Lisbon 2 Vladivostok

_ Yuri Kofner, research assistant, IIASA. Vienna, 24 June 2019.

The dream of a common economic space from Lisbon to Vladivostok was first formulated nearly a century ago and enjoys broad support in the business communities of Europe and Eurasia. However, the crisis in Ukraine and the tension concerning Russia’s relations with some Western countries are hindering the development of ties between the European Union (EU) and the Eurasian Economic Union (EAEU). Disappointed with the West, Moscow has ever more rapidly been looking towards the East, boosting cooperation with China and other Asian countries.

However, a signal event took place on June 21: the top officials of the Eurasian Economic Commission (EEC) and the European Commission (EC) had a first official meeting. Moreover, the meeting was held at the EEC in Moscow. (1)

The goal of that meeting held between an EU delegation led by Ignacio Garcia Bercero, a director at the Directorate General for Trade in charge of neighboring countries, and EAEU officials led by Veronika Nikishina, a member of the EAEU Board and Minister in Charge of Trade, was to promote dialogue on the technical aspects of trade policies, technical regulation, customs legislation, digitalization, as well as exchange of information on the regulatory framework of mutual interest.(2)

Just a week before that on June 14 another notable event took place. Russian Deputy Prime Minister and Minister of Finance Anton Siluanov and Vice-President of the European Commission for Energy Union Maros Sefcovic agreed to establish a working group on the transition to the ruble and the euro in mutual payments. Russian-EU trade increased by 19.3 percent in 2018 and reached some €250 billion, or $294 billion.

In addition to this, the new far-right parties many of which are known for their love of Russia (such as FPÖ, RN, Lega and AfD) have strengthened their positions in the European Parliament following the May elections. The new format of the European Commission is intended to help the EU overcome the ongoing crisis and give a powerful development impetus until 2024.

Brussels has not yet recognized the Eurasian Economic Union, or more precisely, its international legal capacity. The EU doubts the supranational nature of the EAEU and hence is not officially considering cooperation with it.

Will the abovementioned events help change the trend towards a full-scale dialogue between the EU and the EAEU? Time will tell. Anyway, in light of the Eastern euphoria in the larger part of the Russian expert community, we would like to cite several serious reasons for deeper trade and economic cooperation with the Western neighbor, for example, a free trade zone.

First, the EU is the largest trade and investment partner for the EAEU. In 2018, the EU accounted for 32.9 percent of EAEU exports to non-members (36 percent in 2013) and for 13.9 percent of imports from non-member countries. The EAEU is the third largest trade partner of the EU (after the United States and China). In 2018, the EAEU accounted for 5.34 percent of imports (mostly due to duty-free energy deliveries) to the EU from third countries (7.4 percent in 2014), and for 2.5 percent of EU exports to non-members (3.4 percent in 2013). Mutual trade between the EU and the EAEU in 2018 totaled 46.7 percent of EAEU trade with third countries and 7.6 percent of EU trade with non-members (10.8 percent and 52.5 percent respectively in 2013).

Second, production factors in the EAEU and the EU are strategically compatible, which is a major precondition for economic integration. A recent survey by the Center for Integration Studies at the Eurasian Development Bank has shown that the trade structure of Germany, Italy, Greece and several other European countries is best suited for deepening trade with the EAEU. The EAEU is a reliable supplier of relatively cheap energy and raw materials to the European industries. In 2017, fossil fuel accounted for 74 percent of EAEU exports to the EU, and metals, stone, glass, ceramics and chemicals accounted for another 16 percent. In 2016, 36.9 percent of crude oil and 40.2 percent of natural gas delivered to the EU came from Kazakhstan and Russia. At the same time, the EAEU countries with a combined population of 184 million people are an attractive market for high added value commodities made in the EU. European exports to the EAEU consisted mainly of machinery (31 percent), transportation equipment (15 percent) and chemicals (21 percent).

Some economists fear that lower export duties in the potential free trade zone would increase the EAEU’s dependence on energy exports, mostly due to an increase in the exports of energy, metals and minerals, which would strengthen the Union’s status as a resource-based economy.

Others argue that relatively cheaper workforce, electricity and raw materials in the EAEU would encourage European companies operating in the framework of the free trade zone to move part of their production capacities to the Union, and then re-export their output to Europe. That this is possible can be seen on an example of the EU’s eastward expansion.

However, Russia and Kazakhstan would like to have a stable demand for their oil and gas. In purely economic terms, the EU should like to have stable deliveries of relatively cheap oil and gas from the post-Soviet countries. By 2025, the share of gas and oil in energy consumption in the EU will likely decrease from 24 percent to 22 percent and from 39 percent to 35 percent, respectively. But since its own production is decreasing even faster, the EU will still need to import 162 billion cubic meters (bcm) of gas, or one-third of its gas needs, in 2025. On the other hand, energy consumption, production and trade forecasts strongly depend on potential scenarios, for example, of gas transit via Ukraine.

Russia has enough resources to remain the largest gas supplier to Europe and is estimated to cover a third of the EU’s gas needs until 2040. The EAEU accounts for about 20 percent (34,109 bcm) of gas resources and production in the world and nearly 25 percent of global gas exports, as well as 7 percent (16,660 million tons) of global oil reserves, 14 percent of global oil production and 16 percent of global oil exports, plus 5 percent of global electricity production.

Political debates on “excessive dependence” on energy imports from Russia and the need for diversification are ongoing in the EU. However, Russian pipeline gas will likely remain more price-competitive than American LNG. According to forecasts, Russian pipeline gas ($7.34) will be approximately $0.50 cheaper per BThU in 2025 than US LNG ($7.82).

