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The Development of EU-Russia economic relations(KVS10 – 2015)
© Kari Liuhto
16.1.2015 Turku
Contents
Economic foundation
Trade with Russia
EU’s energy supply and Russia
Investments to and from Russia
Tourism between the EU and Russia
Future of EU-Russia relations
New hot potatoes:
- Eurasian Economic Union
- Russia-China trade
Foundation of EU-Russia economic relations (+ a comparison with the globe’s big brothers)
Population of world total 7% 2% 4% 19%
GDP (official exchange rate) 23% 3% 23% 13%
Natural gas reserves Below 1% 17% 5% 2%Consumption 13% 12% 22% 5%
Oil reserves Below 1% 6% 3% 1%Consumption 14% 4% 20% 13%
Sources: BP; CIA World Factbook
Foundation of EU-Russia economic relations (+ a comparison with the globe’s big brothers)
Imports of world total 20% 2% 12% 10%Exports 25% 3% 8% 12%
Outward FDI stock 40% * 2% 24% 7%Inward FDI stock 34% * 2% 19% 9%(stock = total accumulated amount of FDI)
Military expenditure 11% ** 5% 37% 11%(total ~15%)
Military expenditure of GDP 1.65% 4.1% 3.8% 2.0%
* = includes FDI flows between the EU member states** = includes military budgets of UK, France, Germany and Italy only
Sources: WTO; UNCTAD; CIA World Factbook; SIPRI
EU-Russia trade tripled since 2003 …but structure remained unchanged
3/4 energy
1/2 machinery &transport equipment
major deficit for EU
Source: European Commission
2003Imports € 71 billionExports € 37 billion
Structure of EU’s trade with Russia in 2013(exchange of machines against fuels)
Source: EU
Some 30% of EU’s fuel imports comes
from Russia
Some 25% of EU’s machinery exports
goes to Russia
Importance of Russia as trade partner to EU in 2013
Source: EU
Russia 2nd largest import partner to EU with 12%. When the oil price drops, its rank drops to 3rd.
If the fuel imports would be excluded, Russia’s share would drop to 2.9% i.e. its share would be less than that of Turkey.
Russia 4th largest export partner to EU with 7%.
Share of Russia in EU members’ exports in 2013
No dataNon-EU member
0-5%
5-10%
10-15%
Over 15%
20%
Source: National statistics
Share of EU members’ imports in 2013
Over 15%
10-15%
No data
5-10%
0-5%
Non-EU member
21%
18%
28%
Source: National statistics
Russia’s foreign trade in 2013(exports + imports)
Source: Customs Russia 2014
USA 3%EU 49%
Finland 2%Netherlands 9%
Germany 9%
Ukraine 5%
Kazakhstan 3%
Belarus 4%
China 11%
Russia’s exports $ 530 bn and imports $ 320 bn
Japan 4%
Kyrgystan 0.3%Tajikistan 0.1%
Armenia 0.2%
Sources: EU; Rusimpex
Russia’s foreign trade in 2013
The EU is by far the largest trade partner to Russia, and will remain to be so despite the mutual sanctions and the rapid rise of China’s share.
In 2002, China’s share in Russia’s imports was 5.2% and 6.4% in exports i.e. China’s share in Russia’s exports has remained same, while in imports, it has tripled. Sanctions started in 2014 i.e. they have not caused the increase of Chinese imports.
Ukraine 4th largest trade partner.
