Economic situation in Russia
Since the 1998 financial crisis that marked the end of the first period of Russia’s post-Soviet transition, Russia has gone a long way on the road of growth and economic stability. Indeed, in sharp contrast to the previous decade of economic and social dislocation, in the years 1999-2003 Russia not only progressively established a more stable and predictable political environment but also built up a respectable record of economic growth, macroeconomic stabilizations and policy reforms.
Based on high prices for Russia’s main exports (primarily oil and gas), the devaluation of the rouble and prudent economic policies, the country has achieved macroeconomic stability: real GDP has grown by nearly 40%, or by an annual average rate of 6.5%; inflation has been cut drastically, public expenditure has been brought under control; following lessons learnt from the 1998 crisis, higher oil revenues have not been spent but translated into four years of budget surplus; the exchange rate of the rouble, after losing in 1998 half of its value (in real terms), has been steadily appreciating – in real and, lately, even nominal terms. Growth and financial stabilization have led to a large and continuing increase of disposable income (in the first 10 months of 2003 alone, real personal cash incomes rose by 16%) and to a reduction in poverty levels (which decreased from a peak of about 40% of the population in 1999 to about 25% in 2003). The external balance also improved dramatically: the current account registered surpluses of up to 15% of GDP; capital outflows decreased and were even reversed at some point in 2003; international reserves were multiplied by six since the end of 1999. Russia took advantage of this favorable environment to normalize its relations with foreign creditors and reduce dramatically external debt, which, at a mere 28% of GDP, is no longer a matter of concern.
On the structural side, too, progress was achieved; particularly since 2000, the government pushed forward a more coherent reform strategy. Important reforms encompassing wide segments of the economy (such as business deregulation, taxation, pensions and land ownership) have been—or are being—implemented since then. In the area of social policy, a major overhaul of the pension system aimed at putting pensions on a sound financial basis was launched. Yet, in other important areas, such as the energy and financial sectors and housing, key measures still remain to be taken. Also, much remains to be done in the area of state reforms (covering the public administration, the civil service, and the judiciary).
Altogether, given a GDP of close to US$ 450 billion, per capita income of around US$ 3000, a score of close to 3 out of 5 on the EBRD’s transition indicator and a ranking of 63 out of 175 countries in the UNDP development index, Russia has an economy equal to the size of the Netherlands or one third of China’s.
Building on the achievements of the last years, the Russian political leadership has set an ambitious long-term target of raising dramatically the living standards and transforming the Russian economy into a modern, diversified and competitive economy fully integrated in the global economic system. In this context, the growth of the last years is viewed merely as the beginning of a long process of even stronger sustained growth. The main element in this strategy is the objective, set by President Putin in early 2003, to double the size of real GDP in ten years’ time, requiring an acceleration of growth to 8% per year.
In order to achieve permanently higher growth rates, however, it will be necessary to diversify the Russian economy and to accelerate structural, social and institutional reforms, aimed at markedly improving the investment climate and generating higher productivity, notably in the struggling manufacturing sector. In the absence of this, Russia would be subject to a long period of modest growth, possibly lapsing into stagnation in times of low oil and gas prices, combined with a gradual depletion of natural resources.
In addition to maintaining a sound macroeconomic framework, the main policy priorities facing Russia are to (i) improve the investment climate, (ii) further integrate into the world economy, (iii) reform the State administration and the civil service, (iv) enhance human capital and (v) protect the vulnerable.
As regards long-term growth prospects, it is very difficult to offer a reliable estimate. Apart from the government’s target rate of close to 8% per year on average for the next ten years, some current estimates project annual average growth at about 5% per annum in the coming decade.
EU-Russia economic and trade relations
EU-Russia economic relations are increasingly important for both sides. The European Union is the major destination for Russian exports and more than 50 % of Russia’s total external trade is with the EU. The EU is also the main source of technology, know-how and investment for Russia. In turn, Russia has immense resources and a qualified labor force. Furthermore, Russia’s energy supplies to the EU can help to enhance Europe’s energy security. The EU favors the integration of a prosperous Russia into the global economic system and, in particular, Russia’s accession to the World Trade Organization. In this context, the EU also fully supports the ongoing reform of the Russian economy, with its aims of increasing performance and efficiency as well as diversification and broadening its manufacturing base.
The EU enlargement opens new challenges and opportunities for Russia’s economy. Russia is well positioned to take advantage of the EU enlargement, given its geographical proximity to the expanding markets. The majority of the new EU Member States are traditional economic partners of Russia, including in the trade field. This is reflected in the overall trade relations between Russia and the EU. Most importantly, EU enlargement gives Russia direct access to one, larger, harmonized EU market of some 450 million people. This opportunity should lead to an increase in Russia’s welfare.
Since 1997, EU-Russia economic relations have been governed by the Partnership and Cooperation Agreement (PCA). PCA implementation is the keystone for developing the relationship between the EU and Russia. The far-reaching liberalizing thrust of the PCA, envisaging the eventual setting up of a free trade area, reflects the mutual importance of relations between the two economies. Under the terms of the PCA, Russia receives far better treatment from the EU than from its other major trading partners, as the EU grants Most-Favored-Nation (MFN) status, whereby no quantitative limitations are applied except on exports of certain steel products (which represent only 4% of bilateral trade). An efficient dispute settlement mechanism under the PCA has been adopted in April 2004. This will improve the predictability and transparency of trade relations and, should this eventually be required, it will allow for the resolution of a number of long-standing trade disputes.
