Written evidence submitted by the Confederation
of British Industry
BACKGROUND
1. The Confederation of British Industry
(CBI) is the premier voice of UK business, speaking for around
240,000 companies and 150 trade associations. Our membership stretches
across the UK, with businesses from all sectors and of all sizes.
Through their worldwide trading activities, UK businesses contribute
25% of UK GDP. They are the world's second largest source of foreign
direct investment (FDI) and the UK is the second largest recipient
of global FDI.
2. CBI has a large number of members with
interests in Russia, Central Asia, Ukraine and the Transcaucasus.
These interests range from multi-million pound investments to
longstanding and substantial trading relationships in the energy,
natural resources and other key sectors. We believe that there
are significant opportunities to consolidate and develop these
business relationships, and through this process improve energy
and economic security in the region. The views outlined in this
submission represent the opinions of the major investors in the
region and the experience of companies doing business in these
markets. It does not seek to provide detailed trade or investment
data that is available from other sources.
ENERGY SECURITY
UK and Russia as energy partners
3. Maintaining the security of UK energy
supplies becomes increasingly important as North Sea fields decline
and the UK becomes a net importer of oil and gas. Currently less
than 2% of UK gas imports originate in Russia but reliance on
imports from continental Europe mean that the UK can be affected
by reductions in supply. This will have long-term implications
for business and domestic consumers.
4. Russian acquisitions in the UK energy
industry remain relatively small. But even without these, Russia
will soon increase its share of the UK's gas supplies. Gazprom's
acquisitions of shares in Norsk Hydro and Statoil projects mean
that it will supply 20% of the UK gas market by 2015 with deliveries
commencing in autumn 2007.
5. UK business seeks to promote open, competitive
energy markets that encourage investment, deliver security of
supply and competitive pricing. In Russia, UK participation in
energy projects has enhanced project performance and corporate
governance standards. As the world's largest energy producer,
Russia stands to benefit from the continued growth in energy trade,
but requires investment of $300 billion to modernise its power
sector and to exploit fossil fuel reserves.
6. The UK remains the largest foreign investor
in the Russian energy sector. However, Gazprom's campaign to gain
control of the Shell Sakhalin II LNG project, and current bureaucratic
pressures being brought to bear on BP and other international
oil majors make it clear that the Russian state will in future
retain control of major energy projects.
7. The announcement of a UK-Russia Energy
Forum by the Secretary of State during a recent CBI visit to Moscow
is therefore welcomed by UK companies active in the Russian natural
resources sectors. We will seek involvement for our members in
setting priorities for the work of this important bilateral forum.
In particular, we would propose to support the Forum's forward
programme on national energy strategies, conditions for mutual
investment and energy efficiency.
8. Consistent cabinet-level support for
energy focussed and other business initiatives in Russia is vital
to the success of future UK-Russian energy co-operation, as well
as for broader commercial interests in Russia.
Russian legislation
9. The Russian government has recently approved
in principle new legislation limiting foreign investment in 40
named strategic industries including natural resource fields.
UK business is seeking clarification of the terms and implementation
of this legislation. We hope that this legislation may provide
a clear mechanism for foreign involvement in the Russian economy,
compared to the non-transparent, ad-hoc decisions made
to date. Care will need to be taken, however, that it is not indicative
of an increasing trend towards economic nationalism.
10. The Subsoil Law—which would, among
other important measures, clarify the terms of any foreign control
over reserves defined as strategic—is still bogged down
in the Duma. Recent reports suggest that detailed dissection of
its provisions may delay the new legislation by up to two years.
President Putin has publicly stated that investors need clear
rules governing restrictions in strategic sectors. Such a law
will bring a welcome stability if it establishes clear provisions.
11. In the meantime, investors continue
to be threatened with licence revocations and fines for alleged
violations of environmental legislation, cost overruns or failure
to comply with existing—in most cases outdated—licence
terms. There are concerns that future investment opportunities
will be limited to minority equity participation and/or partnerships
with Russian energy companies steering future projects. The protection
of minority shareholders rights does not have a good track record
in Russia.
