Dr. of Science (Economics), Corresponding Members of the Russian Academy of Sciences, Professor, Deputy Director for scientific work, RAS Institute of Europe, RIAC Member
In June 2008, Russia and the European Union started to negotiate the conclusion of a new Partnership and Cooperation Agreement (PCA) after a two-year delay. Talks over the new PCA are proving a slow and painful process. The last round of talks, out of the agreed twelve rounds, took place in December 2010. The main stumbling block was the clear divergence in approaches to bilateral trade and investment. The editorial group’s eleventh meeting, in December 2012, provided some grounds for cautious optimism. It is hoped that the negotiations will resume in 2013, although this is far from certain.
In June 2008, Russia and the European Union started to negotiate the conclusion of a new Partnership and Cooperation Agreement (PCA) after a two-year delay. The intention was to replace the old PCA, which entered into force on 1 December, 1997 and was due to expire after 10 years. For the moment, the old PCA is being automatically prolonged. Talks over the new PCA are proving a slow and painful process. The last round of talks, out of the agreed twelve rounds, took place in December 2010. The main stumbling block was the clear divergence in approaches to bilateral trade and investment. The editorial group’s eleventh meeting, in December 2012, provided some grounds for cautious optimism. It is hoped that the negotiations will resume in 2013, although this is far from certain.
Bilateral relations between Russia and the EU have remained stagnant for a number of years. Both sides should take equal responsibility for this.
The Challenges of European Integration
The European Union is going through a difficult period. The crisis is only partly to blame. The integration process actually stalled back in 2004, after a large group of Central and Eastern European nations joined the EU. At that time, leading Russian academics concluded that the EU’s period of success, which had lasted two decades, was now over. Western academics disputed this forecast, claiming that their Russian counterparts were exaggerating the gravity of the problems. The setback caused by the rejection of the European Constitution had sent the EU into a severe constitutional crisis. The Lisbon Treaty, a clearly palliative compromise, salvaged the integration drive but the concept of a full political union has been shelved. In 2007, Bulgaria and Romania, the continent’s two poorest nations with a combined population of 30 million, joined. As a result, the disparity between the EU member-states became so drastic that it required a re-designed approach to integration.
The European Union is going through a difficult period. The crisis is only partly to blame. The integration process actually stalled back in 2004, after a large group of Central and Eastern European nations joined the EU.
The protest in Madrid
The global financial crisis, which started in 2008, disclosed certain drawbacks in the European integration model that no one, at least among the general public, ever suspected. It turned out that the Economic (with a capital E) and currency union comprises two, non-matching, parts. The European Central Bank, a supranational body, executes the common fiscal and credit policy, while common European policy is carried out on the basis of intergovernmental cooperation. This means that the executive powers of each EU member-state play a key role. To save the euro, the EU’s governing bodies hastily started to build and develop the areas of the pan-European economic edifice that had, hitherto, been lacking. They stiffened the requirements of the Stability and Growth Pact (SGP), introduced a banking supervision system, and enhanced macroeconomic monitoring procedures. This is an impressive achievement in its own right. However, it comes at a price: these reforms have an extremely high social cost. This repressive fiscal policy is depressing economic growth and aggravating the unemployment rate in the EU, especially among the youth.
There is a strong feeling in Europe that the ideal of European integration has faded. Not long ago, it would have been unthinkable to question the rationale or appeal of European integration. After World War II and after the of breakup of the colonial empires, and also after the emergence of the bi-polar world with the USSR and the United States as dominant powers, Western Europe is no longer the undisputed leader in integration to secure peace, achieve economic recovery, and compensate for the loss of its geopolitical prominence. The reunification of the two parts of Europe, which started in the second half of the 1980s, was interpreted as practical steps toward turning the European dream into reality. The recent crisis effectively ended this chapter, and Brussels cannot offer any new model for integration. The romantic vision of democracy’s victory over totalitarian regimes and the free market’s triumph over the managed economy dissipated. Instead, EU citizens started to ask uneasy questions about the benefits of the capitalist system. The ideological vacuum was exacerbated by the failure of the EU institutions to explain the essence of the European unified identity and protect traditional values.
The wide-ranging debates on the future of the European Union are a welcoming sign, but there is a nagging suspicion that it may well be too late. EU leaders have for too long avoided an open and candid dialogue with the people of Europe over the particularly difficult problems of the integration process.
All these developments are taking place against a negative background: the old worries of the EU have become more visible. They include concerns over the deficiency of democracy, social disparity between the elites and ordinary people, and bureaucratic monsters complicating the decision-making process. The wide-ranging debates on the future of the European Union are a welcoming sign, but there is a nagging suspicion that it may well be too late. EU leaders have for too long avoided an open and candid dialogue with the people of Europe over the particularly difficult problems of the integration process. Now, amid the recession, restoring confidence between the elites and the people would be a mammoth task. Moreover, in June 2014, the EU’s legitimacy will be tested again, in the European Parliament elections.
