Alternative routes for EU-Russian economic relations in the current international political context: Eurasian Economic Union as an alternative interface for cooperation and integration – A. Linnikov

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russiaeuropaModern world is no longer imaginable without close economic ties and joint activities of people from different countries regardless of citizenship, nationality or actual geographical location. In the globalization era, inter-penetration and inter-dependence of European economies have become not only a reality but also a relevant factor encouraging economic specialization and enhancing productivity and competitiveness of national economies.

Regretfully, in the recent years we witness to rather successful attempts of the political élites of some of the world’s leading countries to disrupt stable economic connections and isolate potential international competitors from their traditional business partners and strategic allies. Namely, we refer to the raging diplomatic and trade war waged by the United States of America on the Russian Federation, to which the whole European Union falls victim.

After the economic crisis of 2008, the Americans, in possession of vast resources, experience of successful manipulation of friendly regimes in politically and economically weak states, and capitalizing on the pre-existing grounds for and anti-Russian (anti-USSR) sentiment in their own society, have taken a firm anti-Russian stance on the international arena. This policy aims at blocking the rising Russian economic influence and weakening competitors of the US – strong European economies. Political leaders of European states (in our humble opinion, those of Germany and France in particular) have shortsightedly fallen for the American political ploy without properly assessing risks and consequences of accepting the anti-Russian game for their own national interests. However, as the Romans said, alea jacta est – the die is cast. It will now take Europe years, if not decades, to get back on the course derailed by premature decisions dictated by biased political reasons and justified by crude propaganda for ignorant ones.

No matter how questionable the political motives of governments might be, it is not our intention to get involved in a dirt-throwing contest between Russia and the West – there is no shortage of eager participants to that. We will reason from the standpoint of entrepreneurs – pragmatic people of business that produce tangible goods, create new technologies and IP, and work to advance their respective national economies. These people, companies, and even some governments (on national and regional levels) continuously strive to find junction points with each other and communication solutions to bypass obstacles for economic cooperation imposed by faulty political decisions. In the last two years, it has become completely obvious that one of the paths to re-establishment of compromised economic ties between Russia and the states of the European Union lies through cooperation within frameworks set by international organizations. The Eurasian Economic Union (EAEU) stands out among all international organizations as the most likely and convenient counterpart for the EU and its member states. Needless to say that the EAEU is the most transparent and understandable partner for the European Union, its principles, purposes, objectives, and institutional structure being a mirror-image of the pre-Maastricht European Community.

Commercial, political, social, and cultural ties between Russia and Europe have existed and developed from ancient times, although, as some historians have noted, it is difficult to call these relationships perfect or even stable.1 No wonder we are now living though yet another period of tension and instability. If we suppose that the commercial (economic) element in this tormented relationship is the prevailing one, and the political component is a derivative dictated by economic needs, we can try to superimpose Nikolai Kondratiev’s wave (cycle) theory on political events. This simple experiment will probably tell us that the current deteriorated state of economic and political relations is simply a down-phase of a wave bound for an inevitable new rise. Regretfully, in the case of the European Union, such a simplistic and overly optimist view of the outcome of the current confrontation and sanctions war clashes with the decisions of the European political élites that choose to ignore their own national economic interest. Well, so long Professor Kondratiev and the fancy economic theories! It looks like we are now facing a completely new reality shaped exclusively by political ambitions of the powerful with no regard to well-being of economies and welfare of the people.

