Europe's fringe rethinks EU trade ties

 Europe's fringe rethinks EU trade ties
Moldova's wine exports were badly hit by Russia’s sanctions, but its wine is not competitive in the EU.
By Iana Dreyer of Borderlex and Iulian Ernst and Carmen Valache January 24, 2017

After abandoning talks over its free trade and association deal with the EU in 2013 in order to join the Russia-led Eurasian Economic Union (EEU), Armenia is now pursuing a revamped and expanded framework agreement with Brussels. By contrast, Moldova, whose free trade deal has been in place since 2014, may be moving away from its pact with the EU.

Deep & Comprehensive Free Trade Area (DCFTA) deals are a big part of Association Agreements offered by the EU to its eastern neighbours, which Russia has strongly frowned upon. The DCFTA with Ukraine triggered the current conflict there. DCFTA deals significantly open trade between the EU and its partner countries, and partially align their laws to the EU’s.

A combination of domestic factors and Russian moves have led Armenia and Moldova to reassess their attitude towards the EU, revealing how volatile and fragile remains the web of rules the EU is trying to spread in its neighbourhood.

Disillusioned with Russia 

Launched in December 2015, talks for a renewed framework agreement between Armenia and the EU reached their eighth round in January 2017. Both European and Armenian officials have been vague about the progress made thus far. Armenia’s membership in the EEU will likely prevent negotiations from reaching an actual association agreement.

Regardless of the shape that it takes, the new deal will definitely have to leave out provisions related to customs regulations, as Armenia’s EEU membership means that it has harmonised its customs regulations with those of Russian and Central Asia. It has also agreed to give Russia’s Gazprom a monopoly over gas distribution, which prevents the Armenian government from making regulatory changes until 2043.

Despite its limitations, a stronger partnership with Brussels would be a timely and much needed development for Armenia. The country’s membership in EEU has failed to meet expectations, largely due to the economic slowdown in Russia. Remittances dropped by 30% y/y in 2015 and continue to decline steeply in 2016. Meanwhile, Armenian exports to Russia contracted by 18% in 2015, although they recovered slightly in 2016, according to national statistics agency Armstat.

While economic considerations are important to Yerevan, which is highly dependent on Russian trade and investment, a diplomatic falling out with the Kremlin over the Nagorno-Karabakh conflict with Azerbaijan has likely given a sense of urgency to talks with the EU. In April 2016, Baku launched an attack against the breakaway region of Nagorno-Karabakh that is occuppied by Armenian-backed forces, capturing a narrow strip of land after a four-day conflict that left hundreds of casualties.

Armenia was deeply disappointed with the Kremlin, which had historically supported Armenia in the conflict, but has sold some $4bn worth of armaments to Azerbaijan in recent years. In July, week-long street demonstrations decried Russia’s support for Azerbaijan, which Armenians perceived as a betrayal. Armenian officials refrained from accusing the Kremlin directly, but public opinion was further incensed against Russia after Prime Minister Dmitry Medvedev defended the arms trade with Azerbaijan during a visit to Yerevan shortly after the conflict.

The falling out over the Azerbaijan arms trade followed a similar episode in the summer of 2015, during which protesters chanted “Free Armenia” in response to perceived mismanagement at a Russian-owned electric utility, reflecting the Armenian public’s dissatisfaction with perceived corrupt practices at Russian-owned companies in the country. 

As Armenia readies for parliamentary elections in April, democracy and transparency – or the illusion of democracy and transparency – will play an important role in the ruling Republican Party’s campaign strategy. The appointment of a technocratic government in September, led by former Gazprom executive Karen Karapetyan, is testament to Yerevan’s eagerness to at least appear to tackle ingrained corruption in the country.

The EU is the single most important driver for democratisation in Armenia, as President Serzh Sargsyan himself admitted during a meeting with the bloc’s foreign affairs chief Federica Mogherini in 2016. Furthermore, an opinion poll conducted in late 2016 revealed that Armenians have a largely positive opinion of the EU’s support for their country, which is an incentive for the Sargsyan administration to deepen the country’s engagement with Brussels.

The Kremlin has yet to respond to Armenia’s rapprochement with the EU, but Yerevan knows that it is skating on thin ice. However, the Sargsyan regime has registered some success in recent months in diversifying its trade and diplomatic ties away from Russia, most notably by reaching out to Iran, and is likely building on this momentum to pursue a new agreement with Brussels.

Disappointed by the EU

In Moldova, it is disappointment with the highly corrupt pro-EU elite that has led the country since 2009 which partly explains the ebbing support for the EU and the DCFTA. This shift of attitudes explains why the pro-Russian leader Igor Dodon was elected president in November last year.

While visiting Moscow on January 17, Dodon said he would scrap the DCFTA if his party wins the next parliamentary elections slated for 2018. He and Russia have demanded that Moscow have a say in the deal. “Moving away from the DCFTA is a real possibility if parliamentary elections are won by the party of the current president,” Hrant Kostanyan, a researcher at the think-tank CEPS in Brussels, told Borderlex. Kostanyan thinks that Dodon’s Party of Socialists is well positioned to win the polls. Moldovan society is equally divided between pro-EU and pro-Russian attitudes.

Russia cancelled tariff-free preferences for 19 categories of products under the 2011 Russia-Moldova Commonwealth of Independent States (CIS) Free Trade Agreement in 2014, which hit Moldova’s agricultural and food exports badly. Although the EU responded by opening up its markets to Moldova, “in the short term, however, this did not compensate for the harm caused by Russia’s sanctions, mainly because of the limited competitiveness of Moldovan products and the existence of non-tariff barriers”, Kostanyan wrote in a recent piece on EU Moldova relations. Dodon wants to trade with Russia again.

Russia’s continued meddling in Moldovan politics is helping tilt the political balance away from the EU. “But that is not the only variable”, Kostanyan told Borderlex. “Since 2009, when the Alliance for European Integration came to power, the EU’s reaction to the misdeeds of successive Moldovan governments has been lamentable. The EU refrained from criticising Moldova’s elite, but chose instead to throw money at the country’s problem.” 

This stance only changed in the early months of 2016, but by then Moldovan opinion had moved on: support for the EU has fallen from around 70% to only about 40% today, according to polls.

Moving away from the DCFTA with the EU is a risky move for Moldova, however, as 62% of the country’s exports go to the EU, according to a recent Bertelsmann Stiftung report. Romania absorbs two-fifths of Moldova’s exports, which are mainly supplies to the country’s Dacia car production facilities. Italy is also a major market for Moldova’s industry.

Moldova’s sense of disillusionment with the DCFTA largely stems from the agriculture sector. The country’s wine exports were badly hit by Russia’s sanctions, but Moldovan wine is not competitive in the EU. The DCFTA with the EU has also not done away with crucial trade barriers in the agriculture sector, keeping quotas in areas like cereals and fruit and vegetables. Also the EU’s exacting sanitary and phytosanitary standards make it hard for Moldovan food producers to easily sell west of their border.

All in all, the signs are that the EU has not managed to stabilise what its calls its “Eastern Neighbourhood”, which is one of the main roles that the DCFTAs were expected to play. In fact, the trade deals are instead becoming the focus for the deep political divisions in these societies on the edge of Europe.