Source: Customs Russia 2014
Division of Russia’s trade with EU member states in 2013 ($ bn)
Russia's exports Share of Russia's exports to EU Russia's imports Share of Russia's imports from EU
EU total 283,2 100% 134,3 100%Austria 1,3 0% 3,8 3%Belgium 7,7 3% 4,0 3%Bulgaria 2,2 1% 0,7 1%Hungary 6,2 2% 3,0 2%Germany 37,0 13% 37,9 28%Greece 6,2 2% 0,6 0%Denmark 1,5 1% 2,2 2%Ireland 0,3 0% 1,4 1%Spain 6,0 2% 4,9 4%Italy 39,3 14% 14,6 11%Cyprus 1,9 1% 0,0 0%Latvia 0,3 0% 0,8 1%Lithuania 6,1 2% 1,1 1%Luxemburg 0,0 0% 0,2 0%Malta 4,1 1% 0,1 0%Netherlands 70,1 25% 5,8 4%Poland 19,6 7% 8,3 6%Portugal 0,7 0% 0,7 1%Romania 1,6 1% 2,0 2%Slovakia 5,9 2% 3,5 3%Slovenia 0,2 0% 1,4 1%UK 16,4 6% 8,1 6%Finland 13,3 5% 5,4 4%France 9,2 3% 13,0 10%Croatia 1,3 0% 0,4 0%Czech Republic 6,0 2% 5,3 4%Sweden 4,5 2% 3,9 3%
Estonia 4,0 1% 0,8 1%
Source: EU 2014
EU’s energy consumption in 1995 and 2012
Energy consumption remained the same between 1995 and 2012.
Share of petroleum products (= oil) and solid fuels (= coal) decreased.
Share of natural gas and renewables increased (= green economy goal).
Nuclear has been able to maintain its share.
Source: EU 2014
EU’s energy import dependency in 1995 and 2012
EU’s energy import dependency grown since 1995, but it dropped in 2012 (= EU became less dependent on energy imports).
Over 50% of total energy used in the EU is imported.
Some 90% of oil used in the EU imported, while the respective share for natural gas is 2/3 (= 1/3 of gas used in the EU is produced within EU).
Source: EU 2014
Russia in EU’s oil imports in 2012
177 million
tons
Development of Russia’s oil exports
Source: Central Bank of Russia 2014
0
50
100
150
200
250
300
350
400
450
2000 2005 2010 2013
Volume of Russia's oil exports (million tons)
Oil products
Crude oil
390 mt
0
50
100
150
200
250
300
2000 2005 2010 2013
Value of Russia's oil exports ($ billion)
¾ of Russia’s oilproductionexported
Fast volume growthstopped, but export
value has continued to increase due to higher oil price.
Development of Russia’s largest oil exporters(Mt = million tons)
Source: IEA 2014
Sources: EIA; Petroleum & Biofuels Association - Finland
Overwhelming majority of crude oil imports of Finland (~90%), Poland and the Baltic States arrives from Russia.
Russia covers directly 1/3 of German and Swedish oil imports. Indirectly, Russia’s share is bigger, since Sweden, for example, is Finland’s 2nd largest export destination and over 25% of the Finnish exports to Sweden consists of oil products (= Finland refines Russian crude oil and sells oil products to West; Lithuania and Belarus do the same as Finland).
A great part of Dutch oil imports from Russia is sold further (to the USA ?).
China is a relatively small importer of Russian oil for time being, but its share is to grow. Guess: China will be the largest export destination of Russian oil by the end of this decade.
Main importers of Russian oil in 2012
100 000 barrels per day = 5 million tonnes annually
By the end of this decade ?
Europe 79%Asia 18%Americas 3%
Russia’s main oil export routes (January 2009-January 2014)
Majority of Russian oil is exported via Russian ports on the Baltic Sea and the Black Sea.
The Druzhba oil pipeline is the major oil pipeline towards the West and the ESPO pipeline towards the East.
Oil is transported by rail to Estonia, Latvia and China.
1.0 mb/d = 50 mt per annum
Druzhba ESPO
Source: EU 2014
Russia in EU’s natural gas imports in 2012
107 billion cubic
meters
Source: Eurogas 2013
Russia’s share in EU members’ gas supply 2012 (+ importance of gas in energy consumption)
0 20 40 60 80 100
Croatia
Cyprus
Denmark
Ireland
Malta
Portugal
Spain
Sweden
UK
Belgium
Netherlands
France
Luxemburg
Romania
Italy
Germany
Greece
Czech Republic
Poland
Austria
Slovenia
Hungary
Slovakia
Bulgaria
Estonia
Finland
Latvia
Lithuania
How important is gas to economy?How important is Russian gas in
country’s gas supply?
