Economic Relations between Russia and the EU: In Search of a Common Vision

The promotion of innovative business within European markets is not only key to overcoming the remaining differences between Russia and the European Union and establishing a mutually beneficial investment environment, but it is also an element of the Russian version of “soft power”. This article examines the existing models of Russia-Europe innovation cooperation, as well as its potential from the perspective of Russian foreign policy strategy.

The promotion of innovative business within European markets is not only key to overcoming the remaining differences between Russia and the European Union and establishing a mutually beneficial investment environment, but it is also an element of the Russian version of “soft power”. This article examines the existing models of Russia-Europe innovation cooperation, as well as its potential from the perspective of Russian foreign policy strategy.

At present, the economic system of the European Union is facing its greatest crisis since the establishment of the European Economic Community in 1957. Uneven development of the free economic space created a financial and industrial imbalance, which in turn provoked political and social disruption. Against the backdrop of this crisis, issues of economic cooperation between Russia and the EU are more and more often rising to the top of the agenda. Both sides understand that in the context of a global economy, it is impossible to solve domestic problems without factoring in foreign economic and political strategy. The only question is how far these strategies satisfy both sides' interests, and what can be done to smooth over the discord that continues to restrain bilateral partnership.

The inevitable politicization of the energy sector

Today the European Union forms a key market for goods and services for Russia, as well as the main source and object of foreign investment. Since 2008, the EU segment of foreign trade turnover has remained stable, amounting to approximately 50%, and 80% in foreign investments. In 2012, the trade volume approached $400 billion. Russia ranks third among the EU's trading partners, trailing behind the U.S. and China, whose EU turnover in 2012 amounted to $646 billion and $546 billion respectively. However, there are a number of imbalances in the structure of Russia-EU trade and economic relations, ones primarily associated with the dominance of the energy sector.

Photo: ITAR-TASS
Invetment in Europe (In Russian)

The export of raw materials is key to understanding contemporary Russian-European relations, with all other factors being secondary. The European Union accounts for 63% of Russian oil and 65% of gas export, which constitutes 27% and 24% of EU requirements of these energy resources respectively. Stronger cooperation in this area requires joint management of energy risks, which implies the development of a common legal framework determining the relationship between suppliers and consumers.

At the same time it is obvious that the main differences of perception between Russia and the EU are to be found in the energy sector. This is mainly related to the policies of EU bodies, the European Parliament and European Commission and numerous committees and consultative councils established under specific legislative and administrative acts, which are often aimed at the “containment” of Russian energy companies. For example, the Third Energy Package adopted by the European Commission in March 2011, which was aimed at market liberalization, was perceived by many as an attempt to limit Gasprom’s control over gas supplies. Both theoretically and in practice, Russian corporations are able to bypass the legal restrictions imposed on them. On the other hand, such steps would be regarded as antagonistic behavior which clashes with the EU position. This is why we should seek a basis for systemic interaction not through isolated attempts to advance individual interests (even on a strategic level), but by considering the pragmatic attitude of European business towards Russia, a country which enjoys the support of the majority of EU member states. Thus, we can frame the problem more clearly: Russia needs a way to provide incentives for economic cooperation with European countries that harmoniously links the positive factors of raw materials export with the creation of a mutually advantageous investment environment.

The horizons of technological cooperation

At present, innovation strategy is crucial for reinforcing the pragmatic tendency of European economic policy. Moreover, it offers opportunities to lower the level of politicization in Russia-EU relations on a significant number of issues, including that of energy. Innovations are a potential basis for changing the investment climate and developing economic interaction at a basic level. Current investments are highly disproportionate in character: with $240 billion of accumulated investments, the “tax heavens” of Cyprus and the Netherlands remain leading European investors from year to year, and more than anything else this reveals the return of Russia's own assets to itself. Meanwhile, only 20% of investments in Russia are direct, i.e. directly associated with the real sector.

Cooperation between Russia and the EU in the area of innovation technologies should become the basis for developing more interconnected and more mobile economic networks that Russia badly needs for a new burst of modernization, and a crisis-ravaged Europe for new opportunities for liquidity investment. Development in this area can be further promoted by such initiatives and programs as “The Concept of Long-term Social and Economic Development of the Russian Federation for the Period up to 2020”, the “Partnership for Modernization”, and the “Seventh EU Framework Program” [1]. Successful implementation of this strategy would allow Russia to reduce its dependency on unstable oil and gas market conditions and on the low-liquidity foreign funds where it is forced to keep its reserves.

