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EU Logistics In The BRI Maps: Synergy of BRI and TEN-T

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Today, the logistics centers play an important role in the development of various formats of international interaction at the beginning of the new Millennium. At the present stage, their role is particularly high in the context of integration processes at the regional and global levels. The trends of globalization and regionalization led to the formation of the concept of “global region” and the increasing competition of integration associations for sales markets.

The current fight in the transit transport market in the regions of the world is becoming more complicated, as in modern conditions, competition for transit cargo flows is moving from offering more rational routes and cost-effective services to meeting the geopolitical and geo-economic interests of the main participants.

In this regard, initiatives by individual States or mega-partnerships to build new systems and channels of economic interaction between individual countries and subregions are emerging in regions of the world. It should be understood that the implementation of such projects requires the creation of a new architecture of international transport corridors. Thus, in response to the new challenges of developing economic relations between Europe and Asia, EU leaders began to take steps towards the development of logistics routes on the continent.

The Concept of the pan-European corridor was one of the first to appear as part of the concept of pan-European transport infrastructure and was developed for more than 8 years at the so-called Prague (1991), Cretan (1994) and Helsinki (1997) conferences. Its main goal was to increase the EU’s connectivity with its (back then) potential members – the countries of Central and Eastern Europe (CEE). After the Helsinki conference, the content of the pan-European transport and infrastructure network was formulated, which consists of : 1. Trans – European transport network in the EU (TEN-T); 2. 10 pan-European corridors in CEE; 3. 4 pan-European transport zones; 4. TRACECA Eurasian routes.

The implementation of the 10 pan-European corridors program (in 1995 – 2005) was closely linked to integration processes in Europe and the desire to develop pan-European cooperation. Nevertheless, the large number of States in Europe and the borders separating them, and differences in the rules governing international transport, significantly slowed down the cross-border movement of goods.

After the EU enlargement in 2005, a Program was developed to expand the main transport routes (5 logistic roads) to neighboring countries and regions, which were considered as an infrastructure framework for pan-European economic cooperation, which was linked to the future prospects of the EU .

Deepening integration processes within the Union and building up mutual economic and social ties have revealed bottlenecks in European logistics in the form of disparate national projects for its development, lagging in the introduction of intermodal transport technologies, and insufficient coordination of the development of individual modes of transport and improving their environmental friendliness. In order to eliminate these bottlenecks, the EU adopted the Trans – European transport network development program (TEN-T), designed up to 2050.

TEN-T consists of two subsystems: a comprehensive one that provides integrated transport development in the EU countries and a high-speed connection of about a hundred European urban agglomerations, all major seaports, airports and border checkpoints, and a basic one in the form of Trans – European highways, where international traffic is concentrated. There are 9 main logistics hubs: North sea – Baltic; Mediterranean ; Rhine – Danube ; Baltic – Adriatic ; North sea – Mediterranean ; middle East ; Atlantic ; Scandinavia – Mediterranean; Rhine – Alps.

The implementation of the program allows ensuring the smooth functioning of the internal market, economic, social and territorial cohesion of the EU, and improving transport accessibility throughout the Union.

Another EU project to strengthen logistics routes along the EU – Asia line was the TRACECA project created in 1993. Over the past ten years, more than 50 technical assistance and investment projects have been implemented under the TRACECA program, in which 14 States participate, and private investment has exceeded $ 1 billion. In particular, over the past five years, $ 25 million has been invested in the development of the ports of Baku and Turkmenbashi, $ 70 million in Amirabad (Iran), and about $ 100 million in Aktau.

As a result, a significant part of the cargo traffic passing through the Caspian region already goes through TRACECA. However, difficulties in the implementation of the project are also present and the deadline for the corridor to reach full capacity has been pushed back to the 2020s. This project provides for the reconstruction of logistics between Europe, the Caucasus and Central Asia.

Geopolitical changes on the world map and the strengthening of the PRC as one of the main actors in international relations not only in the region, but also in the world, attracted the attention of European political and business circles to a new project put forward by the PRC in 2013 – Belt and Road Initiative (BRI)

According to the Chinese side, the BRI concept should not be considered an integration structure, international or regional organization. This is an initiative of mutually beneficial cooperation and joint development of China and neighboring countries.

The main goal of the project is to redirect the flow of exports of goods and capital to those countries with which China has begun to develop cooperation in the last decade, primarily to countries in Africa and Central Asia and Western Europe. The project’s focus on solving China’s long-term Eurasian problems is clearly visible. After solving numerous political, organizational, financial and other issues, the communication basis of the project should be implemented in the current logistics.

According to the initiators of the project, the New Silk Road should include land and sea components. The land-based silk road, as it was a thousand years ago, will start in Xian (Shaanxi province), then pass through China to Lanzhou (Gansu province), Urumqi district, and cross Central Asia, Iran, Iraq, Syria, and Turkey. Then, passing through the Bosphorus Strait, it will go to Moscow (Russia), continue to Rotterdam and end in Venice (Italy), where it will meet the sea component.

