House of Lords - The EU and Russia: before and beyond the crisis in Ukraine

The EU and Russia: before and beyond the crisis in Ukraine - European Union Committee Contents

CHAPTER 2: EU AND RUSSIA INTERDEPENDENCIES

Economic and trade relationship

15. EU Member States and Russia are heavily economically interdependent. The extent of this interdependence is set out briefly below, with a particular focus on the UK and Germany.

EU28 TRADE WITH RUSSIA

16. According to data from the Russian Federal Statistics Service, in 2013 EU Member States accounted for 57% of Russian exports and 46.5% of Russian imports, making the Union by far Russia's most significant trading partner.[4] In turn, Russia is the EU's third largest trading partner, accounting for 9.5% of EU trade.[5] A number of Europe's largest economies continue to have significant bilateral trade with Russia, with the Netherlands ($52.1billion), Germany ($46.7 billion), and Italy ($34.3 billion) reporting the largest trade volumes in the first half of 2014.[6] Since December 2013, the EU's imports from Russia have fallen by 6.8% while exports have fallen by 9%.[7]

Figure 1: EU28 trade with Russia

Source: Written evidence from Open Europe (RUS0013), citing Eurostat

UNITED KINGDOM

17. According to data from the Russian Federal Statistics Services, in 2013 the UK accounted for 4% ($16.4 billion) of Russian exports and 3% ($8.1 billion) of its imports.[8] Motor vehicles, electrical machinery, nuclear technology, pharmaceuticals, aircraft and tractor spare parts were the main UK exports to Russia.[9] Over 600 British companies have a physical presence in Russia and, in 2013, approximately 5,800 UK traders exported goods to Russia.[10]

18. Links in the financial sector and Russian investment in the UK are lower than might be expected. Data from the UK Pink Book—the annual publication by the Office for National Statistics that details the UK's balance of payments—shows that in absolute terms the stock of Russian investment in the UK sounds quite large at £30 billion. However, in 2012, this amounted to only 0.53% of total international investment in the UK from Europe (including Russia). In turn, the stock of UK investment in Russia totals £48 billion, which is 0.9% of total UK investment elsewhere in Europe (including Russia). In 2013, the Russian market accounted for 1% of the total UK exports of financial services, other business services and insurance.[11]At the end of September 2014, there were 34 Russian incorporated firms listed on the London Stock Exchange out of a total of 2,467—1.4% of the total number of firms and 5.8% of the total market capitalisation.[12]

19. The exposure of UK banks to Russia is fairly low at $14.2 billion, below that of France ($47.7 billion), Italy ($27.7 billion) and Germany ($17.7 billion), all of which have much smaller banking sectors. There was also a marked decrease in the exposure of European banks to Russia between the third quarter of 2013 and the second quarter of 2014, driven by the uncertainty in Ukraine and the impact of economic sanctions.[13]

GERMANY

20. Germany is one of Russia's most important bilateral trading partners. Trade between Germany and Russia in 2013 was close to €77 billion. Russia primarily supplies petroleum and natural gas to Germany. Germany, on the other hand, exports mechanical engineering products, medicines, trains and automobiles to Russia. More than 6,000 German companies are registered in Russia and, together, they have invested €20 billion in Russia in recent years.[14] German trade with Russia declined significantly between August 2013 and August 2014—exports have fallen by 26% and imports by 19% with the decrease mostly over the winter period.[15]

Figure 2: German trade with Russia

Source: Statistisches Bundesamt, data code 51000-0004: available at https://www-genesis.destatis.de/genesis/online [accessed 15 January 2015]

Energy relationship

21. The EU's dependence on Russia for energy is well documented. In terms of gas, in 2013 energy supplies from Russia accounted for 39% of EU natural gas imports or 27% of EU gas consumption. Russia exported 71% of its gas to Europe, with the largest volumes to Germany and Italy.[16] Six Member States (Bulgaria, Estonia, Finland, Slovakia, Latvia and Lithuania) depend on Russia as a single external supplier for their entire gas imports.[17] As for oil, the EU imports more than €300 billion of crude oil and oil products, of which one third is from Russia.[18] The figure below outlines the dependencies of different EU Member States on Russia for their energy supplies.

