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#19 - JRL 2009-65 - JRL Home
Subject: US Economic Relations and Energy Security
Date: Thu, 2 Apr 2009
From: Sarah Carey (scarey@ssd.com)

Designing US Policy Toward Russia Conference
Library of Congress
March 27, 2009

US Economic Relations and Energy Security.
Presented by Sarah Carey, Senior Partner of Squire, Sanders & Dempsey L.L.P.; Board Chair of the Eurasia Foundation.

Under the general theme for this panel, I’ve been asked to comment on the appropriate role for the US government in the economic relationship, including how best to stimulate growth in trade and investment; as well as on the legal context for doing business in Russia or with Russia, and how it might be improved. These issues are not the top priority for policy makers, who rightfully put non proliferation and the revention/resolution of military and terrorist conflicts at the top of the list. But they should not be ignored. Not only are there significant economic opportunities for US companies in and with Russia, but in addition, economic prosperity in Russia will contribute to a more stable nation and, likely, a more investor friendly business climate. Robust trade relations do not prevent political or military conflicts but they do contribute to mutual understanding.

Energy Security:

Before I address these issues, a word about “energy security”, which is also assigned to this panel. We need to recognize that Russia is not an energy security issue for the US; and the security issues, it raises for Europe have been blown out of all proportion. Russia presents an energy opportunity for the US. To realize that opportunity, we need (1) reciprocal opening up and encouragement of investment opportunities in both countries; (2) joint investment in energy projects in third countries (LNG with Canada; oil and gas production in Turkmenistan; and even offshore oil production in Cuba, to name a few; (3) joint efforts to accelerate the development of alternative energy technologies on a scale analogous to the Space Station collaboration and, (4) the design, negotiation and adoption of a WTO for energy that will address the deficiencies of the Energy Charter Treaty (ECT) that have prevented the US and Russia from embracing its provisions. As a starter, we need to put an end the irresponsible accusations by US Government officials regarding Russian energy imperialism or Russia’s use of energy as a political weapon.

The Broader Economic Relationship:

US-Russian bi-lateral trade increased 22% annually between 2004 and 2008. Over $26 billion in trade was reported in 2007, characterized by a healthy balance of trade. Neither country ranks as one of the top 3 trading partners of the other -- for the US, those are Canada, China and Mexico and for Russia, they are the EU, China and Ukraine. These levels, as well as bilateral investment, could be significantly increased if a handful of measures are taken to improve the economic climate, even though the US economy is eight times the size of the Russian economy. To resolve the full potential of the US-Russian economic relationship, the US needs to adopt policies at both the international and bi-lateral levels. These should include:

One: Multinational Agreements -- the international arrangements and institutions for dealing with the globalization of trade and investment are scheduled for an overhaul. That’s, in part, what the G 20 is about. Many of the pillars of the current governance system are outdated, too rigid and too exclusive, not recognizing the new, powerful players that have emerged on the trade and investment scene. Russia wants to be and should be an important partner participating in the redesign of these institutions. The US should ensure Russia’s inclusion in this important effort.

Two: Until the new system is in place, Russia must be included as a full partner in the existing international agreements and arrangements that govern the world economy, especially those of key importance to it. It is intolerable that Russia is not currently a member of the WTO, that it does not have a clear cut role in regard to the European Community, and that it is not a member of the Organization for Economic Cooperation and Development (OECD), and other international organizations. From the US perspective, it is important to execute a Bilateral Investment Treat (BIT) with Russia (US investors in Russia would benefit greatly from such a treaty, as would Russian investors in the US); all of the US’ major competitors in the Russian market have such agreements in place. The US should also support Free Trade Agreements (FTAs) between Russia and its neighbors to stabilize trade throughout the region, just as the US has done with Canada, Mexico and many of its Latin American neighbors. And, as long as that organization remains viable, Russia should be a full fledged member of the G-8.

Three: US and Bi-lateral policy. (1) The US should assess and then consider repealing all existing laws that single Russia out for greater scrutiny or harsher treatment than most other nations, in recognition of the fact that Russia is not an enemy, a threat or even a nation with which we have major policy differences. The nefarious Jackson-Vanik amendment, the lack of a Sec. 123 Agreement that prevents Russia from collaborating with US interests in civilian nuclear projects, and certain provisions in the Export Control or ITAR rules are examples of such laws.

(2) The Obama Administration should create a highly placed vehicle, a modified Gore-Chernomirden Commission, to remove barriers and create incentives to bi-lateral trade and investment. The new mechanism would have two roles: (a), it would focus on “investor friendly,” harmonious regulatory regimes (in both countries) that stimulate trade and investment rather than imposing barriers. (. Emphasis should also be placed on US-Russian efforts to address barriers to trade and investment in third countries where both are impacted.) The Strategic Economic Dialogue between China and the US is a good model for this or the Transatlantic Economic Council, created by the US and the EU and (b), in addition, the new vehicle, or a sister organization, should encourage and facilitate major joint undertakings in areas of mutual interest, such as renewable and clean energy or health related technologies; joint space exploration; global search and rescue systems and the energy projects with 3rd countries previously mentioned.

