Prospects For European Union / Eurasian Economic Union Development

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Op/Ed by Chris Devonshire-Ellis

Russian President Vladimir Putin, speaking at the St.Petersburg International Economic Forum (SPIEF) last Thursday, touched on the development of trade between the Eurasian Economic Union (EAEU) and the European Union (EU). The Eurasian Economic Union comprises, from West to East; Belarus, Russia, Armenia, Kyrgyzstan and Kazakhstan, effectively a trade bloc that sits between the EU and Chinese borders. To competitively trade with Asia, EU countries effectively need to pass through EAEU territory – if not now, then later. We can compare the two blocs in basic terms as follows:

Bloc Land Mass (Sqkm) Population (millions) GDP (US$,PPP) GDP Per Capita (US$,PPP)
EAEU 20,229,556 183 5 Trillion 27,000
EU 4,475,757 513 22 Trillion 36,580

President Putin began by explaining that the idea of a common economic space was nothing new, French President Charles de Galle had proposed a Union extending from Portugal to the Urals in the past. Now, suggestions were to extend that further, to Vladivostok. Where problems arose, he said, was that the EU will not negotiate with the EAEU directly, it prefers to deal with individual countries, which Putin said was inefficient, time-wasting, and ultimately hindered the common technical development aspects of both. As an example, he mentioned snow. The EU and EAEU have different tolerances for measuring the pressure of snow, mainly because Russia has more snow fall than Europe does. agreeing to a common technical standard on snow pressure is an issue that affects agriculture, machinery, and the food supply chain in addition to climate change issues. Russia has a higher standard of measuring this than the EU does, yet agreement, he said on this issue has been extremely slow. That, quite apart from sanctions, has prevented the development of a common Eurasian standard and this is a problem.

Mentioning that in many cases, EU standards were higher than those of the EAEU, he said the reverse was also true. Accordingly, technical standards compliance between the two blocs “need re-equipping”. He also touched upon the need for a more sympathetic view from the European Union and that goodwill was needed to overcome natural boundaries. In summing up, President Putin stated that “There is no having to choose between the EU, the EAEU or China’s Belt & Road Initiative. Russia sees these as complimentary and we will assist all of them.”

In my view it will be interesting to see the development of the EU position towards the EAEU, and Russia as its main partner over the next couple of years. Brussels has long been suspicious of Moscow, and the sanctions, imposed since 2014 for the annexation of Crimea are now in their fifth year having just been extended. It should be pointed out that the historical background to Crimea has been Russian for the most part for the past 250 years, (prior to that it was part of the Turkish Ottoman Empire, and prior to that part of the Mongolian Empire) and that Crimea was a pro-Russian part of Ukraine. Moscow maintains it held a referendum of Crimean citizens, who voted to return to Russia. Brussels regards that as illegal and does not recognize it. The death toll when Russia annexed the peninsula was six persons, which tells its own story. The EU needs to decide when punishment has been enough. The current situation is not sustainable.

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Curiously, it may be American President Trump who rides to Russia’s rescue in terms of upsetting members of the EU. Washington has placed tariffs on European auto manufacturers, which although suspended for 6 months have still not been resolved, leading to EU auto manufacturers having to make alternative revenue and production plans and look elsewhere to develop new markets. That is one reason why BMW have moved production of their 3 series to Kaliningrad which is part of Russia but close enough to the EU so supply chains won’t be too disrupted. Another key factor is the aggressive push by Washington for the EU to dump the Nordstream gas pipeline project from Russia to the EU and buy US gas instead. Sanctions have been issued, against Russia upon its gas suppliers to prevent them selling to EU members, and upon EU companies that buy gas, a situation described as one German Minister as being “outrageous.” President Putin also pushed back against this idea, stating that US gas suppliers were more expensive, had a dirtier product, and carried far more logistics risks. If Washington continues to beat up the EU over autos and gas, they may find that the EU will increasingly turn to Russia for support.

Trade meanwhile, between the EU and EAEU continues to grow, although following the imposition of sanctions, it dropped by 50%. However, some businesses have adapted and in the EU, looked to move production of consumables such as cheese and wine to Russia. The result has been a spectacular improvement in Russian produced gourmet foods, a trend that is continuing. The shame of that scenario is that that business will never return to the EU.

Clearly, the Russia question poses some difficulties for Brussels. However, business sentiment that Russia has been punished enough concerning Crimea is growing, the EU is becoming concerned with the trade behavior of Washington, and Brussels will soon have, from October, a new leadership in place. Chosen by the old guard they might be, however recent EU elections have shown a swing towards nationalism and some of that will work to Russia’s advantage. Meanwhile, both the EU and EAEU are notorious for their slow administrative works. But getting some heads knocked together so that at least the pressure of snow can be agreed upon – a scientific, not political issue – will help improve EU trade with Russia and beyond and vice-versa. The EU-EAEU trade issue is not just political – it requires rather more common sense to enable standards and compliance to be introduced so that when the time is right – businesses can trade, free of ridiculous, non-mutual protocols. Brussels in essence, needs to get its trade development hat back on and sort out its bureaucracy.

 

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Russia Briefing is produced by Dezan Shira & Associates. The firm advises international businesses on investing, setting up businesses and administering them throughout the Eurasian region, including Russia, China, India & ASEAN, and maintains offices and partners in each of these countries and regions. For assistance with investing in Russia, or for Russian businesses wishing to invest in Asia, please contact Maria Kotova at maria.kotova@dezshira.com or visit us at www.dezshira.com.

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