The Maritime Silk Road will start in Quanzhou (Fujiian province), pass through the major cities of southern China, Guangzhou (capital of Guangdong), Beihai (Guangxi) and Haikou (Hainan), reach the Strait of Malacca with a stop in Kuala Lumpur (Malaysia), cross the Indian ocean with calls in Kal-Kutta (India), Colombo (Sri Lanka) and the Maldives, and reach Nairobi in Kenya. Then it will pass through Djibouti, the Red sea and the Suez canal to Athens (Greece) and then to Venice (Italy), where it will connect with the land route.

Control over two Silk Road routes ensures China’s energy security and helps protect its investments in strategically important regions. In addition, the implementation of the project allows to reduce logistics costs. Thus, it is important for China to ensure the security of East, Central and South – East Asia, on which political and economic stability depends the well-being of a number of border regions of the PRC, as well as the stability of its trade.

The emergence of the Belt and Road Initiative has become the embodiment of a competition of development models that challenges the former role of the EU as a global model of regional integration. “Belt and road” partnerships of ASEAN with major international players (USA, China, Russia, Japan, South Korea), as well as the Trans – Pacific partnership are a set of new initiatives, “significantly different from classical integration schemes, which are formulated in the theory of international relations based on the experience of the EU, and “new regionalism” relying on non-state actors and transnational processes that occur “apart from” state” .

China’s ability to respond with interest to new plans for regional cooperation has become an advantage against the background of the EU’s wary attitude to the BRI, which has led to the involvement of the interests of Central Asian and Eastern European countries in the initiative. Thus, as a consequence of the involvement of the Eastern partnership countries in the Chinese investment zone of influence, the EU and China decided to combine their logistics routes.

Analyzing the Sino – European relations, it can be noted that the current relations between the EU and China are characterized by a comprehensive content of the bilateral agenda. In an effort to strengthen a common foreign policy line in relations with China, in 2015 The EU has developed a document“Elements of a new EU strategy towards China”. A new “Connecting Europe & Asia: The EU Strategy” was adopted in 2018, which specified the European policy towards Asian countries as part of the “connectivity” approach, providing a forum for coordinating EU and Chinese infrastructure investment relating to TEN-T and the BRI.

A key objective of the “Connectivity Platform” is to ensure that investment takes place within a framework of fair and undistorted competition based on regulatory convergence, while promoting cooperation in areas such as technology, engineering, construction and the development of standards.

An important initial area of work for the “Connectivity Platform” is the financing of investment on priority transport corridors. The Sino – EU summit 2016 in Riga (Latvia) provided further confirmation of an increasing focus on BRI – related projects and initiatives. At the closure of the summit, participants declared that they would make concerted efforts to develop synergies between the BRI and relevant EU initiatives such as the Trans – European Transport Network, more generally support the development of transport routes between Europe and Asia, and establish multimodal logistics centres throughout the area of the New Eurasian Land Bridge. They also committed to improving the international supply chain and border crossing rules on key transport corridors and the connection from the Port of Bar (Montenegro) to the railway network in Central and Eastern Europe.

Analysing the logistics along TEN-T, it should be mentioned that the EU has ports on the Black Sea, Mediterranean Sea (including the Aegean, Adriatic, Tyrrhenian and Balearic Seas), North Atlantic Ocean, North Sea and Baltic Sea, providing a wide range of access points for shipping from outside the EU.

Also should be taking into the consideration the possible approaches to the EU by land and sea and the TEN-T core network corridors. Thus rail services between China and the EU currently operate mainly on the route through Russia, Belarus (where they transfer from the Russian, broad gauge (1,520mm) to the standard UIC gauge (1,435mm) at Brest) and Poland, using the North Sea – Baltic TEN-T Core Network Corridor (CNC) at least as far west as Warsaw. In the course of this research, various rail routes from the Far East to the EU were assessed to determine the most likely ones for carrying rail freight in the future. To that end, the attractiveness of the time of the shipment was considered. Based on the above assumption, it was found that, with shipping times to the North Sea up to one week longer than to the Mediterranean Sea, rail would be most attractive for transport to Europe north of the Alps, including to EU Member States bordering the North Sea and Baltic Sea.

Containers carried by rail, therefore, would primarily be those previously shipped to North Sea ports, and would travel along the route from Moscow (Russia) through Brest (Belarus) and Warsaw (Poland) to Berlin (Germany). Containers carried by sea would first pass or call at ports in Southeast Europe, such as Athens/Piraeus in Greece, where they could in principle be transferred to rail for travel further north. However, most freight of sufficiently high value to justify the additional costs of rail across the Balkans would already have switched to overland rail travel across Asia. It would therefore be more cost-effective for the remaining containers at Athens/Piraeus to continue by sea to ports in the north Adriatic Sea, such as Venice and Trieste in Italy, Koper in Slovenia and Rijeka in Croatia.

Assuming that sufficient end – to – end capacity is available between China and the EU, the focus of future rail freight flows, including those attributed to the BRI, is likely to be the North Sea – Baltic TEN-T CNC from Brest to Warsaw(Poland).

Some freight trains through or around Warsaw (Poland) currently continue to Berlin and Duisburg in Germany, but, by 2040, services may diverge to a range of destinations: south via Katowice in Poland to Hungary and Austria, Slovakia and the Czech Republic, and onwards to southern Germany, Switzerland and France; southwest via Łódź and Wrocław in Poland to Germany; west, as at present, via Poznań (Poland) to Germany, and onwards to the Netherlands, Belgium, the United Kingdom and Ireland, and via Hamburg to Denmark and Sweden; and northeast along Rail Baltica to Lithuania, Latvia, Estonian and Finland.

