Brussels, May 2002
A GOOD NEIGHBOURLY RELATIONSHIP
The European Union and the Russian Federation have an important trade relationship. This will be even more so following EU enlargement, when they will become direct neighbours. Hence the interest of both parties in maintaining and strengthening solid, predictable, transparent and open trade relations.
The Russian economy has been gradually recovering from the August 1998 financial crisis. Russia has taken advantage of the high price of oil and the devaluation of the rouble. Economic growth showed a strong performance in 2000 (around 8%), and it slowed down to a GDP growth of around 5% . The country is increasingly being perceived internationally as a reliable energy supplier, which meets its debt payments according to schedule.
The EU shares President Putin's belief that the key to bringing Russia economically back on track is to successfully complete the ongoing substantial domestic reforms. This will allow Russia to take full advantage of WTO membership, as well as of EU enlargement, which must be perceived as an opportunity for Russia since it will bring prosperity closer to its border.
In 2001, EU-Russia total bilateral trade (imports and exports) amounted to ?75 billion, with an EU trade deficit of ?20 billion. Overall Russia became in 2001 the fifth trade partner of the EU with a share of around 4% of total EU trade. Around 40% of Russia's current exports are destined for the EU market; this will increase to more than 50% after EU enlargement. In 2001, Russia was the EU's sixth largest export market (reaching ?28 Billion, i.e. over the level prior to the 1998 crisis). However, Russia's manufacturing and trade structures are unbalanced. Energy and fuels accounted for around 51% of Russian exports to the EU. EU-Russia trade in services is still rather limited in value terms: around ?4 billion in 2000 in total, less than 1.5% total EU trade in services.
A significant proportion of Russian goods entering the Community market benefit from the EU's General System of Preferences (GSP). Furthermore, Russia has applied to benefit from the GSP social preference clause. This application is still being examined.
EU imports from Russia are to a very large extent liberalised. Remaining EU restrictions notably in the steel sectors are being addressed under a bilateral agreement. The agreement on steel products signed in 1997 expired on 31 December 2001. A new agreement has been signed by the two parties on 9 July 2002, which foresees an overall increase of 40% of the mutually agreed quotas.
BASED ON A POLITICAL, ECONOMIC AND CULTURAL PARTNERSHIP?
The Partnership and Co-operation Agreement (PCA) is the central plank of the EU-Russia relationship. It was signed in 1994 and entered into force after national ratifications on 1st December 1997. The agreement regulates the political, economic and cultural relations between the EU and Russia and is the legal basis for the EU's bilateral trade with Russia. One of its main objectives is the promotion of trade and investment as well as the development of harmonious economic relations between the Parties. Both sides are committed to the establishment of a free trade area as soon as circumstances permit.
As regards economic relations, the PCA includes provisions on:
MFN: The EU extends to Russia MFN (Most Favoured Nation) Treatment. Therefore, Russia receives the same treatment as if it were already a member of the World Trade Organisation (WTO). Equally, Russia extends MFN treatment to the EU.
There is a special regime for trade in steel and nuclear materials in the PCA.
Freedom of establishment: The PCA facilitates the establishment of production and services businesses in certain specified sectors in Russia and in the EU. EU and Russian companies are free to establish at least on a national most favoured nation basis, i.e. no worse than the conditions applied to any third country. Once established , EU and Russian companies are free to operate on a national treatment basis, i.e. as if they were national companies.
Approximation of legislation: Russia has committed itself to approximate its legislation with that of the Community. Some of the areas where it intends to align its laws with the EU's are standards and certification, competition law, company law, banking law, company accounts and taxes, financial services, rules of public procurement, customs law.
Intellectual Property Rights (IPR): The PCA contains provisions that aim to ensure an adequate protection of intellectual property, namely on copyright, patents, trademarks and industrial designs. Russia has committed to adopt a level of protection similar to that existing in the Community by 1st January 2003.
Trade defence instruments: The PCA recognises that Russia is in transition to a full market economy. A special regime therefore exists in the field of trade defence instruments, whereby "normal value" of a product can be established outside Russia. However, a Russian firm in the course of an anti-dumping investigation may request individual market economy treatment if it can demonstrate that its exporting activities are determined by market forces. Both sides are allowed to take safeguard measures in cases where a product is imported under such conditions and quantities that it will cause or threaten to cause substantial injury to domestic producers.
CONSOLIDATED BY THE EU'S COMMON STRATEGY?
When the EU's Common Strategy on Russia was launched in June 1999, it was the first initiative of this kind provided by the Amsterdam Treaty. It combines Member States' and European Community policies and means, and defines a series of priority areas, including the integration of Russia into a common European economic and social space.
The EU and Russia have entered a new phase in their relations. An important initiative was launched at the EU-Russia Summit of May 2001, i.e. to establish a High Level Group to elaborate the concept of a Common European economic space. The harmonisation of certain parts of Russia's economic legislation with that of the EU is part of the final objectives. In parallel, analytical studies are underway both in Russia and in the EU to assess the effects of the CEES on Russia and the EU. This initiative should contribute to integrate Russia in an enlarged Europe. Indeed, by aligning with EU legislation, Russia will be able to attract foreign and domestic investment and to reverse capital flight trends and thus to gradually reduce the economic and regulatory gap with Central and Eastern European countries.
THAT WILL BE ENHANCED BY RUSSIA'S ACCESSION TO THE WORLD TRADE ORGANISATION WITH THE EU'S SUPPORT?
The EU recognises the fundamental role that membership of the WTO can play in anchoring and solidifying Russia's economic reforms. It therefore explicitly supports Russia's application for WTO membership. At the EU-Russia Summit last October, Russia's accession to WTO was recognised as a priority.
Advantages stemming from Russia's accession to the WTO will be reciprocal. It will provide more stability and predictability, and better terms of access for EU businesses willing to export or establish in Russia. And, on their side, Russian exporters will have guaranteed channels of exports to all markets of WTO members.
The EU has supported the acceleration of the WTO negotiations. Russia received the complete list of EC requests in December 2001. The EU is now contributing to drafting of working party report on Russia's accession.
New Russian offers on services and agricultural products will move negotiations into a higher gear.
The pace will now depend on Russia's ability to implement the necessary reforms of its economic and trade systems to make them compatible with WTO rules, and to improve its offers on market access commitments in the fields of industrial goods, services and agriculture. There remains a great deal to do both in relation to conformity with WTO rules and on market access.
The EU's continued engagement with Russia on WTO is an indication of the political significance of the accession. Likewise, EU technical assistance under the aegis of Tacis provides a concrete illustration of its support for the objective of accession and recognition of the need for sufficient prior capacity-building to ensure Russia can live up to its future WTO obligations.
AND BY EU ENLARGEMENT
EU enlargement should be beneficial for EU-Russia relations, through a general reduction of the external protection of new EU members as they align themselves on Community tariffs, and through the extension of the common Community trade regime and single market rules.
Russia is well positioned to take advantage of the opportunities offered by EU enlargement. This is part of the rationale behind the Common European economic space initiative. Regulatory convergence would allow economic agents to operate subject to common rules in a number of fields throughout the enlarged EU and Russia which represent a market of around 600 Million consumers.
EU policy should be geared towards stabilising Russia, creating the conditions for sound economic growth, and developing a true partnership. These objectives will be supported by an acceleration of the WTO negotiations and the creation of a Common European economic space.