Why the Berlaymont will want to cosy up to the Kremlin

Russia and the European Union are at loggerheads – or to put it more diplomatically, “their efforts over more than 20 years to build a strategic partnership have clearly failed.” That’s the conclusion reached not long ago in a note by a senior EU diplomat, and it was more or less the message at the recent high-level Moscow Gaidar Forum conference attended by Russian Prime Minister Dmitry Medvedev.

The seeds of dissension are well-known: Syria, tensions over Ukraine and Crimea, festering resentment in the Kremlin over NATO’s and the EU’s enlargement, and mutual suspicions over cyber-security, electoral interference and unashamedly clumsy espionage.

Yet both sides should have their heads knocked together. Collaboration and perhaps friendship will be forced on them by irresistible economic and geopolitical pressures. Their leaders and policymakers might as well start waking to a shared future in which their economic complementarity will be crucial.

The 21st century has proved unkind to both Russia and Europe, and it’s going to get worse. The Gaidar Forum heard from Wolfgang Ischinger, Chairman of the Munich Security Conference, that at the beginning of this century, Russia’s economy had been twice as big as China’s, but now it’s only a tenth of its size.

Europe’s economy, too, has shrunk, though not quite so spectacularly. European citizens are getting steadily poorer, with little likelihood of a turnaround. Measured by average per capita GDP, incomes in the EU are down to about two-thirds of those in America and by 2025 that’s forecast to slide to three-fifths. By 2050, the four richest European countries will no longer be ranked among the world’s top ten economies.

Demographics are at the heart of both Russia’s and Europe’s problems. As Igor Yurgens, a former spokesman for Medvedev, pointed out during the Gaidar Forum, the slaughter of tens of millions of young Russians who fought in the Red Army during World War II has had disastrous long-term consequences. Irreversible population decline is accelerating, with today’s population of 143m Russians forecasted by the US Census Bureau to slump to 111m by mid-century.

On the economic front, Western sanctions in answer to Russian actions in Crimea and eastern Ukraine are aggravating the country’s difficulties. Already over-reliant on its oil and gas exports, the neglected and outdated manufacturing sector is suffering from a marked absence of foreign investment. Each of the last five years has seen people’s real disposable incomes fall, leaving the average Russian 10% poorer than in 2014.

Underlying trends such as these have so far been hidden from sight. The dynamic effects of moving to a market economy in Russia, and indeed throughout most of the formerly communist countries that made up the Soviet bloc, have created outward signs of prosperity that mask structural handicaps.

As to much of the EU, the decade of low growth and austerity since the economic crisis of 2008 has seen the rise of populist parties that promise voters a rosier future without specifying how that will be achieved.

Europe and Russia are therefore in much the same boat when compared to Asia’s rising giants and technological tigers. But they will not be joined by the United States, thanks to its high-tech corporations and a buoyant demographic outlook that will take its population to 400m by 2050.

The Russian marketplace could become far more attractive to European companies if Moscow brings in long-promised reforms to improve the conditions in which foreign businesses must operate. European companies have the technology and know-how needed to energise Russia’s industrial rust-belts. A new spirit of economic cooperation would be win-win for both.

It’s hard to predict how policymakers in Moscow and Brussels will adapt to these realities, but adapt they must. An important further factor in their geopolitical realignment will be the opening up of the northern route for shipping between western European ports and east Asian ports. If climate change melts the Arctic ice caps at the rate now predicted, then this game-changing development will be of crucial importance to the EU as well as Russia. Food for thought in both the Berlaymont and the Kremlin.