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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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