Since at least 2014, Russia’s economic and technological cooperation with Europe (and with the West altogether) have been in decline. Both Russia’s government and its people tend to underestimate the long-term consequences of this decline, because they fail to appreciate the fact that in previous decades and even in previous centuries, the paradigm of Russia’s development was based on close relations with Europe. In short, Russia was incapable of achieving economic growth if its relations with Europe were damaged. We should also remember that Russia’s governance is still despotic in nature, even though by the end of the twentieth century it had transformed from a Bolshevist regime to semi-authoritarian (now fully authoritarian) with the predominance of a state-run economy.
This despotic nature came to define the classic Russian approach towards such relations: Russia efficiently exploited both the political contradictions within Europe and the frictions between Europe and America. That approach provided the impetus for economic and technological modernisation, but also allowed the Russian authorities to prevent significant European influence on Russia’s political system.
However, the principles and values of institutional Europe (as well as the principles of trans-Atlantic unity) such as human rights and freedoms, the market economy and democracy, an independent judiciary and so on, pose a challenge to the domestic political order of Russia, especially after these principles came to be implemented in most Eastern European states.
So, it became harder for Russia to play its old-fashioned political game, and the essential tensions in Russia–Europe relations became apparent in 2008 when Russia’s post-Soviet political and economic model faced deadlock: in 2008, Russia’s annual GDP exceeded $1.6 trillion, and in 2017 it was less than $1.58 trillion.
Moreover, Russia’s annual economic growth has hovered around 1.5–2% since 2017 (after another recession in 2015–16), less than the average growth rate across the European Bank of Reconstruction and Development countries. At the same time, ties of cooperation between Russian and Western companies were damaged due to both the disillusion of foreign investors and the imposition of sanctions. So, even if Russia is growing, the development gap between Russia and Europe will only expand in the coming years.
It is in this context that Russia decided to rely on military power, in order to find a new path but also to prevent its near-abroad from gaining access to any competitive/ alternative political and economic institutional model. The reason was clear: any potential success story in the democratisation of post-Soviet states poses a threat to Russia’s domestic order.
Without the extended cooperation with Europe, Russia faces long-term and growing underachievement in its economic and technological performance.
This was the perspective which guided Russian aggression against Ukraine in 2014. Nevertheless, sooner or later Russia will need to make a choice between reconciling itself to all the necessary domestic political steps towards a market economy, democratic governance and peace in its relations with Ukraine, including the withdrawal from Crimea and Donbas on the one hand – and the irreversible loss of its relatively high status in world politics on the other.
The second option will be just as probable, as Russia will not be able to use Europe as the technological and financial source for its modernisation. The main challenge here is that without the extended cooperation with Europe, Russia faces long-term and growing underachievement in its economic and technological performance.
This underachievement creates problems even for Russia’s military capacity, which is one of the main tools for Russia’s foreign policy. For instance, Russian defence industry is incapable of producing advanced satellites, warships and aircraft and many others without access to European technologies.
History does matter
In the twentieth century, Russia’s most important achievements in the area of modernisation came from Europe and the United States. In 1922, soon after the Bolsheviks took full power in Russia, they signed the Rapallo Treaty with Germany which gave them access to German arms manufacturing technologies. Later Moscow obtained much industrial equipment and technology from the Soviet occupation zone in Germany after WW2, and some of this equipment was used in Russian factories until this century. Supplies of industrial equipment and technologies from the United States, in the 1930s through commercial contracts, and in 1941–5 through the Lend-Lease Act, also played a crucial role in Russia’s modernisation. However during the second half of the twentieth century Europe remained the main driver for Russian economic and technological development. During the Cold War, the USSR used both legal ways and espionage to get equipment and technologies from Western Europe, including Great Britain, Germany and France. Moreover, rising oil prices and higher demand for petroleum from European countries, along with the discovery of huge oil and gas fields in Siberia, allowed Soviet Russia to increase its trade with Europe. Russia mostly exported raw materials and mostly imported machinery and equipment, other goods and technologies.
However, the Eastern European states inside the Soviet bloc were even more important for Russia’s modernisation. The Council for Mutual Economic Assistance (CMEA) was established to this end in 1949. During the decades Eastern Europeans were not only consumers of Russian raw materials, but also supplied the machinery and equipment that Russia needed. Moreover, their workers and engineers helped Russia in the construction of crucial facilities such as gas pipelines.
