Russia's economy until recently one of the fastest growing in Europe is in dire straits. In the first three months of this year, output fell by 10% compared with a year earlier. The World Bank now expects the economy to contract by around 8% for 2009 as a whole. Traditional industries such as steel are hurting badly. The decade-long consumer boom has turned into a slump as unemployment soars. The government has cash to spend after years of sensible budget policies, but the central bank will be forced to keep interest rates high as long as inflation is stuck in double digits and trust in the ruble remains shaky.
The reversal in Russia's economic fortunes is particularly painful. Since 1998 the year of Russia's last financial crisis the economy has expanded eight-fold. As oil prices rocketed, so did the country's self-confidence. Not content with presiding over the economic boom, then President (now Prime Minister) Vladimir Putin vowed to restore his country's great power status. Talk about a partnership with the West gave way to belligerent statements about a new Cold War. In the summer of 2008, Russian tanks trundled into Georgia. In early 2009, a dispute with neighboring Ukraine led Russia to cut off gas flows, leaving people in some European Union countries freezing and factories idle.
Most Europeans want to see Russia stable and well-off. But they also believe that the economic crisis might bring opportunities for a political rapprochement. Some hope that the recession might just make the Russian leadership a little more humble or at least trigger reforms that would make it easier for the E.U. to strengthen trade and investment links.
But while Russia's relations with the U.S. have been thawing since Barack Obama took over the White House, E.U.-Russia relations remain frosty. Talks about a new bilateral treaty on political and economic cooperation have made little headway. Hopes for a free trade agreement between Brussels and Moscow have withered after Russia last week put its application for membership in the World Trade Organization on ice. E.U.-Russia energy cooperation remains stuck, which increases the risk of yet another gas crisis this year. Europeans have responded to Moscow's ideas about constructing a "new European security architecture" with a distinct lack of enthusiasm.
Most importantly, perhaps, Russia is incensed about E.U. efforts to draw the countries that lie between the E.U. and Russia closer into its orbit. Russia has traditionally regarded Ukraine, Belarus, Moldova and other former Soviet states along its border as its "privileged sphere of influence," in the words of President Dmitry Medvedev. The E.U.'s new "Eastern Partnership" initiative, launched in May, offers these countries economic integration and stronger political ties. Although the E.U. has shied away from talking about the prospect of membership, however distant, it hopes to help its eastern neighbors to become richer, more stable and more democratic. This would leave them better equipped to withstand Russian meddling and bullying.
Moscow is particularly unhappy about the E.U.'s offer to include Belarus traditionally a staunch Moscow ally in the Eastern Partnership, albeit on the condition that Minsk improve its shoddy human-rights record. When the E.U. recently offered a multibillion-dollar loan to help modernize the Ukrainian pipeline system conduit for 70% of Russian gas sales to Europe Russian leaders were furious. Moscow has also tried to foil European attempts to build stronger energy links with Azerbaijan. Potential for conflict exists in Georgia, where E.U. observers are the only ones left after Russia forced Organization for Security and Cooperation in Europe and United Nations' monitors to leave Abkhazia and South Ossetia.
Wary of ceding influence to Europe, the Russians have stepped up efforts to maintain their traditional fighting weight in the region. They have given large loans to neighbors hit by the economic crisis and sought to strengthen regional security and economic organizations that tie their neighbors closer to Moscow. They have also taken a more hands-on approach to "frozen conflicts" in Moldova and the Caucasus to keep neighboring governments on their toes.
E.U. officials like to insist that its eastern policy does not clash with Russian interests in their common neighborhood. They have asked Russia to take part in some regional initiatives such as an effort to strengthen energy security. So far, though, Russia has refused to play ball. But the E.U. cannot simply pull back and allow Russia to dominate Eastern Europe. It must stick firmly to its objective of helping its neighbors to decide their own destiny. If Europe is to remain credible, there is no other course worth pursuing.
Katinka Barysch is deputy director of the Centre for European Reform, an independent London-based think tank.