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Ties that bind: the economics of the EU-Russia relationship


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Ties that bind: the economics of the EU-Russia relationship

EU leaders will meet again in Brussels on Thursday with a view to enacting tougher sanctions against Russia over its annexation of Crimea.

German Chancellor Angela Merkel has led EU calls for Russia to reverse course on its Ukraine policy or face serious economic consequences.

Both Berlin and Moscow have a lot to lose. Trade between the countries amounts to 76 billion euros annually, according to the German national statistics office.

But what about the EU as a whole?The European Commission says bilateral trade between the bloc and Moscow amounted to 335 billion euros in 2012.

The EU is Russia’s biggest trading partner, accounting for 41 percent of all its trade.

Dependency on Russian energy, however, varies widely across the 28-member bloc.

Some EU countries, such as Britain, have little exposure to Russia’s oil and gas sector.

Others, such as the Baltic states and Poland, rely heavily on such sales.

Lithuania, for example, gets 99 percent of its oil and 100 percent of its gas from Russia.

It means if the Ukraine crisis sparks another gas war, it could prompt a radical re-think of Europe’s energy policy.

Euronews asked Judy Dempsey, the editor-in-chief of the Strategic Europe blog, how far the EU can go in slapping economic sanctions on Russia.

Dempsey is also a senior associate at the Carnegie Europe think-tank in Berlin, Germany.

Euronews, James Franey: Judy Dempsey. Many thanks for being with us here on Euronews. I just want to start by asking you: we’ve got an EU summit that starts on Thursday. Angela Merkel talking very tough on the issue of sanctions with Russia. Do you think she’s going to match those words with real concerete action?

Judy Dempsey, Carnegie Europe: I think she’s already matching the words with concrete action with the first phase of sanctions. But I think now she has no choice but to continue this road of being tough with Russia. To back away now would undermine this very special sense of European Union unity and the cohesion… and for once they are looking at the relationship with Russia in a very, very different way. This is new.

euronews: So you are saying that the relationship with Germany and Russia is fundamentally changing. Because Germany has always been soft on Russia, can we say. There’s a real shift there.

Judy Dempsey: From Chancellor Merkel’s point of view, she was tough on Russia certainly when she first took office in 2005, but then she had other distractions. I think she has seen – especially over the last two years when Putin became again president – how the whole situation with Russia has deteriorated and she really did speak out about this. But I think the whole Ukraine crisis, of course topped by Russian intervention in Crimea, I think Russia has bitten off more than it can chew in its relations with Germany. We are seeing a fundamental shift in the Germany-Russia relationship. In fact, Putin risks losing Germany as its main ally inside the European Union.

euronews: What sort of sanctions could we be looking at do you think? There’s been some talk about cancelling gas contracts. Really hitting Russia in the pocket as hard possible. Is that realistic?

Judy Dempsey: First of all, is it legal to cancel those long-term gas contracts? But then, it’s not particularly legal to invade a country either! If you are going to go down the road of cancelling your contracts with Russia, you’d better make sure that you’ve got a) diversified supplies and b) the storage facilities are very, very full. And that it won’t affect the East Europeans. They are very much dependent on Russia.

This crisis is going to concentrate minds once and for all about the political role of energy. There will be some serious reappraising of what kind of energy relationship we need to have with Russia. Russia could lose out on this energy ‘competition’ — for want for a better term — more than the Europeans, provided they (the Europeans) have fallbacks.They’ve very little time, but they now have to start thinking about it.

euronews: So if gas contracts were cancelled, surely the rouble would plummet. What impact would that have on Mr. Putin and Russia?

Judy Dempsey: The rouble is already falling. Gazprom, in the last days of the first Ukraine crisis (EuroMaidan), lost about 12 billion euros (in the value of its shares), which was swept away. That’s a lot of money lost. And the key question is sooner or later, the middle classes (in Russia) will feel the pinch. For such a long time, Russian domestic gas prices have been heavily subsidised: this has led to waste, inefficiency because Gazprom could rely on western Europe and the Europeans to buy the gas. Any reduction in these kind of revenues may force Putin to rethink about his own energy policy. And that’s when things could get very difficult for him.

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