The economic and financial crisis in Russia – background, symptoms and prospects for the future. OSW Report 02/2015

The crisis in Russia’s financial market, which started in mid-December 2014, has exposed the real scale of the economic problems that have been growing in Russia for several years. Over the course of the last year, Russia’s basic macroeconomic indicators deteriorated considerably, the confidence of its citizens in the state and in institutions in charge of economic stability declined, the government and business elites became increasingly dissatisfied with the policy direction adopted by the Kremlin, and fighting started over the shrinking resources. According to forecasts obtained from both governmental and expert communities, Russia will fall into recession in 2015. The present situation is the result of the simultaneous occurrence of three unfavourable trends: the fact that the Russian economy’s resource-based development model has reached the limits of its potential due to structural weaknesses, the dramatic decline in oil prices in the second half of 2014, and the impact of Western economic sanctions. Given the inefficiency of existing systemic mechanisms, in the coming years the Russian leadership will likely resort to ad hoc solutions such as switching to a more interventionist “manual override” mode in governing the state. In the short term, this will allow them to neutralise the most urgent problems, although an effective development policy will be impossible without a fundamental change of the political and economic system in Russia.

Trade and geopolitics: should the EU engage with the Eurasian Economic Union? EPC Policy Brief, 2 April 2015

In an effort to find a solution to the deteriorating relationship between the EU and Russia, various commentators, policy-makers and experts have suggested that the EU should seriously consider engaging with the Eurasian Economic Union, as part of a new ‘grand bargain’ between Russia and the EU. If Ukraine will no longer be forced to choose between two integrating regimes, so the argument goes, Russian sensibilities can be pacified, which will in turn, hopefully, lead to peace in eastern Ukraine. However, according to Rilka Dragneva and Kataryna Wolczuk, these arguments are based on a number of problematic assumptions about integration dynamics in the eastern neighbourhood. In this Policy Brief, they recommend the EU better think twice before further engaging with the EEU.

Prime Minister Fico’s Russian card. OSW COMMENTARY NUMBER NUMBER 175/01.07.2015

Since the beginning of the Ukrainian-Russian conflict, the position of Slovakia’s left-wing government towards Russia has been ambiguous. Bratislava has accepted the EU sanctions targeting Russia and the plan for strengthening NATO’s eastern flank. At the same time, however, Prime Minister Robert Fico’s government has maintained close political relations with the Kremlin. It has called for the intensification of Slovak-Russian economic relations and has repeatedly criticised the sanctions, speaking in tandem with Russian propaganda in so doing. Slovakia’s Prime Minister is hoping that by playing the role of one of the leaders in the EU and NATO who are most willing to cooperate with Russia, he will gain economic benefits and win votes in next spring’s upcoming parliamentary elections. Despite numerous pro-Russian gestures, Slovakia has been limiting the number of areas in which Moscow could exert pressure on Bratislava. As it strives to become independent of Russia, Slovakia has ensured possible alternative fuel supplies for itself. Moreover, it has been gradually replacing Russian-made military equipment with equipment made in the West. The Slovak government does intend to develop the country’s cooperation with Russia, including in strategic areas involving supplies and transit of oil and gas, as well as supplies of nuclear fuel. Nevertheless, it has been making efforts to gain easy access to an alternative source of supplies in each of these areas. Beset by crises, Russia has ever fewer economic cooperation opportunities to offer Slovakia, and Slovak businesses operating on the Russian market have to take into account the growing risk of insolvency of local contractors. To a great extent, therefore, Slovak-Russian relations have been reduced to rhetorical statements confirming the desire for closer cooperation, and to visions of joint projects accompanied by an ever shorter list of feasible cooperation initiatives.

Cameron’s ‘renegotiations’ (or Russian roulette) with the EU: An interim assessment. CEPS Working Document No. 413/September 2015

Since the May 2015 general election when the Tory Party gained an absolute majority in the House of Commons, Prime Minister Cameron has put his campaign into high gear to get a ‘new settlement’ with the EU and invested much personal diplomacy to try to advance his objective. “What does he really want?” is still heard from other EU leaders, yet his agenda is taking rough shape with calls for results under four headings: “competitiveness, sovereignty, social security and economic governance”. These are only code words, however, for a mixed bag of more specific desiderata, which overall seem to be moderate. Impossible demands have been quietly dropped. Some items will still be tricky to negotiate while others can be placed on the agenda for ongoing EU ‘reform’ that can be widely supported. The Brussels side of the affair thus seems manageable, but the wild cards at home in the UK remain or are becoming even wilder. The standard hazards of the referendum instrument are now exacerbated by the unknown quantity of the new Labour leadership alongside the aggressively Eurosceptic majority of Tory MPs and the great migration crisis, which is translating now into a negative factor for the EU in UK opinion polls. This ostensibly very democratic process is looking more and more like a deadly serious game of Russian roulette.

2016 already puts its mark on the economic map of Europe. CEPS Essay No. 22/8 January 2016

The start of 2016 brought highly symbolic changes to the trade policy map of Europe between the EU- and Russian-led blocs, as the EU’s Deep and Comprehensive Free Trade Area (DCFTA) with Ukraine entered into force provisionally, while Russia moved in precisely the opposite direction by scrapping its free trade agreement with Ukraine. However the ongoing changes go far wider and deeper. The energy sector and major industries see disengagement between Ukraine and Russia, and Russia’s share in Ukrainian trade is falling substantially. New transport corridors with China may offer synergies with trade opportunities for all three DCFTA states, with Georgia first in line. Visa liberalisation for the entire DCFTA space is now firmly in prospect. Divergent macroeconomic trends between a recovering eurozone and recession in Russia will accentuate the changes in trade structures. A better organisation of the pan-European economic space is surely desirable, but prospects for links between the EU and the Eurasian Economic Union remain problematic.

Financial assistance to Greece: Three programmes. EPC Discussion Paper, 26 February 2016

There are a lot of myths surrounding the bailout money that was given to Greece. Many people still believe that the money never went to the Greek people, but to the Greek and European banks; that the intervention of the euro-area governments and the IMF dealt almost exclusively with the Greek debt; that very little money was used to finance Greek public expenditure; that most Greek debt was reimbursed; that no cuts were made to the stock of Greek government bonds on the market; and, finally, that so far, no cuts have been made to the debt of the Greek state towards the euro-area countries. In this Discussion Paper, Fabio Colasanti debunks some of those myths by taking stock of the numbers behind the financial support given to Greece by the countries of the euro-area and the IMF. Examining the three bailout programmes in detail, he discusses the reasons for and against a restructuring of the Greek public debt in 2010, its implementation in 2012, the degree in which the Greek debt towards the euro-area countries has already been cut, and the scope for further cuts. Finally, the paper explains how both issues were and are still dominated by internal political considerations, both in the creditor countries and in Greece.

The consequences of the Western financial sanctions on the Russian economy. OSW COMMENTARY NUMBER 203/23.03.2016

Although they are not the deciding factor, the Western financial sanctions are nevertheless an important factor affecting the deteriorating economic situation in Russia. They have significantly undermined the opportunities which Russian companies have to attract foreign capital, thus contributing to the deterioration of their financial condition (which is particularly prominent in the case of energy firms subject to sanctions). Therefore, Russian businesses need more support from the state. However, this support is becoming more difficult due to the dramatic fall in oil prices – revenues from oil exports are the main source of budget revenue.