Figure 3: Europe's dependence on Russian gas[19]

Institutional relations between the EU and Russia since 1994

22. The Partnership and Cooperation Agreement (PCA), agreed with Russia in 1994, has formed the basis of relations between the EU and Russia over the last 20 years. Annual summits since 1994 have sought to reinforce co-operation and to update the Agreement, but negotiations on a new EU-Russia Agreement are now suspended. Box 1 provides a summary of the institutional structures which have governed the EU's relationship with Russia since 1994.

Box 1: EU-Russia institutional structures

The EU's PCA with Russia, agreed in 1994, has been the framework regulating political and economic relations between the EU and Russia for the last 20 years. PCAs aim to provide a suitable framework for political dialogue, support the efforts made by the partner countries to strengthen their democracies and develop their economies, accompany their transition to a market economy and encourage trade and investment. The partnerships also aim to provide a basis for co-operation in the legislative, economic, social, financial, scientific, civil, technological and cultural fields. The PCA with Russia provides for the creation of the necessary conditions for the future establishment of a free trade area.[20]

In the period 1994-2006 an EU-Russia Cooperation Programme was funded through TACIS (a programme of technical assistance to the Commonwealth of Independent States). Russia has been the biggest beneficiary of support to the countries in the post-Soviet region receiving about half of all funding. Since 1991, when the Programme was launched, €2.7 billion has been granted to Russia and has been used in 1,500 projects in 58 regions.[21]

At the St Petersburg Summit in May 2003, the EU and Russia agreed to reinforce their co-operation by creating four 'common spaces':

· The Common Economic Space, covering economic issues and the environment;

· The Common Space of Freedom, Security and Justice;

· The Common Space of External Security, including crisis management and non-proliferation; and

· The Common Space of Research and Education, including cultural aspects.[22]

Negotiations on a new EU-Russia Agreement were launched at the 2008 Khanty-Mansiysk summit, with the objective to:

· provide a more comprehensive framework for EU-Russia relations, reflecting the growth in co-operation since the early 1990s;

· include substantive, legally binding commitments in all areas of the partnership, including political dialogue, freedom, security and justice, economic co-operation, research, education and culture, trade, investment and energy.[23]

At the 2010 Rostov Summit, the EU and Russia also launched the Partnership for Modernisation, which was conceived as a focal point for mutual co-operation and to reinforce dialogue started under the common spaces. The Partnership for Modernisation deals with all aspects of modernisation—economic, technical (including standards and regulations), rule of law and functioning of the judiciary.[24]

Following a statement on 6 March 2014 by the EU Heads of State or Government, negotiations on a new EU-Russia Agreement were suspended. Meetings at the highest political level (summits) have also been suspended. The last meeting took place on 28 January 2014 in Brussels.[25]

4 Written evidence from Open Europe (RUS0013) Back

5 European Commission DG Trade statistics: http://trade.ec.europa.eu/doclib/docs/2006/september/ tradoc_113440.pdf [accessed 2 February 2015] Back

6 Written evidence from the CBI (RUS0010), citing Rosstat statistical release, 20 October 2014 Back

7 Written evidence from Open Europe (RUS0013) Back

8 Written evidence from Open Europe (RUS0013), citing the Russian Federal Statistics Service Back

9 Written evidence from the CBI (RUS0010) Back

10 Written evidence from the CBI (RUS0010), citing BIS statistics, 2013 Back

11 Written evidence from Open Europe (RUS0013) Back

12 Written evidence from Open Europe (RUS0013), citing London Stock Exchange: Statistics, Companies and Issuers, List of all companies on the LSE at the end of each month Back

13 Written evidence from Open Europe (RUS0013) Back

14 'Economic War with Russia: A High Price for German Business,' Der Spiegel (17 March 2014): http://www.spiegel.de/international/europe/germany-to-play-central-but-expensive-role-in-sanctions-against-russia-a-959019.html [accessed 2 February 2015] Back

15 Written evidence from Open Europe (RUS0013) Back