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By Todd Prince

A Wary Eye Is Cast Over EU's Influence on Trade

The Moscow Times, April 18, 2002

The State Duma narrowly approved on first reading Wednesday thegovernment's billon alternative military service that allows young people ofdraft age to carry out As the European Union brings countries of Eastern and Central Europe into its fold over the next few years, its political clout in the region is expected to strengthen and its influence on Russian economic life is set to grow.

But although the political ramifications of EU extension are considered damaging for Russia, the economic consequences are far from being a black-and-white, win-or-lose situation.

The EU accounts for about 40 percent of total Russian exports, but this is expected to rise to 60 percent in coming years as the bloc expands to include former Soviet satellite states in Central and Eastern Europe. EU membership will require Eastern and Central European countries to bring their economic and trade legislation in line with EU standards, which could mean new hurdles for Russian producers.

"The most important concern on the Russian side is highly justified, that of EU trade policy being applied to yet another eight or 10 countries, many of them important Russian trading partners," said Erik Berglof, director of the Stockholm Institute for Transition Economies. "The EU's choice of protectionist tools, in particular the use of anti-dumping measures, is also particularly damaging to Russia and has hit the country where it hurts the most."

While this will hurt some major Russian companies, like steel and machine manufacturers, some say its biggest effect will be on smaller scale producers. "EU ecological and accounting standards are stricter than those currently in effect in Eastern European countries," said Vladimir Tikhomirov, a senior economist at NIKoil investment bank. "Small manufacturers and businesses will find it more difficult to get into these countries after EU accession."

But even if tougher regulations block Russian consumer goods from entering Eastern European markets, Tikhomirov and others say the Russian economy may not feel much of a sting.

EU candidate countries in Eastern and Central Europe account for about 20 percent of Russian exports. According to ING Bank Eurasia, raw materials account for 75 percent of that total. Oil and gas make up 50 percent, according to the bank. "We do not expect a substantial impact in the short run resulting from trade with the new EU members," said ING Bank Eurasia general director Hendrik Ten Bosch.

That was the case with Finland, currently the only EU member bordering Russia. Finland joined the EU in 1995 and according to Timo Koponen, trade commissioner at the Finland Trade Center in Moscow, Russian export volumes have remained constant since then. Oil and gas, he said, make up the lion's share of exports to Finland.

The EU's interest in little more than Russian energy resources, which would only intensify with the additional states, adversely affects the development of the Russian economy, some say.

"By imposing restrictions on Russian manufacturers and agricultural products, and no restrictions on energy exports, EU trade policy has contributed to the 'Dutch Disease' problem," said Berglof of SITE, referring to the tendency of large influxes of income from the export of energy resources to raise the exchange rate of a nation's currency and damage competitiveness in the non-export sector of the economy. But many observers see benefits for Russia from EU expansion. Some say EU extension could theoretically even help Russian exporters of European-standard goods.

"EU tariff barriers are lower on average than existing barriers in Eastern Europe," said Christopher Granville, chief strategist at United Financial Group. "Thus technically, Russian companies could have a larger export capability, but in real life things are a lot more complicated and regulations could change. The overall effect of EU expansion will be minimal."

But although EU tariffs are lower than current Eastern European tariffs, Russian goods may still lose their competitiveness in both these regions after EU expansion. Current tariffs between the EU and Eastern Europe will disappear with EU expansion, making each regions' goods more competitive relative to Russian goods within the expanded EU market.

EU regulations may single out goods entering Eastern Europe, but they can't single out investors. And in Eastern Europe, where Russia-phobia has shown itself at tenders for major state property, Russian investors should see a more level playing field. Hugo Erikksen, head of public relations at oil major Yukos, said some of these countries have been reluctant to welcome Russian investments. "Under EU regulations, these countries can't discriminate," he said. "They have to treat all investors as equals and that gives Russian companies new opportunities."

Expansion gives Russian companies with assets in Eastern Europe access to the entire European market, analysts say. Some say this could pull Russian investors into Eastern Europe.

"There is a big difference between investing in tiny Estonia and investing in the EU," said Alexei Sushkevich, economic analyst for Yabloko and senior research fellow at the USA-Canada Institute. "Once Estonia joins the EU, any Russian investments there will be investments in the EU."

But analysts are quick to point out that the chances Russian companies will be able to take advantage of such opportunities right away are minimal. Competition in the EU market is already fierce, they say.

However, expansion could have positive consequences for Russian companies beyond dollar figures and market share.

Eastern European politicians and economists will be able to bring their knowledge of Russia to the decision-makers at the EU headquarters in Brussels, some analysts say. Russia will also slowly become integrated into the EU culturally as it plows more investment into the EU member states in Eastern Europe. Russian companies operating there will have to adopt EU business standards and ethics.

But that is a double-edged sword for Russia. EU regulations demand greater transparency in financial transactions than currently exist in Eastern European countries, and that may scare off some Russian companies.

"There may be problems in acquiring assets. Companies will have to show more information about their operations," said Renaissance Capital economist Alexei Moiseyev. "Right now they have to show fewer documents in Eastern Europe. But the EU will be more diligent about money laundering and other issues." Tikhomirov agreed that this would create obstacles for certain Russian companies. "The general trend in the EU is to get more control over borders, including economic ones," he said. "The EU will closely watch these countries."

Moscow has expressed fears that EU expansion may erode trade with Eastern Europe, but observers say that breakdown has for the most part already taken place. EU expansion could only enhance those former Soviet trade contacts by strengthening Eastern European economies, they say.

Economists expect Western European nations to pour money into Eastern Europe after expansion to take advantage of the cheaper labor force. That should lead to stronger economic growth in the region, including parts of Russia.

"Russia will gain from any increased economic well-being in Eastern Europe following enlargement, both in terms of increased demand for Russian products and appreciation of Russian assets in these countries," said SITE's Berglof.

Those Eastern European countries that looked westward following the fall of the Soviet Union may look eastward after EU expansion. And that could pull the EU and Russia closer together.

"Entry into the EU creates a very difficult problem for Eastern European countries -- finding markets for their goods," said Yabloko's Sushkevich.

"Eastern European consumer goods producers will have to fight with Western European producers on the EU market and their chances of success are not very good. The long-term tendency will be for Eastern European countries to export more and more to Russia, and this will strengthen EU-Russian relations."

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The Moscow Times, April 18, 2002

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