"The Enlargement of the EU: Impact on the EU-Russia bilateral cooperation"

SPEECH/03/597 Mr Erkki Liikanen Member of the European Commission, responsible for Enterprise and the Information Society "The Enlargement of the EU: Impact on the EU-Russia bilateral cooperation" 5 th EU-Russia Industrialists Round Table Moscow, 1 December 2003

Introduction - the IRT Dear Mr Khristenko, Dear Mr Chubais, Dear Mr Vuoria, Ladies and Gentlemen. I am very glad to participate, for the third time, in the EU-Russia Industrialists Round Table. I want to especially thank our host today, Mr Chubais, who made it possible for the Round Table to meet for the 5 th time. Likewise, I also want to thank Mr Vuoria for his efforts in the organisation of the European participation and Mr Khristenko for his continuous support. I wish, as you surely do, that the 5 th IRT will be fruitful and that you will provide us, representatives of Russian Government and of the European Commission, with concrete suggestions on how to promote trade and investment between the EU and Russia. This has been a clear request from our leaders, in the EU-Russia Summit of 6 November. You are in the best position to do this, due to your privileged knowledge of the markets and business in Russia and Europe. The last time I addressed you was far from Moscow, in the North of Italy, just one year and a half ago (February 2002). Yet it seems that years have gone by. Our bilateral relations have evolved swiftly. In Turin, in February last year, you recommended the attribution of the market economy status to Russia. I can assure you it was not without its challenges, but this was done in September of 2002. In Turin, you also called for progress in the WTO accession negotiations. This year the pace of talks has been more intense than ever. The Summit has supported the Russian objective for accession by the end of 2004, on mutually acceptable and commercially viable terms. In Turin, moreover, there were references but no proper discussion on the concept of the Common European Economic Space with Russia, since it was then a vague proposal. Now we have agreed on a concept for the Common Space. The Commission is prepared to start concrete work as soon as possible. Enlargement The Round Table Co-chairmen asked me to discuss with you the impact of the enlargement of the European Union in relations with Russia. The enlargement that will take place on 1 May 2004, will be the largest in the history of the European Union. And the present enlargement will not be completed in 2004. Accession negotiations with Bulgaria and Romania have been making progress, and are part of the same inclusive and irreversible process. It is likely these two countries will join the Union in 2007. This is a very challenging moment not only for the current and new members, but also for our partners. In all these parties, the prospect of enlargement raises hopes and concerns. Among our partners, Russia has expressed concerns about the enlargement. This is perhaps not surprising as Russia is our biggest neighbour. 2

Today I will discuss why I think that the enlargement of the Union will be positive to Russia and for the EU-Russia relations. I will in particular address the following points: - what enlargement means to the EU. - how the European Commission is planning to make the most of the opportunities before us. - and what Russia can do to allow it to make the most of enlargement. Impact of enlargement in the EU To begin with, what will be the impact of enlargement in the EU? - The ten new member states will increase the Union s territory by 23% and its population by 19%. Because of their lower level of economic development, they will only increase the size of the EU economy by 5%. The enlarged Union will cover a population of 450 million, with a GDP close to that of the United States. - The new members will greatly increase the diversity of the Union. One only needs to look at their historical experience, administrative tradition and level of economic development. Absorbing ten new members has challenged us to update our institutions and our policies. - We are addressing these challenges through institutional and policy reform. A constitutional treaty is currently under discussion at the Intergovernmental Conference. The implications of enlargement are also at the forefront in the discussions on the future financial perspectives of the Union for the period after 2006. - Enlargement will also affect the EU s role in the world. Our weight on the international scene will increase. But the bigger the Union is, the greater will be the diversity of interests and approaches among Member States. The Iraqi crisis has demonstrated this well. This is the broad picture to be kept in mind. The challenges are formidable, but so are the potential rewards, both political and economic. In the midst of the everyday wrangling of EU business, it is all too easy to lose sight of how successful the EU has been in promoting peace and stability in Europe. Expanding this area of stability to cover another 10 countries is a historic achievement. A Common Treaty and common institutions bind 25 countries together. And economically, enlargement will surely bring about new dynamism in Europe. The new members are hungry to catch up with the existing members and will promote societal and economic reform and restructuring. Impact of enlargement on relations with Russia and other neighbours But promoting peace and prosperity cannot stop at the EU s external border. This new architecture of Europe worries some of our partners. People are afraid that new barriers will be created. 3