The routes to the west and to the northeast form part of the North Sea – Baltic Core Network Corridor of the TEN-T, which extends from Warsaw west to Berlin, Amsterdam and Rotterdam and north to Tallinn and Helsinki. The North Sea – Baltic Core Network Corridor Study includes estimates of rail freight tonnage crossing the border between Belarus and Poland in 2025. While it is difficult to compare estimates of tonnages and TEUs, the estimates in the Corridor Study appear to be small compared with the potential volume of BRI – related traffic by 2040.

Despite wide range of synegration of TEN-T and BRI, the analysis showed, that the geographical and project scope of the BRI are not clearly defined and that they continue to evolve.

The analysis of potential future traffic flows in this study suggests that the first study should focus on the New Eurasian Land Bridge Corridor connecting with the North Sea – Baltic Core Network Corridor of the TEN-T. This would require dialogue with other organisations already engaged in the development of rail transport routes in Eurasia, in particular CAREC. It would also require engagement with organisations such as UNIFE, representing manufacturers of rail equipment, with an interest in the promotion and application of EU standards beyond its borders.

The analysis of BRI – related traffic flows in the EU suggested that the BRI could generate additional rail freight of approximately 3 million TEU (equivalent to 50 – 60 trains per day or 2 – 3 trains per hour each way) between the Far East and the EU by 2040. Subsequently, it was concluded that the most likely TEN-T corridor to be required to accommodate this traffic would be the North Sea – Baltic Core Network Corridor.

It is not expected that the BRI changes patterns of shipping traffic materially other than to reduce slightly the volume of freight entering the EU via the North Sea Ports. Any effect might be offset by a growth in the shipment of BRI – generated freight across the North Sea to the UK. Nevertheless, it should be noted that maritime trade between China and the EU is already well-established, and that it is not possible to forecast possible changes in related trade patterns as a result of the BRI.

Given these results, and taking account of the uncertainties surrounding the definition and evolution of the BRI, recommendations to address particular constraints or bottlenecks on TEN-T beyond those already highlighted by the corridor studies would be premature. In the absence of greater clarity on the scope and priorities of the BRI, there is a risk that the development of specific investment projects designed to accommodate more traffic on the North Sea – Baltic Core Network Corridor, for example, would prove either inadequate or redundant.

It is also worth noting the issue of stabilization of subsidies for infrastructure and logistics projects of the PRC through the EU – Asia line.

At the same time, the TEN-T Corridor Studies should be reviewed and developed periodically as the work of the “Connectivity Platform” progresses and the BRI is defined more clearly. This would require TEN-T policy to become more outward-looking, with an explicit requirement to take account of major policy initiatives sponsored by countries outside the EU. It could also be facilitated by the development of periodic forecasts of BRI – related traffic, following the model of the European Commission’s Reference Scenario, with forecasts developed under the framework of the “Connectivity Platform” and jointly approved by participating countries.

Despite the presence of problem areas in the development of logistics ties between the EU and China, partners (especially the EU) note that the development of the logistics is greatly influenced by the geopolitical considerations of countries, in particular the desire to strengthen their foreign policy influence through modern infrastructure, reduce the geopolitical risks of entering major markets, and diversify options for communication with world markets. In other words, the dynamics of the developing of the EU – China logistics is a reflection of technological progress in transportation, the progress of globalization and regionalization of the world economy, geopolitical and geo-economic interests of participating countries in the development of international communications.

It should be understood that one of the key advantages of continental cooperation in the Eurasian space is the possibility of developing transport potential and related infrastructure. Work in this direction will lead to a number of positive effects, the main of which are the use of the transit potential of countries, localization of industry along the Trans – Eurasian transport corridors, export development and increased connectivity of inland States and regions.

Constructive interaction between the EU and China on the development of logistics routes in Eurasia shows that participation in the Eurasian cooperation can help the participants of the initiative “consolidate the strategic rear”, provide a basis for the rise of countries and influence the restructuring of the world structure, become a useful platform for global governance and international policy building.

PhD in International Politics, Central China Normal University, Wuhan, the P.R.of China Research Associate , Ukrainian Association of Sinologists

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Covid-19 and Liberal World Order

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The liberal international order (sometimes referred to as the rules-based international order or the US-led liberal international order) involves international cooperation through multilateral institutions like the UN and World Trade Organization (WTO), and is constituted by human equality (freedom, human rights and rule of law), open markets, security cooperation and promotion of liberal democracy. The US military and economic might was the custodian of the liberal world order, a network of alliances across Europe and Asia and nuclear weapons, which helped to deter the aggression of the illiberal states like the Union of Soviet Socialist Republic (USSR).

The liberal international order is the product of centuries and unrelenting innovations. It is highly integrated, developed, organized, institutionalized and deeply rooted in the societies and economies of both western and non-western countries.  It is the product of two phases of history: (1) the Westphalian project dating back to 1648, (2) the construction of liberal order led by the United Kingdom and later by the United States. The Westphalian system enunciated the principles of state sovereignty and norms of great-power conduct. While the construction of liberal-order-building project has been possible only, just after the relations of the great powers became stabilized.

