A real game changer in the region

An evening scene of Batumi on Georgia’s Black Sea coast. Photo: Levan Gokadze (CC) www.flickr.com

The rapprochement with the EU is within the framework of the Association Agreement which includes creating the Deep and Comprehensive Free Trade Areas (DCFTA) with Ukraine, Moldova, Georgia, as well as stronger economic ties with Azerbaijan (as an important producer and exporter of oil and gas). These economic processes are less spectacular than the Revolution of Dignity in Ukraine, the war in Donbas, the annexation of Crimea, or the Velvet Revolution in Armenia. At the same time, they will play a very crucial rule in how events over the next several years will unfold in the Black Sea region and Eastern Europe. This growing diversity in the economic sphere should be seen as unprecedented, following some 200 years of Russian domination in the region.

European shift

Today’s Russia is economically too weak to slow this process with its own initiatives. An example can be seen with the Eurasian Economic Union (EEU), of which two Eastern Partnership countries, Belarus and Armenia, are also members. The Kremlin pursues neo-imperial ambitions and has given itself an anti-western identity. It treats the Eastern Partnership region as its own sphere of influence where the increasing economic proximity between the region and the West has become unacceptable. As a result, preparations should be made for a determined Russia which will attempt to halt this process by any means, including the use of armed force. The deepening of economic relations between the EU and the Eastern Partnership, to a large degree, has taken place since 2014. The signing and implementation of the Association Agreement with Georgia, Moldova and Ukraine played a key role in this. They were further advanced as a result of Russian aggression in Ukraine and the economic crisis rooted in Russia’s own structural problems and made worse by EU and US sanctions. The greatest change can be seen in Ukraine, the largest economy among the Eastern Partnership states (45 per cent of GDP measured by purchasing power parity). It was motivated by the hope of gaining independence from Russian influence. Ukrainian trade with the EU is now nearing 45 per cent and is four and a half times larger than with Russia. If one takes into account the pace at which trade has been increasing, it will soon reach over 50 per cent. In 2015 the EU managed to obtain a “majority stake” (55 per cent) in one other Eastern Partnership country, Moldova. In 2013 this had not exceeded 45 per cent.

Only Belarus has a weaker trade relationship with the EU than Russia; nearly half of Belarusian trade is with Russia. In Armenia, the EU and Russia have a similar position. Both make up around 25 per cent each. In Azerbaijan it is the EU that is that country’s main trading partner (over 40 per cent of trade, almost five times the Russian figure). In Georgia the numbers are more even (25 per cent of trade is with the EU, twice that of Russia). It is important to keep in mind that, during the early 21st century, Azerbaijan will surpass Belarus and become the second largest economy in the Eastern Partnership after Ukraine. The EU is also the largest foreign investor in Ukraine, Moldova, Georgia and Azerbaijan, and it remains important to Armenia. In Azerbaijan and Georgia, the United States is another key investor. Russia has a secondary position as an investor in all the countries of the Eastern Partnership with the exception of Belarus and Armenia.

Official development aid plays a significant role in Armenia, Georgia and Moldova – amounting to some two-to-three per cent of their respective GDPs. The EU is the largest contributor while the Russian share in development aid remains relatively low. What is more, the economies of the Eastern Partnership countries rely heavily on money transfers from their numerous diaspora. This figure is around 12 per cent of GDP for Ukraine, Armenia and Georgia; and as much as 15 per cent for Moldova. Russia remains the main direction for economic migrants for smaller Eastern Partnership countries (with the exception of Moldova). However, the Russian aggression towards Ukraine in 2014 changed the direction of Ukrainian economic migration. In recent years they have been flowing into the EU (mostly Poland). Today, more Ukrainians work in the EU than in Russia.

