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The Role of Investment Protection in EU-Russia Relations

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The Role of Investment Protection in EU-Russia Relations POLICY BRIEFS No. 02/2010 ISSN 1653-8994 Vested and Invested Interests: The Role of Investment Protection in EU-Russia Relations Fredrik Erixon and Iana Dreyer Fredrik Erixon ([email protected]) is Director of ECIPE and Iana Dreyer ([email protected]) is an independent consultant Relations between the European Union and Russia its economic statecraft and approach to foreign eco- have lately been improving. After years with a turbu- nomic relations. Russia has reissued its application to lent stop-go relation, fraught by Russian assertiveness join the World Trade Organisation (WTO) alone (and and unpredictability, and the Kremlin’s desire to re- not as a Customs Union together with Belarus and Ka- gain its regional power, there are signs that the Rus- zakhstan), and communicated a willingness to join the sian leadership is warming up to a new approach that WTO sooner rather than later. And it has signaled an is more constructive and aims for deeper integration interest to press ahead with negotiations with the EU with world and European markets through new com- over commercial policy. The first step towards that end mercial policy deals. The crisis, which hit Russia hard, is a new Partnership for Modernization. has forced upon Russia a more realistic notion about SUMMARY This paper concerns Russia’s invest- core principles of trade and investment. lavish investment projects in Europe, and ment policy and why Europe should put when Europe is building up a collective greater emphasis on its policy for im- It simply is not possible for Russia to re- approach for addressing investment proving investment protection in Russia. turn to its pre-crisis model for investment concerns in Russia, the strategy will hit Russia still represents Europe’s greatest protection issues, at home and abroad. the buffers of political reality. geopolitical challenge. One of Europe’s The Kremlin conglomerate, or Kremlin most important strategic tasks is to tie Inc., does not have the necessary re- If the Russian leadership is clever, it will Russia to a world economy based on sources for it. Russia also needs to gear soon ratify the Energy Charter Treaty. It rule of law and the market economy. This up its inward investment and overall raise has already been ruled by a tribunal that is a long-term task – and it cannot be the level of investment in the economy. Russia is bound by the treaty’s obliga- achieved by piecemeal concessions to It also faces a post-Lisbon Treaty Euro- tions on investment protection – hence Russia’s demand for special treatments pean Union, with new powers to address it does not matter now whether Russia is and respect for its authoritarian style of investment protection issues. Russia’s in or out of the agreement. Russia will no capitalism. The EU should show “vision- old strategy to divide Europe by cutting doubt have to live up to its obligations. It ary generosity” – but one of the greatest sweet deals with some governments had is also in Russia’s interest to negotiate contributions it could make to Russia is diminishing returns in the first place. At (sooner rather than later) an investment to pressure it into obligations to respect a time when Russia is short on cash for treaty with the EU. These are positive signs. Yet it remains to be seen if and vestment protection issues. Russia’s old strategy to divide to what degree they will materialize in real decisions and Europe by cutting sweet deals with some governments concrete policies. There are plenty of reasons to hesitate had diminishing returns in the first place. At a time when to the idea of a Russia en route to a new type of economic Russia is short on cash for lavish investment projects in model. Crisis measures have hardly reinforced the ambi- Europe, and when Europe is building up a collective ap- tion to reduce the role of the Kremlin in the economy. proach for addressing investment concerns in Russia, the And Russia has been given many offers in the past decade strategy will hit the buffers of political reality. to prove its interest in proper and cooperative economic relations with the world, not least the EU, based on the This paper concerns Russia’s investment policy and why rule of law, the market economy and predictable policy. Europe should put greater emphasis on its policy for im- Yet on many occasions it has failed to take up those offers. proving investment protection in Russia. Russia still rep- resents Europe’s greatest geopolitical challenge. One of The European Union should welcome the more coopera- Europe’s most important strategic tasks is to tie Russia tive approach from the Kremlin, but remain cool-headed to a world economy based on rule of law and the mar- about