Working group:
Economy, trade and energy

Co-chairs: Christian Egenhofer/Hrant Kostanyan and Boris Grozovsky

The group discussed trade relationship between Russia and EU, energy relationship in the context of climate change discussions, the current economic crisis in Russia, the impact of sanctions on Russian economy and the likely future developments in bilateral relations.

The Russian economy is currently undergoing a systemic crisis caused by several factors, including the low oil price, decreases in foreign investments and exports, and corruption. This crisis started before Russia annexed Crimea and the global geopolitical situation began to deteriorate. In other words, the crisis was not triggered by Western sanctions, but rather by more fundamental issues, such as the distorted structure of the Russian state and the qualities of the ruling elite. The state plays an outsized role in the economy; and the ruling elite is only concerned with its own self-interest.

Since Russia has a commodities-based economy whose GDP depends on oil prices, these must constantly increase to keep the Russian economy growing. Given the current forecasts of the energy markets predicting that oil prices will continue to decline for the next decade, Russia’s need for a long-term strategy to reform its economy could not be more urgent.

One of the measures introduced by the Russian government to overcome the crisis and the constraints imposed on the economy by sanctions, is the policy of import substitution. However, the working group concluded that this policy is failing in Russia; historically, it has also proved to be ineffective in a number of countries around the world, such as Brazil and South Korea. (Although this policy was somewhat successful in the late 1990s in Russia itself, today the conditions for economic growth differ greatly from that period).

The group observed that in reality, instead of addressing structural issues in the economy brought to the fore by the crisis, the Russian government is neither looking for ways to solve the crisis, nor is it interested in developing a long-term strategy for the country’s development. Rather, it is waiting for the crisis to go away.

The issue of sanctions on the Russian economy is another widely discussed topic. The question of whether sanctions are having any real impact on Russia or not, is quite debatable. On the one hand, sanctions imposed by both the United States and the European Union created a level of uncertainty in the Russian economy, exacerbating the existing economic problems and undermining the country’s business climate. The working group agreed that sanctions on the financial and the military sectors are likely to be the most sensitive for the economy (the latter may impede Russia’s military modernization). Personal sanctions are crucial, but, according to the group, they are ineffective as well, as individuals under these sanctions still find ways to transfer money to the EU and the U.S. through third parties.

On the other hand, experts argue that sanctions are not efficient as they do not have the anticipated impact on Russia’s economy. In a sense, sanctions failed because they did not force the regime to change its policy toward Ukraine. Moreover, the working group pointed out that today it would not be realistic to expect any sanctions-related concessions from the Kremlin, because the Russian public will not accept them.

The group contended that for sanctions to have an impact on the economy, they would have to target Russia’s energy trade — something that constitutes the core of the Russian economy. Europe is, however, not willing to go in that direction. Many members of the working group pointed out that European countries are too dependent on Russian commodities, and would never agree to undermine their trade with Russia.

The group concluded that the EU has three options when it comes to the future of sanctions: 1) keep sanctions as they are and continue to pretend they work: 2) extend sanctions to genuinely hurt the Russian economy, while accepting that such measures may create revanchist attitudes in Russia; 3) seek compromise with Moscow, which would mean admitting that sanctions were unsuccessful.

Tying together the issue of sanctions against Russia with that of the EU-Russia relationship, the working group suggested that Europe should help Ukraine become a success story. Ukraine is crucial to European security and plays a key role in dealing with the Putin regime. Regardless of the current chill in the relationship, the EU is still Russia’s biggest investment partner. Energy and trade are the two pillars of the relationship and potential areas where tensions can be eased and differences can be bridged. As Russia faces further economic stagnation, closer ties with Europe would benefit Moscow. But this is not a direction Russia is heading in today.

As a way forward, the working group suggested that Europe continue its efforts to build a relationship with Russia beyond the official frameworks and channels, keeping in mind that the regime will fall sooner or later. One of the ways to do so is through the support of student and scientific exchanges, development of civil society contacts, education of Russian citizens about issues, such as self-organizing or running small businesses. In addition, Europe should encourage Russian citizens to travel abroad, so they can overcome the stereotypes created by Kremlin propaganda about Europe.

Finally, one of the issues discussed by the working group was climate change. The Russian government continues to believe that the current commodities-based model of the economy is sustainable, and ignores that fact that the developed world is moving closer towards green energy. The working group noted that the Russian public cares about environmental issues and climate change, more so than the government does. In recent years, Russia has witnessed a number of environmental protests in different regions. Social entrepreneurship with regard to environmental issues is on the rise. However, given the wide income gap between Russian regions, in too many cases local governments are too poor to really care about green energy.

The group concluded that in the mid-term Russia would remain Europe’s main oil and gas supplier, as the shift toward green energy in the West will take many years, while production of oil and gas in Europe itself will be decreasing in the meantime.

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