Russia’s share will drop dramatically in
Lithuania and Poland due LNG
terminals
Sources: Noel 2008; Eurogas 2013; EU 2014
This is the best indicatorto describe the strategic importance
of Russia’s gas to the EU
Importance of Russia’s gas to the EU
In 2012, Russia’s share in EU’s gas imports was 32%
EU produces 1/3 of gas it uses, and hence, Russia’s share in the EU’s gas imports
differs from Russia’s sharein the EU’s gas consumption/supply.
In 2012, Russia’s share in EU’s gas consumption / supply was 23% (In 2013, this share was 27%)
~15-25%
~25-35%
~45-55%
A rough estimate of share in gas transit from Russia to the EU in 2013
No LNG (=ship) deliveries from Russia
to the EU i.e. gas is transported
completely via pipes.
Main gas pipelines: Brotherhood, Soyuz,
Yamal-Europe and Nord Stream.
South Stream project frozen for time being.
Shall Turkey’s energy transit corridor replace
South Stream ?
In 2013, the EU’s LNG imports decreased by
29% compared to 2012.
Reasons: Asian demand lifted the LNG price and cheap coal
imports from the USA.
EU’s gas import logistics
Imports
Source: Eurogas 2014
EU storage capacitymeets 1/5 of the EU’s
annual gas consumption.
Estonia and Finland do not have gas storages, though both of them are
100% dependent on Russian gas.
Latvia’s gas storage may cover 1/3 of annual gas combined consumption
of Finland and the Baltic States.
Lithuania opened its LNG terminal at the end of 2014.
Poland in 2015 ?
In 2013, EU used only 20% of its LNG terminals’nameplate capacity.
(LNG terminal capacity= 197 bcm)
EU’s gas storage capacity at the end of 2013
Source: EU 2014
Russia in EU’s solid fuel (= coal) imports in 2012
55 million
tons
(22%)
(39%)(20%)
(14%)
(5%)
EU’s coal production and imports in 2013(million tons)
Source: EURACOAL 2013
(22%)
(39%)(20%)
(14%)
(5%)
Russia’s coal exports
Sources: Emerging Markets Insight 2013
(22%)
(39%)(20%)
(14%)
(5%)
EU’s uranium supply in 2012
Is Germany’s nuclear phase-out doable by 2022 (Swedish experience) ?
98% of uranium used in the EU is imported; over 1/4 from Russia
Source: Euratom 2013
(22%)
(39%)(20%)
(14%)
(5%)
Development of EU’s uranium supply since 2003
Source: Euratom 2013
Source: Euratom 2013
(22%)
(39%)(20%)
(14%)
(5%)
Nuclear power reactors in the EU in 2012
Sources: EU 2014; Finnish Energy Industries 2014
(22%)
(39%)(20%)
(14%)
(5%)
EU’s electricity imports in 2012
In 2012, share of imported electricity in EU’s total energy consumption was marginal (2%).
Germany, Italy, Holland and Austria were the EU’s main electricity importers – together they covered over 40% the EU’s electricity
imports.
Finland came 5th within the EU with 5%.
Finland and Lithuania are the largest importers of the Russian electricity in the EU.
In 2013, net electricity imports covered 1/5 of Finland’s electricity consumption
(majority imported from Nordic countries).
However, Russia’s share in Finland’s total electricity consumption was only 5% in 2013.
In 2012, Lithuania’s own production covered 38%, while Russia covered some 45% of Lithuania’s total electricity consumption.
Remaining part of electricity was imported from Estonia, Latvia and Belarus.
Source: Inter RAO 2014
(22%)
(39%)(20%)
(14%)
(5%)
Russia’s electricity exports in 2013
Over 40% of Russia’s electricityexports end up in the EU (= Finland and Lithuania)
Finland is the largest importerof electricity from Russia.