After the Second World War, the United Nations (UN) along with the bipolar system were the defining features of the world order. At the end of the Cold War with the disintegration of (USSR), the U.S. was the indispensable power in the global order.

All mainstream theories of International Relations (IR) concur that the age of the liberal world order is over, a rare moment of consensus in the field of IR. Though liberal world order was already in decay, Covid-19 accelerates the process and profoundly reshapes the geoeconomics and geopolitical configuration of the world.

The Liberal world order is in a state of disrepair. There appear several reasons why this is happening. Since the global financial crisis of 2008, talk of order has given way to talk of disruption: the end of unipolar world; rising nationalism in the heart of the West; lack of proper handling of Syrian crisis among P5in the UN Security Council, rising protectionism, depleting credibility of democracy and fragmented response of UN bodies like WHO in the Covid-19 crisis.

America’s reluctance to abide by the liberal rules it has nurtured in the global system for more than seven decades thus marks a turning point. The present transition to the new world order has some differentiating characteristics compared to the liberal world order. One of the most important factors is the attitude of the US. Under President Donald Trump, the US backtracked against joining the Trans Pacific Partnership (TPP) and to withdraw from the Paris Climate Agreement. The US also quitted the Iran nuclear deal signed by the major powers and threatened to leave the North America Free Trade Agreement (NAFTA).  It has unilaterally introduced the trade tariffs repugnant to the liberal economic system and introduced the policy of “America First” incompatible to the liberal world ideals.

The rise of China will certainly be the greatest phenomenon of the twenty -first century. China’s extraordinary economic expansion and vigorous diplomacy are transforming the dynamics of the international politics.  Propelled by the rapid economic growth, China is extending its political influence as well as military capabilities and reach. Despite its engagement with the liberal world order, China is concerned about this order’s ability to protect its national interests.

But what are the long-term impacts of Covid-19 on liberal world order? The emerging world order, in the context of decaying liberal order, looks very different. First, a more fragmented world order in which “great power competition” will be intense and pervasive. Escalating tensions between the United States and China are the hallmark of this emerging world order.

Second, the emergence of new geopolitical environment indicates that there will be multi poles in the international politics. No single country can dictate the world in the direction of its will. Third, the economic effects of Covid-19 will certainly reduce the defense budgets, more spending on health care, infrastructure development and people-oriented government spending. Fourth, the credibility of the world governance system is strongly depleting in the context of very weak response to the Covid-19 crisis. Five, China’s successful response to Covid-19 raises the questions on the credibility and efficiency of the democratic system of government.

With the shifting economic power from west to east, the liberal world order faces multiple challenges. Already in the process of decay, Covid-19 has also some special meanings for the liberal world order. In the words of Dr Kissinger, “the coronavirus pandemic will forever alter the world order”. With the passage of time after Covid-19 pandemic, the emerging geopolitical and geoeconomics realities of the world are testimony to this changing world order.

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The European Green Deal: Risks and Opportunities for the EU and Russia

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The European Green Deal approved by the EU in 2019 is an economic development strategy for decoupling and for carbon neutrality by 2050 [1]. The plan is to reduce greenhouse gas emissions by at least 55% by 2030. In pursuit of this policy, the EU is setting the goals of increasing resource use efficiency and of advancing toward a circular economy, restoring biodiversity and curbing pollution.

While obviously having an impact on the EU economy, the implementation of the Deal will also concern the economies and foreign commerce of its trading partners through the anticipated re-structuring of energy markets and reduced carbon-intensive imports. In the next decade, the European Green Deal will mostly affect coal imports, possibly followed by oil and gas imports after 2030. By 2030, coal imports are expected to reduce by 71–77% of the 2015 level, coupled with a 23–25% decrease for oil imports and a 13–19% decrease for imports natural gas. Post-2030 plans envision a virtually complete abandonment of coal and significant reductions in the EU’s oil and gas imports—by 78–79% and 58–67% of the 2015 level, respectively.

The border carbon tax (BCT) is one of the mechanisms envisioned by the European Green Deal with a view to covering the expenses of European manufacturers in their commitment to reduce emissions. The tax will be based on the carbon-intensity of a particular product and its foreign trade share in EU market sales.

Why does the EU want The European Green Deal?

The EU and Russia offer quite different reasoning for the European Green Deal and the ВСT.

European regulators believe the European Green Deal and the ВСТ will help “force” the nations (primarily the EU’s partners) trying not hard enough to reduce their emissions and to mount a stronger climate policy. The EU has declared its historical responsibility for the accumulation of greenhouse gases in the atmosphere, while believing that it will not be able to resolve the issue of global climate changes on its own.

Along with enhancing supply security by making the EU less dependent on imports of a vast number of raw materials from one single country, other arguments suggest boosting the efficiency of resource use and curbing pollution. The EU is largely dependent on the deliveries of several natural resources, since it imports 87% of the oil it consumes and 74% of the natural gas. Proponents also note greater dependence on deliveries from a limited number of countries, including Russia. In 2019 and the first half of 2020, Russia’s share in the value of natural gas supplies to the EU was 44.7% and 39.3%, respectively. Norway, the second biggest supplier, had a share of some 20%, or about half of Russia’s. In reality, the degree of dependence is even greater, since long-term contracts are commonplace in this field and no allowances for delivery route flexibility are made as shipments are transported by pipeline. In 2019 and the first half of 2020, dependence on oil imports from Russia was less pronounced and amounted to 28% and 26.4%, while still being way higher than the share of the second biggest supplier, the U.S. (9.2%).