prospects for genuine change in Russia. The EU ket economy. This is a long-term task – and it cannot be should stick to its core commercial-policy agenda of get- achieved by piecemeal concessions to Russia’s demand for ting Russia to accept the rule of law and core principles special treatments and respect for its authoritarian style of cross-border commerce. In fact, this will become even of state capitalism. The EU should show “visionary gen- more important now as Russia will face some difficult erosity” – but one of the greatest contributions it could choices over its model for foreign economic relations. make to Russia is to pressure it into obligations to respect core principles of trade and investment. One of the choices concerns investment protection, or more precisely: litigation, under the Energy Charter Treaty (ECT), against the Russian state for expropriation THE ECONOMIC CONTEXT FOR INVESTMENT of assets when it took control of the energy major Yukos. POLICY Last year an ECT tribunal ruled that Russia is covered by the ECT, despite Russia’s claim that it had only signed but The recent approach to investment protection issues not ratified the ECT, and hence does not need to live up in Russia was determined by overall economic condi- to the ECT’s conditions for investment protection. The tions and resurging economic philosophies close to eco- ruling was predictable.1 What is not predictable, however, nomic nationalism. Russia experienced a spectacular is how Russia will react if it loses the subsequent case over economic boom in the past ten years. Its first transition violation of investment protection provisions in the ECT. period ended abruptly in 1998 with Russia’s severe fi- A refusal to accept an adverse ruling with damage claims, nancial crisis. A raft of macroeconomic reforms by the which is likely, will tarnish its reputation in a much more Yeltsin and Putin governments restored confidence in the profound way than past examples of investment unpre- overall macroeconomic management of Russia. Growth dictability in Russia. An acceptance of the ruling may pro- picked up early in the 2000s and subsequently took off voke several other investors to bring claims against Russia as world commodity prices hit through the roof. From under the ECT. 2002 to 2008, Russia’s economy boomed. Increasing oil prices (gas prices follow oil prices with a time lag of Russia, however, does not have many options. It simply is approximately six months) enabled Russia to follow an not possible to return to its pre-crisis model for dealing export-led economic growth model, with increasing with investment protection issues, at home and abroad. revenues coming through the balance of trade. Reserves The Kremlin conglomerate, or Kremlin Inc., does not soared and fiscal revenues enabled Russia to balance its have the necessary resources for it. Russia also needs to books and, later, run a significant fiscal surplus.Capital gear up its inward investment and overall raise the level also accumulated in the private sector and a new breed of investment in the economy. It also faces a post-Lisbon of Russian financiers and capitalists emerged – some of Treaty European Union, with new powers to address in- them domestically focused; others with an appetite for 2 ECIPE POLICY BRIEFS/No 02/2010 investing abroad and acquiring foreign assets. A domestic Russia’s growing hydrocarbon-based economic power has investment boom followed on the heels of the commod- caused concerns for its European neighbours. Economi- ity boom. Asset prices in Russia increased rapidly and a cally, Russia depends more on the EU than vice-versa. In- considerable part of net savings ended up in real estate. deed, its growth depends on its exports of hydrocarbons, Despite distributive concerns about the newly acquired of which a considerable part is engineered for Europe. wealth, the past ten years saw the emergence of a Russian The latter represent two thirds of Russian exports. Yet middle class, rapidly proliferating, with incomes enabling Europe’s energy dependency on Russia, its fragmented them to travel abroad for holidays and seek a lifestyle vast- energy market, and the absence of a common foreign pol- ly different from life during the era of communism or icy have made the EU a weak partner of Russia and cre- under the turbulent period immediately after the fall of ated an asymmetric bilateral relationship. European inter- the iron curtain. ests have been neglected time and again. Its investors have been stripped of invested assets in Russia. Russia has been But everything is not all and well in the Russian economy. able to play such games with Europe as its main energy The economic crisis has hit Russia hard. Oil process went partners have been offered sweet energy deals too lucra- from roughly $150 per barrel in mid 2008 to $30 per bar- tive to say no to.
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