The future of Europe and Russia

The situation in and around Europe has been in the limelight of late, and not only in the context of the Brexit processes that question many economic axioms of the last two decades, but also in view of the fundamental change in the role that Europe is used to playing in the global politics and economy.

Donald Trump’s desire to “buy” Greenland, Emmanuel Macron’s “crisis of capitalism” statement, and the Brexit with more and more political problems growing around it – all these expected events cast doubt on Europe’s prospects as an integrated economic space in its traditional format and borders. But at the same time, this reflects the gradual loss of Europe’s geopolitical agency, its ability to play a decisive role in addressing central issues in the global economic development. Europe is now increasingly perceived in the context of global transformations as an object of politics and a source of investment resources, but not as a consolidated and independent player in the global politics and economy, capable of competing with major players such as the US and China, at least in the economic dimension.

The most important factor that catalyzed Europe’s loss of its geopolitical and geo-economic agency was its strategic vulnerability to low-intensity military force risks that could have a negative impact on economic processes. The most important risk was the transformation of the Mediterranean into a version of the historical Wild Fields eating up substantial resources just to keep it stable, with a full-fledged strategic solution still far away. The growing risks in the Mediterranean – not only the Eastern, but also the Central and Western Mediterranean – enhanced the discrepancy of interests in the European Union, something that had also played a negative role before.

Given the current crisis of elites and the apparent revival of radical right-wing and left-wing sentiments in European societies, it is only a question of how quickly Europe will lose its agency and how sharply these processes will manifest themselves in the economy.

Despite the obvious economic stagnation and growth of non-economic risks, already partially out of control, such as the risk of social atomization in urban spaces, Europe remains the most important investment hub – no longer capable of equal competition with the United States in investment instruments as it was 15 years ago but continuing to be a source of investment capital and a center of substantial financial resources. And most importantly, Europe remains a significant center for the turnover of investment resources, which is still not fully controlled by the United States. Gaining control of the European financial system is likely to be the core of “Atlantic” relations in the foreseeable future. This will have important consequences both for the global economy and for Russian-European relations.

The banking crisis in Europe is seen as a most important factor, along with the growing administrative pressure on the European banking system from the US. These trends go far beyond the situation around Deutsche Bank and affect the entire banking and investment sector in modern Europe, not excluding the British segment. Therefore, the European banking system’s gradual transfer under the control of the US and Asian (mainly Chinese) investment players cannot be ruled out in the future.

This leads to Europe losing its investment self-sufficiency, something that will have a long-term, if not eternal, constraining effect on economic growth, and most importantly, a toolkit for external management of European investment processes will be formed.

Setting aside plans the EU’s internal restructuring and the possibility of reformatting the relatively consolidated union into the so-called multi-speed Europe – the most significant risks for Europe’s development as an integrated economic system – we can highlight the factors that limit the potential for geo-economic development of the Old World:

  • The strategic vulnerability to military force risks, not only in the Mediterranean, but also in the Balkans and the Black Sea region. The situation in the Baltics is also prone to political manipulation with military force instruments. In the future, northwestern Europe may turn out to be a relatively stable region, but objectively, after Brexit, it will be outside the control of either the EU or individual European countries. With time, Europe’s dwindling defense capabilities, exacerbated by the military-political divergence between the “new” Europe (generally pro-American) and the “old” Europe, will play a greater geo-economic role.
  • The formation of buffer zones – in both the political and economic senses – around the European perimeter, such as the Danube “Wild Fields” (Russia tends to underestimate the significance of the “Moldovan model”), the Balkans, and, in the very near future, the Adriatic. These regions are effective tools for managing economic growth and investment appeal, but as a rule, Europeans do not hold the keys to them.

The processes in and around Kosovo are extremely indicative in this context, as Europeans see them as a success story of stabilizing a region and forming sustainable institutions of power there. In reality though, it appears that the situation can be easily transitioned to controlled instability with strong economic impact. Even the legal enclave status achieved with high political costs can be taken away relatively easily, resulting in a far tenser political situation in the EU.

  • Energy vulnerability; the consistent and not always logical narrowing of Europe’s own energy base. All attempts at the so-called energy supplies diversification we have seen in Europe involve procuring various types of energy carriers from outside the continent, moreover, under increasingly complicated and politicized conditions. At the same time, Europe’s own energy base is being increasingly pegged on alternative energy sources, which reduce industry’s market competitiveness. Another result of this trend is more room for potential manipulations in the energy sphere, coming from various external players.