COVID-19 and the subsequent 6.2% contraction of the EU’s economy were additional factors weighing with the European Green Deal. Economic recovery has come to be considered in connection with achieving carbon neutrality. The 2020 global economic meltdown has become a driver for stepping up the environmental—and climate, in particular—ingredient in the aid packages offered by many developed and a number of developing countries.

From Russia’s perspective, the new deal is intended primarily for preemptively boosting competitiveness on global markets through advancing new technological sectors, which is mainly justified as a solution to the climate problem. Moreover, Russia believes that the deal is driven by political considerations that, among other things, have to do with reducing the EU’s dependence on imported raw materials. The environmental sector in the EU economy is already a global leader. According to Eurostat, the environmental goods and services sector grew by 2.3% already in 2017, while its gross added value amounted to $287bn, or 2.2% of the EU-27’s GDP.

Another proof that the task of making Europe-made goods more competitive is high on the agenda lies in the fact that the ВСТ will be based on the foreign trade share of carbon-intensive products, which will help stimulate sales of Europe-made goods. At the same time, European officials acknowledge that no significant carbon leakages have so far occurred; however, they cannot be ruled out in the future. Russia believes that exporters from other countries will hardly be able to compete once the tax is introduced.

Like the EU, Russia presumes that the BCT is an additional source of revenue for the European treasury amid the crisis brought about by the pandemic as well as a way to cover the significant expenses involved in implementing the new deal.

From Russia’s standpoint, one of the “unfair” aspects of levying such a tax is the fact that the EU’s policy-makers are playing up the advantage of the Union’s higher level of economic and technological development, making particular use of the historically broad resource base and the accumulated volume of greenhouse gas emissions. The EU-28’s Accumulated Emissions for 1751–2017 were estimated at 22% of global emissions, which makes the EU the next to largest emitter after the US (25%), while Russia accounts for only 6%.

Both parties concur that the main goal of the European Green Deal is to maintain the EU’s competitiveness amid the radical restructuring of the global economy. It is claimed that the ВСТ could prompt a shift of manufacturing into the countries with less stringent carbon emission standards (“carbon leakage”) due to the fact that outlays on de-carbonizing businesses in several carbon-intensive sectors will significantly increase.

For the EU and Russia, the European Green Deal carries both risks and rewards

The main risks for the EU lie in the high costs of making the European Green Deal a reality as well as in the fact that some manufacturers being tipped into unfavorable conditions, all of which is coupled with a price hike for consumers, retaliatory measures to be undertaken by other countries and energy security risks. Apart from some technological difficulties in introducing the BCT, other challenges include the tax’s ineffectiveness in resolving the climate change problem, since the BCT is non-existent in other countries.

The European Commission estimates the additional annual investment required to achieve these goals by 2030 at €260bn. Yet the unprecedented funding envisioned by the new deal for the purpose is not enough to achieve these goals. The roadmap entails allocating at least €1 trillion for “sustainable” investment. Besides, the Next Generation EU fund, established to boost the recovery of the European economy after COVID-19, earmarks another €750bn for this purpose. A staggering €600bn shall be provided for climate action funding alone, as stipulated by the Green Deal and the pertinent part of the recovery plan. Additional investment is expected to come from companies, households and national governments.

Ultimately, the ВСТ will have a negative impact on the competitive edge of all European manufacturers, concerning, above all, those sectors where imported raw materials with a high carbon footprint account for a significant chunk of the costs.

Transitioning to new power sources will require higher carbon prices, which might ultimately result in a hike in consumer prices and a drop in the quality of life across the EU.

The European Green Deal might result in new threats to the EU’s energy security, since a significant import expansion of metals and minerals—used in manufacturing solar panels, wind turbines, ion-lithium batteries, fuel cells and electric cars—is needed for a large-scale de-carbonization of the economy. As of now, no substitutes for these raw materials are to be found.

Should the ВСТ be introduced, the EU’s trade partners may well, contingent on specific policies, initiate trade disputes. The European Commission has to ensure that the BCT is compliant with the WTO’s rules, which, however, does not eliminate the risk of retaliation on the part of other countries, which may take the shape of their mounting resistance to the adoption of the tax. In 2012, the plans to introduce the ВСТ for foreign air transport companies encountered particular pushback from other states, such as the US, China, India, Japan or Russia, which forced the EU to abandon the idea.

Several experts point out that this tax is ineffective in resolving the global climate change issue, since it does not exist in other countries.

There are also technical difficulties in introducing the tax. These have to do, in particular, with calculating the carbon component in imported goods in consideration of greenhouse gas emissions along the entire value chain of the product.

At the same time, the European Green Deal could benefit the European companies that bear the high costs in de-carbonizing their manufacturing. The tax will allow production to be expanded in energy-intensive sectors as well as in sectors with high-intensity trade, as about 20% of the drop in manufacturing will be offset by payments for CO2 emissions.

