EU – Russia Relations and the WTO

Russian President Medvedev, French President Sarkozy and Commission President Barroso

After the end of the Cold War and the collapse of the Soviet Union, the European Union adopted a new strategy for dealing with the states of the old Eastern bloc. Central and Eastern Europe, the Commonwealth of Independent States and the Balkans were one of the main targets of the Common Foreign and Security Policy as designed by the European Council in June 1992. Through the incorporation of the CFSP into the Maastricht Treaty as the second pillar of the three pillar system of the EU, the member states at the time openly declared their will to establish “harmonious relations between the European Union and the new States” (European Union, 1992, p. 35). Their objectives included:

  • Strengthening of the existing trade relations between the new states;
  • Promoting political stability
  • Prevention and settlement of conflicts

Relations with Russia developed very rapidly and culminated in the signing of the first Partnership and Cooperation Agreement (PCA) in 1994. The special status of Russia in the EU’s foreign policy is underlined with the fact that it is the only non-WTO state to receive compensation for the losses it sustains due to trade diversion as a result of EU enlargement. In addition to this, it is the first state for which a Common Strategy under the CFSP was designed. All of these initiatives were commenced by the EU, showing its political willingness to open dialogue with its neighbor.

The bilateral PCA was signed in June 1994 and entered into force in December 1997. It is an important agreement since it laid out the spheres of cooperation and created a framework for developing relations between the EU and the Russian Federation. It includes 11 Titles, ranging from political dialogue, trade and economic cooperation, to democracy, human rights promotion and culture.

The PCA has particular provisions concerning the economic relations between the EU and Russia. Title III, Art. 10, Pt.1 of the agreement states that “the Parties shall accord to one another the general most-favoured-nation treatment described in Article I, paragraph 1 of the GATT.” Even though the accession of the Russian Federation into the WTO is an ongoing process, the two sides have agreed to respect the rules laid down by the international organization in their relations. In 1997, when the PCA was coming into force, the accession talks were optimistic, while at this time they have stalled and it is unsure when and if Russia will join the WTO.

Since the collapse of the Soviet Union in the early 1990’s, the Russia economy has undergone significant changes from a socialist, centrally controlled state economy to a market-based and internationally integrated one. It has averaged a 7% economic growth since 1998, but the country suffered substantially during the economic crisis of 2008 and in 2009 there was a GDP real growth rate of -8.5% (EuroStat, 2009). Nevertheless, the privatization process which was initiated very rapidly in the 1990’s led to the turning over of major state-owned firms to politically-connected “oligarchs”. This has left ownership of major industrial firms and corporations highly concentrated in the hands of the political elite and a small number of businessmen. The private sector has remained under the control of heavy political influence (Economy Watch).

The Russian Federation applied for WTO membership in June 1993 and this was followed by the creation of a working party from 1995 onwards (World Trade Organization, 2009). Its last meeting was in March 2006, after which the negotiations stalled mainly because of the political concerns. In more recent news, Pres. Dimitry Medvedev (Russia) urged Pres. Barack Obama (USA) to “push harder for [Russia’s] WTO accession” during a summit held in Washington D.C. in April 2010. He also criticized that the issue was being used as a carrot for other goals (Reuters, 2010).

In the preamble of the PCA, there are several references to the fact that “Russia is no longer a state trading country” and that both parties will “liberalize trade, based on the principles contained in the [GATT]”. Even though Russia was not a member and still has not acceded to the World Trade Organization, it has shown willingness to cooperate with the EU on the matter of playing by the rules laid down in the agreement of the international organization.

Throughout the PCA there are references to the GATT agreement. For example, Title III, Art. 13 states: “The following Articles of the GATT shall be applicable mutatis mutandis between the Parties:…”. Similar wording has been used in other articles of the PCA and this shows that the EU recognizes the importance of Russian accession to the WTO as it is the only major world economy which has not joined the international organization. Until the accession process has been completed, the EU is reluctant to take the next step in economic relations, i.e. the potential of an economic integration agreement, as described in the PCA objectives for a possible Free Trade Area (European Commission, 2009).

