Energy is expected to dominate two days of high level talks between Russian and German leaders meeting in Hanover, due to start Monday night.

Observers say Russian President Dmitry Medvedev is looking to secure closer access to consumers in Germany, which is already the biggest market for Russian gas, after Berlin's recent announcement that it would phase out of nuclear power by 2022 increased its need for alternatives.

The high-level forum, which will include cabinet ministers as well as CEOs of major companies, comes on the heels of a strategic energy partnership between Germany's largest electric utility, RWE, and Russian gas giant Gazprom. Last week, the two companies agreed to jointly construct new, or expand existing, gas and coal power plants in several European countries.

But the talks also come just after Quadriga - a German organization that annually recognizes individuals or groups for their commitment to political, economic and cultural activities - decided to cancel its planned award for Russian Prime Minister Vladimir Putin.

Former recipients of the Quadriga award and others were angered when they heard that Putin was to be honored. Critics of the Prime Minister – a former president who is also a former KGB agent - accuse him of trying to roll back democracy and human rights in Russia.

Gazprom is leading Russia's direct investor in Germany

Tough issues

Putin aside, observers warn the talks could prove slightly difficult on a number of key issues, such as visa restrictions, complex investment rules and market liberalization.

In an interview with the German business newspaper Handelsblatt, the chief executive of the German retailer Metro Group, Eckhard Cordes, slammed Russian rules requiring foreign firms to include minimum levels of "local content" in their products or face high import tariffs.

Foreign carmakers operating in Russia, for instance, are entitled to low import duties for parts if they produce at least 300,000 cars a year and ensure at least 60 percent of parts are sourced locally. Fiat, General Motors and Volkswagen are among the manufacturers that have committed to invest millions of euros in exchange for low import duties.

On Friday, Putin announced that Russia won't lift incentives to foreign carmakers to source parts locally in exchange for membership into the World Trade Organization. Russia, which has been holding talks with the WTO, is the largest economy still outside the organization.

Occasional friction

Cordes - who is also the chairman of the Committee on Eastern European Economic Relations, a body that represents companies trading and investing in Russia - also urged Russia to privatize its state-owned industries and promote medium-size enterprise to foster greater competition in the country.

Russian Prime Minister Vladimir Putin isn't a big WTO fan

Despite the occasional friction in German-Russian relations, trade ties between the two countries have been steadily expanding.

More than 6,000 German companies are now active in Russia, and German direct investments in the country totaled 1.2 billion euros in the first fourth months of 2011.

On the trade front, Russian exports to Germany - mostly natural gas and oil – were worth 31.8 billion euros last year. The value of German goods going the other way, such as machine tools, chemicals and cars, was 26.4 billion euros.

"Huge growth potential exists in trade and direct investment for Germany and Russia alike," said Christof Römer from the Cologne Institute for Economic Research.

But Römer notes that while Russia may be rich in natural resources, it remains relatively poor in traditional manufacturing sectors such electronics and chemicals.

"Russia is way too focused on natural resources, compared to China and India, which have begun to expand into many other areas," Römer told Deutsche Welle. "The country should encourage greater German investment and know-how transfer. This is crucial for sustainable growth."

Author: John Blau

Editor: Sam Edmonds