LSE Conference: European Parliament in external trade and investment policy
European Parliament, Brussels
23 September 2014
Session: how can the Parliament contribute to policy coherence?
INITIAL PAPER OUTLINE
Trade and foreign policy : the case of Ukraine/Russia
By Iana Dreyer – iana.dreyer@borderlex.eu – www.ianadreyer.net – Trade policy analyst,
formerly EUISS
Key messages:
A: EU Enlargement and its shadow, is the dominant theme the EU’s political
relationships with Ukraine and Russia, shaping the general politics of this relationship
but also trade relationships in particular.
B: Energy is the key trade issue that will require special attention in the coming years if
a lasting solution to the EU’s and its neighbours’ relationships with Russia is to be
sought.
1/ In the shadow of EU Enlargement
a) Trade policy has been an important tool in the reordering of Europe after the end of
the Cold War, but the EU’s primary goal has been and remains a regional order based
on international law
The 1993 European Council Summit in Copenhagen which laid the basis for EU enlargement,
reflects this.
“The Community proposes that the associated countries enter into a structured
relationship with the Institutions of the Union within the framework of a
reinforced and extended multilateral dialogue and a concentration on matters
of common interest.
“The European Council, recognizing the crucial importance of trade in the
transition to a market economy, agreed to accelerate the Community's efforts
to open up its markets. It expects this step forward to go hand in hand with
further development of trade between those countries themselves and between
them and their traditional trading partners”.
b) The 1990s - The establishment of a new European economic order based on two
pillars –Enlargement policy - Single Market (deepening and widening of the Single
Market)
Pillars:
Multilateral framework: 1994/1995: World Trade Organization (WTO): most CEE countries
joined from the very beginning
Multilateral/regional framework: 1994: Energy Charter Treaty: supposed to become the
“WTO of energy” = remained a European/Eurasian institution.

Lays the foundation for market-based trade and investment relationships on the Eurasian
landmass. It regulates transit, investment, tries to secure competition, and includes even
investor protection clauses. The ECT ISDS mechanism was the first to be adopted by
the EC! A long time before the Lisbon Treay!
Regional level: 1990s: Association Agreements signed between the EU and CEE countries
who joined the bloc in 2004 & 2007.
» » “Trade policy bargain”: absorption of EU body of laws (trade & investment
liberalisation + ‘acquis communautaire’; in return :access to EU market and eventually
EU decision-making through membership + Four Freedoms (incl. mobility of labour).
This policy has had a tremendous transformational power.
Domestic level: EU undergoing significant transformation: Single Market 1993
c) After 2004
4 key political processes meet:
Transformation of EU domestic politics after 10 new members from Central and Eastern
Europe joined
“Import” into domestic EU politics of “unfinished business” between former COMECON bloc
members and a Russia that was never satisfied with the emerging new order.
»» Cf. Baltics/Lithuania exposed to Russian oil embargoes since the 1990s. Issue
became a serious European concern only after the Baltics joined EU.
New political asymmetries within the bloc.
»» Jan Zielonka: “Europe as Empire”, 2007
“Enlargement fatigue” in EU.
Feeds on lack of economic dynamism in Western member states, backlash against globalisation
and enlargement due to competitive pressures on low-skilled workers in advanced economies.
Also beginning of reflection on where the EU’s borders actually end.
New waves of democratisation on former Soviet territory
Democratisation processes that the EU has sought to stabilise in Central and Eastern Europe
run deep into the territory of the former Soviet empire (Ukraine Orange Revolution, Georgian
Rose Revolution…). The EU felt it needed to respond to these moves by offering these states
closer ties.
Russia resurgent
High oil prices since 2003/2004 & a limited set of economic reforms early in 2000s decade lift
Russia’s economic performance and greatly improve the finances of its government = Russia
has means to act on its previously already notable disagreement with its loss of status as a
dominant power in Europe.
Developments since 2004 leading up to Ukraine crisis

2004: development of a new set policies under the European Neighbourhood Policy,
followed by Eastern Partnership 2008. Critics said: “Enlargement light”, shaped by
fundamental EU ambivalence about what it wanted to achieve in the region.
»» “Trade policy bargain”: AAs echo previous CEE AAs pre accession. In fact
less ambitions on trade liberalisation on both sides especially in sensitive sectors
for EU (ag, steel, chemicals); many critics say too intrusive in terms of EU
acquis (problematic for cost reasons for what are in fact v poor neighbours), no
membership perspective and disappointing results of AA process for labour
mobility. The attractiveness and transformational power of EaP AAs for EU
partners much lower than those commonly attributed to 1990s AAs. Explains
greatly the ambivalence of a country like Ukraine towards signing a deal with
the EU. That ambivalence came to a head – as we know – in late 2013, with
Yanukovich’s U-turn on the AA.