EU-Russia Bilateral trade
Russia is the EU's fifth trading partner (after the US, Switzerland, China and Japan), while the enlarged EU is Russia's main trading partner accounting for more than 50 % of its total trade.
Total EU trade with Russia in 2003 amounted to ? 84 billion and the EU had a trade deficit of ? -18 billion. Main EU imports from Russia are energy, agriculture and chemicals. Main EU exports are machinery (34%), chemicals (13%), agriculture (11%), transport material (11%) and textiles (6%).
However, Russia's manufacturing and trade structures continue to be unbalanced. In 2003, energy and fuels accounted for more than 50 % of Russian exports to the EU and EU-Russia trade in services is still rather limited in value terms: around ?10 billion in 2002 in total, around 2% of total EU trade in services.
A significant proportion of Russian goods entering the Community market benefit from the EU’s Generalized System of Preferences (GSP). GSP and other trade publications are available on the Europe website.
In November 2002, recognizing the great efforts that Russia has made in its transition to a fully-fledged market economy, the EU granted “market economy status” to Russian exporters, which substantially increases their ability to defend their interests in the context of anti-dumping proceedings. It should be noted that anti-dumping is not a major aspect in EU-Russia trade at present.
EU imports from Russia are to a very large extent liberalized. Remaining EU restrictions notably in the steel sectors are being regulated under a bilateral agreement. Negotiations on an agreement on trade in nuclear materials will be launched in 2004.
The pattern of bilateral trade reflects the comparative advantages of the two economies, with fuel and primary products representing the bulk of Russian exports – as opposed to capital and finished industrial and consumer goods imported from the EU. Russia now provides over 20% of the EU’s needs in imported fuel. Trade in services retains great potential for growth and the dynamic services sector will undoubtedly be increasingly important to the trade relationship in the future. The recovery of the Russian economy since 2000 has attracted growing imports from the EU, which are now running at levels exceeding trade before 1998.
Russia’s accession to the World Trade Organization (WTO)
The EU recognizes the fundamental role that membership of the WTO can play in anchoring and solidifying Russia's economic reforms. Advantages stemming from Russia's accession to the WTO will be reciprocal. It will provide more stability and predictability, and better terms of access for EU businesses willing to export or establish in Russia. And, on their side, Russian exporters will have guaranteed channels of exports to all markets of WTO members.
The EU has supported the acceleration of the WTO negotiations. Russia received the complete list of EC requests in December 2001 and a long series of meetings at technical and political level have taken place since. The EU is also contributing to the acceleration of the drafting of working party report on Russia's accession.
The EU Trade Commissioner and the Russian Economy Development and Trade Minister signed on 21 May 2004, in the margins of the EU-Russia Summit, the agreement concluding the bilateral market access negotiations for the accession of the Russian Federation to the WTO.
Investment and economic reform
Trade relations have flourished over the past decade. However, investment flows are still below both their potential and the level required by the Russian economy to refurbish industry and infrastructure. EU investors can play a key role in providing capital and technology.
Currently, companies from the EU countries are the major foreign investors in Russia. However, the level of such investments is well below what Russia could absorb to modernize its economy. Over the past two years, Russia has achieved good results in establishing a stable and sound macro-economic framework. There is a general consensus that, in order to secure sustainable economic growth and attract more EU investment, Russia needs to continue its reform process to complete its transition to a rules-based market economy. In particular, further reform measures are needed to improve the business and investment climate in such areas as the restructuring of natural monopolies, administrative reform, tax regimes, corporate governance and accounting rules, intellectual property rights, and banking.
The European Union is committed to helping Russia in carrying out its economic reform process, notably by providing financial and technical support through the Tacis Programme.
Industrialists’ Round Table
The EU-Russia Industrialists’ Round Table (IRT) is a business-driven process, endorsed by the EU-Russia Summit in July 1997. Its main objective is to provide a permanent forum for businesspeople to present joint recommendations to the European Commission and the Russian government with regard to business and investment conditions in Russia and the EU, and promotion of industrial co-operation. Since December 2003, Jukka Härmälä, Chief Executive Officer of Stora Enso, is the EU Co-Chairman of the IRT process. Since February 2000, Mr. Anatoly Chubais, CEO of RAO-UES (Unified Energy Systems of Russia), is the Russian Co-Chairman of the IRT process. The latest meeting of the IRT took place on 10 November 2004 in The Hague and attracted 150 participants, representing business communities and official bodies from both sides. The discussion was centered on practical issues of bilateral cooperation in specific sectors (energy, transport, telecommunications and information technologies, forest industries, construction, and financial services) and on prospects for the development of the EU-Russia Common Economic Space and the role of business in this process.
The meetings of the Industrialists’ Round Table have adopted substantial recommendations, which resulted in some concrete policy changes. The EU-Russia Summits' joint declarations have referred to the IRT and its results, recognizing it as an important aspect of economic co-operation between the parties.
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