Russia more deeply integrated in free trade area

By Prof. Roland Berger

The eastward expansion of the EU and the Finnish presidency of the European Union have brought Russia closer than ever. A population of 143 million makes this gigantic country both a significant selling market and a strategic bridgehead to the CIS and the countries of Central Asia. In terms of purchasing power, the Russian Federation is the world's tenth-largest economy. The average Russian today earns EUR 8,496 a year – nearly twice as much as ten years ago – and the trend is still pointing up. As a result, wholesale and retail groups, manufacturers of building materials, car makers, drug companies and telecom firms are enjoying continuous growth.

The EU is Russia's number one trading partner, accounting for an impressive 60% of foreign direct investment. Every year, the Russian Federation exports energy products worth more than EUR 60 billion to the EU. A quarter of the European Union's demand for gas and oil is thus met by Russian imports, and this volume is likely to increase further. Forecasts indicate that imports will meet around 70% of the EU's energy needs by 2030, compared with a "mere" 50% today.

A partnership treaty signed in 1997 laid the cornerstone for today's Russo-European collaboration. Initially concluded for a ten-year period, the treaty is renewed each year upon expiry. Starting in 2007, the main focus will be on issues relating to business, law, domestic and foreign security, and closer collaboration in the fields of research, education and culture. Accordingly, the Russian Federation will be forced to pay more attention to such problems as insufficient legal security, inefficient administration, corruption and the need for much more extensive market deregulation. Unquestionably, much remains to be done in the existing "planned democracy".

Nevertheless, Russia has come a long way since the heady days of glasnost. President Vladimir Putin's consistent, coherent economic policy is paying off. Since Putin took office in 1999, tax reforms, a more favorable investment climate and much more reliable government institutions have combined with rising oil and gas prices to help the country overcome its 1998 economic crisis. A new boom has ensued.

Russia and Europe share a turbulent history. As neighbors, however, we need each other. The EU is therefore right to continue to help the Russian Federation in its transformation. German Foreign Minister Walter Steinmeier has even advocated reciprocal agreements to involve Russia more deeply in the EU, possibly going so far as to create a free trade area between the two. These ideas point in the right direction. Such moves will give the EU a potent and increasingly reliable partner on the old continent.

(This column was published in "Rheinischer Merkur" on October 12, 2006)