(3) Exchanges, training and internships for young people going into business, finance, law and accounting. Exchange programs for young Russians pursuing careers in or related to business and finance, including law and accounting, have successfully operated since the late ‘80s. The graduates of these programs are now in leadership positions in regional and national government offices, in business and in academia. They, for the most part, understand international business practices and standards. These programs, expanded to include exchanges for young Americans interested in Russia, should be maintained and enlarged. Focusing on the next generation of leaders is of utmost importance.

(4) The US should stop the uninformed, vitriolic criticism of Russia’s economic policies that impact Russia’s role in the global economy. (E.g., USG lobbying on behalf of its own oil and gas industry for PSAs in Russia; USG insistence that Russia should privatize pipeline ownership as a precondition to support for a Murmansk pipeline; overt and covert efforts to block the construction of international pipelines where Russia has a dominant position and similar interventions). It should also abandon the assumption that investments/acquisitions by large Russian companies of assets overseas, particularly in its neighborhood, are politically driven or constitute a form of economic imperialism. Political factors are often involved, but it is important to acknowledge the economic imperatives, such as access to raw materials, a desire to be closer to the market or to take advantage of certain treaty arrangements (such as the move of Russian steel companies to locate in the US or Canada).

The Legal Context for Doing Business With Russia:

This is a much misunderstood subject. Otherwise knowledgeable experts and policy makers frequently bemoan the absence of the Rule of Law in Russia or assert that there are no property rights in Russia or no shareholder rights. There are serious deficiencies in the Russian system (as in most systems) but to address them it is important to get the facts right. With President Medvedev’s expressed goal of ending legal nihilism in Russia and insuring that Russia becomes a rules based society, the time may be right to address some of the deficiencies.

As a starting point, it is important to recognize that Russia has enacted most of the laws required to support commercial activity. The legal regimes governing business forms, property rights, contracts, taxation, sales and leases, shareholders rights and other fundamentals to doing business are well defined and generally meet international standards. These legal systems are far more sophisticated than those that exist in many countries where US companies are invested.

The weaknesses in what we call Rule of Law (ROL) have to do with the “business culture” and the lack of widespread commitment to or comfort with the still relatively new legal order, especially in old line enterprises or industries. Transparency is not “genetically coded” and does not come naturally in Russia; and commitments still run to friends and colleagues rather than to the corporation. Local administrative agencies with decision making responsibilities are undertrained and understaffed. Most importantly, the judiciary is not fully independent. For example in the Arbitrazh courts, although many problems have been addressed (lack of training, inadequate salaries, lack of support staff computerization of most decisions), the courts are still subject to political interference whenever the state has a strategic interest in the court's deliberations. In addition, local and national politicians routinely interfere with court cases to insure the desired outcome.

The lack of judicial independence undermines the very real progress made in creating legal regimes to support commercial activity. Fortunately, the experience of Squire, Sanders & Dempsey attorneys based in Moscow shows that in 80% of the deals on which our attorneys work, the parties adhere to the agreements that they negotiated. In another 15% the agreements are modified and the parties continue to meet their commitments. Only a few deals break down and result in litigation or, in large matters, in international arbitration.

What will work to upgrade the overall legal climate: (1) exchanges that train young people in international business practices, as mentioned above; (2) inclusion of Russia in the WTO and OECD and in a special relationship leading to ultimate membership in the EU; (3) ongoing active engagement of the EBRD, the IFC and other ILOs in Russia; and (4) the execution of a US-Russian BIT, to name a few. As the experience in Central and Eastern Europe demonstrates, membership in the international organizations requires adherence to international standards including the enactment of conforming legislation and implementation of the legislation once enacted. The ILOs, (as well as private equity funds) when investing in debt or equity in Russian companies, require as a condition of investment, conformance with international standards; they also participate in corporate governance via board directorships. And, arbitration under a BIT is a dramatic teaching tool regarding the niceties of contractual commitments and the obligation of governments not to discriminate against investors or to use regulatory procedures to cause a diminution of the value of their investments. Equally important is the day-to-day role that US and other international partners play managing and operating joint ventures or wholly owned local companies. In short, inclusion in international bodies involved in rule setting regarding trade and investment, expanded activity by ILOs and increased investment -- in both directions will all contribute to an improved investment climate.


Fortunately, the agenda described above has been incorporated in part in the joint statement released by Presidents Obama and Medvedev in London on April 1, 2009. Their statement referred to a shared position on addressing the global economic crisis, and renewed focus on economic links, including the creation of a bi-lateral intergovernmental commission on trade and economic cooperation, a commitment to finalize Russia’s accession to the WTO as soon as possible and other efforts to create “favorable conditions for the development of Russia-US economic ties.” The two presidents also committed to implement the Global Energy Security Principles, including energy efficiency and the development of clean energy technologies.