international analysis and commentary

The Russian way: doing business in Europe

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In his third presidential mandate, Russia’s Vladimir Putin is still one of the most powerful men in the world. His political power comes from his capacity to silence any internal opposition as well as from his ability to create personal relationships with other top-tier political leaders. Furthermore, Putin has showed a remarkable ability to divide his adversaries and use the financial resources of such corporations as Gazprom or Rosneft to reinforce his network of economic and political power. When personal relationships have not worked, Putin has often been able to deal from a position of strength vis-a-vis other European leaders, thanks to the increased importance of the Russian market for many European economies.

The Russian President has another important instrument at his disposal to create large networks of contacts and indirect political influence: the oligarchs. After the incarceration of Mikhail Khodorkovsky about ten years ago, no oligarch has ever contested the authority of the Kremlin. The wealth of this powerful group has provided them with enough financial resources to invest in Europe in recent years, acquiring European companies and assets. Personal networking, the oligarchs, and economic influence (especially in the energy sector) are the key elements of the way in which Russia pursues its economic and financial interests in Europe.

The recent visit of Vladimir Putin to Italy  underlines both the networking capacity of the Russian leader and the increased relevance of Russian investment in the southern regions of the EU. The Russian delegation also comprised most of the CEOs of the largest Russian conglomerates. During the visit, the Russian Federation and Italy signed 28 economic and commercial agreements, confirming that the relevant role of Russia, and Russian corporations controlled by oligarchs, as one of the main foreign investors in the Italian economy as well as a growing market. The investments are not only in the energy field, but also in sectors like mobile telecom, heavy industry and banking. Russia represents one of the main potential outlets for European goods on the basis of well established commercial links.

Putin’s capacity to create personal friendships with important political leaders is quite undisputed. A particularly high profile case has occurred in Germany, when former German Chancellor Gerard Schroeder was nominated Chairman of Nord Stream AG, the enterprise in charge of building a natural gas pipeline through the Baltic Sea, from Russian territory directly to Germany. The project, which was quite controversial for geopolitical reasons, has become a symbol of  Putin’s ability to play divide et impera with EU members. Amongst the European corporations involved in building or financing the pipeline, there are Britain’s Rolls Royce, Italy’s Snam, France’s GDF Suez and Holland’s Gasunie. Gazprom and the Kremlin have constantly worked to exclude the eastern European countries from the pipeline.

Relations with some European leaders, however, have been complicated, as in the case of Angela Merkel and David Cameron. For different reasons, both leaders distrust Putin. Merkel has always acted with caution. The tensions between the two leaders have been frequent, but Russia represents one of the main markets for German goods and Germany is one of the main customers of Russian energy supplies. As a consequence, a rational calculus of common interests has prevailed. Cameron, too, is well aware of the importance of Russia for the British economy and he has developed a very pragmatic working relationship with Putin based on reinforcing commercial and economic ties between the two countries. Another element of this complex relationship is the presence in London of a large number of very rich Russians – a fact that earned  part of the city the nickname “Londongrad”. The Russians living in London are mainly part of the so-called “oligarchy” and upper Russian middle class.

This friendly “invasion” at the end of the nineties has represented a gold mine for the city, with billions of fees acquired by the local bankers to quote Russian companies on the London stock exchange. This situation inevitably creates channels of influence on the British business but also political establishment.

Unlike in the UK, the economic and political clout of Russia has never been particularly strong in France, where the oligarchs are more often seen at fashion weeks than in French political circles. Nevertheless, recently elected President Hollande is trying to increase the economic penetration of French companies in the Russian market and strengthen economic cooperation with the Kremlin.

It is against this background that we should assess the recent developments linked to the partnership agreement between Ukraine and  the European Union and the strong pressure that Russia has exercised on Kiev. Indeed this episode could turn out to be, along with the final result of the Commission’s investigation over the abuse of a dominant market position  by Gazprom, a turning point in the relationship between Russia and the EU. Only the strong network and bilateral relationships between Russia and the major member states (Germany, UK, France and Italy) will probably help moderate the immediate fallout between Brussels and Moscow. 

In the medium term, there is an exogenous and unexpected variable that could make a major difference: the shale gas revolution. The new situation on world markets  is already affecting the revenues of Gazprom and reducing the financial resources available to the Kremlin. It may change the rules of the game for Moscow, perhaps even pushing the Russian leadership to change its way of doing business in Europe.