Russia-EU Partnership in a Global Context
The European Union’s routine problems also affect its relations with Russia. This is reminiscent of the 1990s, when the EU was totally absorbed by the planned introduction of the single currency, institutional reform and, later, eastward expansion. The concentration of the political will and the best available human resources on implementing that agenda prevented the EU from consistently pursuing the goal of establishing a free trade zone with Russia, as had been stipulated in the PCA. A few years later, EU executives decided to list Russia as among those nations covered by the European Neighborhood Policy (ENP), with its rigid monitoring and accounting rules. This suggests that the decision was taken without due preliminary analysis and proper consideration.
EU’s territorial expansion has objective limits.
In the coming years, the EU can embrace
smaller nations, but not Turkey and definitely
Russia is also implicated in this superficial approach. The absence of a coherent strategic action plan regarding one foreign policy partner is clearly a major lacuna. In summer 1999, the European Union put forward a common strategy towards Russia, and Russia immediately reciprocated. But this was the last time that Moscow responded appropriately. All 27 EU member-countries approved a comprehensive and detailed action plan covering relations with Russia for 2007-2013. It was accompanied by the National Indicative Programme for 2007-2010 which incorporated a financial plan, list of priorities, summary of expected results, risks and tools to make it happen.
In fact, the deficit of political will on both sides comes as no surprise.
First, profound economic integration can only be achieved by industrialized, developed nations. This is a prerequisite for specialization and cooperation in industry, and in this case the exchange of goods and commodities takes place less between various sectors and more within particular sectors of the economy. This is the pattern of trade between France and Belgium, Austria and the Czech Republic, the UK and the United States. These international industrial ties prove resilient when confronted with economic and political volatility. Yet, there are no such ties linking Russia and the EU countries. Trading raw materials for ready-made goods, although it fosters interdependence, has never provided and adequate basis for integration, and never will.
Second, the reunification of Europe has closed down the agenda not only for the European Union but also for its relations with a major partner, Russia. What next? Nobody knows. The crisis showed that the EU’s territorial expansion has objective limits. In the coming years, the EU can embrace smaller nations, but not Turkey and definitely not Ukraine. Acute social problems coupled with the failure of “multiculturalism” as a policy have strengthened Europeans’ desire to define Europe’s boundaries, and to distinguish between “us” and “them”. Russia found itself on the other side of the curtain, albeit not the Iron Curtain.
In fact, the deficit of political will on both sides comes as no surprise. First, profound economic integration can only be achieved by industrialized, developed nations. Second, the reunification of Europe has closed down the agenda not only for the European Union but also for its relations with a major partner, Russia.
Third, Russia and the EU have not yet agreed on their joint response to global challenges, either separately or in unison. For many years Brussels was a proven reliable ally for Russia in its drive for WTO accession. It has now acceded to the WTO . But the Doha round of talks left everyone frustrated. It is not surprising that the regional and bilateral mechanisms for regulating international economic interaction are being thrust into the limelight world over.
The European Union has long maintained a special preferential regime in dealing with the poorest nations in Africa, the Caribbean and the Pacific, and also with European and Mediterranean neighbors, pursuing the goal of creating a global system of bilateral economic bonds. The new generation of free trade agreements stipulates not only the abolition of trade barriers but also improvements to the business environment. These agreements are usually termed “profound and comprehensive,” and are already in place with Mexico, Chile, South Africa, and the Republic of Korea. Similar agreements have been signed with Singapore, Peru, Columbia, Ukraine and Central American countries, and are now due to enter into force. Negotiations to conclude similar agreements with Malaysia, Vietnam, and the MERCOSUR countries, as well as India, Georgia, Armenia and Moldova are all still ongoing. Negotiations with Japan are expected to start at some point in 2013. On February 13, 2013, the EU and the United States agreed to launch internal procedures ahead of talks on the Trans-Atlantic Trade and Investment Partnership.
Nations not named on the list of trade partners include China, Australia, Kazakhstan, Belarus, Central Asian republics, and the countries of the wider Middle East. Russia’s status in this context has yet to be defined. In theory, economic relations between Russia and the EU should be regulated by the revised new PCA. However, it is exactly the issues of trade, investment and business model, which have proven to be stumbling blocks to progress in negotiations over the new PCA. So, what is to be done?
Russia-EU Relations: Future Scenarios
The first possible scenario, although the least likely, would be reaching consensus on the wording of the agreement to be followed by the formal signing within the next one-to-two years. If all goes well, the PCA would be ratified by Russia and all the EU member-states, including Poland and the Baltic States which still harbor resentment (and claims) against Russia, and finally the agreement would come into force. If this happens, the European Union would find itself five minutes away from the emergence of a comprehensive common market with the free flow of goods, capital, services, and labor force, from Cabo da Roca to Kamchatka. In order for this to happen, agreements need to be signed not only between Russia and the EU but also between their immediate partners, the European Economic Space and the Customs Union. In this case, the common market would incorporate Turkey as well as Kazakhstan.