The belt and road through Eurasia

Another important actor in the economic reality of the Eastern Partnership region is China. It is enough to take a look at Ukraine to see its impact. Since 2012 the Chinese share of Ukraine’s trade has doubled, standing close to 12 per cent. In fact, China has become Ukraine’s most important trading partner, surpassing Russia and Germany. Chinese trade with Armenia is less in overall volume (10 per cent), while Georgia and Moldova trail not far behind (around eight per cent). This expansion should be viewed in the wider context of extending China’s economic influence in the region of the former Soviet Union, including Russia. Beijing sees this region as the Eurasian part of its Belt and Road Initiative which aims to create trade links to Europe via land and sea routes, many of which cross through the Eastern Partnership region. Thanks to this initiative, China has the ambitions to become the main geopolitical player in Eurasia.

The Chinese share of Russian trade has also skyrocketed in the 21st century. At the beginning of the century it barely registered two per cent; today, it is close to 17 per cent. In comparison, the EU share in Russian trade has dropped to 40 per cent over that period. Moreover, close to 20 per cent of Russian-EU trade consists of trade between Russia and the Netherlands. The Netherlands plays an important role in the global energy market, where Russian raw materials are mostly sold outside of the EU.

It is likely that in the coming years we will witness a deepening imbalance between the potential and asymmetrical economic relations between Russia and China. According to forecasts made by the International Monetary Fund, China’s economy will grow around six per cent between 2020 and 2024, three times faster than Russia. These forecasts confirm that the GDP growth gap between the two countries grows decade by decade. Early in the 21st century China’s GDP was more than twice the size of Russia’s. By the 2030s, it is estimated to be around 7.5 times larger. By 2030 China will become a wealthier country than Russia, measured in purchasing power parity. Paradoxically, China’s role in the economic reality of the Eastern Partnership countries will grow on par with its asymmetrical economic relationship with Russia’s. The pace of development of China’s transit infrastructure in Eurasia will have an impact on how fast it can deepen its influence over the Eastern Partnership states.

The engine of growth in the Black Sea

Closer economic relations between Turkey and the Eastern Partnership have also developed in recent years. Turkey is second only to Russia when it comes to its economic size for the neighbouring Eastern Partnership region. Its GDP (PPP) is just behind that of Italy. Turkey’s economic stature is strong especially in the South Caucasus and the northern shores of the Black Sea. Turkey has become the largest trading partner of Georgia (roughly 15 per cent) and Azerbaijan (10 per cent). On the other side of the Black Sea, Turkey is one of the most important partners of Moldova (seven per cent) and to certain degree of Ukraine (four per cent).

Turkey has increased its foreign direct investments in Georgia; between 2014 and 2019, it invested nearly 840 million US dollars, which amounts to 10 per cent of all foreign investments in the country. Turkey’s investments in Georgia between 1991 and 2013 did not exceed one billion dollars in comparison. In the last few years Turkish companies have begun investing on a larger scale in Ukraine as well. In Azerbaijan they have been one of the largest foreign investors for decades. At the same time, Azeri investments in Turkey have boosted between 2015 and 2018. During this time the Azeris have invested some three billion US dollars, more than any other country.

One of the largest Turkish specialities on the international market is construction. Prior to 2019, Turkish companies have completed construction projects worth 12.5 billion US dollars in Azerbaijan, six billion in Ukraine and 4.5 billion in Georgia. Turkish companies have come to dominate the local construction markets in Azerbaijan and Georgia. Finally, Turkey is becoming an increasingly popular destination for tourism, shopping and work among citizens of the Eastern Partnership countries. This is reciprocated by Turkish visits there, especially on the Black Sea coast.

The number of Ukrainians visiting Turkey and vice versa has grown spectacularly. In 2014 more than 650,000 Ukrainians visited Turkey, while over 1.5 million chose to do so in the first 11 months of 2019. Ukraine has become a popular destination for Turkish travellers with three times more visits in 2018 than in 2014. As a result, Ukraine has become one of the most popular destinations of Turks going abroad. The economic relations between Turkey and Eastern Partnership countries could be much stronger if not for serious problems in the Turkish economy. It slowed down in 2018 and faces a recession towards the end of the following year.

The empire strikes back?

