Russia and Europe: Which Common Space?

Is Russia on track for joining the ‘common European space’? This was the topic of a conference in Vilnius last weekend, organised by the ‘Russia in United Europe’ committee, whose coordinator is Duma deputy, Vladimir Ryzhkov.

From the point of view of the political system, the answer is no. Under the Putin presidency Russia has been retreating from the European ‘norm’ of a federal democracy. A couple of years ago it was common to describe Russia as a ‘managed democracy’ [upravlayemaya demokratia]. Today it is more accurately called a ‘soft dictatorship’. This is becoming the preferred political system for the CIS as a whole. It does not lead towards Europe.

In economics, the situation is more complex. One of the first ‘common economic spaces’ in Europe was COMECON which from 1949-1991 linked the USSR to Bulgaria, Czechoslovakia, Hungary, Poland, Romania, and East Germany. In the 1970s and 1980s over 70 per cent of a typical member’s trade was with other COMECON, or socialist bloc, members. However, this was not market integration, based on comparative advantage, but ideological integration based on central planning. Large trade volumes were supported by artificial scarcities. The system, kept by going by Russia supplying COMECON countries with subsidised oil, immediately fell to pieces when COMECON was dissolved.

Since then, the CIS has experienced ‘a significant movement of trade away from the COMECON and towards OECD and other global markets’.(EBRD) Today over 60 per cent of Russia’s trade is with the EU; and only 13 per cent with the CIS. Russia is the EU’s fourth largest trading partner. The East European members of the former COMECON have also switched most of their trade from the CIS to the EU. It looks as though Europe is becoming a ‘single economic space’, with Russia as an integral part of it.

However, aggregate figures do not tell the whole story. Russia’s relationship with the EU is largely based on the exchange of oil and natural gas (60 per cent of its exports) for machinery and finished industrial and consumer goods. The higher the price of oil, the more Russia can satisfy domestic demand by imports from the EU. But this leaves its ‘integration’ dangerously dependent on a single price. A fall in oil revenues automatically decreases Russia’s trade links with the EU.

The same distancing from the EU would result if Russia were to diversity its economic base. Initially uncompetitive in hard currency markets-and facing non-tariff barriers from the EU – Russia’s industrial exports would find their readiest sale in fast growing CIS and other ‘traditional’ markets. In either case –falling oil revenues or diversification of Russia production –the prospect is for growing economic integration within the CIS at the expense of economic ties with the EU.

This is not necessarily bad. There is no law of economics which states that Russia should have closer economic links with the EU than with its non-EU neighbours. And there is no necessary inconsistency between re-integrating with CIS and other Soviet-era trade partners and expanding trade links with the EU.

The danger arises if Russian policy-makers come to view the CIS as the nucleus of a separate political-economic system, alternative to a ‘common European space’. Both sides can contribute to preventing such a divorce. The EU has to overcome its domestic protectionist lobbies and adopt more flexible regulatory policies. Russia has to move closer to European political norms, break the links between the state and energy sectors, and reform its system of public administration. Europe cannot complete itself without Russia, and Russia cannot complete itself without Europe. As Sergei Karaganov pointed out in Vilnius, each needs the other.