Russia, in turn, may face the dire prospect of losing its energy and carbon-intensive markets as well as encounter challenged posed by the BCT. Most of the profound consequences will stem from a gradual loss of oil and gas markets following a drop in demand and prices, which may additionally be exacerbated by the carbon tax. Oil and gas revenues play a key role in the Russian budget, with their share being in the ballpark of a third and a half of it. In 2018 and 2019, the figures stood at 46% and 39% respectively. In 2020, they fell to 28% owing to the slumping demand and prices amid the pandemic and OPEC agreements.

No significant drop in oil and gas imports is expected before 2030. However, in the longer run, the EU aspires to significantly reduce its supplies from Russia. In the meantime, 45% of Russia’s fossil fuel exports go to the EU. Russia might lose a significant chunk of the EU market to European manufacturers or foreign competitors whose oil production has a smaller carbon footprint: take Saudi Arabia, for instance.

The ВСТ will be conducive to the EU’s demand for Russia’s finished products falling as well, primarily when it comes to a number of steels manufactured with carbon-intensive technologies. The BCG company estimates Russian exporters’ losses, once the tax is introduced, to be some $3–5 bn annually; KPMG’s estimates are somewhat higher.

De-carbonization practices in other countries will also inform the demand for Russian fuels and carbons. Many countries have set the goal of radically reducing greenhouse gas emissions. Some countries plan to introduce a ВСТ, while the US, China and the EU are now discussing possible cooperation in this field. It is worth noting that the global pace of de-carbonization and ВСТ introduction is hard to predict, but this should not justify a setback in Russia pursuing a more active climate policy.

At the same time, Russia could stand to benefit from the European Green Deal. Before 2030, a significant reduction of emissions will demand that the use of coal be rapidly phased out, which will result in an increased demand for natural gas, as the latter is seen as a “transition fuel” on the way to a low-carbon economy. This will allow Russia to expand its short-term and medium-term gas exports.

Technological restructuring of the economy and export diversification might emerge as the main potentially positive outcomes for Russia. The point at issue has ultimately to do with transforming the energy industry towards greater use of renewable energy sources (RES), whose cost tends to gradually decrease, as well as towards enhanced reliance on the new types of energy, such as hydrogen, which may, at the very least, partially replace fossil fuels and be exported to foreign markets.

Timely introduction of climate regulations will allow Russia to avoid having the ВСТ applied to its products. It remains unclear what kind of regulations could help resolve this matter, though.

Russian companies, now transitioning to low- and zero-carbon technologies, will be able to benefit from the price to be put on carbon and avoid paying the special tax, much as able to engage in trading quotas, depending on the instrument to be potentially used at the state level. They will likely be required to monitor greenhouse gas emissions along the entire product value chain.

The European Green Deal and the pertinent part of the EU’s economic post-pandemic recovery plan earmark about 10% of the climate action funding for “internationalizing” the Deal, which effectively means providing aid to trade partners in the form of grants, loans and guarantees for transitioning to “sustainable” energy industries and restructuring their economies and exports. Therefore, there is a theoretical possibility that some of the investment will be channeled into joint “green” projects.

The ‘green’ avenues for fostering EU–Russia bilateral relations

The European Green Deal affords opportunities for the parties to cooperate. This should not be limited to climate issues alone, although restructuring the energy sector remains a priority. Such cooperation should also include addressing the whole set of measures needed to transition to a “green economy”, with circular economy being one of its ingredients. The latter’s share in the global economy is estimated at some 9%.

Investment cooperation might become a key area, primarily encompassing investment in research, manufacturing and infrastructure, since restructuring the economy means taking it to a new technological level. Amid falling oil and gas revenues, Russia needs to explore new areas. Legally, there are no sanctions-related restrictions in climate matters.

The world already possesses a large number of the technologies to facilitate transitioning to a zero-carbon development track. Above all, these are the RES, “green” hydrogen and state-of-the-art bioenergy. Combining these sources will help implement this development track. Additional academic assessments are required to identify the efficiency and environmental acceptability of specific technologies to be used in joint projects, while taking the entire value chain into account.

Investment in hydrogen energy might become an important cooperation avenue, since its global market share is pegged at $2.28 trillion already by 2027. The International Renewable Energy Agency (IRENA) predicts that hydrogen will account for 12% of global energy consumption by 2050. Other experts put hydrogen’s share in global final energy consumption at 18%.

Hydrogen energy is seen as an important element in achieving the EU’s carbon neutrality, as the hydrogen’s share in Europe’s energy balance might reach 14% by 2050. Gazprom estimates Europe’s hydrogen market at $153bn as of 2050, while the Ministry of Energy suggests it will amount to $32–164bn. The Hydrogen Strategy approved by the European Commission in 2020 as part of the European Green Deal encourages the development of hydrogen energy. In Russia, it may be driven by the Strategy for Hydrogen Energy Development, which is currently being drafted. This strategy provides for collaboration with other states, including the EU. Plans for 2021 include presenting incentive measures for hydrogen exporters and consumers.

Supplies of “blue” and “turquoise” hydrogen could be a promising cooperation area. This hydrogen is produced from natural gas and it might be a particularly viable option, since this is generally perceived as being profitable economically and having the smallest negative environmental impact. Another prospective area is to encourage “green” hydrogen projects [2]. Hydrogen cooperation is of interest to both Russian and European companies, including Gazprom, Rosatom and NOVATEK. Rosnano and Enel Russia plan to jointly produce “green” hydrogen at the Enel Russia wind power plant, which is currently under construction in the Murmansk Region, and subsequently export the hydrogen of some $55m worth to the EU. Besides, NOVATEK signals its intentions to commence production of “blue” and “green” hydrogen together with Germany’s Uniper.