EU-Russia dynamics
12. Energy is an extremely important element
of the EU-Russia relationship in terms of mutual interdependence
of supply, demand, investment and know-how. The EU is dependent
on Russia for 50% of its gas and 30% of its oil. Conversely, sales
of raw materials to the EU provide most of Russia's foreign currency
and contribute over 40% of the Russian federal budget. There is
a strong shared interest in a closer energy partnership between
the EU and Russia that offers security and predictability for
both sides.
13. Despite six years of co-operation within
the framework of the EU-Russia Energy Dialogue covering issues
such as security of supply, energy efficiency, infrastructure
(eg pipelines), investment and trade, a positive breakthrough
is still lacking. Bilateral deals between Russia and EU Member
States continue to prevail over a specific EU approach.
14. For future development and prosperity,
it is important that EU and Russian companies should have fair,
transparent and reciprocal access to energy resources and markets,
as well as to oil and gas transportation infrastructure. The Energy
Charter Treaty plays an important role in creating a legal foundation
for energy security, based on the principles of open, competitive
markets and sustainable development. It also prohibits participating
countries from interrupting existing energy transit flows, and
aims to strengthen the rule of law on energy issues, by creating
a legal framework to be observed by all participating governments.
Once a foreign investment is made in line with a country's national
legislation, the treaty protects foreign investors against discriminatory
treatment, direct or indirect expropriation or the breach of individual
investment contracts.
15. Interruptions to EU energy supplies—last
year gas via Ukraine, this year oil via Belarus—are a matter
of serious concern. The UK and EU should encourage Russia to finalise
the Transit Protocol of the Energy Charter Treaty to help establish
long term transit energy arrangements. While it is evident that
Russia is unlikely to do so in the short term, it is nonetheless
vital to continue to reinforce the message that multilateral rules
provide a more balanced, efficient framework for international
energy co-operation than is offered by bilateral agreements or
by non-legislative instruments.
16. At a bilateral level we believe the
EU should strengthen co-operation with producer, transit and consumer
countries throughout the region to promote investment in energy
development and to co-operate on energy efficiency. The EU should
also revitalise its energy dialogue with Central Asia, the Caspian
and Black Sea regions in order to help diversify its energy sources
and supply routes.
17. EU business organisations are calling
for a common framework to anticipate energy disruptions by sharing
information between Member States about external energy vulnerability,
strategic oil and gas stocks, possible energy shortages and disruptions,
as well as critical infrastructure risks.
18. Greater transparency in the terms of
co-operation between Russia and the EU, with a clear definition
of the role of energy trading companies in third countries is
needed. Increased access for alternative producers to the EU's
gas markets and transport networks is required, in particular
to ensure unrestricted gas transit from the Caspian region to
the EU via both Russia and Turkey.
RUSSIA'S
G8 PRESIDENCY
19. The principles agreed at the St Petersburg
G8 Summit are important steps in providing for a firm framework
for future energy security, not only in Europe and Eurasia but
globally too.
20. In line with the G8 principles, UK investors
fully support the implementation in Russia of the following:
— increased investment in all
stages of the energy supply chain;
— open, transparent, efficient
and competitive markets for energy production, supply, use, transmission
and transit services as a key to global energy security;
— promotion of transparency and
good governance in the energy sector to discourage corruption;
— transparent, equitable, stable
and effective legal and regulatory frameworks, including the obligation
to uphold contracts, and generate sustainable international investments
upstream and downstream;
— the diversification of energy
supply and demand, energy sources and transportation routes;
— and co-operation on energy efficiency
and clean technologies to tackle climate change.
21. Free, competitive and open markets are
essential to the efficient functioning of the global energy system.
Efforts to advance transparency in Russia, to deepen and spread
the rule of law, to establish and strengthen predictable, efficient
and regulatory regimes, and to encourage sound energy supply and
demand policies all play a significant role in maintaining EU
and UK energy security.
