A new beginning

Relations between the European Union and Russia are put back on track at the end of a high-power summit, where the E.U. agrees to back Russia's bid for entry into the WTO and Putin indicates his willingness to ratify the Kyoto Protocol.

in Moscow

FOR most of the post-Soviet decade, relations between Russia and the European Union have been mired in a rather civilised but strategic stalemate over two outstanding issues: Russia's ardent desire for inclusion in the World Trade Organisation (WTO) and the European Union's demand that Russia ratify the Kyoto Protocol. In a high-power summit held in Moscow on May 21, Russia and the E.U. took a landmark step towards resolving this stalemate: the E.U. promised to back Russia's bid to enter the WTO and, in turn, Russian President Vladmir Putin indicated that Russia may ratify the Kyoto Protocol in the near future. In addition, the two sides discussed a rather complex trade agreement.

At the end of the deliberations a satisfied European Commission President, Romano Prodi, said: "Both sides gave way in order to accommodate the delicate political and economic issues important to each." Bilateral talks leading up to this summit began six months ago, though most of the groundwork for this deal had been done over the past two-three years. Negotiations intensified after European Trade Commissioner Pascal Lamy and Economic Development and Trade Minister German Gref met in Luxembourg on April 27.

President Putin indicated after the summit that the concurrence achieved on the trade deal facilitated the E.U. to back Russia's bid for entry into the WTO and that this could prompt Moscow to move quickly towards a ratification vote on the Kyoto Protocol. "The E.U. has met us half way in talks over the WTO and that cannot but affect positively our position on the Kyoto Protocol," Putin told mediapersons. He stressed that Russia "did not package the issues of WTO and the Kyoto Protocol". Nevertheless, Putin stopped short of giving a firm commitment on Kyoto, saying that certain sections in his government still had concerns about the "obligations" imposed by the treaty and it was "not 100 per cent certain" that Parliament would endorse the treaty.

Analysts, however, are convinced that "horse-trading" did happen at the summit and that there is a clear link between Russia's entry into the WTO and the Kyoto issues. Moscow-based economist Mikhail G. Delyagin, chairman of the Institute for Globalisation Problems (Moscow), indicated to the media that it was clear that Russia had agreed to a quid pro quo. He said: "What Putin said about the ratification of the Kyoto Protocol means that today's summit was not Russia's diplomatic victory at all. Russia has paid for its accession to the WTO by giving up its positions on Kyoto." Moscow's signature is vital for the survival of the Kyoto Protocol, which aims to reduce greenhouse gases to 5.2 per cent below the 1990 level by 2012. However, Putin's turnaround on Kyoto is also expected to put pressure on the United States' decision to abstain from voting on the controversial protocol.

Fears abound in Moscow on the negative impact of the protocol on Russia's economy. As recently as last month, Andrei Illarionov, Putin's economic adviser, indicated that ratifying Kyoto would be equivalent to sending the economy into "Auschwitz". He had then said that "the Kyoto Protocol is a death treaty because its main purpose is to stifle economic growth and economic activity". Analysts interpret these remarks as little more than posturing preceding the summit.

The Russian Academy of Sciences, in a comprehensive report addressed to Putin on the eve of the summit, concluded that compliance with Kyoto would cost the nation "tens of trillions of dollars" over the next century but environmental benefits would be minimal. However, sources within the E.U. believe that ratification of the protocol could lead to substantial gas-saving infrastructure investment and would entail significant European investment in Russia. Analysts also believe that Russia could sell the surplus carbon emission "credits" that were earned due to a temporary decline in production in Russia.

The trade compromise worked out at the summit is especially critical for Russia now. The recent E.U. expansion into the Baltics and Eastern Europe makes the E.U. not only Russia's chief trading partner but also the bulwark of its future economic prosperity. One of the main items on the agenda was the E.U.'s demand that Russia liberalise its gas prices, and a compromise of sorts seems to have been reached on this front. Under strong pressure from the E.U. to raise low domestic gas prices for industrial users, Russia agreed to increase the price from the current $28 to $37-42 per 1,000 cubic metres by 2006 and $49-57 by 2010.

Until now the E.U. was adamant that Russia equalise its gas prices despite the risk of severe damage to its economy and this was held as a condition for its support for Russia's entry into the WTO. But right now it appears as though the E.U. is letting Russia get away with manageable losses. They have asked Russia merely to double its domestic gas price and agreed to Russia maintaining monopoly over the state-owned gas company, Gazprom. However, the E.U. is expected to gain limited access to Russian pipelines, though not transit rights. Export duties on gas will be capped at 30 per cent. In addition to this, compromise was reached on a vast array of other trade issues as well.

On the whole, analysts are optimistic about this deal despite the horse-trading and expect that Russia could end up joining the E.U. as early as the end of this year or in 2005. However, Russia is expected to complete similar agreements with the U.S., China and Japan before this can happen. Further, there is the feeling that with the current rapprochement and the E.U.'s expansion, the dynamics of Russia's relations with the E.U. could undergo a major change. In the post-Soviet period, Russia-E.U. relations were constantly frustrated by these three major issues - WTO, the ratification of the Kyoto Protocol and the hiking of gas prices - and many minor issues. However, with the major hitches seemingly removed, the relationship should even out despite minor problems. This is an optimistic development and heralds a new beginning for E.U.-Russia relations.