What steps in the area of technological co-operation are necessary for successful European market entry by Russian innovation companies? The aforementioned “Seventh EU Framework Program” is an example of coordination of efforts to develop the key areas of science and technology in European countries. However, this type of interaction should rather be considered an attempt to integrate the leading Russian scientific research centers into the European market, notably using European funds. Meanwhile, the real objective is to ensure market entry not for the scientific community itself, but rather for innovation businesses located in Russian territory that work together with Russian scientists and scientific centers. This is the very level which presently lacks systematization, partially due to low private demand for innovations in Russia, as well as administrative barriers that impede the development of entrepreneurial incentives.

Another problem related to the advancement of Russian technologies in Europe is that innovative entrepreneurs who begin to integrate into the European business community often try to transfer all their assets there, or even register their business as a European company. For example, the manangement of Art Photonics, a company which specializes in the production of fiber optics equipment, chose to close down its Russian head office and concentrate its business in Germany and Scotland. There are, however, also some examples which demonstrate the possibilities for strengthening Russian innovation business within the European market. There are three such basic models: (1) entry by small- and medium-size enterprises from Russia, with subsequent attraction of Russian and foreign investment; (2) establishment of small- and medium-size enterprises by Russian entrepreneurs and scientists in Europe, with their subsequent total or partial sale to Russian investors; (3) establishment of joint Russian-European innovation enterprises in strategic innovation areas (outer space, oil and gas sector, nuclear power etc).

Photo: nprpss.ru
In 2004, Optogan company was established in
Finland, which traditionally allocates significant
funds to R&D; in 2008 it was acquired by the
ONEXIM Group

The Human Stem Cells Institute can serve as an example of the first model. In 2009, it organized the first successful innovation IPO in Russia, and then opted for a model of business development in Germany and the UK which involved the employment of local scientists involved in pharmaceutics, biochemistry and nanotechnologies.

The experience of Optogan, the only company in Russia with a full cycle of LED equipment production, proves the effectiveness of the second model. In 2004, this company was established in Finland, which traditionally allocates significant funds to R&D; in 2008 it was acquired by the ONEXIM Group. After RUSNANO joined the Russian investors in 2009, the company's first production plant opened in St. Petersburg. Today Optogan is a holding company which actively works with specialized Russian higher education institutions, with annual turnover exceeding $30 million.

And, finally, the third model represents the establishment of joint innovation enterprises which have that form from their very inception. Such alliances in strategic technological areas usually require extensive negotiation due to still-extant differences in technical regulations, standards and certification. Today, such companies are being established mainly with direct government support. As an example, there is presently a joint venture that manufactures telecommunication satellite components, established on the basis of the Russian Information Satellite Systems Joint Stock Company and the French Thales Alenia Space company.

The three models represent various strategies of entry into European market, with different scopes for cooperation. However, they pursue one common goal – the development of partnerships with European businesses, scientists and investors. As the experience of Russian innovation business development has shown, it is precisely small- and medium-size enterprises that have proved to have the greatest mobility. Thus, in four years Vizerra, a software company, has worked its way up from a start-up to one of the most dynamic high-technology companies in the world. In 2011 it managed to attract €4 million from the Solway Investment Group fund , which had previously been exclusively involved in investments into the metallurgy and chemicals sectors. It has also established an effective partner network in Spain and the Czech Republic.

Nevertheless, a number of successful attempts to advance Russian innovation business in Europe notwithstanding, the intensity and effectiveness of efforts by Russian companies in that area are still far from ideal. The companies tend to explain this by citing the lack of necessary resources and well-established channels of access to foreign markets. They therefore need targeted support from big business and the Russian state. In addition, at this time there is a lack of strong demand for innovations in Russia, which impacts on the search for investors. Clear coordination of the efforts of the state, business and science is necessary to create a comprehensive system of innovation economy in Russia, and to integrate it into the world economy.

The innovation boundary of “soft power”

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The present Russian innovation business, to say nothing of the economy as a whole, is facing a difficult task – to become more attractive for investments from the European Union. In order to address this task, the Russian government and Russian business must find a different perspective on the existing social and political technologies. This is especially true of “soft power”, which can be used not only to advance innovations and economic interests, but also to improve the country’s investment image, and to increase the effectiveness of foreign policy strategy. According to the original definition by J. Nye, “soft power” is understood as the influence exerted by diplomacy and the promotion of cultural and historical values. The extent to which the “soft power” is close to economic influence has been widely debated throughout the world in recent times. Categories such as language, culture, and history have evolved over centuries, and they undoubtedly constitute essential core values. But can innovation and economy be a source of "soft power"? More and more countries believe that they can. Thus, in the official opinion of the authorities and business of South Korea, the strengthening of political influence is a direct consequence of increasing economic power and technological superiority [2]. Today, Korean officials speak of “soft power” exclusively in relation to the promotion of their own models of economic development. In 2009, South Korea established a Presidential Council on National Branding. The work of the Council was already visible at the G20 Summit in Seoul, which in a way served to present a new image of South Korea.

