The Development of Economic Relations Between V4 and Russia: Before and After Ukraine

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1 Summary of an Expert Roundtable The Development of Economic Relations Between V4 and Russia: Before and After Ukraine On February 27 th, in cooperation with the Slovak Foreign Policy Association (SFPA), Prague Security Studies Institute (PSSI) organized a closed-door roundtable in Bratislava, Slovakia, S to discuss the development of economic ties between the Visegrad countries and Russia in light of the Ukraine crisis. Since the outbreak of the Ukraine conflict the volume of total trade betweenn the Visegrad countries (Czech Republic, Hungary, Slovakia, Poland) and Russia has experienced a notable decrease. Similarly as in other EU member states, it began to accelerate especially in the second half of The main causes of the decline are connected to the dramatic fall of the Russian rouble, swift drop in gas and oil prices, and accompanying economic difficulties brought about by a combination of the EU and US sanctions imposed upon Russia for its illegal actions in Ukraine. Given that the expert roundtable s goal was to consider changes in economic relations between the Visegrad countries and Russia caused by the conflict in Ukraine, speakers sought to assess the specific impacts of sanctions on the economies of the respective countries. Furthermore, they touched upon political reactions to sanctions and shed light on how worsening relations with Russia influenced the work of institutional mechanisms designed for the improvement of mutual relations. In addition, energy security was a key topic of discussion. The effect of sanctions has been rather negligible in Slovakia The first speaker underscoredd that the influence of sanctions on the overall performance of the Slovak economy has been rather negligible, and that this is the case even for the most m affected sectors. An important aspect in relations between Slovakia and Russia is, however, that Slovakia S is significantly dependent on gas supply from Russia. Additionally, the gas price, set within the agreement with Gazprom, is valid until 2028, which is below the EU-average. As a transit country for gas deliveries destined for Western markets, Slovakia enjoys vital streams of revenue from transit fees. Hence, any decision to stop gas supplies through Ukraine is viewed negatively because it would have a detrimental effect on the state budget. Through this prism, the energy dimension is a crucial component to understanding Slovakia s position vis-à-vis Russia. There is a number of Slovak-Russiaactivities. The key body is the Slovak-Russian Intergovernmental Commission for Economic and channels of communication to address questions q related to trade Scientific-Technical Cooperation, which was established in The Commission has been active even during the Ukraine crisis, and quite remarkably, the issue of sanctions was not discussed during its last

2 meeting held in It was as if the question of sanctions had no significance for mutual economic relations. Looking at the statements of Slovak government officials, they can often generate mixed feelings in their goal to apply multi-vectoral foreign policy. Even though policymakerss did not sometimes shy away from expressing open opposition to sanctions, especially during the campaign preceding 2016 parliamentary elections, the government sought to counterbalance this approach by providing Ukraine with reverse flows of gas (the decision followed both political and economic interests). Polish policymakers support using a precautionary principle when it comes c to inviting large Russian businesses into Polish economy, especially into sectors deemed strategic Similarly to Slovakia, sanctions have harmed Poland s economy much less than had been expected, even in the agricultural sector that was, as one speaker suggested, deliberately targeted by Russian counter-sanctions. In fact, the Russian embargo could actually be viewed as a beneficial incentive that motivated Polish farmers to diversify their exports. The speaker also noted that the growth of economic exchanges that took place between Poland and Russia until 2013 created a myth of o the indispensability of the Russian market. Consequently, the sanctions have helped to invalidate this belief. In a similar manner, Russia s investments in Poland as well as Poland s investments in Russia are a only marginal (most significant are the big players such as Gazprom, Lukoil, and Russian Standard) ), and as such, sanctions could not cause significant losses. Despite political polarization, and in contrast to positions of other Visegrad countries, Poland can rely upon a domestic consensus on vigilance towards Russian investment. Polishh policymakers therefore support using a precautionary principle when it comes to inviting large Russian businesses into the Polish economy, especially into sectors deemed strategic. Even though the country is still heavily dependent on Russian gas supplies, diversification efforts have been the focal point of their energy security policy for many years. Among the most important elements of this strategy was the opening of a LNG terminal in 2015, ten years after the idea was initially proposed. In addition to this is the current gas pipeline project called Northern Gate lookss to connect Europe from the north to the south, and bring Norwegian gas to Eastern Europe. As for the institutional mechanisms designed to improve mutual trade relations, similarly as in other Visegrad countries, the key body is the Polish-Russian Intergovernmental Commission for Economic Cooperation established in 2005, whose main role is to solve potential disputes and assess new opportunities. The commission officially met six times until 2013, but anyy further activities were suspended due to the conflict in Ukraine. The speaker concluded that in light of the decreasing scope of Polish-Russian trade and investments, there has been no serious incentive to resume the commission s work, as problems are preferred to be solved at bilateral level.

