The Russian state wields import bans, gas delivery stoppages, export restrictions, and unilateral revisions of trade agreements, with abandon. It has no compunction about using state harrassment to wreck and expropriate foreign positions in ventures within Russia. The E.U. depends heavily on Russian oil and gas, and Gazprom has large investments in E.U. gas companies and infrastucture. That alone is cause for unease, given Russia's record of using its control over oil and gas for political purposes, but Russia refuses to provide opportunities for reciprocal E.U. access to the Russian gas market.
So Iana Dreyer and Brian Hindley ask: Russian Commercial Policies and the European Union - Can Russia be Anchored in a Legal International Economic Order? It would be nice if companies and countries had some sort of legal recourse.
Russia’s legal integration into the world economic system is very weak. It remains outside the WTO. The legal structure of its relations with the EU, Russia’s top trading partner, is framed by a weak and outdated agreement. International investors protected by a BIT [Bilateral Investment Treaty - Ben] do have a chance of getting a hearing and receive potential compensation should damage be established by an international arbitration tribunal -- yet only 40% of foreign investment into Russia is covered by BITs.
Dreyer and Hindley point to the possibility that Russian actions reflect a lack of control at the top (not just abuse of control at the top):
There is little point in rehearsing in this paper the string of cases in which investors in Russia
have been maltreated. More important in this context are the common characteristics of many
of these cases. The first is the use of soothing words. A report in the Financial Times provides an example:
EU officials said they had raised the shareholder dispute at TNK-BP, the Anglo-Russian
joint venture, with Mr Medvedev. “Mr Medvedev told us that the situation should not
be dramatized, the position of the partners should be resolved, and the state should
remain neutral.” “I welcome this,” said Peter Mandelson, the EU trade Commissioner.
“He emphasised that the state’s job is to provide a legal framework and enforcement
but otherwise keep away.”
The words are indeed to be welcomed. But they do not correlate with actions. The Russian state
did intervene in the dispute – for example by removing the Russian entry visas of key players on
the BP side of TNK-BP. Why the gulf between words and action?
It is difficult to believe that Mr Medvedev was simply telling untruths. But, if not, one is driven to the conclusion that the government of Russia is not fully in control of its various ministries. And in that case, how reliable are its commitments in the WTO?
Nor is it only ministries that the government seems unable to control. In other cases of investor
mistreatment, regional and local governments, and regional and local courts are involved, perhaps acting independently of the government in Moscow; which might in one sense be laudable, but again raises the question of the reliability of commitments made by the central government.
I'm not sure I'd necessarily assume Medvedev is telling the truth. A "bodyguard of lies" or at least misleading and confusing statements could keep the targets of expropriation offguard. But I think the point about lack of control is also a good one. The two explanations can be complementary.
Integration into the WTO might be useful and one of the strengths of the paper is a discussion of the issues raised in accession negotiations. During the accession process WTO members can negotiate deals with the Russians covering issues that concern them. Once the Russians are in the WTO, the dispute settlement mechanism can be used to bring pressure when violations occur. However,
Three thoughts on how to work with the Russians:
Three main channels have been identified to progressively persuade Russia that it is in its interests to adopt a rules-based approach in its external commercial relations:
Firstly, litigation in areas where the Russian government has committed itself such as the Energy Charter Treaty and bilateral investment treaties should be used more systematically. Fear of retaliation by national governments should be measured against the fact that not making a government accountable for its commitments will not save any investment in the future nor will it improve the situation.
Secondly, domestic reform and clean-up of its relationships with Russia should be a key priority
during the talks. As long as the EU’s energy market is not unified, EU member states will remain a ball in the game of Russian economic diplomacy and any EU common position towards Russia will be weakened. Member states should increase transparency of financial relations between Russian state-connected businesses and European politicians, policy-makers and business figures.
Thirdly, Russia’s WTO accession should continue to be regarded as a prerequisite for a future
Common Economic Space or free trade area between Russia and the EU. But WTO accession
will not solve the problem of power asymmetry in the energy sector, and Russia’s track record of respect of international engagements does not bode well for its compliance with WTO rules.
Russia should be put to the test first. During the coming PCA [Partnership and Cooperation Agreement - Ben] negotiations, the EU should consider dropping the approach it has deployed during its eastward expansion, reflected in the existing PCA, namely regulatory embrace. The EU should rather focus on key market access issues, strong dispute settlement provisions and adoption of international – not necessarily European --standards for regulation in business and industry.
Anders Aslund of the Peterson Institute looked at U.S. options for recourse when the Russians go over the line: Limited recourse for U.S. Yukos shareholders.
Edits Nov 21.
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