23 Jul 2010

Weighing the costs and benefits of a free trade area between the EU and Russia

The EU-Russia Partnership and Cooperation Agreement, which entered into force in 1997, foresees the possible establishment of a free trade area (FTA) between the parties. In analysing the partnership, CASE found that an EU-Russia FTA would prove beneficial to both the Russian Federation and the EU27. While under the agreement some sectors are expected to contract in the medium term, their importance in total output is small. Over the long run, the majority of sectors in Russia should expand, and only a few sectors in the EU27 may register negligible decreases in output.

Experts in CASE Network Report No. 93 estimate that welfare losses from the environmental damages would be very small for Russia (possibly even smaller due to the implementation of greener technologies), and negligible for the EU. Despite some significant negative medium-term social implications in selected sectors in Russia, the overall increase in economic activity and wages, coupled with likely domestic policies aimed at easing the impact of transitional unemployment, could set the stage for an overall reduction of poverty rates.

Overall, the results show that significant welfare gains (2.24% of GDP for Russia) would accrue from the deep FTA scenario involving a significant reduction of non-tariff barriers (NTB) along with additional flanking measures, particularly on competition, intellectual property rights (IPR) protection and corruption. These measures would help in re-branding Russia as a safe and attractive investment location. In addition, a number of countries such as Finland, Ireland, Netherlands, Denmark, Estonia, Slovakia, Slovenia and Sweden are expected to see their welfare increase by around 0.5% of GDP as a result of the closer cooperation.