Another potentially conducive to cooperation factor is that, as far as the EU is concerned, Russia has a competitive edge in its geographical proximity, large gas deposits, production facilities and robust infrastructure. Small-scale pilot projects may become the first step to determine their benefits and costs for both parties. Building business partnerships may be another prospective path.

Cooperation is also promising in the areas of increasing energy efficiency, reducing methane leaks, supplying electricity, adapting to climate change, preserving biodiversity as well as in the fields of waste management, sustainable agriculture and forestry, electric car manufacturing, introduction of trading quotas, etc. The big take-off of digital technologies makes it possible to create databases in order to transparently select the most promising projects, boost their efficiency and achieve positive outcomes, and improve management systems.

Predicted development of EU-Russia economic and political relations amid Europe’s increasingly stringent environmental standards

The BCT tax will clearly have a negative impact on the bilateral relations and, most importantly, serve to breed deeper distrust between the parties, triggering a further re-orientation toward enhancing economic links with Asian nations, primarily China, for whom Russia, along with Saudi Arabia, is one of the biggest suppliers of oil and where Russia is stepping up its natural gas exports.

To avoid a deterioration in relations, it would be preferable for the parties to engage in constructive cooperation in their mutual interests, especially since the framework for this is already in place. In 2021, Russia intends to adopt its own Climate Strategy as well as a number of environmental laws in other areas. In order to facilitate Sakhalin’s path to carbon neutrality, there has been proposed a bill introducing a mechanism for selling greenhouse gases emission quotas on the island. Russia’s leading energy companies have already embarked on climate-related plans, with some companies devising climate strategies of their own.

In fact, the European Green Deal is an issue where Russia and the EU have common approaches as much as differences of opinion. At the same time, divergent opinions are no crucial obstacle to environmental cooperation between the parties.

The implementation of the European Green Deal is fraught with major risks for both parties, the principal ones for the EU being the high costs of the strategy and retaliatory steps to be undertaken by other countries. Russia faces the dire prospect of losing markets and lagging behind in re-structuring the energy industry, its key economic sector. At the same time, new opportunities are opening up, such as bolstering the parties’ global competitiveness by entering new markets.

Environmental cooperation between the two parties could be mutually beneficial to become one of the principal areas for negotiation and implementation. In order to fulfil this potential, dialogue—based on an open and balanced approach to assessing areas for collaboration and possible rapprochement—is needed. As a first step, the EU and Russia could develop a roadmap outlining every step of such cooperation and the parties’ commitments as well as specifying the market segments where projects could be carried out.

  1. Breaking down the proportionate relations between development and resource consumption.
  2. Produced by using RES to power water electrolysis.

From our partner RIAC

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Economy

Eastern Balkans Economic update: Romania’s and North Macedonia’s new data for 2020

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When governments around the world started reacting to the pandemic, they induced a vast and unpredictable crisis. The ensuing recession struck in decidedly variegated ways both we looking at different countries and multiple social strata. Many economies fell in a downturn that has compromised access to income in certain States, although elsewhere these effects were risible. Such inequalities stand out in worldwide comparison, but they happen to be huge in structurally-alike, bordering States as well.

Recently, a varied pack of heavyweights and some smaller countries has rebounded strongly in relation to both GDP and employment. China and the US are at the forefront of this recovery for diverse whys and wherefores and in dissimilar manners. Like trucks on a difficult mountain road, the two are accelerating as they overcome the crisis helping the world economy.

Still, something is absent in this rubicund montage of rebounds and development: the European Union. Being the wealthiest market in human history, the EU may support other countries’ recovery tremendously. Yet, inner imbalances, organisational feebleness, and lack of resolve are restraining the Union. There have been serious consequences for some unconsolidated EU economies and on the many other States bound to the block. Following up a previous article, new data reveal how two very different country on the EU’s periphery fared in 2020.

Romania — The worst seems over

Over 20 million inhabitants and yearly exports worth about $80 billion make Romania a little giant in the Eastern Balkans. It joined the EU In 2007 in tandem with Bulgaria, and since analysts then to bundle the two countries together. However, this article’s approach is different as it compares Romania with the least populous country in the region: North Macedonia. The latter is not an EU member either, making them possibly the most dissimilar cases in the Eastern Balkans.

Romania’s economy suffered badly in the beginning of 2020, with its GDP collapsing 33% in the first quarter. These figures could be considered the worst since the onset of the post-socialist transition in the 1990s.The trend only got partially more positive in the following three months (April–June), when the economy started recovering somewhat. Yet, by the end of 2020 only 128,800 people had lost their job, or 1.49% on the previous year. The fact that the economy seems to be performing well has kept swaths of them in look for a new job. This explains rather discomforting unemployment statistics.