There is a certain probability that both sides are happy about the delays in negotiations. Both might have something to gain from stalling the process. By not signing the PCA with Russia, and thus avoiding any political concessions, the EU secures its positions regarding even tougher negotiations that are looming with more powerful parties, Japan and the United States. Russia, in turn, can use this time-out to foster relations with its neighbors, including Kazakhstan and China.
Are Russia and the EU ready for this magnitude of development? It is rather unlikely, although this strategic roadmap would have laid the foundations for a new partnership, and might become Europe’s new agenda. Until now, the EU representatives rejected the very idea of starting a dialogue between the EU and the Euro-Asian Economic Community Council or the Commonwealth of Independent States (CIS). The motive for this rejection is that these alliances are not integration-based. However, this argument does not correspond to reality, since the EU is engaged in framework negotiations with the African, Caribbean and Pacific Group of States (ACP countries), which are not bound by formal ties. Judged by quantitative and qualitative parameters, the nations that form the Euro-Asian Economic Community Council can be placed on par with MERCOSUR or ASEAN, which enjoy a framework agreement with the EU. All the more so because there is a historical precedent: in 1988, the European Economic Community and the countries of the Council for Mutual Economic Assistance (COMECON) signed a declaration establishing formal ties.
Should a Pan-European free trade zone emerge, the EU would seem less attractive for its closest neighbors, tilting the political balance in favour of Russia. For instance, if Ukraine realizes the futility of its attempts to join the EU, despite the fact that this nation is a veritable pillar of European culture, then Kiev would place more emphasis on the newly acquired access to a broader Pan-European market and would feel relieved of no longer being compelled to perform a balancing act between Brussels and Moscow. However, the European Union only became a formidable legal force relatively recently, and would be reluctant to dilute this newfound gravitas.
The management of a Pan-European market on this scale would require a high degree of political cohesion, flexibility and mutual trust from both Russia and the EU. It is most likely that the key decisions would be taken within the triangular axis of Berlin-Paris-Moscow with regular liaison with London, Rome, Warsaw, Kiev, and Ankara. The fate of the large part of this Euro-Asian space, with a population of some 830 million, would depend on the ability of this group of nations to exercise policy- and decision-making skills while meeting the challenges of the day. There is no historical precedent for a group of nations governing such a huge portion of the globe, which plays a key role in both the global economy and world politics. It looks like the time is not yet ripe for this development.
The second, and most probable, scenario involves prolonged negotiations and the preservation of the status quo. Russia and the EU would be left with no alternative but to use the old legal and political platform as the basis for their relations: the obsolete but prolonged PCA, four roadmaps and the Partnership for Modernization program. Russia would continue to claim a rather symbolic gain, the visa-free regime, and the EU would demand energy supply security while attempting to lessen its dependence on Russian natural gas.
However, despite all the disagreements, including different approaches to investments and market access, Russia and the EU would remain major trade partners. The EU would remain at the top of the list of Russia’s trade partners, with 50 percent of Russian foreign trade focused on EU countries. Russia is currently the EU’s third main trade partner, right after the United States and China, with a 9 percent share in the community’s trade turnover. The trade diversification drive by both sides might yield some results but any changes will be extremely slow. Russia will work to find providers of modern equipment and quality consumer goods in other regions, while Europe will find it hard to find an adequate alternative supplier to replace imported Russian raw materials.
There is a certain probability that both sides are happy about the delays in negotiations. Both might have something to gain from stalling the process. By not signing the PCA with Russia, and thus avoiding any political concessions, the EU secures its positions regarding even tougher negotiations that are looming with more powerful parties, Japan and the United States. Russia, in turn, can use this time-out to foster relations with its neighbors, including Kazakhstan and China. If talks with Japan and the United States are concluded fast and successfully, then this can serve as a model for the future agreement between the EU and Russia. This would be based on equal footing while agreements between the EU and Peru, Ukraine or Moldova have a different foundation. If talks with Japan and the United States fall through, then the EU and Russia will be left back where they started, but with new experience and expertise regarding the opportunities and limits to foreign policy diversification. Consequently the dialogue between the EU and Russia is likely to become more pragmatic.
The most important thing is that during this coming time-out both sides refrain from experimenting with the solidity of the foundations for their partnership, and do not use threats, ultimatums or sanctions to pursue their goals. There is no point in any side assuming that mutual interdependence allows them to pressure the other side, especially by putting forward demands that clearly run contrary to common sense and fail to engage with the existing realities. Both sides are in a weak position. The European Union has been weakened by its expansion eastward and by the crisis in the eurozone. Russia is weakened by its worsening technological time lag and slow modernization process. If the EU and Russia were to take several paces back in their partnership, then both sides would suffer a setback in their ability to withstand the growing pressure of globalization.