Meat, Oil, Timber, and Air Transport

These are just some of the divisive economic issues that have stalled out EU-Russian relations, preventing a deepening of the partnership. A new analysis from Stratfor argues that despite rapidly growing trade between Russia and the EU, Moscow’s aggressive use of business as a political lever has provoked deep resentment among many member states who are willing to throw down the veto on any talks. The analysts write, “The Kremlin’s continued use of politics in choosing its economic relations will come back to bite it.

Excerpt from Stratfor:

The Polish Meat DisputeRussia began implementing trade barriers against Polish agricultural products in 2005 under the guise of product safety. The embargo has cost Poland dearly; approximately 8 percent of all Poland’s agricultural exports — about $506 million a year — were products going to Russia. Poland threatened to push the issue into the EU arena, a threat Russia dismissed until November 2006, when Warsaw made good on its promise.But the Warsaw-Moscow dispute isn’t just about meat. The dispute is part of Poland’s struggle to assert itself as a full member of the West against an increasingly aggressive and assertive Russia. Warsaw has now placed itself as the roadblock between Europe and Russia, showing that it does have its own voice and ability to push back.The Lithuanian Oil DisputeAnother country ready to block the EU’s relationship with Russia is Lithuania. A major trunk of the Druzhba oil pipeline running from Russia to Lithuania ruptured in July 2006, cutting off 324,000 barrels per day. Lithuania receives 90 percent of its oil from the Druzhba, which also supplied the Baltic state’s Mazeikiu Nafta refinery. The line and refinery also supplied oil to Lithuania’s neighbors Poland, Latvia and Estonia. The rupture should have taken no longer than a few days to fix, but Russian pipeline company Transneft has said the repairs have been put off “indefinitely.”The Druzhba’s “accidental rupture” came most conveniently during Russia’s attempt to take over the Mazeikiu Nafta refinery, which Lithuania was looking to sell to anyone but Russia. Vilnius is still feeling the ramifications of the economic dispute that turned political and has been paying to have its oil expensively shipped from Russia.Disputes With Finland, Sweden and GermanyRussia’s economic disputes are not just with EU members that used to be behind the Iron Curtain. Russia is also economically bullying Finland, Sweden and Germany — a move that could lead the EU to a more unified stance on Russia.Russia sees Finnish and Swedish paper and pulp processing industries as the largest rivals to its own aspirations to expand its timber industry domestically. Russia is the world’s largest exporter of cut logs and supplies 80 percent of Finland’s timber imports, chiefly for the Finnish-Swedish timber behemoth Stora Enso. But in July, Russia announced it was raising the tariff on timber exports from $7 to $15 per cubic meter, followed by a jump to $75 planned to take effect before 2009. The extra costs have already caused a 20 percent drop in timber exports from Russia to Finland in 2007.Members of the Finnish government have said Russia’s move will force Finnish paper companies to either fall to ruin or move to Russia to avoid the tariff. The large Finnish timber industry is already seeing the tariff’s effects, as Stora Enso is talking about closing many of its plants in Finland and Sweden.Meanwhile, Germany’s Lufthansa — the second-largest airline in Europe — is deadlocked with the Kremlin over Russia’s demands to move Lufthansa’s air-freight hub en route to Southeast Asia from Kazakhstan to Russia. After Lufthansa declined, Moscow banned the airline’s cargo flights from Russian airspace Oct. 28, forcing Lufthansa’s planes to make costly detours on their way to Asia.It seemed the dispute would escalate quickly when Germany briefly banned Russian airline Aeroflot’s cargo flights from the Frankfurt airport — a move the Kremlin called “blackmail.” But the German Transport Ministry made the surprise decision to agree to Russia’s proposal for Lufthansa. Russia has given Lufthansa until February 2008 to agree to the German and Russian governments’ decision.Lufthansa, which had planned to take the issue to the EU, was bewildered by the German government’s last-minute deal, but this is one dispute that German Chancellor Angela Merkel does not want to see escalate outside her control. When the EU’s heavyweight, Germany, gets into a row with Russia, relations between Russia and the whole EU — not to mention the whole West — can deteriorate very quickly and nastily. Merkel is not looking for another large dispute between Europe and Russia, especially not over a small issue like airspace.ConsequencesMerkel knows that Europe and Russia are tied together by energy and trade and that regardless of what she and most Europeans think about the Russians, threatening Moscow rarely produces favorable results. Merkel cannot force the other EU members to share her hesitation to counter Moscow — and it only takes one EU member to break economic relations with Russia. Yet Moscow’s continued use of trade and economic relations as political levers is only entrenching many EU members against the bloc’s giant neighbor.The EU has already said that the Polish and Finnish crises with Russia violate Moscow’s 2004 deal with the EU in which Russia agreed, in exchange for the EU’s support for Russia’s bid for World Trade Organization (WTO) membership, not to change trade prices or place embargoes on trade. Moscow’s WTO membership bid has long been in jeopardy, and while WTO membership would benefit its economy, Russia will not budge on anything that infringes upon its politics.The Kremlin’s continued use of politics in choosing its economic relations will come back to bite it. Politically motivated trade, energy projects or embargos tend to not be economically competitive. For example, the politically motivated Nord Stream pipeline project to connect Russia to Germany without passing through “problematic” states like Poland or the Baltics is an excessively expensive project that realistically does not have the financial or political support it needs. Russia’s economic blackmail has left many EU states turning to alternatives in energy and trade to avoid the messy ties to Moscow.