European politics of the past ten years has been chaotic and lacking any strategic plan whatsoever. This was particularly evident during the 2014-2016 migration crisis but also equally affected the situation with Brexit and recent efforts in updating Europe’s energy security system.

One example of this chaotic approach that clearly manifested itself in the investment environment has been the excessive number of ‘alternative’ gas supply projects amidst the growing radical environmentalism. Europe does not have the investment resources to follow through with all the declared hydrocarbon transit projects. The projects are starting to compete, which hinders strategically sensible investment decisions and leaves more room for manipulations.

This goes in direct contrast with the high degree of formalization and institutionalization that have always been typical for the EU both at the level transnational and national levels. This means that the EU as a system was not designed for enduring relatively long periods of fundamental and complex political and economic turbulence.

The EU as a system was inherently too slow, which made it increasingly uncompetitive in the face of accelerating political and economic processes, including investing. Therefore, it is safe to assume that Europe’s uncompetitiveness as a geoeconomic system will only be growing. 

The increasingly more serious problems for Europe are its insufficient internal social stability, the eroding traditional system of social institutions and the emerging alternative investment systems in the EU’s socioeconomic space. That is, not only the ‘archaic’ mechanisms associated with the activity of immigrant communities from the Middle East but now also China-centric unofficial payment and investment systems. These processes can have rather long-term consequences as they restrict the control over the investment processes at the national and European levels. 

Stalled globalization and development of the global economy based on a model of moderate regionalization, to say the least, creates new risks for Europe. From the investment perspective, the primary risk is hybrid political and investment spaces forming around Europe that require extensive investment and management resources for their stabilization. However, the pan-European institutions and individual countries will be relatively small. Some of these spaces may be legalized as “free economic zones” that will compete with the EU in terms of investment. 

The Mediterranean is the largest and most vital space of this kind. Beirut’s reappearance as an offshore financial centre will have exceptionally serious consequences for the European economy. But in the long term, Southeastern Europe and the Black Sea region, in particular, may also become a ‘hub.’  

Therefore, the essential question is how much of its investment potential Europe can preserve and, most importantly, how much of its ability to manage its investment channels and tools with non-crisis and soft methods? A disturbing tendency in this respect is the notably tougher and more frequent use of administrative mechanisms for regulating economic and, particularly, investment processes. Another factor is the emergence of alternative financial and investment systems in Europe – facilitated by alternative ‘post-European’ social structures related to stronger social and economic significance and influence of immigrant communities. 

This prospect has already fully manifested itself in Great Britain where there are basically two co-existing investment paradigms. It is also starting to emerge in France and Germany. 

Of course, these alternative systems do not have the same financial potential yet as in some Asian countries. But objectively, the crisis of the European financial system and tougher control over the financial flow will be increasing the demand for such mechanisms and, more importantly, the extent of their integration with Europe’s traditional financial system. 

The future scenarios of European development are becoming the critical counterpoints for Russia when it comes to strategic decisions – economic rather than political. The main question is whether it is reasonable to consider the future Europe as Russia’s strategic partner in a wide range of issues related to re-formatting the global political and economic space. 

The political aspect, naturally, matters but even the most extreme scenarios of the European political developments do not require any massive restructuring of Russia’s own politics and space architecture because all the main points of political competition between Moscow and Europe have already been identified. They concern not disagreements in values rather than the degree of econic influence and control over Eurasia and a number of associated regions that may potentially be part of the new macroregions emerging through regionalization of the global economy. 

Russia is facing a strategic choice: Europe may become its competitor, mainly in the energy market, which is already happening, but in the long-term also in the non-conventional capital markets where Europe is objectively very strong – thanks to its more advanced financial infrastructure and relations established in the regions with excessive capital in the 1990s and the 2000s. 

To a large extent, this concerns financial resources of Middle Eastern origin as well as Chinese investment. We can’t rule out that the sluggish investment cooperation between Russia and China is in fact caused by active antagonism on behalf of the EU, including by political means.  