22. We welcome the commencement of implementation
of the Joint Oil Data Initiative (JODI), and the contribution
it will make to the creation of a global common standard for reporting
oil and energy reserves.
THE ENERGY
RELATIONSHIP BETWEEN
THE UK AND
EU AND STATES
IN CENTRAL
ASIA AND
THE TRANSCAUCASUS
23. Bilateral disputes between Russia and
its neighbours over energy transit can quickly have multilateral
implications. Russia's political disagreements with Ukraine, Belarus
and Georgia, and indeed with EU members such as Estonia and Lithuania,
can have negative impacts on EU energy supply. It is therefore
essential to use instruments available under the European Neighbourhood
Policy to support projects that diversify EU energy supplies,
such as the Nabucco gas pipeline linking Central Europe to Turkey,
and other projects connecting the EU with the Caspian and Middle
East.
24. Political and economic tensions affecting
business strategies for the region arise from:
— Russia's perceptions of the
EU's continued eastward enlargement;
— the treatment of ethnic Russians
in the Baltic states;
— the perception that some of
the new EU members are trying to make the EU more hostile towards
Russia;
— the Orange Revolution in Ukraine
and supposed western (particularly Polish and US) interference;
— Russia's treatment of Georgia;
and
— human rights in Chechnya and
Russian policies toward former Soviet states located between Russia
and the EU.
25. Russian relations with Ukraine remain
central to EU energy security. Gas pipelines crossing Ukraine
constitute a vital EU supply route but they are also the most
important route for Russian gas exports, transmitting over 80%
of all gas sold outside the CIS.
26. Recent agreements with Turkmenistan
and Kazakhstan have strengthened Russian control of future pipeline
developments in Central Asia. Concerns have been expressed that
Russia will be able to limit gas exports to the EU in particular
from the Caspian region.
27. Despite the lack of investment in new
gas fields and a levelling off in gas production, Russia has announced
plans to increase gas exports to the EU. In order to meet contractual
obligations to supply Western partners, Gazprom is reliant on
supplies from Central Asia. Gazprom aims to keep full control
of gas exports from this region, aided by soviet era pipeline
networks that currently prevent Central Asian producers from selling
direct to the EU.
28. Gazprom owns all gas pipelines bringing
Russian gas to Europe. There has been little progress on transparent
access to pipelines for independent producers, nor on access for
private companies in neighbouring countries. This means that Russia
is able to compel landlocked Central Asian states to sell gas
at one quarter of European prices because they have no other export
routes. Even independent Russian gas producers such as Lukoil
have little choice over what price they sell at because without
pipelines they have no access to external markets. In theory they
can sell direct to Europe but in practice they have to sell through
Gazprom's export arm, Gazexport. TNK-BP's plans to develop the
East Siberian Kovykta field have been delayed by Gazprom's refusal
to allow access to its pipelines.
29. Gazprom has no plans to give up its
monopoly despite continued pressure from Europe for it to liberalise
trade. Liberal reformers in the Russian government have advocated
access for foreign producers, but President Putin remains firmly
behind Gazprom. This reflects the continuing tension between statist
and reformist elements in the Russian government.
30. Gazprom sells gas abroad in three principal
ways:
— via subsidiaries and joint-ventures
with local businesses (eg Germany's ZMB and Wintershall Erdgas
Handelshaus in Switzerland); and
— via trading companies with no
formal ownership links to Gazprom (eg RosUkrEnergo).
31. Gazprom has been strengthening its presence
in the EU, most recently through the purchase of a stake in the
Central European Gas Hub (CEGH), a company owned by Austrian energy
group OMV. This could give Gazprom influence over the Nabucco
pipeline project, which if built would link Europe with the Caspian
region and the Middle East.