Europe and Russia before and after 2014
After the end of the Warsaw Treaty and CMEA, and the collapse of the Soviet Union, the ties of cooperation with European states also changed, although Russia became even more dependent on the whole of Europe. Nevertheless, in the post-Soviet era, before the annexation of Crimea, Russia’s access to Western technologies and investments was also limited due to the grand corruption and poor institutional environment in the country.
Later, in the 2000s Russia was able to support its economic ambitions with huge amounts of petrodollars as it had done in the 1970 & 1980s. The modernisation and the trade and cooperation with European states as Russia’s main partners certainly benefited it a great deal.
The problem is that up to 70% of all FDI (Foreign Direct Investments) in Russia are FDI round tripping. So, actually they are not direct foreign investments but come back from the offshore subsidiaries of the Russian corporations.
However the other 30% are real, and most of them come from Europe. There were two peaks in the balances of FDI in Russia: $74,783 billion in 2008 and $69,219 billion in 2013. After that Russia lost many European investors; some of them have decreased their work in Russia since President Putin returned to power in 2012.
Of course, there are still European investors working in Russia, but they have definitely become much more prudent in their business strategies. Although the post-Soviet modernisation of Russia has not been completed, some competitive companies have appeared in the fields of telecommunications, IT, banks and retail.
Once again Europe was a source of knowledge, technologies, capital and equipment. Moreover, Russia cooperated with European companies in order to modernise its defence industry and armed forces. For example, in the 2000s Russian authorities tried to interest EADS (currently Airbus) and AugustaWestland (currently merged with Leonardo) in manufacturing aircraft in Russia.
The German defence company Rheinmetall supplied a training centre for the Russian army, the Italian company Iveco supplied armoured vehicles, and a couple of Mistral helicopter carriers were ordered from France (these ships had not been supplied due to the European sanctions in response to Russia’s actions against Ukraine). One more example: as one of the leading space powers, Russia was unable to develop and produce advanced communication satellites without cooperation with European aerospace companies such as Thales, Airbus and others.
So, Russia needed such cooperation in order to maintain its ambitions to world-power status. All the examples above mean that the annexation of Crimea and the war in Donbas have impacted Russia’s economics hard. This situation suggests that the country will be unable to develop successfully before it withdraws from Crimea and European investors come to trust Russia again.
This scenario will be unavoidable if the EU and the US maintain their positions towards Russia’s trouble-making foreign policy. Therefore Moscow’s model of economic growth, with its typical authoritarian practices of limiting private initiative and its aggressive foreign policy, is bound to fail – there are just no drivers for sustainable development in Russia, so the country will likely only be able to maintain its current status projection as a political winner for a limited time.
Reasons for measured optimism
So, more than five years of confrontation between Russia and the West have resulted in the long-term decline of Russia’s economy. The economic gap between Russia and the developed countries is increasing, and there is no hope of Russia managing sustainable development within the current political circumstances.
Nor can China replace Europe as Russia’s main trade partner. In 2017, the trade between Russia and six European countries presented in Table 3 was 1½ times higher than that between Russia and China that year. Also, China cannot give Russia the investments that the European countries gave before the Crimean annexation or even still give now, even if it were just because Russia is not a priority market for Chinese companies.
At the same time though, Beijing is trying to keep Moscow as a strategic partner. For instance, China has secured itself a longterm supply of oil and gas from Rosneft and Gazprom.
Also China is gradually entering the Russian telecommunications and transport sectors, and will hardly stop there. However, what China needs is a predictable neighbour which will definitely not join any anti-Chinese coalition. This is China’s main objective in its relations with Russia. All that means that China has no interest in Russia’s sustainable development, as it has no interest in Russia’s domestic political situation. So, the cost of confrontation is growing for Russia.
With Western sanctions in place, Russia is unable to modernise its economy. Due to the absence of significant sources for development in ‘fortress Russia’, it is fated to decline in its political and economic sustainability, which makes scenarios of domestic turbulence much more probable.
Also the number of people in Russia who have benefited from its authoritarian regime is decreasing. Consequently, we will see a significant transformation of the regime in the coming decade, with the option of transition towards democracy and market economy. In order to restore itself as a trustworthy actor and partner, Russia will need to undertake huge domestic reforms and withdraw from Ukraine, and possibly from Georgia and Moldova (that depends on the political circumstances of the future transition of power in Moscow in the coming decade).
Also, Russia will have to reconsider its trouble-making tactics towards the Western states and its adverse approach towards NATO and the EU enlargement process. Nevertheless, if this happens, some day Europeans will be the first to support Russian efforts towards economic and political modernisation.