Another scenario is that Russia and Europe, at the level of major industrial powers, will be able to find some basis for geo-economic agreements which would allow them to come through a period of upcoming geo-economic turbulence basing on at least some sort of partnership, regardless the objectively increasing difference in vectors of their development, and to increase their competitiveness as compared to the main players in today’s political and economic arena – that is, China and the United States. But the prospects of such partnership are entirely dependant on European elites’ capacity for strategic vision and their willingness to stop the politicization of economic decisions that is becoming uncontrolled.

The actual question is whether Russia and Europe will become partners in regionalization of the global economy and renationalization of economic sovereignty by key global players, or they will be competitors, with this competition gradually expanding to political and military-political spheres – which would be extremely undesirable.

It is not so much the United States’ increasing economic influence in Europe and the latter losing its geopolitical independence that would be a risky circumstance for Russia. This is not going to drastically change the state of affairs Russia is facing now. The situation is even going to become simpler to some extent as development of relations with pan-European structures will become redundant. The most risky scenario for Russia is chaotization of the European policy and simultaneous display of tendencies for intensification of the United States’ influence on the continent, with takeover of European financial institutions and attempts of counterplay by pan-European institutions. Both tendencies will develop amidst a considerable influence of anti-Russia sentiment and the urge to restrict Russia’s economic influence on the continent.

Obviously, China-US competition in the European financial market is going to be extremely tough. Both players will not be restricted by the sole task of preserving the European financial and investment structure; their strategic aim is readjusting it to their own standards. They are more interested in establishing control over Europe’s investment base that relies on the European consumption pattern, and further control over this base. And both players will ignore Russia’s interests during the consequent ‘reformatting’ of the region and its financial and energy systems.

This has been proven by China’s behavior during the implementation of the program for cooperation with Central and Eastern European countries (also known as 16+1), which implies expanding mutual trade between China and the region’s countries, with specific China-oriented calculation mechanisms possibly to be built around them and gradually turning into investment mechanisms.

Objectively, in the mid-run Russia will have to consider Europe as a competitor, particularly as regards the energy industry and issues related to routes and access to logistic corridors.

The situation will aggravate in case Europe persists with its policy of escalating competition with Russia in the post-Soviet space. Prospects for such aggravation have become evident not so much in the context of the Ukrainian issue as the developments in the Caspian region, where European institutions’ policy has already become anti-Russian and does not imply reasonable compromises with Moscow. 

Eurasia’s transformation into a competitive space with policy that contradicts Russia’s interests – and objectively, the situation is going to develop this way – makes it highly unlikely that a reasonable basis will be created for Russian-European strategic partnership.

Yet, competition does not rule out the use, and sometimes borrowing, of infrastructure of the European presence in the Middle East, Africa and areas remote from the European investment space, such as the Asian-Pacific Region, where Russia – despite its weak positions – still has opportunities for embedding into investment systems, provided there is a complex approach and provision of reasonable investment compensations for Europeans in the regions controlled by Russia, such as the Arctic and the Russian Far East, where portfolio investment mechanisms may be implemented.

Russia should be open for interaction with economic entities in Europe that seek to preserve their investment potential in the current conditions of global competition for investment resources, not to mention possible tougher competition models that Europe may pursue.  

It is unlikely that the model of pumping out investment resources from Europe will be based on mechanisms previously tried out by Americans, as well as by Europeans – particularly, by France – during the Arab Spring. Withdrawal of investment resources through ‘safety rent’ and ‘energy rent’ will serve as the major mechanism; it appears that Europeans will pay for modernization of the United States’ military-industrial complex. But this rather implies involving controlled mechanisms as a tool for legitimization of politically motivated management of the economy. 

Soon, we can expect a new campaign initiated by the United States against European banking, financial and investment structures – in particular, Italian and French ones. This campaign will aim to finally ruin Europe’s opportunities for receiving investment capital from other regions, such as the Middle East, without the United States’ control. The US will use its potential for hybrid manipulation against Europe in full and without any restraints. One of the instruments for this competitive struggle can be a new anti-offshore campaign, focused on anti-corruption and aimed at certain representatives of European elites, possibly including those allied to the US.

To fully engage in the competition for ‘European investment inheritance,’ Russia has to develop efficient mechanisms for mid-term reinvestment of European capital that would go beyond traditional cooperation with European investors and provide them with a greater capital security than in Europe. This implies the necessity for taking Russia’s economy to a whole new level and creating its inner vector of strategic development.  

By Dmitry Evstafiev, Professor at the Communications, Media, and Design Department at the Higher School of Economics

Previous ArticleNext Article