External Relations Between EU And Russia

University of Gdansk

EXTERNAL RELATIONS BETWEEN EU AND RUSSIA

External Relations of the European Union

Prof. Anna Barbara KisielŁowczyc. Department of International Economic Relations.

Faculty of Economy. Sopot 2011 Summer Semester.

Fernando Roldán Ibáñez University of Valencia

Contents

1. Russia

2. EU-Russia relationship

2.1 Institutional Relations between EU and Russia

2.1.1 Partnership Cooperation Agreement (PCA)

2.1.2 Common Economic Spaces (CES)

3. Russia´s WTO accession

4. Conclusions

5. Sources

RUSSIA

The economy of Russia is the tenth-largest economy in the world by nominal value and the sixth-largest by purchasing power parity (PPP). Russia has an abundance of natural gas, oil, coal, and precious metals. It is also rich in agriculture. Russia has undergone significant changes since the collapse of the Soviet Union, moving from a centrally-planned economy to a more market-based and globally-integrated economy. Economic reforms in the 1990s privatized most industry, with notable exceptions in the energy and defense-related sectors. Nonetheless, the rapid privatization process, including a much criticized "loans-for-shares" scheme that turned over major state-owned firms to politically-connected "oligarchs", has left equity ownership highly concentrated. As of 2011, Russia's capital, Moscow, now has the highest billionaire population of any city in the world.

In late 2008 and early 2009, Russia experienced the first recession after 10 years of rising economy, until the stable growth resumed in late 2009 and 2010. Despite the deep but brief recession, the economy has not been as seriously affected by the global financial crisis compared to much of Europe, largely because of the integration of short-term macroeconomic policies that helped the economy to survive.

As of April 2008, the International Monetary Fund estimates that Russia's gross domestic product (nominal) will grow from its 2007 value of $1,289,582 million to $3,462,998 million by 2013, a 168% increase. Its GDP PPP is estimated to grow from $2,087,815 to $3,330,623 in the same time, which would make it the second largest economy in Europe in terms of purchasing power.

Main Economic Indicators

Surface Area: 17.098,2100 sq km

Population: 141,4 millions of inhabitants

Current GDP: 881,3 Billians of euros

GDP per capita: 6.223 Euros

Exports to GDP ratio: 22,8%

Imports to GDP ratio: 13,4%

Trade to GDP ratio: 36,2%

2006 2007 2008 2009

Real GDP growth 7,7 8,1 5,6 -7,9

Inflation rate 9,7 9 14,1 11,7

Current account balance 9,5 6 6,2 3,9

RELATIONS BETWEEN RUSSIA AND EU

The Soviet Union did not provide much attention to the European project and in fact preferred ignore the constitution of the European Communities, which never recognized as an international institution. Although the early 80's the USSR became a major energetic supplier, their approaches to Western Europe were mainly focused on the politic-military and were marked by the evolution of East-West relations. The Soviets viewed with hostility to European integration processes and, especially, sought to widen the gap between U.S. allies in Europe.

After the fall of the Berlin Wall in 1989 and subsequent disappearance of the Union of Soviet Socialist Republics (USSR), the European Union (EU) has experienced a gradual development of relations with former Soviet bloc countries and in particular with Russia which for over four decades were two antagonistic blocs, have initiated an approach that has led them to become vital partners in most aspects. Thus there are agreements reached at the community level: a steel agreement came into force in 2002. Russia benefits from the EU TACIS program since 1991, the EU being the largest provider of financial and technical assistance to Russia, through this program and also under the European Initiative for Democracy and Human Rights. In 2006 in Moscow opened a training center in Europe.

The European Union's relationship with Russia is undoubtedly of strategic importance fundamental for the following reasons:

• Since the enlargement to 27, Russia is the EU's largest neighbour, with 2,200 miles

border and the territory of Kaliningrad sandwiched between several member states (Poland, Lithuania), which poses specific of problems transit and the enclave relationship Neighbouring regions. There are also problems on the delineation of borders (with Estonia mainly).

• Preserves one of the largest arsenals of weapons of mass destruction, so their guarantee stability and control of such weapons is key to European security and the world. President Putin has ordered the allocation of large financial resources to rebuild the military power of Russia and has encouraged industry consolidation and Russian defense sector.

• It is the first energy supplier to the EU, which imports from Russia almost 40% of gas and 25% of its oil. The dependence is mutual because about 70% of Russian exports of energy products ranging to 15 European countries and are the main source of revenue for the country and the Russian state.

• In addition, networks of pipelines linking the fields oil from Russia and other countries of the former Soviet Union (Kazakistan,Turkmenistan, Uzbekistan) with the cargo terminals in the Black and Baltic Seas and consumer markets in Europe offer Russia a near monopoly in transport of these resources to much of the Old Continent.

• Russia also has 20% of world coal reserves, 14% of reserves uranium and is a leading producer of titanium, copper, zinc, aluminium and gold. Russia and the EU have privileged economic relations with over 50% of Russian foreign trade is done with the Union.

• .For Russia the EU is the main market for its exports of oil and Russia is the EU a booming market (200% in the last 3-4 years). Russia is already the third largest trading partner of the EU after U.S. and China.

• Russia is also an increasingly important destination for European investment (70% of foreign investment in Russia in recent years has come from the EU, although some areUNISCI Discussion Papers, N º 16 (Enero / January 2008) ISSN 1696-2206 91 repatriation of Russian capital.) Russia also has an interest (and indeed it is already doing) investing in Europe, both in the energy sector and other sectors (EADS). The Russian companies are flocking en masse to the European capital markets (mainly London).

• Russia is a permanent member of UNSC and G-8 (whose annual summit was held in July 2006 in St. Petersburg), the Council of Europe and OSCE. It is also a member Quartet for the peace process in the Middle East and the Six-Party Talks on dismantling the nuclear program of North Korea.

Trade in goods

 EU good exports to Russia 2009: €65.6 billion

 EU goods imports from Russia 2009: €115 billion

Trade in services

 EU services exports to Russia 2009: €18.2 billion

 EU services imports from Russia 2009: €10.8 billion

Foreign Direct Investment

 EU outward investment to Russia 2008: €25 billion

 Russian inward investment in the EU 2008: €2 billion

2004 2005 2006 2007 2008 2009

Current Account Balance (% of GDP) 10.1 11.0 9.6 5.9 6.2 4.0

Trade Balance (USD bn) 85.8 118.4 139.3 130.9 179.7 111.6

Exports (annual variation in %) 34.8 33.1 24.5 16.8 33.1 -35.7

Imports (annual variation in %) 28.0 28.8 31.0 36.0 30.6 -34.3

Int. Reserves (months of imports) 15.3 17.4 22.2 25.7 17.6 27.5

External Debt (% of GDP) 36.1 33.5 31.4 36.0 29.1 38.4

Note: Trade balance, imports and exports in US$ million.

Source: Bank of Russia.

Energy

Energy is a very important element in the EU-Russia relationship. This relationship can be best characterised as mutual interdependence of supply, demand, investment and know-how.

Russia is the world’s largest producer and exporter of natural gas and, together with Saudi Arabia, also the largest producer and exporter of oil. Russia possesses more than 20% of the world’s known gas reserves and 5% of proven oil reserves. The share of the energy and metals sector in the Russian economy is around 20% while it employs only 2% of the total labour force.

There is a strong mutual interest in a closer energy partnership between the EU and Russia – one that offers security and predictability for both sides. The energy that the EU buys from Russia contributes very significantly to Russia's current economic growth and the improved living conditions of its population. In turn, the stable flow of reasonably priced energy remains an important

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