Third, the EAEU’s interest in deepening economic cooperation with the EU is based on a desire to encourage foreign direct investment (FDI) and the transfer of cutting-edge technology from Europe. In 2017, the EU accounted for 29.2 percent of global FDI exports, and half of the 30 sample countries on the ICT Development Index were EU member states. Between 2010 and 2017, European countries provided the bulk of foreign investments in Russia, which accounts for 87 percent of GDP in the EAEU. Over that period, Cyprus, Ireland, the Netherlands and the UK jointly accounted for 48 percent of FDI in Russia. Investments from Asian countries were much less significant: Singapore accounted for 6 percent and China for 1 percent of FDI in Russia. In 2016, FDI in Russia from the EU28 amounted to €84.9 billion (approximately $93.4 billion).

Fourth, IIASA researchers believe that a shortage of skills will hit the European Union by 2025, and that the gap can be filled with professionals from the EAEU. Workers from the EAEU countries have relatively higher skills and better education compared to other transition and/or emerging economies. For example, the rate of higher education is higher in the post-Soviet countries than in the EU: 31 percent of people in the EAEU countries have a higher education compared to 28 percent in the EU countries.

Fifth, geographic proximity is another favorable factor. Brussels is 6,215 km away from Washington and only 2,256 km from Moscow. Cargo delivery by sea from Rotterdam to New York takes some six days or twice as long as to St Petersburg. Rail freight between Moscow and Duisburg takes up to 24 hours. Moreover, the creation of a common transportation space within the EAEU, with common rules and lower barriers, could facilitate trade and logistics between Europe and the rising Asian markets.

Sixth, the Eurasian integration project has been inspired by the European experience and is drawing on its example. The EAEU is working to introduce many European methods, practices and standards, first of all, common European technical regulations and standards for industrial products that largely comply with European directives and standards (between 60 percent and 95 percent, depending on the sector). This is leading to the creation of a technological foundation necessary for free trade in the space from Lisbon to Vladivostok.

Seventh, acting with reliance on the EU experience and WTO recommendations, the EAEU is trying to create a more streamlined institutional and legal framework which all member states will be obliged to comply with. This alone could be a sufficient reason for Brussels to support cooperation with the EAEU and thereby to promote rules-based cooperation in the larger Eurasian space.

Eighth, Europe and the Eurasian Economic Union have a common cultural heritage. Although not a purely economic reason, it is a vital factor because it helps promote ties among people and is conducive to the development of a favorable business climate. Russia remains the largest EU partner for short-term student exchanges. Some 11,000 Russian and European students took part in the Erasmus+ exchange programs in 2015-2017. In 2017, Russian tourists made 20 million trips to Europe, which remains the second most popular tourist destination for Russians (after Turkey) despite the costs and the Schengen visa requirements. EU citizens make up the second largest (after Ukrainians) group of tourists in Russia.

Ninth, according to the Munich-based ifo Institute for Economic Research, a free trade zone between the EU and EAEU countries could greatly increase mutual exports and improve their prosperity. The benefits for Belarus, Poland and the Baltic states would be especially large (see Table 1).

Table 1. Trade and economic benefits of a free trade zone between the EU and the EAEU

 

Exports to EU, % Overall exports, % GDP growth, % GDP per capita growth, €
Armenia +81% +34% +2% +€75
Belarus +109% +46% +5% +€229
Kazakhstan +18% +10% +2% +€165
Kyrgyzstan +100% +20% +2% +€25
Russia +32% +19% +3% +€234
EAEU +34%* +19%* +3% +€226*
Exports
to EAEU, %
Germany +59% +2% +0.3% +€91
France +64% +2% +0.1% +€34
Italy +67% +2% +0.2% +€51
Austria +49% +1% +0.2% +€65
Lithuania +82% +10% +2% +€206
Latvia +79% +10% +2% +€220
Estonia +81% +10% +1% +€187
Poland +69% +5% +0.4% +€47
EU28 +63% +2% +0.2% +€30

Source: Felbermayr, Aichele, Gröschl (2016) Freihandel von Lissabon bis Wladiwostok: Wem nutzt, wem schadet ein eurasisches Handelsabkommen? ifo Institut.

 

* This table was compiled by the author based on the data in the ifo Institute’s report.

Lastly, the share of the EU in global GDP is expected to decrease from 22 percent to 16 percent in 2018-2030, while the share of the EAEU is estimated to fall from 2.2 percent to 2 percent.

Taken together, these 10 arguments show that closer economic cooperation between the EU and the EAEU could help maintain the global competitiveness of European industries, modernize the EAEU economies and adjust them to the challenges of the 21st century.

The EAEU economy is a midget compared to such giants as the EU and China. Their GDP was estimated at $1.8 trillion, $17.3 trillion and $12.2 trillion, respectively, in 2017. It would be unwise for the EAEU to focus only on the eastern or the western sphere of international cooperation. As Yevgeny Vinokurov, chief economist at the Eurasian Fund for Stabilization and Development, said, quoting Isaac Newton, the EAEU should “stand on the shoulders of giants,” in this case, both the EU and China, in order to benefit from their achievements.

Note:

This article is based on the IIASA report Connecting Eurasia Dialogue (2019).

1 It is notable that the EEC has published this news, while the European Commission is keeping silent.

2 Such meetings were held before, but they were held either behind closed doors or on the sidelines of IIASA’s academic events in Vienna.

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