EU-RUSSIA: PARTNERSHIP
AND CO
-OPERATION AGREEMENT
32. CBI remains fully supportive of Russia's
expeditious accession to the WTO. UK business believes that WTO
accession will bring major benefits to the Russian economy, as
well as ensuring that the process of liberalisation in Russia
is strengthened and maintained. CBI also believes that Russian
accession will generate significant new commercial opportunities
for UK companies operating in the Russian Federation. Furthermore,
since the WTO is the only authority regulating global trade, Russia's
entry will substantially enhance the transparency, predictability
and security of its trade regime. Upon accession, we urge the
Russian government to ensure full and rapid implementation of
WTO rules and its specific market access commitments according
to the schedule agreed with its trading partners.
33. Building on Russia's accession to the
WTO, CBI also supports a robust and comprehensive new Partnership
and Cooperation Agreement (PCA) to be agreed between Russia and
the EU. The previous EU-Russia PCA was originally negotiated in
1994 and is now in need of revision to take account of the substantial
changes in bilateral relations in the intervening period. CBI
therefore fully supports a PCA that leads to a substantial improvement
in the economic climate for UK businesses trading and investing
in the Russian Federation. Furthermore, we acknowledge the broad
range of issues that will likely be tackled within the framework
of the PCA, including political and social objectives. We note,
however, that priority should be given to economic issues given
the importance of Russia as a market. CBI's position paper on
the PCA is attached as an Annex to this document.
34. We are deeply concerned that political
dynamics have to date prevented the launch of negotiations on
the PCA. The recent EU-Russia summit failed to make significant
progress due to diplomatic tensions between Estonia and Russia,
as well as an ongoing issue related to Polish meat exports to
Russia. We urge the EU Commission, Member States and the Russian
Government to work together to resolve these issues as rapidly
as possible. A renewed PCA could have very substantial economic
benefits for both the EU and Russia, so the launch of negotiations
should be prioritised. It is unfortunate that political issues
are preventing the development of more prosperous economic relations
between the EU and Russia.
UK-RUSSIA BILATERAL
RELATIONS
35. UK business has major interests in Russia
with over 400 UK companies invested in a broad range of sectors.
These include retailing, services (particularly financial services),
oil and gas supplies and services. While many British investors
experience problems operating in Russia, most outside the natural
resource sectors express optimism for the future with significant
numbers expanding their activities. Even those in strategic sectors
clearly state that they cannot afford to be absent from the Russian
market.
36. Bilateral trade growth has grown for
the sixth successive year—with increases averaging 20% per
year. In 2006, exports grew to £1.9 billion, while UK imports
from Russia stood at £3.6 billion.
37. UK companies invested $5.5 billion in
Russia in the first nine months of 2006, and the UK is currently
ranked fourth in terms of accumulated investment. The largest
UK investments to date include BP's $6.75 billion invested in
a joint venture with TNK, and Shell's $5.5 billion investment
to build the Sakhalin II LNG plant.
38. There is significant individual portfolio
Russian investment in the UK, most famously Roman Abramovich's
investment in Chelsea Football Club and a great deal of Russian
private investment in the property, land and education sectors.
Much of this comes from off-shore centres such as Cyprus and is
therefore difficult to quantify. Russian commercial vehicle manufacturer
GAZ's acquisition of Birmingham based van producer LDV in 2005
was one of the first major Russian manufacturing ventures in the
UK.
39. There is significant Russian interest
in the London Metals Exchange, London Stock Exchange and Alternative
Investment Market, in particular by Russian metals and oil companies
but increasingly others too. The sums involved are huge: over
$4 billion in Initial Public Offerings in 2005, rising to $20
billion in 2006 (provisional). Over 40 are expected in 2007, with
a total value of $30 billion.
40. Given the increasing role of government
in Russia's economic strategy, the decision to reinvigorate the
UK-Russia Intergovernmental Steering Committee on Trade and Investment
is welcomed by British business. For it to be a viable forum it
will need consistent and senior support from government on both
sides and the ability to involve decision-makers from industry
in Russia and the UK. The creation of the UK-Russia Energy Forum
(referred to above) is also a welcome initiative, and could help
to protect British interests in the Russian energy sector.
