Monday

26th Jun 2017

Opinion

Uncertainties multiply in EU's Russia policy

  • Together with a declining ruble, Russia’s export competitiveness has risen dramatically (Photo: Alex F)

In July 2014, following Russia’s annexation of Crimea and support for rebels in eastern Ukraine, the EU imposed substantial economic sanctions, limiting access to finance, banning exports of advanced technology to Russia’s energy sector, and travel bans on senior Russian officials.

Russia, for its part, retaliated with a ban on the importation of food products, including most meats, fish, vegetables, fruits, and dairy products, particularly hurting nearby EU countries such as Finland and the Baltic states.

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These measures have been kept ever since.

The sanctions have seen a collapse in trade between the two economies, which had previously seen a steady growth in commercial relations.

Neither side wants to back down

The result has been a suboptimal equilibrium, both sides being somewhat hurt, but neither willing to back down, especially as both economies have since seen improvement.

The EU, particularly its inner core, the eurozone currency union, had been struggling for years in the face of the 2007-8 financial crisis and a largely self-inflicted sovereign debt crisis in 2011.

Since then, however, thanks to low oil prices, a reinforcing of the Eurozone’s economic governance, and unprecedented action by the European Central Bank (ECB) to prevent the default of any member state, the European economy is enjoying a recovery.

There has been steady, if uneven, growth of over 1.5 percent of GDP in 2015 and 2016.

Unemployment has fallen to its lowest level in five years, though the situation remains painfully bad, even in major states such as France and Italy.

Russia’s food ban had a substantial media impact in many EU countries, especially neighbouring ones and those with struggling farmers.

However, the European Commission’s economists have found that Russia’s measures have not had a major impact on the EU economy overall, despite the pain in certain sectors.

Russian competitiveness grows

On the Russian side, the situation has also been mixed.

As the German magazine Der Spiegel reported, the food ban has been a boon to Russian farmers, protecting them from EU competition.

Together with a declining ruble, Russia’s export competitiveness has risen dramatically.

Russian agricultural exports, for the first time, surpassed that of weapons and in 2015 Russia, also for the first time, produced more grain than the United States.

Yet Russian farmers have struggled to increase production of vegetables and milk.

While the gains for farmers have been paid for by Russian consumers, with high inflation in food prices, reaching over 25 percent in 2015.

The general Russian economy has considerably suffered since the sanctions were imposed, although this may have more to do with the decline in oil prices, depriving the country of a massive source of revenue.

There followed a recession, with inflation over 16 percent, a fall of the ruble of up to 40 percent, and the exhaustion of Russia’s strategic reserve fund accumulated from fossil fuel profits.

While the Russian recession is largely over, growth has not returned.

But all is not doom and gloom: Russian unemployment is low and has even declined to 5.2 percent, while public debt remains low at less than 20 percent of GDP.

Russia has however continued to develop its Eurasian Economic Union (EEU), significantly modeled on the EU, with members including Belarus, Kazakhstan, and Armenia.

The EEU may well form a genuine common market and many Central Asian economies have considerable growth potential.

However, this bloc will continue to be dwarfed by the EU, with its market of over 500 million consumers and considerably higher GDP per capita.

The European consensus against Putin’s foreign policy could shatter

The situation then has all the characteristics of a stalemate, though change may occur because of Ukraine itself.

While the EU and Russian economies are relatively stable, the Ukrainian situation is catastrophic, with collapses in GDP, the national currency, and real incomes.

This bodes ill for Western influence in Ukraine, as BTI notes in its 2016 report on Post-Soviet Eurasia: “Since, in times of doubt, many people put their own obvious interests above more abstract potential gains, the EU risks seeing its attractiveness dwindle if it continues its current reticence.”

In the absence of more concrete guarantees from the West, whether economic or military, Ukraine’s alignment with Brussels and Washington seems insecure.

Russia stable amid western turmoil

Furthermore, while the American and European economies are performing decidedly better than Russia’s today, the political situation is something of a negative mirror image.

Russian president Vladimir Putin has enormously benefited from the conflict with the West through a “rally-round-the-flag” effect: his approval ratings have since consistently topped 80 percent.

Across the West, in contrast, the situation is far more unstable with question marks everywhere: the EU will be lessened by Great Britain’s vote to depart from the bloc, the Italian government lost a constitutional referendum leading Prime Minister Matteo Renzi to resign, and French president Francois Hollande with his 4 approval rating has now waived his candidacy for a second term of office.

Most daunting of all for analysts is Donald Trump’s election as president of the United States, with unclear and potentially revolutionary implications for the West’s Russia policy.

The EU, which requires unanimity to impose sanctions, had long been limited in its approach by relatively pro-Russia states like Hungary and the Czech Republic, to be joined by Bulgaria.

If Trump emerges as a rare pro-Russia American president, the European consensus against Putin’s foreign policy could well shatter.

Nothing seems more uncertain than eastern policy today.

Frank Beauchamp is a European political analyst and writer. He writes for the Bertelsmann Stiftung’s BTI Blog and SGI News.

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