Lithuania became major importer of electricity after the closure of Ignalina
nuclear power plant in 2009
Million kWh (= 1 TWh);annual change
17 539 Share in Russia’s electricityexports
-4%
Finland4 107 23%+8%
Belarus3 597 21%
-3%
Lithuania3 568 20%-25%
Ukraine39 0%
-53%
Azerbaijan57 0%
+3%
Georgia461 3%-11%
South Ossetia134 1%+3%
Kazakhstan1 668 10%-27%
China3 495 20%+33%
Mongolia414 2%+5%
Source: EU 2014
EU’s energy consumption and Russia’s share in it in 2012
1/5 of EU’senergy consumption
met by Russia~ 100 million EU citizens
dependent on Russia
[Russia: 9-10%]
[Russia: 5%]
[Russia: 4%]
[Russia: 2-3%]
[Russian share of EU’s energy consumption]
Sources: Statistics Finland; Petroleum & Biofuels Association – Finland; Euratom; Customs Finland
Finland’s energy consumption and Russia’s share in it in 2013
[Russian share in Finland’s energy consumption]
Oil
23 %
Renewables
28 %Nuclear
18 %
Coal
11 %
Gas
8 %
Turf
4 %
Net imports of
electricity4 %
Others
4 %
Oil Renewables Nuclear Coal Gas Turf Net imports of electricity Others
[Russia: 8%]
[Russia: 15%]
[Russia: 6%]
[Russia: 5%]
[Russia: 1%]
Finland more dependent on Russian energy
than the EU on average (~ 35+%).
Russia’s share in Finnish energy imports:Crude oil 87%Crude oil + oil products 63%Uranium 33%Coal 43%Gas 100%Net electricity 27%
Investments of Russian companies abroad (= Russia’s outward FDI stock - $ bn)
Source: UNCTAD
Russian capital exports 1886-1914 $ 33 billion (measured at 1996 money)
Soviet era - abnormally closed period (intra-socialist bloc investments)
Russia’s inward FDI
stock $ 509 bni.e.
inflow slightly exceeds outflow
Major boom in this millenium due to higher energy prices !
Russian corporations use foreign countries as their safety boxes / banks
i.e. money is return in form of loans back to Russia when needed.
Russia’s outward FDI stock at the end of 2012
Source: Central Bank of Russia
USA 3%
Finland 0.3%Cyprus 37%
Netherlands 16%
British Virgin Islands, Bermuda andBahamas 13%
China 0.1%
Japan 0.0%
UK 2%
Switzerland 3%
Ukraine 3%
EU 66%
Increased and accumulated wealth in Russia (over 80 billionaires in 2014)
High prices of natural resources in this millennium
Control over value chain (from exporter of natural resources to active player – better profit margins)
Global competition forces (“eat or be eaten”)
More managerial experience in internationalisation
Capital exports have become more transparent (from illegal capital flight to recorded FDI, i.e. better statistics)
Assets moved away from hands of Kremlin (risk diversification)
The Kremlin uses some firms as tools of Russia’s foreign policy
Investments linked with criminality (internationalisation of crime)
Knowledge-intensive investments abroad (new phenomenon)
Why Russian corporations invest abroad ?
Relationship between outward FDI and high oil price
Sources: BP; East Office of Finnish Industries
Russia’s outward FDI boom started in the
beginning of the millennium i.e. at the
same time as oil started to rise
Russia’s most outward-oriented firms
Source: Kuznetsov 2011
Oil, gas, metals,telecorporations
cover at least 2/3 of Russianinvestments
abroad
[1]
How to assessRussian business expansion abroad?
Fugitives & outlaws
Tax evasion
Illegal operations (money laundering, illegal armament trade, narcotics business, prostitution)
Foreign policy tools
State-controlled corporations
Strategic industries, such as energy, logistics, telecommunications and banks
Political goals superior to business rationality
Russia’s foreign policy goals
Transparency of operations
BusinessmenMain goal to receive new clients and higher profits
SMEs or companies operating outside the energysector and telecommunications
Foreign countries are used as banks (risk diversification against uncertainties at home)
Economically motivated patriots
Although internationalisation largely guided by economic rationality, many major companies conform to Russia’s foreign policy as they often operated in politically sensitive branches within Russia(denial to cooperate would create problems at home)
[1]
Attitudes towards Russian investors
Not welcomed
Resistance
Russia’s foreign policy goals
Transparency of operations
Welcomed
Reservations
Russia’s share in inward FDI stockof EU member state in 2013
Source: Liuhto ja Majuri, Journal of East-West Business 2014
4.7%
3.8%5.1%5.3%
1.1%
4.8%
13.8%
Below 1%
No data
Non-EU member 1-10%
Above 10%
Russia’s inward FDI stock($ bn)
Moscow attracted (1/2) in 2010
St. Petersburg holds second place with 5% share
Sources: UNCTAD, CBR, Rosstat
32
496
0
100
200
300
400
500
600
2000 2012
Russia’s inward FDI stock at the end of 2012
Source: Central Bank of Russia
USA 0.6%
Finland 1%Cyprus 30%
Netherlands 12%
British Virgin Islands, Bermuda andBahamas 22% China 0.4%
Japan 0.5%
EU 62%
Some large foreign-owned firms in Russia in 2010
Source: Kuznetsov 2012
TNK-BP has been acquired by Rosneft
More trade thanproduction-oriented
activities i.e.Russia, contrary to China,is a consumption market - not a production site
-No Finnish firms (Fortum)in this list (error ?)
