COMMENT: Europe’s historic lack of economic engagement with Russia

By bne IntelliNews April 27, 2015

Ousmène Mandeng in London -


At the third "East Forum Berlin" held on April 22 in Berlin, there was high praise and lofty talk of the need to engage more with the East and Russia in particular. The mayor of Berlin, Michael Müller, chimed in calling for a common economic area from “Lisbon to Vladivostok”, echoing similar calls from German Chancellor Angela Merkel. At the same time, sanctions against Russia were lamented but grudgingly accepted as a necessary measure to “guide the country back onto the path of virtue.” The alienation felt between Western Europe or the European Union and Russia has seemingly deepened to a post-Soviet Union low. This may in large part be due to the fact that Europe has never fully engaged with Russia economically in the first place.

The 1951 European Coal and Steel Community Treaty, later forming the basis for the Treaty on European Union to establish the bloc, offered in its preamble that the government signatories are “resolved to substitute for age-old rivalries the merging of their essential interests; to create, by establishing an economic community, the basis for a broader and deeper community among peoples long divided by bloody conflicts”. This essential belief that economic integration would lay the foundations and be necessary for peace was at the heart of Europe’s drive for co-existence. While it was administered to many former Eastern Bloc countries, it was seemingly largely absent in Europe’s dealing with a post-Soviet Russia.

Europe has not fully engaged economically with Russia. Or it did so at a scale that indicated some tepid rapprochement rather than a willingness to merge essential interests. The stock of total foreign direct investment (outward), as proxy for genuine economic interests, in Russia of Eurozone countries (excluding financial offshore centres Cyprus and Luxembourg), to represent the leading EU countries, amounted to $158bn at end-2013. This puts Russia on 13th place behind Sweden (Russia is the 8th largest economy in the world). It amounted to a mere $1,100 per head. Former Eastern Bloc EU member countries Czech Republic, Hungary and Poland obtained foreign direct investment from Eurozone countries of $8,237, $7,790 and $3,094 per head, respectively. Eurozone foreign direct investments in Russia represent 8% of Russia’s 2013 GDP compared with 62% in Hungary, 44% in Czech Republic and 24% in Poland (see table below).

Many would argue that conditions had not been right to invest in Russia (the Eurozone represents 23% of Russia’s foreign direct investment received). This may indeed have been the case. Politics though could have made all the difference and promote, possibly at a high cost, conditions to make investments sufficiently attractive. There may just not have been the vision, in particular during the early period after the collapse of the Soviet Union, that massive economic engagement would have helped broker peace in Europe over the long term. The same logic that brought together age-old enemies like Germany and France was not applied to Russia. Whatever the stated intent, the outcome indicates that Europe left Russia economically largely in the cold.

The lack of economic engagement may today haunt Europe in the quest for peace over Ukraine and more widely. Russia, while depending economically on Europe through gas exports, could now seek alternative buyers. This would reduce Russia’s interest in Europe even more. Russia only put 19% of its foreign direct investment in the Eurozone (39% of Russia’s total foreign direct investment went to Cyprus).

In the age of sanctions against Russia, the question should be asked: has Europe engaged Russia sufficiently to tie its interests to Europe such that conflict would be self-defeating? The answer seems to be no. Could further sanctions incentivise Russia to move further away from Europe? The answer is probably yes. The remedy then seems to be to engage Russia much more. Europe needs to ensure that there are sufficient strong mutual interests that would encourage Russia to align its foreign interests with Europe. While this may sound naïve to some, it seems fair to say that the existing strategy has led to the most disconcerting and precarious security situation in Europe since World War II. Russia needs to have an economic stake in Europe. Europe needs to give Russia a bear hug.

Ousmène Mandeng, Senior Fellow, Reinventing Bretton Woods Committee


COMMENT: Europe’s historic lack of economic engagement with Russia

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