Yet, the recent announcement for the creation of a customs union between the Russian Federation, Belarus and Kazakhstan has proven as a deterrent to the EU’s plans for economic integration and has made accession to the WTO more difficult. Accession to the international organization as a state is different from doing so as a customs union, which means that a new set of procedures and negotiations have to be initiated. The situation is very uncertain but nevertheless, a United States Congress Report from 2006 states that it is only a question of time before the country joins the WTO and the US has remained optimistic that with the support of the EU and Japan, Russian accession will become a reality (Cooper, 2006).

Furthermore, Art. 11 of the PCA effectively removes all tariffs, internal taxes or other charges “in excess of those applied to like domestic products”. Imports from Russia to the EU are therefore, to a large extent, not subject to any restrictions. One of the sectors which remained exempt from this rule was steel products, which was amended by an Agreement signed in 2002 introducing mutually agreed steel quotas. Special provisions were also added on the subject of trade in nuclear materials.

Also, Title IV of the PCA concerns the provisions on business and investment with special chapters on liberalization and control over labor conditions, establishment and operation of companies, and cross-border supply of services. In effect, these sections lay down the rules to be followed by the two parties in these matters with very detailed descriptions and distribution of competences on the EU side. This is because granting Russian nationals, businesses and service providers access to the EU’s internal market is a sensitive issue which requires control and regulation. This has facilitated the trade in commercial services between the two parties to a very large extent.

The institutional set-up created by the agreement is described in Arts. 90, 92 and 95. Firstly, a Cooperation Council was created to monitor the implementation of the agreement. It is on the ministerial level and meets annually. Secondly, a Cooperation Committee was also created to assist the Cooperation Council in the performance of its duties. It is on the senior civil servant level. Thirdly, a Parliamentary Cooperation Committee was established, consisting of Members of the European Parliament and the Federal Assembly of the Russian Federation. These bodies were not required only to observe the implementation of the agreement, but also to supervise the accession of the Russian Federation into the WTO. Until this occurs, the Cooperation Council and Committee are in charge of negotiations, settling disputes and other such functions usually performed by the WTO institutions.

In total, it seems that the EU has facilitated its relationship with Russia to accommodate the latter’s non-membership in the WTO both economically and institutionally. By doing so, it has not given as much of an incentive to the Russians to progress towards accession. Nevertheless, trade between the EU and Russia is important to both sides and the articles of the PCA state this clearly. Therefore, the result of Russian accession to the WTO would probably be to render some of the institutional set-up obsolete. The relationship itself would not change.

Sources:

1. Casier, T. (2007). The Clash of Integration Processes? The Shadow Effect of the Enlarged EU on its Eastern Neighbors. In K. Malfliet, L. Verpoest, & E. Vinokurov, The CIS, the EU and Russia: Challenges of Integration (Studies in Central and Eastern Europe) (pp. 62-79). Basingstoke: Pelgrave Macmillan.

2. Cooper, W. H. (2006). CRS Report for Congress: Russia’s Accession to the WTO. Washington DC: Congressional Research Service.

3. Economy Watch. (n.d.). Russia Economy. Retrieved April 04, 2010, from Economy Watch: http://www.economywatch.com/world_economy/russia/

4. European Commission. (2009, May 01). Russia. Retrieved April 3, 2010, from European Commission: DG Trade: http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/russia/

5. European Union. (1992, June 28). European Council in Lisbon, June 26-27 1992. Retrieved April 02, 2010, from European Parliament: http://www.europarl.europa.eu/summits/lisbon/li2_en.pdf

6. EuroStat. (2009, Sept 22). Russia: Main Economic Indicators. Retrieved April 03, 2010, from European Commission: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdf

7. Reuters. (2010, April 14). Russia wants U.S. to push harder for its WTO entry. Retrieved April 15, 2010, from Thomson Reuters: http://www.reuters.com/article/idUSWAT01429820100413

8. World Trade Organization. (2009, Nov 27). Accession Status: Russian Federation. Retrieved March 25, 2010, from World Trade Organization: http://www.wto.org/english/thewto_e/acc_e/a1_russie_e.htm

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