A superficial look at the recent political steps of the European Union is enough even for an unenlightened observer to sense a persistent trend to alienation and desire to break all ties with Russia. It seems that after the collapse of the Soviet Union (over 25 years ago!), the EU started to search for political partners among the once-Union states, often ignoring the core element of the former USSR – Russia. Ukraine, which the EU has strongly supported over the past 20 years, is a fine example of this trend. As declared on the official website of the European Commission, the goal for the EU is to bring Ukraine closer.2 Well, Ukraine does not only get close to the EU. It also gets very deep into EU pockets. Financial aid of extended by the EU to Ukraine from 2014 amounts to €2.81 billion – the largest amount of macro-financial assistance the EU has ever disbursed to any non-EU country.3 Besides, in 2014 the EU signed the far-reaching association agreements with three former Soviet Republics – Ukraine, Georgia and Moldova.4 It is yet another example of how the EU is trying to cooperate with the states of our region, leaving Russia out of the loop. Of course, such outright distribution of spheres of influence does suit the political interests of the Russian Federation. On the contrary, it inevitably complicates Russia’s relationship with both, the ex-USSR countries and the EU itself. In recent years, several attempts of Putin administration to initiate a closes dialogue with Europe were fenced off with economic sanctions and political actions incompatible with Russian national policy and historical background. In particular, we refer to the silent encouragement by the EU of the nationalist movements in the Baltic states of the former USSR (Latvia, Lithuania and Estonia), the so-called de-Communization in Poland, reassessment of the historic outcome of World War II, etc.

Repelled by the hostile attitude of the West, Russia, most logically, considers closer engagement with Asian countries, especially China. Speaking in marital terms, the honeymoon in the Russian-Chinese relations is in full swing and cooperation with the Oriental neighbor moves forward at a rapid pace, seemingly into a bright and promising future. Not surprisingly, in mid-2014, when the Russian-European sanctions only gained momentum, President Putin proclaimed Russia's turn to the East.5 Almost every day we get news on agreements signed between the two countries. The media incessantly praise new alliances and joint achievements in different industries.

Relations between Russia and Japan also show rapid progress. After the exchange of official visits between the leaders of the two counties, there clearly is a possibility of political cooperation on a new level that may eventually lead to the long-awaited peace treaty with the Land of the Rising Sun.6

It seems that Russia has found, in many respects (including commercial, military and cultural cooperation), a substitute for Europe in the Orient. Europe, on the other hand, seems to disregard this trend and stubbornly continues to support “artificial life” in some states of the former USSR and other countries of the ex-Soviet Block, irritating the Russian political leadership to no end.

However, political smokescreens only disguise the poor state of economic affairs and keep the unsuspecting general population at bay in front the TV screens or web pages. The actual reality is quite different from the media stories.

A closer look at Russian relations with China over the last 4 years shows that economic cooperation between the two states is quite lopsided. In 2015, the share of oil and other raw materials has reached 82.9% of the total volume of Russian export to China. In 2016, the share of Russian oil in the Chinese market grew by almost a quarter. Russia bypassed Saudi Arabia and become the main supplier of oil to Beijing.7 Sad as it is, in reality Russia is just a colossal gas station for China, not a partner in creative activities.

Trade turnover between China and Russia in the end of 2015 has decreased by 27.8% to 422.7 billion Yuan ($ 64.2 billion). At the same time, the volume of exports of Chinese goods to Russia fell by 34.4% to 216.2 billion Yuan ($ 32.9 billion) in 2015, while imports of Russian products to China decreased by 19.1% to 206.5 billion yuan ($ 31.4 billion). Despite the fact that in 2016 the trade turnover between the two countries has grown a little, the trend is obvious – the relationship between Russia and China has not progressed yet beyond buying and selling raw materials.8

Statistics from Europe, in particular those on the Russian-Italian commercial relations, show better dynamics. Partnership between Italy and Russia dates back as far as 1909, when the Italian Kingdom and the Russian Empire signed the so-called Racconigi Bargain taking a vow to prevent any single power from dominating Europe. On the eve of World War II, the diplomats of the two regimes successfully negotiated mutual recognition of spheres of influence in the Mediterranean (Rome) and Central/Eastern Europe (Moscow). The fascist Italy and the Soviet Union have almost come into a comprehensive alliance in order to counter-balance German supremacy in Europe.9

Italy steadily remains one of the largest trade and economic partners of Russia. According to 2015 figures, it's the third in Europe in terms of trade turnover with Russia after Germany and the Netherlands.10 In 2015 the trade turnover between our countries amounted to 30.6 billion US dollars (Russian exports – $ 22.3 billion, imports – $ 8.3 billion), having decreased by 36.2% (in 2014 – $ 47.9 billion). The negative trend in trade continued in 2016 – foreign trade turnover with Italy fell by 35% to $ 19.8 billion.11

