EU-RUSSIA RELATIONS: IN SEPARATE BOATS BUT SAILING IN THE SAME DIRECTION

Though the EU and Russia have vacillated between political cooperation and confrontation over the last twenty-five years, economic relations between Europe’s two leading players have remained pragmatic and relatively stable. 

Despite continued political tension and mutual economic sanctions, the EU and Russia can be expected to remain important trade partners in the coming years because of their geographic proximity and the complementary nature of their export and import markets: EU-Russian trade is largely based on Russian hydrocarbons (which constitute 85 to 90 percent of all EU imports from Russia) and European vehicles and equipment (which make up more than 65 percent of all Russian imports from the EU).

European demand for natural gas in the EU is declining slower than European production of natural gas, so the EU can be expected to continue to import Russian gas in the near term. Russia accounts for 30 to 40 percent of the EU’s total gas imports, and the volume of Russian gas imported to the EU has risen by 17 percent since 2005. 

Russian oil will also continue to factor into EU-Russian trade in the coming years. The EU still depends heavily on imported oil: in 2013, EU countries imported 83 percent of the oil they consumed. Russia remains the leading supplier of oil to the EU, accounting for about 29 percent of the EU’s total imports. Russia’s reliance on European consumption is even stronger: Russia sells about 75 percent of its oil to EU Member States. With Russian oil output expected to drop by half by 2035, the EU and Russia must prepare for a gradual contraction of this market. Russia must find other goods to export to the EU in order to replace falling oil deliveries, and European oil refineries must prepare to transition from Urals oil to other types of oil.

Although the EU is clearly dependent on Russian energy, Russia is no less dependent on a wide range of European goods and investments. Russia spends more than 50 billion euros importing equipment from the EU per year. Transportation, telecommunications, and data processing equipment accounts for about half of all such imports. Equipment for high-speed trains and commercial airplanes also makes up a significant portion of EU exports to Russia. 

For many years, European investment has accounted for more than 80 percent of all foreign investment in Russia. Germans alone own more than 25 billion euros in shares of Russian companies. 

European financial markets have also helped bring capital into Russia: Russian companies have raised more than $180 billion through bond sales on European markets, which accounts for more than 35 percent of Russia’s total foreign debt. 

Money flows in the other direction, too: since the collapse of the USSR, Russian businessmen and officials have moved at least $1 trillion out of Russia. The lion’s share of this money has ended up in Swiss banks, but German, Austrian, and Cypriot banks also have significant Russian holdings.

Although the rhetoric surrounding sanctions has become antagonistic in Moscow and European capitals, the real effect of the sanctions has been relatively minimal. For example, falling oil prices have inhibited the development of expensive oil projects, so exploratory technologies that Russia can no longer import because of the European sanctions regime have become unnecessary. 

Russia responded to European sanctions by prohibiting the importation of a number of agricultural products. This measure was touted as promoting import substitution and punishing the Europeans, but in actuality it produced temporary shortages, a considerable decrease in the quality of foodstuffs, and a spike in prices. Unable to replace sanctioned goods with domestically produced ones, Russia is now buying many food products from new suppliers. A number of countries, as well as informal groups within Russia, are making money smuggling sanctioned goods into Russia; all they need to do is print and affix new labels on European goods. 

Even though sanctions have had some effect on the Russian economy, it could have been much, much worse. The Ukraine crisis has not caused major changes in trade relations with Europe and European capitals want to keep political relations separate from economic ones.

Still, in the coming years, in view of the sharp drop in the influx of foreign currency, Russia will gradually replace higher-quality, expensive European goods with cheaper, lower-quality goods from China and elsewhere. Over time, some Russian regions will revert to producing certain equipment, as they did in Soviet times—the automotive sector, for example, may be revived to a certain extent.

Trade relations between the EU and Russia will likely remain stable for many years, though the overall volume of bilateral trade will gradually contract. The EU will grow less dependent on Russia for energy security, while Russia will become less reliant on European finance, industry, and infrastructure.

In the emerging new geopolitical reality, Russia is no longer the eastern flank of the Greater Europe and is becoming the western flank of the emerging Greater Eurasia. The shift of strategic accents means that Moscow should invest considerable political capital in developing the mechanisms of Eurasian Economic Union (EEU), the Shanghai Cooperation Organization (SCO) and other multilateral structures of Greater Eurasia. This is especially true since many of these mechanisms are being created virtually from scratch and Russian foreign policy has every opportunity to play active and, in some areas, leading role in their formation.

This does not mean that Russia should turn its back on Europe, renouncing interaction with its European partners and friends. Far from it. Russia has too many bonds connecting it to Europe: history and geography, culture and religion, decades of economic cooperation and a multi-million Russian diaspora in all European countries from Poland to Spain. Moreover, the success of including Russia in various Eurasian integration projects depends greatly on whether Moscow manages to ensure security and stability on its Western flank and to forge new pragmatic and mutually beneficial relations with its European neighbors.

The outlines of future relations between Russia and Europe are only just emerging. Yet it is already clear that these relations should not be hostage to the political rhetoric and romantic expectations. It is necessary to take stock of the existing effective forms of interaction in all four spaces and work steadily in specific areas, without reviving old illusions and generating new ones. For example, Russia and the European Union could concentrate on the sore issue of managing migration. Or on preventing political extremism and terrorism. Or on the subregional mechanisms of cooperation from the Black Sea to the Arctic. Russia and the European Union will remain neighbours and even the fading of the idea of Greater Europe cannot wipe out this reality.

More innovative, out of the box ideas and proposals need to be generated for Moscow and for Brussels. The current crisis in the EU-Russian relations will ultimately make both sides more responsible, realistic and more mature in dealing with each other. But that will require a lot of hard work on both sides.

The EU needs to propose an EU vision of a possible common space with Russia. Developing and communicating a strategic European vision for its future relations with Russia will benefit all parties in the long run. The EU should clearly indicate that Russia is indeed part of Europe and should participate alongside other EU members as a rightful member of European civilization. This would send a clear signal to reasonable statesmen, the business community and all who support the European choice for Russia, that there is a plausible happy future for EU-Russia relations. The power of this possible harmonious future should not be underestimated. This could trigger the start of a real discussion, both in Russia and Europe, of a desirable common future and possible ways to achieve it. Europe desperately needs a clear vision of where and how it sees Russia in the future. It is only logical for Europe to learn from the experience of the past 25 years and recognize that a Russia not of Europe means a considerably less stable and secure Europe itself.