Russia’s energy riches – bane or blessing?

The Russian economy is booming, as it has been consistently for the past five years: the crisis of 1998, when Moscow had to default on international debt, is just a fading memory. But the Russian Federation’s long-term prospects are still dire.

Its population is shrinking. Diseases such as HIV/Aids, alcoholism and tuberculosis ravage the poor. Russia has, according to the World Bank, the "dubious distinction" of being one of two major regions of the world in which life-expectancy is declining. The other is sub-Saharan Africa. Russian males cannot expect to live any longer than their fathers did in 1955, or, astound-

ingly, their peers in Eritrea and Papua New Guinea, according to the World Bank.

Even in the medium term, unless the country uses its oil wealth to help restructure its economy and build robust social, legal and financial institutions, so-called Dutch disease beckons. Its abundant natural resources may turn out to be the curse that they have been in countries such as the Netherlands, after whom the phrase was coined, in the 1970s and Nigeria in the past decade.

Wealth from oil - or gas - can unbalance an economy, drive up the exchange rate, weaken export sectors and trigger an inflationary consumer-led surge in demand. It can also erode the reformist impulse and exacerbate endemic corruption. "The risk is that oil revenues are wasted on a gradual increase in expenditures and tax cuts that will not raise potential growth," the International Monetary Fund said in June.

This embryonic failing state, rich in military technology as well as energy, is sitting on the European Union’s borders posing arguably the EU’s biggest geo-political challenge. How can we help proud and touchy Russia, some of whose policymakers do not see the dangers ahead, help itself?

This is a question of particular significance for Brussels, because trade policy, as an element in a wider EU-Russia dialogue, can be one of the mechanisms through which the European Union can try to ensure that Russia becomes a reliable economic partner. Europe is Russia’s biggest trade partner, in terms of exports and imports. And Russia is the EU’s third biggest partner in both imports and exports.

Trade policy can help to boost the EU exports to Russia and to pay for the energy imports on which we depend. The EU imports around one quarter of its energy from Russia. Most importantly, trade policy can also help to promote the cause of Russian internal reform, industrial diversification and, through technology transfer, the modernisation Russian manufacturing needs if it is to become competitive in world markets outside the energy sector.

It was in 2004 that then trade commissioner Pascal Lamy reached agreement with Russia on the broad terms on which the EU would support Russian membership of the World Trade Organization (WTO). EU policy remains geared towards this objective even though, in EU eyes, Russia has still to meet some of the commitments it made then. WTO membership, could underpin the EU-Russia trade-relationship with a rules-based framework. This would make managing any disputes less diplomatically fraught.

But whether WTO membership is achieved depends first on Russia agreeing entry terms with the United States. If this is not resolved by next summer, before the Russian Duma elections in November and the presidential elections in April 2008, then WTO entry is unlikely before 2009.

But Brussels cannot wait this long to deepen its trade and economic relationship with its big eastern neighbour. So, as with India, the foundations are being laid to start negotiating what will be called "a very ambitious economic integration agreement", otherwise known as a bilateral trade agreement. There are hopes that the Council of Ministers will approve a negotiating mandate for these talks ahead of the November EU-Russia summit.

Such a deal would secure privileged EU access to Russia’s markets, going beyond the terms of a WTO deal. It could range over issues such as intellectual property protection, public procurement, financial services, competition policy and technical standards, so aiming to promote the cause of Russian economic reform and closer EU-Russian economic integration.

It would also be part of the more ambitious architecture of bilateral EU-Russia diplomatic relations, covering issues such as energy, migration, terrorism and the environment, for example, which will be part of the new and deeper Strategic Partnership Agreement or Treaty which it is expected will replace the existing Partnership and Co-operation Agreement.

Russian trade

Year

Imports from EU (€bn)

Exports to EU (€bn)*

63

* of which 27% energy.

Source: Eurostat

• Stewart Fleming is a freelance journalist based in Brussels.

The Russian economy is booming, as it has been consistently for the past five years: the crisis of 1998, when Moscow had to default on international debt, is just a fading memory. But the Russian Federation’s long-term prospects are still dire.