41. Recent political tensions between the
UK and Russia have caused frustration in the business relationship
and have adversely impacted on the level of Russian participation
in some bi-lateral business fora. We hope that such tensions will
be addressed effectively and that two-way economic and business
links can continue to grow.
PERFORMANCE OF
FCO IN RUSSIA
42. The CBI recognises the considerable
support given by the British Embassy in Moscow to Ministerial
and CBI delegations to Russia. We also welcome regular dialogue
on priorities and forward planning, which enables the delivery
of best outcomes in terms of senior business involvement in a
range of policy initiatives.
43. It is important to note that the political
dynamics in Russia and its relationship with Central Asia and
the Transcaucasus have a key impact on the way that business is
conducted in the region, particularly in the energy and strategic
sectors. We believe due consideration should be given to the following
points:
— the significant commercial impact
of the political and economic briefings given by FCO officials.
This is recognised and appreciated by business. In addition, diplomatic
assistance provided by the FCO has been central to investment
decisions in the region; and
— official government contact
is extremely important in all these countries. It is vital to
maintain and strengthen networks of contacts to assist in growing
existing commercial interests, to facilitate the search for solutions
to business and investment related problems, and to best take
advantage of emerging opportunities.
44. Business feels that there are strong
arguments for an enhanced level of resources in Russia and Central
Asia. It believes that:
— in spite of the recognition
given to the overall limitations on FCO resources, increased FCO
representation in the region is made necessary by the growing
complexity of energy supply and transit politics in the region;
— the CBI would urge that this
situation is kept under review; and
— high levels of experience and
expertise in FCO staff are particularly important. These markets
often operate in a complex manner and exhibit less than transparent
characteristics. Business recognises the role that Ambassadors
play in trade and investment matters. This is valued. There is,
however, a need for more sector specialisation in commercial staff,
particularly in the energy sector.
BRITISH COUNCIL
AND BBC WORLD
SERVICE
45. Business values the work of the British
Council and BBC World Service in promoting educational opportunities
and cultural relations with Russia. UK business in Russia benefits
from the promotion of English language, UK education and training,
working with government institutions and organisations, and showcasing
the innovation, creativity and excellence of UK science and design.
CLIMATE SECURITY
AND CLIMATE
CHANGE
46. In addition to trade, investment and
transit issues, the EU-Russia Energy Dialogue will focus on energy
efficiency and energy saving. There is a substantial common interest
in enhancing energy efficiency in Russia, which, according to
International Energy Agency data, is still 2.5 times lower than
in the OECD countries.
47. Examples of EU-Russia co-operation on
a practical level include the joint Energy Dialogue Technology
Centre in Moscow, which is a focal point for practical co-operation
in the energy sector. It covers areas such as harmonisation of
energy policies and the promotion of energy efficiency regional
pilot projects.
48. At a global level, the commitment of
the EU and Russia is vital to combat climate change, to promote
the sustainable use of forest resources, to halt the decline of
bio-diversity, and reduce waste in the energy sector. Russia's
decision in 2005 to ratify the Kyoto Protocol was pivotal in bringing
the agreement into force. We look forward to continued close co-operation
in this area.
49. The EU-Russia Environmental Dialogue
launched in Helsinki in October 2006 is currently developing joint
projects on climate change, industrial pollution, forestry and
water and marine issues. There is also joint working on the reduction
of trans-boundary air pollution, reduction of industrial accidents
and to clean up the Baltic, Barents and Black Seas. Progress is
evident in other areas including the joint funding of projects
in the context of the Northern Dimension Environmental Partnership,
bilateral collaboration on Kyoto implementation and the work of
the EU-funded Russian Regional Environment Centre.
50. On a UK-Russia level, these issues will
be high on the agenda by the recently announced UK-Russia Energy
Forum, in which the CBI wishes to take an active role. We also
support work under the FCO Global Opportunities Fund Climate Change
and Energy Programme in promoting energy security and efficiency,
and renewable energy use. The most important element for Russia
is an improved investment regime in the Russian energy sector,
along with a continued process of structural and economic reform.
May 2007
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