The good news, however, is that the structure of trade between Russia and Italy is quite different from the Russian-Chinese picture. Besides oil and gas, Russia supplies to Italy chemical products, food and agricultural raw materials, ferrous and non-ferrous metals. Italy, in turn, finds in Russia a market for industrial machinery, equipment and vehicles, chemical products, food and agricultural raw materials, textiles and footwear.12 The Italian example clearly shows that the structure of commercial exchange between Russia and Europe is much more prominent, diverse and inter-dependent and therefore has greater development potential. Of course, recent statistical figures clearly reflect the adverse effect of sanctions and counter-sanctions that have caused a relevant drop in commercial turnover. As of 2016, Italian economy alone has lost approximately 3.6 billion euros in revenues.13

Once again, the official picture is very different from the actual economic situation and from what the ordinary citizens and real business people feel. Impressive figures of financial losses demonstrate counter-productivity and debilitating effect of the sanctions game. A solution to this problem has become of paramount importance to both, Russia and the EU that have grown morally and economically tired of pointless mutual restrictions.

Almost two years ago, in 2015, Ernesto Ferlenga – President of Confindustria Russia – already openly noted the urgent need to find new mechanisms for cooperation between Russia and Italy.14 According to Mr. Ferlenga, Italy is working to invest in industrial facilities in Russia, to introduce Italian know how and to protect the market from those countries that are rushing in to take advantage of the sanctions regime. Confindustria Russia has signed cooperation agreements with the largest Russian associations of small and medium-sized businesses (the Opora Rossii and Delovaya Rossiya). Productive cooperation between Russian and Italian companies continues despite sanctions. Italian industrial and high-tech leaders work with Russian companies. For instance, Leonardo helped Alenia and Sukhoi to develop, produce and market the new Sukhoi Super Jet 100 airplane. Other major Italian companies, such as Pirelli, Danieli, Gruppo Marcegaglia, Ferrero, Indesit, Cremonini, Coeclerici, Marazzi and Barbaro have made substantial investments in Russia. UniCredit is a top foreign bank in Russia and is rated 8th in terms of assets. Banca Intesa is among the leaders in financial support to small and medium enterprises. Monte dei Paschi di Siena, Banca Popolare Italiana and Unione Bancaria Italiana have prominent representative offices in Moscow that every day assist Italian business in Russia.15

So, how do we get over this paradoxical situation? Well, one of the possibilities is to use the existing international organizations and integrational structures. At some point, there was an opinion that the sanctions could be challenges through the WTO but no real attempt was ever made.16 Apparently, the American dominance in the WTO is so obvious, that no one believes it to be a communication platform for Russian and the EU.

The Eurasian Economic Union, on the contrary, draws always more and more attention from Europe. The relatively young organization established in 2015 unites five states: Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. It begins to play an important role in establishing new bridges between the countries of the region and the European Union. It is no coincidence that the official symbol of the X Eurasian Forum in Verona, which took place on October 19-20, 2017, depicts a bridge that connects Russia and the EU.

Italy must be more than ever interested in cooperation with the member-states of the EAUE. For example, if in 2016 the volume of trade between the EEA and Italy declined by 30%, and then it suddenly catapulted by 23%, according to the President of Kazakhstan Nursultan Nazarbayev, this happened due to the deferred effect of the fall in energy prices and the crisis and the growth began after the market stabilized.17

During the period of sanctions, the exchange of goods has declined, but it must be said that over the past nine months we have registered the restoration of direct investments of foreign companies to Russia and other countries of the EAUE. Despite sanctions, businessmen continue to work actively here. The Russian Federation has adapted to the new conditions, it was done by Belarus and Kazakhstan” – says Professor Antonio Fallico, head of the Board of Directors of Banca Intesa – Russia and President of the Knowing Eurasia Association.18 Professor Fallico is no stranger to the economic and political game between Russia and Europe on the global level. He works in Russian since the early 1970-s and is a unique practical expert in economic relations between Russia and Europe. Mr. Fallico has lived through all kinds of political changes and economic crises and knows how to recognize a real major trend at its very beginning, so his optimism in respect to the new channel of Russian-European communication through the EAUE is worth a lot in terms of credibility.

