The EU and Russia – logical trade partners are moving away?

Timo Vuori,
Director, International Trade and Trade Policy, LL.M. (International Law),
Confederation of Finnish Industries EK,
Helsinki, Finland

European Economic and Social Committee,
Brussels, EU

Today the global economy is recovering quickly from negative impacts of the Covid-19 although there are rising geopolitical tensions. In Europe the GDP of the European Union will grow about 4.8% in 2021 and 4.5% in 2022. Surprisingly, Russia’s economy is also on track to grow (4.4%) more than expected in 2021 but less (3.1%) in 2022.

In idealistic world Russia as the EU`s largest neighbour would be a logical partner for the European Union and its´ 27 member states to deepen bilateral trade and economic co-operation when many countries are reforming their economies to become more sustainable and digital. However, at the moment it seems to be obvious that these neighbours are moving in different political directions.

From 1997 to 2014 there were many positive trends in EU-Russia trade relations. However since 2014 the illegal annexation of Crimea and the conflict in Eastern Ukraine have seriously affected the bilateral co-operation. The EU still applies a set of restrictive measures against Russia. Furthermore, Russia has introduced counter-sanctions against the EU, banning imports of some food and agricultural products.

From that moment EU-Russian economic relations have suffered, although sanctions cover directly only part of bilateral trade. Many European companies have left the Russian market because of uncertainty in political and economic development. But still the EU is by far the largest investor in Russia. In 2019, the EU`s outward foreign direct investment stock in Russia amounted to €311.4 billion, Russia´s FDI stock in the EU was estimated €136 billion.

The EU is also Russia´s biggest trade partner, accounting from 37.3 % of the country´s total trade in goods with the world in 2020. About 36.5% of Russia´s imports came from the EU and 37.9% of its exports went to the EU. Furthermore, Russia is the EU`s fifth largest trade partner, representing 4.8 % of the EU´s total trade in goods with the world in 2020.

In February 2021 the European Commission launched “the new EU Trade Strategy – An Open, Sustainable and Assertive Trade Policy”. This new strategy underlines the importance of closer trade and investment partnership with the USA and China. Even Africa and Balkans are mentioned but no reference to trade policy with Russia at all. It is political reality that Russia does not play relevant role in the official EU trade policy. As the new EU trade strategy is still not adopted by 27 EU member states at the European Council, it will be interesting to see whether any reference to Russia will be added at that level. I doubt about it.

Furthermore, there may be soon new challenges for bilateral EU-Russian trade when the EU is considering new defensive trade policy tools against unsustainable trade and unfair competition from third countries. The Carbon Border Adjustment Mechanism (CBAM) is a case-in-point. The EU is working proposal for a CBAM in order to avoid the effectiveness of EU green economy action being undermined by carbon leakage of third countries.

Naturally Russia is worried about the situation because EU CBAM is likely to hit Russia the hardest. The study by the Sandbag and E3G think tanks estimated that CBAM fees charged on imported Russian products would reach 442 million euros by 2026 and 1.884 billion euros in 2035, when free carbon emission allowances in the EU are reduced to zero. The fees will mainly be imposed on steel, aluminium and fertilizer. Although business understand EU´s ambitious climate target it is naturally worried about possible counter-action by Russia and other trade partners.

The future of EU-Russia trade and investment relation does not look very positive due to frozen political conflicts and the latest development. Furthermore the EU is seriously developing modern European green and digital economy in which use of fossil fuels will be restricted. This will definitely hit export of Russia to the EU. The EU plans for better strategic autonomy means that the EU wants to be less depended on imported energy.

Both the EU and Russia would have potential to deepen bilateral economic activities in moving towards to modern, sustainable and digital economy. Both the EU and Russia need to improve competitiveness of industry and infrastructure and tackle aging challenge. Together they would have natural and human resources and innovation for positive transformation. But Russia must first be ready to take ambitious steps to modernise its economy. And after all, conflicts of Crimea and Eastern Ukraine must be resolved.

Expert article 3065

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