The economic diversification and growing relations with actors other than Russia presents both great opportunities and challenges to the Eastern Partnership states. The future of the Turkish economy, for example, is in jeopardy. It is dealing with internal structural problems which could in turn lead to a very serious crisis. This would have a strong ripple effect on both Georgia and Azerbaijan, but on Moldova and Ukraine as well. Furthermore, the increase in economic co-operation between the Eastern Partnership countries and the West is likely to be met by an aggressive response from Russia.

The outlook for Russia regaining its influence, or at least halting the diversification tendency with economic tools, looks bleak. According to the IMF, the Russian economy will grow at a snail’s pace (just above 1.5 per cent). This is why the Kremlin is reluctant to spend its large currency reserves abroad. These have grown from 360 billion US dollars in mid-2015 to 550 billion at the end of 2019 (30 per cent of GDP, fourth largest in the world). The Kremlin, for example, could certainly use these funds to aid Eastern Partnership states if they are in trouble by making loans with the condition of giving up co-operation with the West. However these countries could also look for aid through international financial institutions like the EU, US, China, Japan or the Persian Gulf.

Certainly, the Kremlin will be more determined in the coming years to forge closer ties with Armenia through the Eurasian Economic Union. This will be even more evident with Belarus. The Kremlin will use a carrot and stick approach to coerce Minsk into deepening political and economic integration within the Union State, with the long term goal of creating a federation. In the case of Georgia, Moldova and Ukraine, Russia will attempt to halt or slow the complete implementation of the Association Agreements with the EU. It may try different carrots (forms of incentives in access to the Russian market and enticing loans) or sticks (sanctions, embargos, tariffs and closing of the job market).

Russia may go even further. It could attempt to implement a Moldovan-like scenario in Georgia and Ukraine where a power grab is made by political forces balancing between Russia and the EU, but closer to the former. It may also try to force Moldova to join the Eurasian Economic Union. And certainly, as the last resort, the Kremlin will not hesitate to heat up the already existing frozen conflicts.

Buffer zone

The intense economic co-operation in recent years between some of the Eastern Partnership countries and the EU is looking increasingly like the Western Balkan relationship with the EU: remaining outside the bloc but economically integrated with it. The Eastern Partnership countries and the Western Balkans are recognised by the EU as European states which gives them the opportunity to apply for candidate status. One main difference between the two regions is Russia’s military presence in the Eastern Partnership, with frozen conflicts and occupied territories. This is not the case in the Western Balkans. This is also the reason why the EU has given potential candidate status to Western Balkan states but not Eastern Partnership countries, even if some of them deserve it more than certain Balkan states.

The further economic integration between the Eastern Partnership countries and the EU could face serious hurdles without some of the countries taking the next step institutionally by beginning the European accession process. This situation reflects how the economic integration of third party countries with the EU depends largely on the acceptance of the EU model of governance. Russia, being fully aware of the ambivalent attitude of the EU towards the Eastern Partnership countries, will try to come to terms with France and Germany with regards to the future of the region. This would be an attempt to find a “compromise” that would recognise it as a permanent buffer zone. Moscow would have a veto right on the region’s membership in international organisations and initiatives. This is the reason why the Kremlin was encouraged by the idea of a reset in relation with Russia that was proposed by France’s President Emmanuel Macron.

Turkey and China’s growing economic influence in the Eastern Partnership countries could be a chance for Russia and a challenge for the EU. Moscow has, after all, grown closer to both Ankara and Beijing in recent years while these actors pose a growing problem to the West. In turn the EU faces a clash with three authoritarian powers in its Eastern neighbourhood that will promote a different model for economic and political development.

Translated by Daniel Gleichgewicht

Adam Balcer is head of the foreign policy programme at WiseEuropa, an independent Polish think tank. He also works as a national researcher at the European Council on Foreign Relations (ECFR) and is a lecturer at the Centre of East European Studies (SEW) at the University of Warsaw.

Eastern Europe, Eastern Partnership, economy, Eurasian Economic Union, Russia