Ukraine: nurtured hopes and expectations of joining EU eventually, but faces reluctant
and divided EU over the issue.
Russia: fears “losing Ukraine” to EU embrace (which it also puts in with NATO
membership).
Ukraine crisis = above contradictions have come to a head.
2/ Russia & EU fragmentation
a) Main goal of West and EU since end of Cold War: tie Russia into international rulesbased order
EU traditional method to achieve these goals in Europe i.e. “export” of EU acquis
communautaire” through political and trade agreements - has not worked with Russia.
Trade and investment policy:
Russia signed up to ECT but never ratified the treaty, and pulled out in 2009.

It took Russia 19 years to join the WTO (membership in 2012) – lingering issues with
implementation of its commitments. Already several dispute settlement cases launched
by both sides.

Negotiations towards a successor treaty to the EU-Russia 1997 Partnership and
Cooperation Agreement never succeeded. Idea of a free trade agreement, or a Common
Economic Space (2003 project) or Lisbon to Vladivostok economic space (V Putin,
2010) never materialised.

Latest attempt at cooperation: 2010 Partnership for Modernisation. Lingering old
method of dealing with Russia: try to have it adopt EU laws and ways of doing + provide
project funding. Results inconclusive.

Currently those initiatives are on ice. The latest ‘trade policy’ on both sides has been titfor-tat sanctions (EU export restrictions on military equipment and dual use industrial
goods, and Russia food import bans).
b) Russia exposes the EU’s remaining fragmentation in key policy areas: foreign policy,
and energy policy.
Energy the defining trade relationship between the EU and Russia

Russia is the EU’s biggest provider of fossil fuels: oil, gas and also coal. The EU absorbs
41% of Russia’s exports. More than two thirds of Russia’s exports are fossil fuels.
Russia has increasingly become dependent on oil (more than on gas) for its revenues.
Its post-Soviet industry has not been able to adapt to global competition for a variety of
reasons (Dutch disease, absence of reforms, persistent protectionism…)

Russia’s government never had enough of an incentive to liberalise its economy, to do
difficult trade policy reforms as required by the WTO or the ECT: its key exports never
faced serious import barriers, high oil prices throughout the last decade have secured
revenues.

Russia is one major actor in the 2000s turn towards ‘resource nationalism’ in emerging
markets. It partly renationalised and remonopolised its oil and gas sector after 2004. The
move has helped exclude political and economic rivals (Khodorkovsky arrest & Yukos
nationalisation most prominent example) at a time where authoritarian rule was reestablished. It also resulted in discriminatory treatment and asset stripping of foreign
investors. Basic ECT principles were not respected.
»» Yukos case – July 2014 €50bn ruling in Hague Court, based on ECT law

In the 1990s, Gazprom – the export monopoly controlling production, distribution and
pipeline routes - gained foothold in EU national gas markets as foreign investor,
especially in Central and Eastern Europe, as these markets partially opened up in a bid
to fulfil EU requirements (but they maintained national monopolies). Many CEE
markets (SK, BG) depended on Russia for close to 100% of their gas deliveries via
Soviet-era pipelines. Russia’s ability to exert political and commercial pressure on
former satellites of the former Soviet Union is unsurprisingly very strong.

Germany and Italy have become very dependent on gas imports from Russia over the
last 3 decades. Italy’s electricity sector depends to four fifths on imported gas. Related
business ties to Moscow have created powerful lobbies that have undermined the EU’s
ability to respond in a joint and forceful manner during acute political crises (e.g.
Georgian war in 2008, gas supply disruptions of 2006 & 2009).
Russia’s foreign policy: the energy and trade ‘weapon’

The central issue since the end of Ukraine’s Orange Revolution has been the country’s
status as key transit state for Russian gas to the EU. Russia has developed very pipeline
projects to depend less on Kyiv for its exports to the EU and has developed Nord Stream
and South Stream. The projects have relied on member state backing for these projects.
At the same time Russia has moved from subsidising Ukrainian domestic gas
consumption before 2004 to demanding from it the highest gas prices in the EU….
Key obstacles to a coherent approach in EU-Russia relationships and by extension to Ukraine

