Publication: Monitor Volume: 7 Issue: 73

The Kremlin’s hopes of moving quickly to cement ties with Europe–a policy undertaken in part to compensate for worsening relations with the United States–appeared to hit a small pothole last week when a much anticipated summit meeting between President Vladimir Putin and German Chancellor Gerhard Schroeder failed to produce an agreement on what has emerged as the most difficult and important issue in Russian-German relations: Moscow’s repayment of its US$19 billion debt to Berlin. The absence of a debt agreement, which came despite two days of apparently amicable meetings in St. Petersburg, led a number of Russian newspapers to conclude that the talks had been a nearly complete failure for Russia. The dearth of practical results more generally also raised some broader questions about the future of Russian-German relations. Those questions involve not so much Berlin’s intention to continue strengthening its “strategic partnership” with Moscow, a policy not likely to be altered, but whether Russia will continue to look at Germany as its major partner in Europe and as the country best positioned both to promote EU-Russian integration and to help ease tensions between Russia and the United States. The Kremlin had originally singled out Britain to play this role, but has appeared in recent months to have turned increasingly toward Germany instead in the hope that it, as Russia’s largest creditor, might take the lead in satisfying Russian requests for debt relief.

Berlin will apparently not do this. While in St. Petersburg Schroeder signaled in remarks to the press that, especially because of rising Russian oil revenues, Germany believes that Russia is now in a position to repay its debts. Schroeder did, however, hold out one small ray hope of hope. On April 11, the second of the two-day summit, he said that Germany was willing to take a leading role in trying to convince Russia’s Western creditors that it would be necessary to restructure Moscow’s foreign debt in 2003, when annual payments are set to rise from their current level of US$14 billion to about US$19 billion. At the beginning of this year, Russia’s debt to the Paris Club of international creditors totaled over US$48 billion, approximately US$19 billion of which is owed to Germany. But for Moscow the main failure of the Putin-Schroeder talks was that the debt-for-equity deal Schroeder proposed last year was not finalized. In it, Germany would have written off some of Russia’s debt (actually Soviet debts to the former East Germany) in exchange for equity in Russian companies. The deal had been under discussion for some six months, and a large contingent of top Russian officials traveled to St. Petersburg for the negotiations.

Exactly why the negotiations over the debt-for-equity deal failed is unclear. Some sources pointed to the inability of the two sides to reach agreement on the actual value of those debts (which had amounted to 6.4 billion transferable rubles). According to the The Times [of London], however, the German government in fact distanced itself from the draft accord because of objections to it from Washington. Quoting German advisers in Berlin, the newspaper reported that the Bush administration had conveyed to Schroeder its concerns about the increasingly close relations developing between Germany and Russia. Indeed, the newspaper observed that the debt-for-equity program was to have been the cornerstone for a greatly strengthened Russian-German partnership, one which would have brought German businessmen into Russian boardrooms and extended Germany’s economic presence from Siberia to St. Petersburg.

Whether the Times report was accurate regarding Washington’s role in the failure of the debt-for-equity scheme, Russian newspapers joined the British daily in observing that what was to have been a mechanism for German-Russian economic interaction–the so-called Petersburg Dialogue–was reduced by the failure of last week’s summit to a mere “talking shop.” Reports also suggested, moreover, that the debt-for-equity deal is now all but dead, What that will mean for Russian-German relations more generally remains unclear.

Indeed, this year’s Russian-German summit appears in general to have raised more questions than it answered. In the runup to the summit, for example, press reports had suggested that the two leaders would engage in intensive consultations over a host of important security issues, including U.S. missile defense plans, Russian-U.S. relations and the Balkans situation. Putin and Schroeder did apparently discuss those topics, but some reports suggested that the talks were cursory and something less than what the Russians had had in mind. In his statements to the press, meanwhile, Schroeder appeared to walk a careful line. He encouraged Russia and the United States to begin a dialogue, but went out of his way to underline that Berlin does not see itself as a mediator between the two countries. He was equally cautious in his comments about U.S. missile defense plans and a Russian counterproposal for a theater-based European alternative. He indicated that it was still unclear whether Russia would participate in any U.S. missile defense system extended to Europe. He also said that both the Russian and U.S. missile defense proposals are still preliminary and urged Moscow and Washington to hold direct consultations on the matter.

Russian-German talks on key security issues might also have gotten sidetracked by the fact that the drama over Russia’s NTV television network was grabbing headlines at the time the two leaders met in St. Petersburg. Against that background, the two leaders reportedly spent considerable time discussing Russian press freedom, and Schroeder is said to have delivered a strong message regarding European concerns in this area. If that is so, however, Schroeder appeared nevertheless to go out of his way in his public comments not to embarrass Putin on the subject. The German leader did give an interview to an Ekho Moskvy radio, which is part of the NTV family, but avoided during the interview and in other comments to the press any direct criticism of the Kremlin’s policy toward NTV. The same was also true of Russian policy in Chechnya. The issue reportedly came up, but any criticism Schroeder might have directed at Moscow over the conflict was not reflected in his public statements (AFP, April 8, 10-11; The Times [London], April 9; New York Times, April 10-11; AP, Reuters, April 10-11; Izvestia, April 11-12; Segodnya, April 11; Russian agencies, April 10-11).