Recovery from Covid-19 in Eastern Partnership Countries Faces Political Hurdles
With the support of the European Union, the European Bank for Reconstruction and Development (EBRD) announced in December a scaling up of its financial support for small and medium-sized enterprises (SMEs) in the EU’s Eastern Partnership (EaP) countries. However, potential for economic recovery from the pandemic in the region is undermined by EU marginalisation of issues in corruption and Russian subversion capabilities. It is unlikely that sustainable private-sector growth will be realised until the EBRD fiscal approach is complemented with a strategy to address these political challenges.
The EBRD plans to scale up its support for companies in EaP countries with the backing of a €5 million grant from Brussels. In providing a programme to help SMEs adopt digital technologies for uninterrupted operations, the aim is to enhance export potential of the region as it struggles to cope with the severe economic downturn as a result of the Covid-19 pandemic.
Despite the bank’s fiscal initiative to engage with the six post-Soviet states’ Covid economic recovery, outstanding political problems remain to be addressed. Currently, the EU is struggling to respond to issues of elite circumvention of reform efforts and Russian capabilities to frustrate state-building processes. This puts the prospect for private-sector growth at risk in the long-term.
While the EaP has brought economic results, it struggles to tackle corruption
Progress in the economic realm has been made since the launch of the Eastern Partnership in 2009. The initiative facilitated closer cooperation with Brussels in the form of Deep and Comprehensive Free Trade Areas (DCFTAs). EaP countries’ exports to the EU have increased significantly since 2015 (Georgia by 35%, Ukraine by 26% and Moldova by 40%). Joint-investment projects, tourism and educational opportunities provided by visa-free travel regimes in Moldova, Georgia, and Ukraine and facilitation and readmission agreements with Belarus and Armenia also boosted economic transformation.
However, despite opening up the region to the single market, EaP focus on economic integration means that it has been slow on making commitments to fight corruption. The lack of a capacity building programme within the Partnership framework leaves vested interests able to circumvent reform efforts and thereby undermines the pathway to eventual EU accession.
In Ukraine, President Zelensky’s initiative to overhaul a judicial system beset with oligarchic influence diminished as the Constitutional Court ruled that the National Agency for Prevention of Corruption could not punish government officials and judges for filing incorrect information on asset declarations.
A similar pattern where reform-minded political leaderships are undermined by state capture is present elsewhere in the region, as the case of Moldova demonstrates. Although the then prime minister, Vlad Filat, pursued a pro-European agenda, the rule of law reform process in Chisinau took a severe blow as his government siphoned $1bn out of the national banking system, the equivalent of one-eighth of Moldova’s GDP, to offshore shell companies.
EaP state-building efforts undermined by lack of strategy to combat Russian interference
The crisis in Belarus following Lukashenko’s rigged presidential election victory and the outcome of the Armenian-Azerbaijani conflict over Nagorno-Karabakh also exposes the limits of the EaP to combat Russian interference in post-Soviet institutional and critical infrastructure development.
EU sanctions against the regime in Minsk and Putin’s financial backing of Lukashenko raised the prospect of strengthening Belarus’ position in Russia’s orbit. Brussels’ response to the crisis with the imposition of asset freezes and travel bans exposes the difficulty that the EaP is facing in making progress on the country’s democratic transformation. Meanwhile, sanctions have created space for Russia to expand areas of consultation with Minsk concerning Belarusian state sector governance.
Since August, meetings have taken place between Russian and Belarusian defence ministries and general chiefs of staff. With the independence of Minsk’s foreign policy and security sector under threat, much to the advantage of Moscow’s position in a key strategic area of the European post-Soviet space, the process of integration with the EU is in doubt.
In putting an end to hostilities in Nagorno-Karabakh, Russia was able to compromise post-Soviet state-building processes and isolate Brussels in the process. While the EU failed to pursue a collective strategy as a result of a French accusation levelled at Ankara of crisis escalation, Moscow utilised the Basic Principles under the OSCE to broker a peace accord and restore Azerbaijani control over key areas in the contested territory.
As part of the conflict resolution process, Russia and Turkey set out in memorandum an opening up of communications, new infrastructure across southern Armenia and a safe transit route connecting Azerbaijan with Turkey. It has also secured Russia’s military foothold in the region in the form of a five-year peacekeeping mission.
Although Turkish regional presence and the risk that boots-on-the-ground carries may cause problems for Putin, acting as the principal mediator in the conflict affords Moscow the opportunity to exploit the EU’s faltering bilateral agenda in the South Caucasus.
SME-driven growth at risk unless political challenges in Eastern Partnership countries are met
Economic growth driven by the private sector in the six post-Soviet states is at risk until it is complemented with a strategy to withstand attempts to frustrate the region’s European integration process.
Although the EBRD chief, Odile Renaud-Basso, defends her bank’s policy in stating that private-sector lending strengthens civil society against repressive regimes, export potential in EaP countries is undermined as the EU currently lacks capabilities to tackle corruption and counter Moscow’s subversive tactics.
Ukraine’s energy sector, for example, stands to lose from EU inaction on Russia’s ability to compromise its security. The statement made by the Danish energy agency that it has received the necessary documents to approve Nord Stream 2 construction for 15th January brought Moscow a step closer to opening an alternative gas transit route on the continent. This development in the pipeline project puts energy flow profits stemming from an agreement between Naftogaz, its national gas company, and Gazprom at risk. Ukrainian energy supply diversification is stifled as a result while European gas dependence on Russia strengthens Gazprom’s export revenue.
Putin also took the initiative to use the breakdown in EU-Belarusian relations following the imposition of sanctions as an opportunity to discourage further engagement in the trading relationship between Minsk and Brussels. Alexander Novak, Russia’s deputy prime minister, stated that Moscow was exploring ways in which to help Belarus export oil products and circumvent ports in the Baltic states.
Finally, in the South Caucasus, regional instability threatens Georgia’s international trade and investment flows, according to the World Bank’s economic outlook for the country in 2020. At the start of last year, the EU was accused by the foreign minister in Tbilisi, David Zalkaliani, for not doing enough to combat Russian engagement in sophisticated military and intelligence operations in the breakaway Abkhazian region.
Until there is an assertive EU strategy in place to address corruption and Russia’s disruption of state-building efforts, it is likely that sustainable private-sector growth in the region will suffer.