The first obstacle is law and the treaties. The 2009 Lisbon Treaty has not given Brussels
full competency on energy and foreign policy. Certainly, the Lisbon Treaty reinforces
the CFSP and has created a new institution (External Action Service, High
Representative) to deal with foreign affairs, but decision-making still requires
unanimity. The EU Parliament has no co-decision powers.
o In the energy field, Article 94 of the Lisbon Treaty clearly stipulates that
decisions on the energy mix and security of energy supplies remains a national
prerogative. Despite increasing efforts to develop a foreign energy policy
notably to diversify sources of supplies, a coherent energy policy including an
energy security (in other words and energy ‘trade’ policy) is not emerging. To
the contrary.

The second obstacle has to do with the structure of the EU’s gas market: still divided
into national markets which are insufficiently competitive, diversified, interconnected.
This fact holds even more the further east one goes in Europe. The third Energy Package
of 2009 has aimed to address these issues, but despite visible progress in some regions
(notably more interconnections between Visegrad countries) some EU member states
remain excessively vulnerable to Russian gas supply disruption and related political
pressure. Most analysts and economists believe that the single most important remedy
to the ability of Russia to continue to influence political processes in EU member states,
especially CEE states, is to create a liquid, interconnected single gas market in the EU.
This has still not materialised.

In 2012, the EU Commission launched an antitrust case against Gazprom to investigate
whether it was manipulating prices and obstructing competition in Central and Eastern
European markets. The case was suspended on 22 September 2014 – indicating
extremely high political pressure.
3/ Coherence between foreign and trade policy in Russia/Ukraine issue? Role
for EU Parliament?
The EU’s traditional policy instruments used in its neighbourhood so far – trade, energy,
investment – will not help solve the current Ukrainian crisis, nor restore relationships with
Russia. The West needs a new foreign policy vision and doctrine. Definitely the West’s vision
would need to continue to work on the project of establishing a rules-based political and
economic order in and around the EU – but it would need to re-think its means. Trade policy is
only one among other means.
The entire EU Neighbourhood Policy needs to be re-thought ch and many old instruments
revised. The reflex to export the EU rule-book without giving much in return in terms of market
access or mobility to smaller states in particular should be best avoided given that their EU
membership is far off.
Relationships with individual countries East of EU borders need to be tailored to their political
and economic realities and priorities. Priority should be given on the one hand to improving
these countries’ state capacity (Moldova, Ukraine, Armenia, etc.), rule of law, and on the other
to reduce their economic vulnerabilities to Russian pressure (diversification of their gas
imports).
It is not easy to identify an overarching strategic role for the EU Parliament and INTA in
shaping a new comprehensive neighbourhood policy that involves sound trade rules, including
energy trade and investment rules.
However, there are areas it could certainly contribute with to strengthen the EU’s efforts:

Support the new EU President-nominee’s Energy Union (excluding the ‘gas buying
consortium’ idea…) project and any policies aimed at diversifying the EU’s energy mix
and the number of energy suppliers.

Pay more attention to the ECT for trade and investment rules for energy on the Eurasian
landmass

Support the ongoing transatlantic trade and investment talks and the possibility it gives
to the EU to diversify its oil and gas imports. If TTIP is well negotiated and comes to a
conclusion, it would liberalise US oil and gas exports. It is not expected to lead to much
more actual US exports to the EU, because the exporters would fetch higher prices in
Asia. However TTIP would create more options for Europeans, and this is what matters
most.

Despite many flaws the EU-Ukraine DCFTA’s implementation should be back on the
agenda soon as it should be considered above all an economic modernisation tool and
not a bargaining chip or ‘political football’ with Russia. In parallel, seek ways to
improve the deal for Ukrainians over time (mobility, agricultural and metals markets…).

Move the ongoing debate on investor protection and investor-to-state dispute settlement
to another level than the one currently perceivable in TTIP/CETA cases. Think in terms
of reform of the system, rather than in terms of an ideological rejection. Investment
protection is an essential feature of good economic governance, and becomes more
important the more one moves east in Europe. It is an essential issue in the EU’s
relationship with Russia, especially in the energy field.