Such worries have been expressed before. For example, when the European Community decided to complete the Internal Market in 1992. Just as fears of the creation of a Fortress Europe were unfounded then, so I believe will fears about new dividing lines in Europe be proven wrong in 2004 and beyond. Enlargement involves challenges and costs. But the opportunities to Russia and the other neighbours of the Union are far greater. Let me mention some figures to illustrate this: - With the implementation of the internal market rules in the new member states, the exports originating from our partners will circulate freely in the entire EU space. And indeed in the European Economic Space. This means 450 million consumers and 25 million enterprises, producing and consuming goods with common rules and standards. A Russian product that duly enters Estonia can be sold in Lisbon or Athens without further testing or certification. - The growth rate of new members is already higher than, indeed double, the growth of the current members {in 2002-2004 prospects for new members of 3.2% and EU15 of 1.6%}. This is expected to continue following enlargement. The enhanced prosperity will constitute an opportunity also for neighbouring regions, through the expansion of business and investment. - The inevitable trade diversion to the EU has already taken place under the free trade area established by the Europe Agreements; enlargement will not have a dramatic effect in this regard. The EU already receives 62% of the exports of acceding counties. Russia comes second as their main trade partner. We expect that trade flows of the enlarged EU with Russia will continue to increase. - And in general the EU is the most open of the large world markets: after enlargement it will account for 18% of world trade in goods and 24% of trade in services. The enlarged EU will remain open to world trade, more than the US or Japan. In summary, experience of previous enlargements tells us that the overall impact on our neighbours is almost exclusively positive. EU policy initiatives towards the new neighbours Let me now turn to our new political initiatives regarding the neighbouring area of the enlarged Union. In the European Council of Copenhagen, when the Union leaders decided to enlarge the Union in May 2004, they also offered a new relationship to the neighbouring countries. This led the Commission to propose the Wider Europe initiative. Our objective is twofold: to avoid new barriers, and to extend the stability and prosperity of the Union to our neighbours. It is the creation of what President Prodi called a ring of stability around the European Union. We believe we can reach this goal by promoting our shared values, including those of rule of law, democracy and human rights, and by enhancing economic development, interdependence and cultural links. But also by jointly addressing common threats - regional conflicts, terrorism, organised crime, illegal immigration. The countries concerned by our Wider Europe initiative form an area with close to 400 million inhabitants, i.e. of the same order of magnitude as the Union of 25, although the GDP is less than 10% of the Union of 25. 4

We are prepared to work with our neighbours to fully tap the potential of existing agreements, but also, where mutually desirable, go beyond them. On the economic front, we offer a stake in our Internal Market. Russia is of course recognised by us as a special case. Our relations with Russia are broadly developed. And we have committed ourselves in St. Petersburg to build up four spaces. In May 2001 we launched the discussion on how to create a Common Economic Space with Russia. We have devised the concept of this Common Space which was finally approved by the EU-Russia Summit in Rome, on 6 November. The concept is based on the principle that to promote economic integration of Russia it is not enough to liberalise trade. The essential efforts must be geared towards the promotion of regulatory convergence with EU rules and structures, with the necessary emphasis on the proper implementation and enforcement of the rules. I believe we should push ahead with developing action plans for the four spaces we have committed ourselves to create, fully taking into account how they can interplay with the Wider Europe initiative. What can Russia do to fully benefit from enlargement? May 2004 will in our view mark the opening of a major opportunity for Russia. To reap the full benefit of the enlargement of the European Union, Russia will need to promote: 1) economic reform 2) economic integration with the EU 3) and trade liberalisation. First, economic reform needs to be continued. This progress is the pre-condition to achieve improved business and investment conditions. A lot has already been accomplished by Russia as regards regulatory reform. The single most important element now is the consistent and transparent implementation of legislation. This includes capacity building of the institutions that are the guarantee of a functioning market. All our grand strategies and legislative programmes are of little help to the entrepreneur who is stuck in his operation, at the discretion of local bad administration. Business need to be assured that the legal order will be applied fairly, proportionately, consistently, predictably and in a non-discriminatory fashion. 5

