A new deal with Russia?

A new deal with Russia?

Opinion piece (Prospect)
01 November 2007

"The Soviet Union was easier to deal with than Russia is today," says a senior French diplomat. "Sometimes the Soviets were difficult, but you knew they were being obstructive in order to achieve an objective. Now Russia seeks to block the west systematically on every subject, apparently without a purpose."

Relations between Russia and the west are at their prickliest since the break-up of the Soviet Union. Russia is blocking a UN security council resolution that would authorise independence for Kosovo under EU tutelage. It is thwarting US and EU efforts to impose more UN sanctions on Iran. It says that if the US proceeds with plans to install missile defence systems in Poland and the Czech Republic, it will target missiles on European cities. It has blockaded Georgia. Its ban on imports of Polish meat has led the EU to walk away from talks on a "partnership and co-operation agreement." And so on.

Yet there may be method behind Russia's obduracy. Some influential figures in Washington, including Henry Kissinger, think Russia may be seeking a "grand bargain." President Putin dropped hints that he might be open to such a bargain when he met think tankers (myself included) in Sochi in September. "If our partners want us to do something, they must be specific," he said. "If they want us to resolve Kosovo, let's talk Kosovo. If they are worried about nuclear programmes in Iran, let's talk about Iran, rather than talking about democracy in Russia." He has a point: the US has tended to make wide-ranging demands of Russia without prioritising them.

The EU has a central role to play in any set of bargains between the west and Russia. Its trade and investment links are much more extensive than those of the US. Moscow's antagonistic behaviour has gone some way to help forge a common EU approach on Russia (though not yet on energy). Nicholas Sarkozy and Angela Merkel have been more critical of Putin than their predecessors, while all EU governments issued statements of solidarity with Britain over the Litvinenko affair.

What should the EU's common approach amount to? Bernard Kouchner, France's foreign minister, summed up the mood at a recent gathering of EU ministers: "Faced with the reality [of the new Russia], we must be realist." This realism should focus on interests rather than values, since Russia's rulers do not appear to subscribe to liberal political values. So although the EU should speak up for human rights, it should not pick fights over Russia's internal politics: it lacks the ability to shape them and the attempt could be counterproductive. It should instead seek to work with Russia on three areas of mutual interest.

One is energy, where Russia and the EU share long-term interests: Russia supplies almost half the EU's gas imports. But the dependency is two-way, since Russia's gas pipelines run westwards. Europeans want assurances that Russia will develop new gas fields, since a gap between demand and Russian supply is likely to emerge in a few years. Russia will need western technology and expertise to develop reserves in its far north and east. Europeans also want the right to invest in Russia's oil and gas industries.

The Russians worry about moves to liberalise the European energy market. They like dealing with the quasi-monopolies that combine supply and distribution, such as Gaz de France and Eon Ruhrgas. But the EU is slowly moving towards the "unbundling" of supply and distribution, which may prevent Gazprom from buying distribution networks. The EU also plans to ban non-EU firms from buying retail networks, unless their home country grants reciprocal access—which Russia does not.

Russia will have to abide by the EU's rules on energy markets, just as the EU will have to accept that Russia will limit the right of foreign companies to own its leading energy assets. The EU should assure Russia that liberalisation will not, as it fears, prevent Gazprom from making long-term supply contracts with EU firms. Mutual dependency should encourage both sides to compromise.

The integration of Russia into the global financial system is a second area where Europeans and Russians can work together. Thanks to the high oil price, Russia's government and leading companies are sitting on funds worth several hundred billion dollars. They want to put some of this cash into foreign companies. Earlier this year, the FT estimated foreign direct investment by Russians at $140bn. Russian companies also want to raise money abroad, as many of them are doing on the London stock exchange.

But the EU is becoming concerned about "sovereign wealth funds"—investment funds that are run by governments and may have opaque objectives—from Russia, China and elsewhere, and may try to regulate them. It should allow these funds to invest in European firms, so long as they are transparent and operate independently of politicians. And the EU should welcome Russian acquisitions of its companies, so long as its rules are respected and European companies gain reciprocal rights.

The third area where the EU and Russia should work together is their "common neighbourhood." This may be difficult: some Russians do not accept that the EU has legitimate interests in the former Soviet republics of Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. Yet both the EU and Russia would benefit if these countries became stable, prosperous and well governed. Fearing more "colour revolutions," similar to those in Georgia and Ukraine, the Kremlin opposes democratic forces in all these countries, on the grounds that they will promote western interests against Russia—a policy that risks becoming a self-fulfilling prophecy. Russia also fears encirclement by an expanding Nato.

The EU should offer to work with Russia to promote peaceful change in Belarus, stability and unity in Ukraine, and a resolution of the "frozen conflicts" in Transnistria, South Ossetia, Abkhazia and Nagorno-Karabakh. EU governments should allay Russian concerns by saying they will not support Nato membership for Ukraine or Georgia in the medium term. But the EU should also offer such countries closer ties—and make clear to Moscow that they must be free to determine their own destiny.

The EU has a huge stake in the future of Kosovo; it cannot integrate the western Balkans until the status of that territory is resolved. It will be responsible for most of the money, soldiers, policemen and administrators that will be needed for any peace plan to work. Russia has almost no interest in Kosovo, other than as a card to play against the west. The EU and the US believe that the least bad option for Kosovo is supervised independence, which Russia rejects.

But what if Russia were offered something in return? The US decision to deploy missile defence systems in Europe—against an Iranian threat that does not yet exist—was unwise. Russia's anger over the deployment is genuine. Some former US officials claim that the deployment would break the spirit of promises made to Russia in the 1990s: the US said it would have no significant military presence in the central European countries that were joining Nato.

The Europeans should urge Washington to postpone the deployment indefinitely—so long as Russia accepts independence for Kosovo in return. In any case, there are senior Russians and Americans who want to discuss how their missile defence systems could mesh together, and such talks will need time.

Russia may prove unwilling to bargain with either the US or the EU. But if its foreign policy continues on its current trajectory, it will lose friends around the world. It will also harm its energy sector and the prospect of its top companies becoming real multinationals. If Putin really cares about maximising Russian power, he should seek a grand bargain.