Political risks differ between the industries(risks in each sector have climbed up after the Crimean crisis)
National security sensitive* Defence
* eMedia
* Heavy industry
* Telecom
Economically sensitive
* Banking
* Insurance
* Non-strategic natural resources
Top sensitive* Strategic * Oil and gas
metals
* Logisticalinfrastructure
* Electricity
Highly strategic fornationalsecurity
Non-sensitive* Chemical industry
* Pharmaceuticals
* Agriculture
* Conventional construction* Retail trade* Consumption-related products/services
Less strategic for national security
Less strategic for the economy Highly strategic for the economy
* Strategic innovations
* Shipping & aviation
* Forestry
What do strategic sectors mean for foreign firms (traffic light analysis) ?
National security sensitive
Military interests, i.e.a number of closed industries increased
Individual interests of siloviki (they wantto become rich by reducingcompetition)
Yellow may turn into red
Economically sensitive
Oligarchy-related risks, i.e. oligarchs invade new sectors and receive state support
Artificial definition of new strategic sectors based on lobbying of oligarchs
Yellow may turn into redafter the Crimea annexation
Top sensitive
Political risks extremely high
Business resembles more international politics than international business
Bargaining with the Kremlin
Russian roulette
Highly strategic fornationalsecurity
Non-sensitive
Business risk in a Russian way
Not always free and fair competition
Non-federally orchestratedadministrative harassment(corruption-motivated or competitor-based)
Less strategic for national security
Less strategic for the economy Highly strategic for the economy
Russian tourists spend a lot abroad
Source: World Tourism Organisation 2014
Travels of Russians abroad in 2013
USA 0.6%
Finland 10%
China 4%
Total number of travels abroad 54 mn
Japan 0.2%
Kazakhstan 7%
Ukraine 18%
Turkey 8%
‘Abhasia’ 6%
EU 37%
Source: Federal Agency for Tourism of Russian Federation
EU-Russia tourism in 2013
Source: Federal Agency for Tourism of Russian Federation
31 million visits to Russia 54 million visits from Russia
CIS is the main source and the main destination – no detailed data available
China 4% 8% TurkeyUSA 1% 4% ChinaTurkey 1% 4% EgyptEU 21% 37% EU
EU total 6.4 mn 19.8 mn EU totalPoland (K-grad) 1.6 mn 5.5 mn Finland (transit)Finland 1.4 mn 2.3 mn EstoniaGermany 0.7 mn 1.6 mn Poland (K-grad impact)Lithuania 0.5 mn 1.6 mn GermanyEstonia 0.4 mn 1.4 mn Greece (major growth in 2013)Latvia 0.4 mn 1.3 mn SpainOther EU state 1.4 mn 6.1 mn Other EU state
Compare: 85 million foreign tourists in France in 2013 i.e. Russia has not used its potential in full
(hotels expensive – services not very developed)
Finland 1/10
EU-Russia tourismunused potential for integration
Deteriorating Rouble exchange rate decreases considerably Russians’ travel and expenditure abroad in the near future. Russians’ travel abroad dropped by 14% 1-9/2014.
Simultaneously, foreigners’ travel to Russia increased by 4% (Chinese +6%). Travels from the EU to Russia remained the same, while they dropped by 27% from the USA to Russia.
Visa-free travel between the EU and Russia unlikely to be reached during the Putin regime.
