With its European Neighbourhood Policy Instrument (ENPI CBC), the EU emphasises a strong policy commitment to promote cross-border co-operation as a vehicle for regional development and the advancement of cohesion goals. This policy operates from the assumption, furthermore, that the strategic development of urban networks across borders will be a central element in positively exploiting increasing interaction between the EU and its neighbours. However, to what extent do existing policy instruments actually facilitate such networking? Upon closer scrutiny, it becomes clear that territoriality principles regarding the use of EU funds could create a distinct policy gap between “internal” development and “external” networking. While cross-border co-operation (CBC) and the Europe-wide support of cross-border, interregional and transnational cooperation are now firmly embedded within the EU's Cohesion Policy, CBC links to projects involving neighbouring states are as yet relatively weak. This case study of Finnish-Russian co-operation indicates that simultaneous processes of inclusion and exclusion operate in terms of the interaction of governance mechanisms of Cohesion Policy and ENPI CBC. We argue that a too strict separation of EU internal and external policy activities would be counterproductive to pro-active strategies aimed at avoiding wider divisions between the EU and its neighbouring regions. For this reason, the issue of policy innovation, of combining internal consolidation of the EU with external engagement and co-operation, should be explored and will be taken up by this paper.