The Eu Expansion: Economic Implications For Russia

Economics dominate Russia’s relations with the European Union. Will Russia benefit, or suffer, from the expansion of the EU – and to what extent did these considerations influence Russian policy towards the enlargement? For political reasons, Russian commentators chose to interpret EU enlargement as bad news for Russia, but the evidence suggests just the opposite.

The incorporation of ten new members to the European Union on May 1 was a milestone in modern history. But Russia nearly spoiled the party. In February Moscow laid down fourteen conditions without which, it insisted, it would not extend its existing Partnership and Cooperation Agreement with the EU to the new members. At the last minute Moscow abandoned its petulant stance and signed off in an all-smiles ceremony in Luxemburg on April 27.

In the weeks before the enlargement, Russian observers were complaining that the inclusion of the new members underlined the exclusion of Russia; as if their gain must be Russia’s loss. German Gref, minister of economic development and trade, suggested that EU expansion could cost Russia US$150 million in lost trade (or maybe not, he added). Other observers put the alleged costs even higher, at US$600 million.

Gref’s equivocation was due to the fact that he was adding up all the potential losses, not actual losses – and he was excluding all the potential gains. This is a curious arithmetic, one driven by political considerations and wounded pride rather than a rational calculation of economic self-interest.

First, it should be remembered that the Comecon trading bloc collapsed fourteen years ago, and EU expansion does not mean a sudden interruption of Russia’s trade. The diversion of East European trade flows from Russia to the EU took place very quickly after the Soviet collapse, and was completed by 1995. And the new member countries had already adjusted their tariff regimes and trade regulations to EU standards by the late 1990s, as a precondition for entry.

Second, bear in mind that the EU is Russia’s largest trading partner, and neither side wants to interrupt that mutually beneficial relationship. Russia-EU trade totaled US$93 billion in 2002, a figure that dwarfs the scary sounding $600 million losses in the (hypothetical) worst-case scenario. Russia-EU trade has doubled since 1995, and Russia is now the EU’s fifth largest trade partner. Russia accounts for a modest 4 percent of EU imports – but 15 percent of its energy imports. The EU accounts for 30 percent of Russian imports and 40 percent of Russian exports, showing that Russia needs the EU more than Brussels needs Moscow. The new member countries currently take about 15 percent of Russian exports and provide 8 percent of her imports (led by Poland, with 3.5 percent and 3 percent, respectively).

Third, Russia will benefit from having a large, integrated and expanding market on its doorstep. Russian commentators tended to ignore the upside of EU expansion, which could (according to the Finnish prime minister, for example, speaking in November 2003) lead to a 50 percent increase in Russian trade. As a result of EU entry the average tariff on Russian imports to the ten new members will actually fall from 9 to 4 percent.

Fourth, in any trade negotiations, the devil is in the details. The EU was perfectly ready to meet the Russians halfway on a case-by-case basis. Russia was concerned that its existing exports to new member countries be preserved, and this was largely assured. (Though the April 27 declaration was a political statement of intent and not a legally-binding document.)

Russia’s quota for steel exports to the EU will increase by 480,000 metric tons – even though its current exports to the new members run at less than 200,000 tons. EU generosity is possible due to the shortage that has gripped international steel markets this year as a result of booming demand in China, leading to a 50 percent increase in prices. The existing Russian quota is 1.38 million tons, out of the 20 million tons that the EU imports each year.

Customs duties on aluminum will be raised gradually over three years, reaching 6 percent in 2007. The EU agreed that Russia can maintain existing contracts to deliver nuclear fuel to plants in four new member countries. It agreed to waive noise regulations to allow Russian jets to continue regular service to Budapest and Vilnius. The EU promised to increase Russia’s grain export quota from the 2003 level of 600,000 tons, although they are unlikely to go up as far as the 2 million tons that Russia sold in 2002.

Russia’s curious diplomatic dance in the run-up to EU enlargement was presumably driven by political considerations – the desire to ensure continued transport access to the Kaliningrad exclave, and the desire to score political points off the situation of the Russian minorities in Latvia and Estonia. Spurious economic arguments were roped into this political agenda. But Russia should be wary of politicizing relations with the EU. They say “Latvia,” and the Europeans will say “Chechnya.”

When it was signed in 1994, the Partnership and Cooperation Agreement was predicated on a convergence of values between Russia and Europe, but this hope has been gradually abandoned. What is left is business. The real challenge for Russia is securing EU help in gaining entry to the World Trade Organization, which will require reaching agreement on Russian domestic energy prices and the Kyoto accord (Vremya novostei, Gazeta, April 30).