Georgia war risks derailing long-term EU-Russia ties

MOSCOW (Reuters) – Strains in Russia-EU relations over Russia’s war in Georgia pose a long-term threat to investment flows and risk further complications when critics of Kremlin policy assume the EU presidency over the next 12 months.

EU leaders said on Monday they would suspend a September 15 negotiating session on a new partnership agreement unless Russia had by then pulled back its troops to positions they held before its brief war with Georgia over a rebel Georgian region.

The accord aims to create a new legally binding framework for trade and political contacts between the two, and market analysts say failure to update the current deal could damage Russia’s attractiveness as a home for Western investment.

But Russia has recovered from the state of near economic collapse it was in when it signed the first deal in 1994 and, flush with dollars from high oil prices, it now sees the European Union as only one source of potential investment.

“It is unsettling, it’s not a short-term issue but long-term investments in Russia are contingent on an understanding of Europe as a main trading partner. Over time, it will affect sentiment,” said one European diplomat.

European Commission figures show that while EU investment in Russia reached 18 billion euros ($26 billion) in 2007 — three-quarters of the total invested in Russia that year — just 1 billion traveled the other way.

But the trade balance was tilted in Russia’s favor. Some 155 billion euros in goods and services, including energy, traveled westwards and 107 billion euros shifted eastwards.

SOURING BUSINESS CLIMATE

The European diplomat said deteriorating political relations would sour the business climate too, if investors felt Russia’s Western orientation was no longer assured.

Moscow’s behavior towards its neighbors and western companies such as BP has affected investment, prompting concerns about the rule of law and the security of contracts.

Russian stock prices and the rouble have fallen recently as foreign investors put their money elsewhere.

Other diplomats pointed to the problems the EU may face rekindling the talks if the suspension continues into 2009, when the Czech Republic and Sweden will occupy the EU presidency.

Both are among the most outspoken of the 27-member bloc against Russia’s behavior in Georgia, alongside the Baltic States and Poland, largely responsible for delaying the talks.

Russia’s economic transformation since 1994 into a $1.3 trillion raw materials powerhouse helps explain why it no longer seeks to frame its relations through a Western prism, said Fyodor Lukyanov, editor of “Russia in Global Affairs”.

“For Russia, the EU is less important than it was some period ago,” said Lukyanov. “The institutionalization of relations with the West will not be a high priority.”

With Europe dependent on Russia for energy and domestic investors flush with cash ready to step in, Moscow seems to be in the stronger position, at least so long as oil prices, which provided 50 percent of Russian tax income last year, stay high.

The current deal covering trade, security, justice, education and scientific cooperation needs to take the recovery into account and pay attention to issues like global warming.

Both sides say they aspire to visa-free travel but many European diplomats believe privately the Kremlin has no interest in abolishing visas because Russia is not psychologically ready to relinquish control over who enters its territory.

WTO: ‘NO ADVANTAGES’

Another plank of the talks is freer trade, which could only take effect after Russia joins the World Trade Organization.

But Russian Prime Minister Vladimir Putin on August 25 said Russia currently saw no advantage in WTO membership and should freeze some commitments it made during entry talks.

In a sign of growing confidence, the Kremlin signaled it would respond in kind to any EU attempt to impose sanctions.

Restricting energy supplies is one weapon, but lost revenue would hurt Moscow. There are alternatives, from cutting agricultural imports to tighter work restrictions on expatriates.

EU leaders, meeting in a special session on September 1, said it was too early to talk of sanctions.

Nevertheless, they know Russia would need decades to reconfigure its trade to Middle Eastern or Asian markets, which makes an agreement with the EU vital, some Russian analysts say.

“We are not in the same family, we are not a part of the EU, but because the alternative to a partnership is war — cold or hot — we have to have a partnership,” said Andrei Klimov, a senior United Russia lawmaker and an expert on European affairs.

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