Iana Dreyer of Borderlex -

“Trade from Lisbon to Vladivostok: yes, it’s a beautiful vision,” said Cecilia Malmström, the new EU trade commissioner, at a recent parliamentary meeting in Brussels. “But I don’t think it’s a vision that will materialise in the very short term. Russia has occupied an independent country. The situation is escalating. Entering into trade agreements with Russia does not feel appropriate.”

That statement was made the same day the EU’s foreign policy chief, Federica Mogherini, met with the US trade representative, asking him to include a chapter on energy in the ongoing transatlantic trade and investment partnership (TTIP) negotiations. Geopolitical considerations run high in current EU trade policy, and the TTIP is increasingly seen as a political necessity.

The TTIP could trigger US exports of crude oil and shale gas to Europe, and ease the continent’s dependence on Russian fuel. This dependence is seen as Europe’s Achilles’ heel in its political relations with Russia. 

In 2010, Russian President Vladimir Putin offered the EU to establish a common economic space stretching from Europe’s westernmost capital to Russia’s easternmost city in Asia, at a time when he was establishing a Customs Union with Kazakhstan and Belarus. The latter is due to become the Eurasian Economic Union (EEU) in January.

Russia’s desire to include Ukraine in the EEU – a project conceived as a rival to the EU and its Association Agreement plans with Ukraine, Moldova and Georgia – has been one of the main triggers of the crisis in Ukraine.

Political tensions have gone hand in hand with trade and investment sanctions. These involve so-called ‘dual-use’ industrial goods export bans to Russia that risk being used for weapons production, a halt to Western energy and financial investments, and Russian food import bans. All these measures have accelerated the current economic downturn in Russia and complicated matters for EU industry and farmers.

Echoing the tones of Germany’s 1970s Ostpolitik, which aimed to bring East and West together through closer economic integration, Chancellor Angela Merkel, who is under pressure from certain business groups and parts of public opinion to become more conciliatory with Moscow, recently told the German parliament in Berlin: “We are ready for talks between the Eurasian [Economic] Union and the EU on trade.”

Business favours the idea. Frank Schauff, CEO of the Association of European Businesses (AEB) in Moscow, told Borderlex: “One large, single economic space [between the EU and Russia] makes sense.” And talking to the EEU “would be positive if issues like technical regulations and technical standards are harmonised with the EU,” he added.

Elusive goal

Yet Brussels and Moscow are still far from this goal.

Trade is the EU’s exclusive competency. If Berlin were to press Brussels hard for a trade deal now, it could not, alone, change Brussels’ current firm stance and current unwillingness to engage with the EEU, although there is evidence that the issue is being debated within the bureaucracy.

Brussels-Moscow negotiations towards a follow-up treaty to their 1997 Partnership and Cooperation Agreement were suspended last March, immediately after Russia annexed Ukraine’s Crimean peninsula. The new treaty would have included a free trade agreement.

A trilateral dialogue initiated last summer between Ukraine, the EU and Russia over how to handle a potential negative fall-out for Russian exports of Ukraine’s Association Agreement with the EU is now moribund. That free trade and association deal was ratified last September. Ukraine postponed its implementation until December 2015, following Russian pressure. The key dispute revolves around Ukraine’s adoption of EU technical standards as part of its free trade requirements with the EU.

To Michael Emerson, senior fellow at the think-tank CEPS in Brussels, “the Eurasian [Economic] Union gets off to a very shaky start. Neither Belarus nor Kazakhstan are yet in the World Trade Organization (WTO), and two new prospective members – Armenia and Kyrgyzstan – are WTO members which have not yet sorted out how to reconcile this with Eurasian [Economic] Union membership.” WTO membership is a prerequisite for the EU to start free trade talks with any country.

“Russia shows no signs of wanting free trade with the EU and even in the area of technical standards cannot get round to embracing international or European standards unambiguously,” Emerson added.

Tough talking at the WTO

Absent formal talks, Brussels and Moscow frequently meet in Geneva. Brussels’s long-standing frustrations with Russia’s many protectionist trade measures are now channelled to the WTO dispute settlement body.

The WTO establishes international norms on how trade policy is handled. The aim is to contain trade protectionism and discrimination. The rules are enforced by a strong dispute settlement mechanism that allows trade sanctions against members that are found in breach of international law. Russia was the last major economy to join the multilateral trade body in 2012.

The talking in Geneva is tough. Whereas most WTO newcomers are given time to adjust to the new WTO environment, “there has been no honeymoon period for Russia,” a trade professional in Geneva knowledgeable about the details of Russian dispute settlement cases told Borderlex, speaking on condition of anonymity. 

The EU has already brought four cases against Russia to the WTO dispute settlement authorities: the first case contests Russia’s recycling fees on imported cars from the EU, the second an import ban on pigs, the third anti-dumping duties on light commercial vehicles from EU member states, and the fourth contests Russian tariffs on various agricultural and manufacturing products.

Most disputes brought to the WTO are settled during preliminary consultations, but the Russian cases brought by the EU will likely be settled through a formal panel, and the process is long and drawn-out.

Russia too has brought two cases against the EU: one on Brussels’ anti-dumping duties on Russian fertilizer exports, and another one concerning the EU’s 2009 Third Energy Package, which are a series of laws aiming to increase competition in the EU’s gas and electricity markets. On the energy case, “Russia is mostly interested in having a challenge,” said Borderlex’s anonymous Geneva source.

As long as these sensitive trade cases remain unresolved in Geneva, it is hard to see how Brussels and Moscow can talk trade liberalisation in the near future, even if the broader political climate between both parties improves.

Iana Dreyer is Editor of borderlex.eu