As far as the unfinished reform agenda is concerned, natural monopolies (electricity, rail, gas and pipelines) and the financial sector (state banks) assume a particular importance. Furthermore, creation and development of businesses, especially small and medium sized companies, is still a challenge to Russia. The SMEs are the main job creators in the enlarged Union. Furthermore, a more diversified Russian business sector will be better able to take full benefit of the proximity with the EU and of the initiatives for trade liberalisation. This crucially depends on the legal certainty of the market and on the relief from excessive administrative burdens. I am glad that the Russian politicians who are in charge of administrative reform, deregulation and entrepreneurship will address this Round Table. The Commission is very interested in their and your views on these areas. This is a new, welcome, theme in the Round Table. Moving on to the next issue, I believe that the enormous pool of Russian talent is a fantastic asset to a more skill-intensive, high technology industry. These industries would complement activity in raw materials and energy. Let me use the Information Technology and Telecommunications sector as an example. It has a significant role in facilitating economic growth in Russia, as a service sector, as a high-tech, innovative industry, and as a support sector for other industries. Russia has the potential to become an important telecom market in the world. The sector, however, is in urgent need of modernization and investment over the next decade. Russia would strongly benefit from a telecom sector that has converged sufficiently with international trends, not least those of the EU internal market. This concerns the regulatory framework in the telecom services, radio and telecom equipment and competition fields. The Commission is willing to develop the dialogue with the Russian experts. Finally, parts of Russian traditional industry will still need to face restructuring. I think for example about the steel sector. The Russian Government is now analysing how to proceed. Commission services, which have overseen the very painful restructuring and rationalisation of the EU sector in the 1980s, are also ready to support these efforts and share experiences. For all these areas, the example set by the transition process in the acceding counties is worthwhile to analyse. Their experience shows that while restructuring and diversification of the economy has important short-term costs ultimately it yields long term gains. Seeing this process through requires political conviction, courage and determination. One thing Russia needs above all is investment. Both domestic and foreign. FDI levels continue to be disappointing. Recent events have not contributed to the kind of stability and predictability that will induce greater flows of investment. 6

One cannot stress enough the need for predictability of business conditions and protection of shareholders rights. Business fora such as the EU-Russian Industrialists Round Table can play an essential role here as they provide a forum where business people can share with the authorities their main concerns. They can suggest recommendations on the way forward. They can help us to focus our attention as regulators to key areas. Indeed, the EU-Russia Summit called on you to present concrete proposals to the policymakers. The second element that is essential for Russia to benefit from the enlarged internal market, is the continuation of economic integration in Europe. This would contribute to the consolidation of the Russian reform process. It would also contribute to the enhancement of trade, investment and business activity in Russia. The concept of the Common European Economic Space with Russia has confirmed that regulatory convergence needs to complement an opening up of the market. We are looking for a market where the same rules and standards would apply to all products made and sold there. We aim to have a high level of regulatory convergence with Russia in relation to internal market rules, for industrial products and services. The full use by Russia of international and European standards and a shared approach to regulation would facilitate the free circulation of goods. We should aim at alignment of industrial products specifications, in the sectors that are of common interest. Such an effort of convergence would have impact on the promotion of economic integration, trade and investment with the EU. It has been calculated by independent experts that over time it could lead to the doubling of Russian exports to Europe. It would also contribute to the removal of restrictions to innovation and entrepreneurship within Russia. And promote transparency in legislative work, towards the industry. The views of the Round Table are essential for the Commission and the Russian Government to focus regulatory cooperation on the sectors that are of real, common interest, due to their present or potential importance in trade and investment. Finally, also in the regulatory area, the efforts to create legislation need to be matched with effective implementation and institutional reinforcement. Finally, the third element for Russia to take full benefit of enlargement is continued trade liberalisation. I am convinced that the traditional linkages that Russia enjoys with some new members will affect positively our trade flows. The figures in this regard are already quite impressive: if the EU now accounts for 38% of the Russian exports, the enlarged Union will account for more that 50%. Enlargement will mean that the new members will be part of the EU customs union. The overall level of tariffs in the EU will decrease after enlargement (current average tariff in the EU is around 4% while the average tariff in the 10 acceding countries is around 9 %). Russia will benefit from this. 7

There is nevertheless a lot of work that remains to be done in this area. I am especially thinking about non-tariff barriers to trade. This is a huge challenge that must be gradually resolved. The on-going work for accession of Russia to the WTO will contribute to these efforts. We are tackling important problems of the European industry in this framework, such as export duties on raw materials, the pricing of energy or regulatory problems regarding pharmaceuticals and alcoholic beverages. I strongly believe that the participation of Russia in the rule-based trade system within WTO is the leverage for market opening. I am happy that in the Summit the parties have given themselves the objective of accession by 2004, on commercially viable terms. Again, the Round Table may convey to us their views on this process and the challenges to be tackled. Conclusion Ladies and gentlemen, I wish to conclude by repeating my conviction that enlargement will be good for Russia. Recent economic studies (e.g. CEPS and the Moscow-based RECEP (Russian European Center for Economic Policy)) confirm that enlargement will have a positive effect on the Russian economy. Russia s GDP, exports and terms of trade are all also set to improve. But the importance of the economic benefit for Russia depends on how the economic reform process continues; on how economic integration through regulatory convergence progresses; on how trade with Russia is increasingly liberalised and on the maintenance of a stable, predictable business climate in which entrepreneurship can expand. I now look forward to listening to your comments and ideas. Thank you for your attention. 8