High-ranking officials of the UAEU now openly state that major cooperation possibilities for the two integration associations – the European Union and the Eurasian Economic Union – lie in the sphere of energy and creating global new infrastructures, not only in Russia and Europe alone but all along the way of the new economic belt of the Silk Road.19 This is where the newly developed relations between Russia and China come into play. For obvious reasons the free trade area between Lisbon and Vladivostok (and then on to China and Japan) professed by the European visionaries is not feasible without active involvement of the Russian Federation. Despite all the general optimism, at the X Eurasian Economic Forum in Verona some of the opinions were skeptical. “We catch some positive signals, although, frankly speaking, it has not gone beyond hints and thoughts aloud yet”, said Vladimir Chizhov – Russia's ambassador to the European Union: “It is significant that in the EU's global strategy adopted in 2016, the topic of Eurasian integration is completely absent. This attitude towards Eurasian integration took shape long before the crisis in Ukraine. Back in 2012-2013, the European diplomatic service carefully thwarted any attempts official bodies of the European Union to establish contacts with the EAUE. This was even related to the potential cooperation of statistical units. This only confirms that for many in the European Union the Eurasian continent continues to be as a checkerboard, and the countries of our common neighborhood – as bargaining figure in the game against Russia for an illusory domination and exclusivity”.20

Of course, as any opinion this one deserves to be listened to, but Mr. Chizhov’s position, official as it is, must be taken critically. There is clearly always more and more academic and social attention to the EAUE topic and, most significantly, there is definitely a great deal of practical interest from the business community. One of the indicators of this growing interest is the Eurasian Economic Forum in Verona itself. In 10 years of its history, the forum has never been attended by as many participants as in 2017. If in 2016 there were about 700 corporate participants and 1000 individual guests, in 2017 there were over 1000 companies from Africa, South America, USA, China, France, Germany, not to mention almost two thousand other visitors.21

Getting back to the political side of things, one more thought comes to mind. Current political regimes in some of the member-states of the EAEU are highly dependent on personalities and may become unstable in the event of death, disability or forced removal of their leaders. We refer to Nurzultan Nazabraev of Kazakhstan (77 years old) and Alexander Lukashenko of Belarus (63 years old). It seems that for these states and nations the EAEU may be the only chance to maintain political stability. Moreover, for the heirs of these honorable gentlemen (as well as for the élites that surround them) embracing the EAEU as the new USSR under the aegis of the Russian Federation may be the only way to avoid prosecution and even physical extermination in the event of fall of the current regimes. Joining a greater geopolitical reality dominated by a more stable state with a more transparent political regime and a government clearly endorsed by the majority of the population for some of the EAEU member-states in the mid-term prospective might be a historically correct decision that would enable to transfer power smoothly and prevent years of political and social turmoil, if not outright civil wars and bloodshed.

linnikovAlexander Linnikov

Ph. D., Attorney-at-Law, founder of Linnikov & Partners

Honorary Advocate of the Moscow Regional Chamber of Advocates

Associate professor of Department of World Economy and International Finance of the Financial University under the Government of the Russian Federation

1Огнева В. В. Россия и Европа: исторические грани идеи о сотрудничестве и современность // Научные ведомости БелГУ. Серия: История. Политология. Экономика. Информатика. 2007. №8. С.165-168

11http://провэд.рф/analytics/research/40407-vneshnyaya-topgovlya-possii-v-2016-godu-tsifpy-i-fakty.html

16Экономические санкции и их влияние на хозяйственные связи России с Европейским Союзом [Текст] / М.В. Клинова, Е.А. Сидорова // Вопросы экономики. – 2014. – № 12. – С. 78