Several events from the past few days highlight the degree to which the Russian and European economies are intertwined and how, despite current frictions over Ukraine, both actors will maintain strong economic links. Citing energy and trade, tourism and infrastructure projects, many members of the European Union recognize the need to preserve their links with Russia and vice-versa. This will severely affect the European Union's next moves against Russia and limit the possibility of meaningful sanctions.
The South Stream pipeline project, which would transport Russian natural gas through the Black Sea to Bulgaria, Hungary, Slovenia, Serbia, Croatia, Greece, Italy and Austria, is a prime example of Europe's inability to present a coherent response to Russia. On March 26, Bulgarian Economy and Energy Minister Dragomir Stoynev said his country must look after its national interests, which include the South Stream pipeline. Questions over the fate of the project are only some of the notable consequences of the current frictions between Russia and the European Union.
In late 2013, the EU Commission suggested that the pipeline might contravene European regulations but offered to mediate between Russian energy giant Gazprom and the EU members of South Stream to find a solution. Brussels recently admitted that the negotiations could be affected dramatically by the events in Crimea. Even Paolo Scaroni, the head of Italy's ENI, one of the largest partners in the project, expressed concerns about the future of South Stream.
The South Stream pipeline was specifically designed to bypass Ukraine and reduce its role as a transit country for Russian natural gas going to Europe. The Bulgarian government recently said that the crisis in Ukraine actually underscores the need for the pipeline. More important, the project will create jobs and attract investment in some of the European Union's poorest countries. Brussels is aware that the threat to block the project is one of the few levers it has against Moscow. But it also understands that several EU members could eventually side with Russia in the dispute over the pipeline at a time when the European Union's authority is already being questioned by some of its members. As a result, negotiations on how to adapt South Stream to EU norms are likely to restart, despite the ongoing tensions between Europe and Russia.
Another pipeline project is in doubt because of the events in Ukraine. In late 2013, Bratislava and Kiev nearly reached an agreement to send natural gas from Slovakia to Ukraine via reverse flow techniques, whereby natural gas supplies requested in one country are subtracted from the natural gas flowing to another. This would reduce Ukraine's vulnerability in importing directly from Russia somewhat by covering roughly one-third of Ukraine's total natural gas imports, but it would also put Slovakia in a difficult position. Slovakia is completely dependent on Russian natural gas and plays a key role as a transit country between Russia and Western Europe. Moreover, Bratislava recently received a discount on natural gas prices from Gazprom. The Slovaks are worried that helping Ukraine would lead to higher prices for natural gas from Russia.
On March 25, while Slovakian delegates were in Brussels discussing the issue with their Ukrainian counterparts, Slovakian Prime Minister Robert Fico said his country would be willing to help Ukraine, but "any kind of help has its bounds and it is economically limited." He added that Slovakia's first priority is to ensure guaranteed and secure Russian natural gas deliveries through Ukraine to the country. This clearly illustrates Slovakia's concerns about being trapped in a conflict between the East and West. Bratislava will probably keep negotiating this issue with Kiev but needs a clearer signal from Brussels that the European Union is willing to commit to helping Slovakia in the investment necessary to send natural gas to Ukraine and compensate for potential retaliations from Russia.
Two other countries in Central Europe are in a similar position. On March 24, the Czech Chamber of Deputies condemned Russia's annexation of Crimea but voted that the government should try not to impose EU economic sanctions against Russia. Like most countries in Central Europe, the Czech Republic depends heavily on Russian natural gas and is interested in receiving Russian investment. For example, Russian companies are currently bidding in a tender to expand the Temelin nuclear power plant in the Czech Republic. The Czech prime minister recently admitted that his country could not afford to sever its trade ties with Russia. Similar calculations are taking place in Hungary, which recently signed a substantial agreement with Russia for the expansion of nuclear energy in the Central European nation.
But Russia is an important player in Europe's economy for reasons that go beyond trade and energy. For many Mediterranean countries, the tourism sector is one of the few areas still prospering despite the economic crisis. As a growing number of locals in Spain, Greece and Italy cannot afford to go on vacation, these countries are looking for foreign tourists, and Russia has been a key target. On March 20, the Italian Embassy in Moscow said the current frictions between Russia and the European Union would not affect Italy's plans to simplify visa procedures for Russian citizens. On March 25, the Rossiyskaya Gazeta daily quoted the Italian ambassador as saying that visas will be issued free of charge to Russian tourists. In 2013, some 1 million Russians visited Italy, twice as many as in 2009. Greece is also considering making visa rules easier for Russian travelers.
These events are a reminder of the deep economic links between Russia and several members of the European Union. Even the largest economies in the bloc, such as France and the United Kingdom, recently expressed concern about the economic impact of retaliatory behavior between Brussels and Moscow. For example, one-fifth of French banks' foreign lending is to Russian companies and individuals. Many large Russian firms have heavy listings on the London Stock Exchange. Tensions between the two players are likely to remain high in the coming weeks, especially since the European Union is set to sign association and free trade agreements with Moldova and Georgia in June.
This will put additional pressure on EU member states; the need to take a tough stance on Russia contradicts the need to keep close economic ties with Moscow. But even if tensions remain high, and even if the European Union approves additional sanctions against Russia, the Europeans' economic needs will ultimately shape most of their decisions.
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