Gross Domestic Product

Romania’s economy only managed to get out of a steep slump in the summer quarter (July–September) of 2020. The figures reveal a strong V-shaped rebound, with GDP recovering almost 20 percentage points on its 2019 levels (Chart1). In the last three months of 2020, Romania’s GDP rose by a further 13%, reaching slightly above last years’ estimates. At the end of 2020, total production was 100.39% of its 2019 levels, whereas the Euro Area stopped at 96.86%.

Un/Employment

Curiously, unemployment data for most of 2020 diverge from Romanian economy’s overall impressive performance — and significantly so (Chart 2). Unemployment rose in the first three months of 2020, and started growing even faster in the ensuing nine months. In spite of a positive GDP dynamic, employment decreased by almost 130,000 units in 2020Q4due to the pandemic-induced crisis.

True, unemployment statistics do not say much about the structure of the Romanian labour market, a key factor in these processes. Unlike most of their Eurozone peers, Romanian enterprises deal with a greatly flexible manpower with fewer rights and protections. Thus, they can lay off and hire staff much faster than competitors and partners in the richest EU economies. Yet, one should not interpret unemployment’s as a consequence of new people entering the job market during 2020Q2–Q3. After all, in those six months the number of employed people fell by 2.4% compared to 2019Q3 or 207,500 units. Meanwhile, unemployment ‘only’ grew by 1.3 percentage points indicating that some laid-off workers became inactive. In a word, ordinary Romanians did not get a fair share of the recovery’s gains.

RNM — It couldn’t get much worse, so it got better

As anticipated, the Republic of North Macedonia (RNM) is very different from Romania in many respects. First, its population is a fraction of the latter’s, only about two million people according to questionable official data. Furthermore, the RNM is not a member of the EU despite the fact a markedly asymmetric dependence from the Union. In effect, its economy is mostly reliant on trade with and tourism from three EU member States: Bulgaria, Germany and Greece. The country averted a civil war in 2001 by appeasing its Albanian minority, but its economy has struggled ever since.

One could argue that the situation before the pandemic hit was so dire that worse performances were rather unlikely. When the economies of Bulgaria and Greece slowed down and tourism came to a halt, the RNM’s suffered as well. In the first quarter of 2020 the RNM’s GDP fell by 14%, and shrunk further in the following three months. New figures show that about 17,000 people lost their job in April–June 2020, which became 21,000 in December. This means a 2.66% decrease in employment for a country where unemployment was 17.3% in 2019.

Gross domestic product

The RNM’s economy took the biggest hit in the second quarter of 2020, after having already suffered somewhat in January-March. In 2020Q2, North Macedonian GDP was about 23% lower than in 2019 (Chart 3), against the Eurozone’s 17%.Yet, the slid is nothing like the recession the RNM experienced during the Yugoslav Wars and the 2001 civil war. With the summer, both Bulgaria and Greece as well as the entire EU reopened their borders and started growing again. There were positive ripple effects on the RNM’s economy in the third quarter, with GDP growing by 448 million euros. The 20% increase of the summer became the base for further growth in the October-December 2020. By the end of the fourth quarter, the RNM’s GDP increased by another 10%— converging on its 2019 levels.

Un/employment

Unlike in Romania’s case, inconstant performances did not affect unemployment statistics visibly in the RNM (Chart 4). Actually, and counter intuitively, in comparison to 2019 unemployment decreased by 0.6% to 16.7% in the first two quarters of 2020. In total, during the first half of 2020, the RNM’s economy lost4,200 jobs or 0.5% in comparison to 2019 levels. The National Statistical Agency recorded similarly inconclusive fluctuations all year round, suggesting a deep disconnect between GDP and unemployment. All in all, one could justify these findings with the ignominious state in which the RNM’s labour market is. The population is not very active, yet unemployment has never fallen below 15%in the past 20 years.  Therefore, ordinary people fail to reap sensible benefits even if the economy overall is growing.

Conclusion: Pandemic management matters

There are two lessons that one can draw from these figures and by comparing the cases of Romania and the RNM. One, regards the pandemic and the ways its management interact with key economic indicators. While the other speaks volume on the differences between these two countries on the EU’s periphery.

Arguably, the data may comfort the thesis that not only lockdown fuel recessions, but less lockdowns spur economic growth. In fact, Romania performing better than most EU and Eurozone economies in terms of GPD growth suggests that less lockdowns favour growth. After all, authorities in Bucharest have been and remain remarkably consistent in their refusal to shut down the economy. Conversely, the rather trendless fluctuation in the RNM’s data and performance results at least partly from the government’s inconsistency. Actually, Skopje went from minimal anti-contagion restrictions to declaring a full-scale, countrywide lockdown virtually overnight— a behaviour that fuels uncertainty.

Additionally, these figures dispel some of the cloud surrounding the EU’s and its peripheries’ path out of the crisis. On the one hand, the EU is trying to dig its escape route by investing billions of euros over the coming years for countrywide Recovery plans. True, Romania’s share of grants is not as bis as Bulgaria’s, Greece’s or Italy’s, but the government is thinking big. On the other hand, the RNM is amongst the “poorest countries in Europe” never to be part of the USSR. Unemployment figures could cause vertigos even before the pandemic hit and the population is shrinking at impressive rhythms. Not being a member of the EU, Skopje will get only a fraction of the money Brussels has earmarked. Paradoxically, dependence on the EU was the transmission belt of the crisis, but lack of integration will hinder the recovery.

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