EU – EAEU: economic background for a deepened cooperation

_ Yuri Kofner, head, Eurasian sector, CCEIS, HSE; research assistant, IIASA. Vienna, 28 October 2017.

What are the main economic pre-conditions and obstacles for an increased cooperation between the European Union and the Eurasian Economic Union and the potential for the creation of a common economic space from Lisbon to Vladivostok? The following are the major arguments.

The EU is the largest trading partner of the EAEU: in 2016 it accounted for about 50% of the total exports from, and for about 41% of the total imports to the Eurasian Economic Union.

The importance of the European Union for the EAEU is also evidenced by the sheer volume of the European market, whose GDP in 2016 amounted to USD 16.4 trillion at current prices and USD 20 trillion on the PPP basis (EAEU: USD 1.5 trillion and USD 4.5 trillion, respectively), while the EU population exceeded the EAEU population by a factor of 2.8 in 2016.

European capital has made sizeable investments in the economies of Russia and its Eurasian Economic Union partners. Thus, according to the Eurasian Development Bank, Austria's investments stocks in the EAEU in 2016 stood at USD 8.9 billion, including investments in Russia of USD 5.2 billion, while Dutch FDI in the EAEU has reached USD 21.2 billion, including FDI in Russia of $12.2 billion. However, in the recent years, there was a strong downward trend in EU investment flows to the EAEU countries, especially to Russia, and even the stock of total investment has fallen showing an outflow of European capital.

Even though the priority is still given to the European capital, the EAEU countries are more and more often look for alternative sources of foreign investment. It is important for European investors to understand that they are exposed to an increasing risk of losing EAEU markets due to the inflow of capital from the leading Asian economies. On the other hand, no breakthrough in the downward trend of European investment can be expected unless there is an improvement in the EU-Russia political relations, and even more importantly, in Russia’s investment climate, protectionist trade policies and the conditions offered to foreign investors in general.

However, a protectionist trade policy per se may be conducive to FDI, for example, in the food processing industry in Russia.

According to the FDI database of the Eurasian Development Bank, capital investments in the EU accounted for 62% of the total Russian FDI and for 90% of the total Kazakh FDI. Therefore, despite a growing importance of Asian (especially China), trade and investment links with the EU remain critical for the EAEU.

From the EU perspective, the share and even the absolute value of trade and investment flows with the EAEU countries has been declining in the recent years, while no similar trend could be observed in case of other major regions. This shows that, apart from vulnerability to oil prices, political tensions, sanctions and the actual economic policies in the EAEU countries are acting as deterrents to the development of trade and investment relations.

The larger part of trade decline in 2014-2016 can be attributed to oil price collapse and related devaluations.

It is clear that the present trends do not benefit either side, after all the geographical proximity, the long traditions of East-West relations should lead to stronger inter-regional economic ties. Thus, there would be common interest in reversing these downward trends – which would require a change in the negative factors mentioned above.

Russia’s "Turn to the East" is slowly gaining momentum. The APEC countries are beginning to overtake the EU as a source of imports: in 2016, the Eurasian Economic Union imported relatively more goods from APEC countries (42% of total imports - mostly from China, Korea, and ASEAN countries) than from the EU (41%). However, the EU still remains by far the most important export market.

In order to properly discuss the prospects and challenges for a deepened economic cooperation between the EU and the EAEU, one also has to keep in mind the economic dimensions and economic asymmetries of each player, both in an inter-regional and intra-regional context.

After the Brexit, Germany and France will account together for about 35% of the EU-27 economy. The “new” Eastern European member states (that joined the EU in 2004 and 2007. respectively) will account for 14% of the EU-27 GDP. In contrast, the EAEU economy is dominated by Russia (87% of EAEU GDP in 2016).

The results of 2016 survey within the “EDB Integration Barometer” show, that up to 82% of EAEU states’ citizens support the potential conclusion of an EAEU – EU agreement on free trade and investments. The EAEU, in turn, is EU's third largest trade partner after the US and China (Russia, if taken separately from its EAEU partners, is currently holding the fourth position).

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