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Bloomberg: Russia’s Antics Deserve a Tough Response From EU: Matthew Lynn

EXTRACT: First, start using European muscle to protect European companies. Oil producers BP Plc and Royal Dutch Shell Plc have been treated disgracefully as Russia seeks to reassert control over its energy assets. Just like any country, Russia needs outside expertise — and in return it must recognize that it can’t just expropriate assets.

THE ARTICLE

By Matthew Lynn

July 25 (Bloomberg) — Poisonings in London restaurants, expulsions of diplomats, foreign ministers snarling at each other. At this rate, they may have to rebuild Checkpoint Charlie, and dust off those Cold War spy manuals.

Over the last few months, relations between Europe and Russia have taken a turn for the worse.

The European Union should smarten up. It can stop thinking that Russia is emerging as a peaceful European democracy — a kind of Sweden with oil.

And EU politicians in Brussels must think harder about how to deal with an autocratic, suspicious neighbor, and use the trade bloc’s leverage more forcefully.

“The EU needs to change its view of Russia,” Katinka Barysch, chief economist of the London-based Centre for European Reform, said in a telephone interview. “They saw Russia as evolving toward Western-style democracy and capitalism, as Russia did itself. But you just can’t take that view anymore.”

Nobody should be under any illusion that ties between the EU and Russia are more strained now than at any time since the fall of the Berlin Wall in 1989.

The U.K. has been leading the way.

Earlier this month, Prime Minister Gordon Brown expelled four Russian diplomats from London. Politicians in Moscow responded by kicking out four U.K. officials — precisely the kind of thing that used to happen when the Russians still called each other “comrade,” and the British still wore bowler hats.

Brown’s Response

Russian President Vladimir Putin’s refusal to extradite ex- KGB agent Andrei Lugovoi, wanted in the U.K. for the murder of former spy and U.K. passport holder Alexander Litvinenko in London, was the trigger for the tit-for-tat expulsions. “We will not tolerate a situation where a British citizen is assassinated on British soil,” Brown said last week.

This isn’t just about diplomatic strains with the U.K. government. Russia has also been blocking a plan to grant independence to Kosovo, much to the EU’s annoyance. Germany has been considering the case for curbs on foreign-controlled funds after Russia expressed an interest in buying a stake in Deutsche Telekom AG. And Russia has been flexing its muscles over the countries that used to be part of its empire. It banned Polish meat on the grounds of hygiene, while it has been embroiled in a row with Estonia over moving a memorial to Soviet troops in the capital, Tallinn.

There is little sign of goodwill on either side.

Smooth Transition

Maybe it is too early to talk about a new Cold War. At the same time, the EU’s policy of promoting shared values with Russia doesn’t appear to be working. In reality, Russia isn’t turning into the new Germany or Spain, countries that transformed from dictatorships into democracies relatively smoothly.

Instead, the EU needs to accept that Russia is devolving back into an autocracy, with an antagonistic attitude to Europe.

It is no use just encouraging Russia to become more Western. People have been trying to make Russia more European since the days of Peter the Great. If it was going to work, it would have happened by now.

Instead, the EU needs to be a lot more hard-headed. You deal with bullies by standing up to them. “The EU needs a clear, interest-based policy towards Russia,” said Barysch. “They will respect us much more for that.”

Here are four ways for Europe to stand up to Russia.

First, start using European muscle to protect European companies. Oil producers BP Plc and Royal Dutch Shell Plc have been treated disgracefully as Russia seeks to reassert control over its energy assets. Just like any country, Russia needs outside expertise — and in return it must recognize that it can’t just expropriate assets.

London Listings

Russian companies have been listing their shares in London, so how about telling Russia that access to the U.K.’s capital markets will be cut off unless the rights of British enterprises in Russia are protected?

Two, Russia is a resource-based economy, and Europe is the main market for those resources. There isn’t much point in being a massive producer of oil and gas if you haven’t got anyone to sell to. So how about using some of that leverage? The EU could set a series of targets. For every 5 percentage points of the European energy markets that the Russians take, they need to hit certain benchmarks for opening up their market to European companies. Every time they fail, Europe should build a new nuclear power station instead.

Conditional Access

Three, make market access conditional. It is fine for companies such as OAO Gazprom to start making acquisitions in Europe. Countries prosper if they are open to foreigners — but they prosper even more when both sides are equally open. So every time a Russian company proposes making a purchase in Europe, how about demanding a European company is allowed to make an acquisition in Russia in return?

Four, maybe the Group of Eight should be the Group of Seven again. After all, the point of the G8 is to promote cooperation between nations that are broadly signed up to a free-trading global economic system based on democracy and the rule of law. If Russia isn’t willing to adhere to those values — and there isn’t much sign that it is — then it shouldn’t be a member. Again, access to Western institutions should be conditional upon supporting the principles those bodies stand for.

There are also concessions the EU should be making. The British, for example, should be thinking about whether London needs to be a tax haven to every Russian billionaire.

The EU must be more realistic about the nation it is dealing with. Europe can cooperate with an assertive Russia if the EU gets real about the challenges it faces.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at [email protected] .

Last Updated: July 24, 2007 19:14 EDT

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