3 The Czech Republic is not a strong opponent of Nord Stream 2 The speaker from the Czech Republic indicated that it is extremely difficult too assess the exact impact of sanctions on the Czech economy because it is impossible to disentangle thee sanctions regime from other, often more important factors. Nevertheless the effects of sanctions have been much smaller than initially assumed. This was partly achieved by an amendment which excluded machine tools from the list of sectoral sanctions imposed in July 2014, an area that represents a crucial share of Czech exports to Russia. Also, agro-exports has been hit less than sometimes reported through various public statements. Concerning the institutional mechanisms, Czech exporters can utilize the existence of the Intergovernmental Commission for Economic, Industrial Scientific and Technical Cooperation established in 2005 and supervised by the trade ministries. Interestingly, the meeting planned for November 2013 was postponed until 2014, but after the Russian annexation of Crimea C it was informally agreed among EU member states that no meeting with Russian representatives on a ministerial level should take place. This essentially ruled out another commission s session for some time to come. While there was an effort to organize another meeting in 2015, the session was canceled at the very last minute by the Ministry of Foreign Affairs. Members of the commission eventually met m in 2016 without any public outcry. Another session is planned for April In contrast to other Visegrad countries, the Czech Republic s energy supply iss more diversified due to close proximity to German and Austrian networks. The question of energy security has also been a key topic on the governments agenda, especially since the gas crisis in In I terms of supplies, an increasing share comes from countries such as Azerbaijan or Kazachstan, but a high reliance upon gas from Russia remains. The speaker also stressed that the Czech Republic is not a strong opponent of Nord Stream 2. This is mostly due to the fact that if Nord Stream 2 goes through the Czech territory, it could benefit from transit fees. Moreover, from the government s perspective it is vital to secure various supply lines. The Ukraine crisis occurred at a time when Hungarian government stressed strengthening relations with Russia within the framework of Eastern Opening initiative In Hungary, the effect of sanctions has been assessed as marginal as well. In most cases, the main exporters to Russia are multinational companies that are able to diversify their exports. As for the energy sector, gas supplies from Russia decreased since 2006, partly because of a decline in Hungarian consumption, and partly throughh diversification of supplies. In terms of value off imports the decline was significantly deepened by the fall of oil and gas prices in The speaker from Hungary then underscored that the Ukraine crisis occurred at a time when the Hungarian government stressed the strengthening of relations with Russia within the framework of the Eastern Opening initiative. In recent years Hungary s Prime Minister Victor Orban O has had ambitions

4 to find political partners outside the EU in order to diversify its economicc base due to a fear of overdependence on EU markets. This strategy has been in line with his perception of foreign policy as a tool to gain much-needed economic benefits that can consequently be used for political p gains. In January 2014, Hungary, for example, signed a multi-billion dollar contract with Russia s state-owned Rosatom on building of nuclear power plant Paks II, which became the single largest Russiann investment to Hungary in years. It is important to note that the agreement also spurred the Europeann Commission to check whether the terms of the agreement did not violate EU s competition rules. It is thus not surprising that Victor Orban repeatedly called for the abolitionn of the sanctions despite the fact that Hungary has always supported them at the EU level. This atmosphere has resulted in Hungary having some of the most vocal opponents of sanctions within the Visegrad countries. Moreover, among the advocates of strengthening economic relations with Russia are companies unable to access the EU market such as stakeholders from the nuclear industry for whom collaboration with Russian partners is a question of survival. Within this category also fit representatives of the gas industry that often oppose the EU s ambition to liberalize gas markets because the fears of losing their current market share. The speaker observed that Hungary s political elite as well as Hungarian society is generally more pro- Russian than other Visegrad countries and quoted an opinion poll in which 58 % of Hungarians are in favor of stronger economic ties with Russia, while 38 % are in favor of stronger political ties. Questions & Answers How would lifting of sanctions influence mutual economic relations? Should the sanctions be lifted, it is unlikely that the economic exchanges would w come back to the volume before There are many factors that in this respect have to be taken into account, such as poor condition of Russian economy and its likely stagnation in the foreseeable future. In addition, Russian market is not perceived as safe due to worsened relations and loss of mutual trust.. For instance, Polish farmers are not likely to return to the Russian market. Instead, companies from the Visegrad region seek to diversify its export base to other countries. Sanctions thus serve the purpose of incentive to explore new opportunities. Lastly, some reforms in the Russian economic strategy aimed at modernization and greater self sufficiency have been accelerated by the conflict in Ukraine. For example Russian efforts to support local producers can, in some cases, cause greaterr difficulties for foreign businesses than sanctions themselves.

5 Why politicians refuse sanctions? In general, the public perceives sanctions negatively, and many fear that they will w result in a decline of living standards. Given that the goal of most politicians is to attract voters, they criticize sanctions in public, but at the EU level they are quiet supporters. Another reason lies in the close ties of some political figures with influential business b groups that have their own interests in Russia. While small businesses constitute most of the financial activity between Russia and the Visegrad countries, most lobbying efforts come from groups connected to influential businessmen and these interest groups have special relations with political elites.. Besides, some Visegrad leaders admire particular aspectss of Russia s political model. A popular way how to bypass sanctions was to re-export goods (with minor changes) via other countries such as Belarus. Have exports to Belarus risen? It is very challenging to assess the real impact of re-exports, but there have been a couple of interesting cases of re-exports of sanctioned goods. One could, for instance, observe increased exports of Slovak dried milk to Belarus or at one point, Polish apple exporters sought to sell cider to Belarus (cider was not on the sanctions list in contrast to apples). However, it was emphasized that most agro-businesses have tried to focus on other countries rather than to bypass sanctions. It was alsoo added that Russia was strongly influenced by being cut off from financial markets, and therefore a series of investment projects had to be cancelled or modified. Are sanctions effective in achieving its political goals? It is important to perceive sanctions as a long-term instrument rather than ann economic blitzkrieg. One participant remarked that sanctions represent a tool that may have influencedd the Kremlin s decisionin i 2014 could have been making process more than is often imagined, and that the situation in Ukraine worse if no sanctions had been applied. On the other hand, sanctions are used by the Russian political elite to explain ongoing economic hardships. Nevertheless, if sanctions were abolished before Moscow changed its policy p behavior towards Ukraine, it would set a dangerous precedent. It would signal to the Russian political elite that determination of the West is weak and time-limited.

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