Organization, saying “delays in increasing the EU-Russia relationship has to do with Russia not joining the WTO.” The EU has refused to sign off on Russia’s WTO bid as it feels Russia has not implemented a 2004 bilateral WTO accession deal. Weafer noted that it is appropriate that President Putin’s last Russia-EU summit should take place in Portugal. In a mission statement posted on the government’s internet site on December 29, 1999, then- PM Putin talked of the need to make great efforts to expand and diversify the economy. He noted that even if growth could be sustained at 8% per year, Russia would only catch up with the EU’s poorest country in terms of GDP per capita by 2015 at the earliest.

At that time Portugal was the EU’s poorest country. Human Rights, freedom of expression, strangulation of free media and the list goes ad infinitum about the subjects that should be and could be put on the “talks” agenda when the 27- member EU meets with its neighbor Russian Federation once in a while. This is the utopian idea pursued by European dreamers of propagators of democratic institutions and human rights but the fact on the ground is what Eurostat produced on the eve of the Mafra summit on October 25. With Russian Federation, European energy import climbed from €36 billion to €94 billion while exports of machinery driven by vehicles sector accelerated from eight billion to €34 billion during 2006. Germans top the list of both importers and exporters with €29 billion imports and €23 billion exports. (neurope)