Russia still lacks a single coordinating center responsible for crafting a development strategy and enhancing the image of national business. Some entities (such as the Russian Union of Industrialists and Entrepreneurs and the Ministry of Economic Development and Trade) have acquired vast experience of dialogue with European partners, so they should be the means of expanding the group of cooperating companies, with more involvement from small- and medium-size enterprises. At present the image dimension is limited to the desire of Russian business to hire consulting companies and Government Relations experts that are mainly based in Brussels, such as Hill & Knowlton and G+Europe. Without denying the merits of European professional lobbyists, one has to recognize that their involvement is not enough to fundamentally improve Russia's investment image and render economic cooperation more systemic in nature.

Here again the innovation potential of Russia comes to the foreground. In the medium-term perspective, success in scientific, technological and fundamental research, and the development of dynamic high technology companies, can become a basis both for advancing the economic interests of Russia and for changing European perceptions of the country and its economic capabilities. It is noteworthy that 79% of poll respondents surveyed in 43 countries considered scientific and technological leadership to be the main positive element of the U.S. image, rather than its achievements in building democracy, or its popular culture.

Russia must emphasize the development of leadership strategies in the high technology and innovation segments where it has competitive advantages. Additionally, it should deal not only with domestic infrastructure issues, but also the development of human resources, the enhancement of regulation quality, the effectiveness of science and education, and the removal of barriers to innovation. One can speak about the effective use of the “soft power” only when models of innovation business that are attractive to Europe have been created. The use of “soft power” in this case implies the establishment of a complex network of social and economic ties with the European expert community, NGOs, business associations, consumer organizations and the media. In order to avoid the fragmentation of this process into isolated information flows, coordinating structures are required that can create necessary information background for the promotion of Russian economic innovations in Europe.

***

Currently, economic relations between Russia and the EU are at their highest point over the history of their bilateral cooperation. This rise, however, is associated with a number of difficulties. It is obvious that in order to overcome them, Russia needs not only to diversify the supplies of its energy products, but to change the basis of intersystem interaction and move the innovation economy to the forefront. This, in turn, will require solving a number of issues of domestic economy and infrastructure, and the application of new methods for business promotion in Europe.

We can cite several causes for the low effectiveness of Russian innovations: insufficiently developed domestic demand for innovations (as Russian business prefers to borrow ready-made foreign technologies); low competition between innovation companies inside Russia; an unbalanced investment environment. In order to remove these problems, it is necessary to develop a comprehensive innovation system, one integrated into the economy. Today Russia possesses sufficient resources and human capital to carry out a structural modernization of the technological system, and transform it into a foundational element of both domestic and foreign strategy. Further development of venture financing should become an important step forward on the way to enhancing the high technology sector. At this time, there is already visible progress in this area: for the last four years, the volume of venture investments into innovation industries in Russia has increased ten-fold, and Russia came 4th in Europe in 2012 by volume of such investments, with €236.5 million. Nevertheless, more efforts are required to unite business, government authorities and the scientific community in order to develop priority programs of research, application and marketing of these results. Moreover, integration should be carried out both at the macro-level, by establishing special innovation areas such as the Skolkovo Innovation Centre, and at the base level by stimulating technological competition.

It seems logical to establish government coordinating agencies that would professionally engage in systemic promotion and innovation branding within the European economic environment, and work in a more calculated fashion within the European information space. The perceptions of Russian business by the European Union are mainly based on experiences of interaction with major energy and investment companies. Therefore it is necessary not only to promote innovations as such, but also to develop the innovation image of the Russian economy – one that is more technologically advanced, competitive, up-to-date and attractive for investors.

In the medium-term, the solution of the problems discussed above should lead to an increased volume of trade and direct investments, which will inevitably contribute to reducing the level of politicization in bilateral relations and to Russia becoming the European Union's primary economic partner.

1. Within the Seventh EU Framework Program, Russia leads in terms of represented scientific organizations (452) and total volume of financing (Euro 54.9 million).

2. Cho.H., Kalinowski T. Korea’s search for a Global Role Between Hard Economic Interests and Soft Power // European Journal of Development Research/ 2012. № 24. P. 245.