Development of Euro-Rouble exchange rate
2005-2014
Sources: Federal Agency for Tourism of Russian Federation; European Central Bank
Future of EU-Russia relations
Source Sergey Medvedev, 2006
Now here -
what next?
Prior to Crimea wewere here
Prior to Georgia wewere here
Economic integration among ex-Soviet republics, excl. the Baltic States
Eurasian Economic Union (=Eurasian Union)
Source: Popescu, European Union Institute for Security Studies
Russia dominated Eurasian Union vs. diversified / balanced European Union
Sources: Popescu, European Union Institute for Security Studies; CIA World Factbook
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %
GDP ($ 16 950
bn)
Population
(511,4 mn)
Area (4,325 mn
km2)
European Union 2013
Others (22)
Poland
Spain
France
Italy
UK
Germany
133
133
Armenia's Azerbaijan's Belarus' Georgia's Kazakhstan's Kyrgystan's
Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports
Russia 25 % 23 % 14 % 4 % 53 % 45 % 7 % 4 % 21 % 8 % 21 % 11 %
EU 26 % 34 % 33 % 50 % 24 % 28 % 29 % 22 % 22 % 45 % 5 % 5 %
China 9 % 5 % 6 % < 1.6 % 7 % 1 % 8 % < 2.0 % 31 % 23 % 52 % 5 %
USA 3 % 6 % 3 % 4 % 1 % < 0.5 % 4 % 5 % 3 % 2 % 1 % < 1.4 %
Moldova's Russia's Tajikistan's Turkmenistan's Ukraine's Uzbekistan's
Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports
Russia 23 % 19 % - - 16 % 6 % 16 % 1 % 30 % 24 % 20 % 19 %
EU 45 % 50 % 44 % 52 % 6 % 7 % 16 % 9 % 35 % 27 % 14 % 2 %
China 2 % 1 % 17 % 7 % 42 % 9 % 13 % 69 % 10 % 4 % 21 % 28 %
USA 1 % 1 % 4 % 4 % < 1.4% < 1.9 % 3 % < 0.8 % 4 % 1 % 3 % < 1.5 %
EU dominates the Caucasus; excluding Armenia balancing between Russia & EU (more towards Russia in the future ?)West diversified; Russia-focused Belarus; EU-focused Moldova & Russia; Ukraine balancing between EU & RussiaChina dominates Central Asia, excl. Kazakhstan balancing between China, EU & Russia; Uzbekistan balancing between China & RussiaUSA’s trade presence relatively modest Source: EU
Main trade partners of ex-Soviet republics, excl. the Baltics, in 2013
133
133
Russian investors dominate in Tajikistan, Uzbekistan, Armenia and Belarus
Russia’s strategic presence in Ukraine, Moldova and Kyrgystan
Russia’s share in FDI stock of its neighbours, end of 2013
Source: Eurasian Development Bank
Source: Kuznetsov, European Union Institute for Security Studies; CIA World Factbook
Inward FDI stock of ex-Soviet republics, excl. the Baltics, late 2010 ($ million)
Some open questions related to the Eurasian Union
1.1.2015 -> five members – Armenia, Belarus, Kazakhstan, Kyrgystan and Russia. Next new member: Tajikistan ?
Decision-making in enlarging Eurasian Union ?
Joining Eurasian Union obviously lifts tariffs, increasing prices of imported goods in new members.
Migration of poor people from Central Asia to Russia (illegal workforce).
Monetary integration – political integration in the future?
“the Eurasian Economic Union might be a more reasonable interlocutor than Russia” (Nicu Popescu, September 2014).
Hot potatoes at the moment - Russia-China trade
133
133
January-October 2014Russia’s exports to:EU -3%China +10%USA -2%
Russia’s imports from:EU -8%China -2%USA +20%(according to US statistics +1.2%)
Sources: Central Bank of Russia; Customs Russia = oil and gas
China’s oil imports from Russia(total oil imports some 280 million tons)
133
133
If the signed deals with Russia and China will materialize, some 50 million tons of oil will float from Russia to China by the end of this decade (currently, Russia’s oil exports to China is some 25 million tons).
At the moment, China does not import any gas from Russia.
China’s gas imports may reach 55-70 billion cubic meters by the end of the 2020s, if the agreed deals will materialize.
