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. Last Updated: 07/27/2016

Better Early Than Never to Strike a Europe Deal

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European Commission head Jose Manuel Barroso has said the European Union would consider a free-trade agreement with Russia after Russia's accession to the World Trade Organization. Negotiations could take place next year, after the expiration of the Partnership and Cooperation Agreement. Europe is offering Russia this latest carrot in the hope of spurring the "honest and open development of an energy partnership." Russia's problem is figuring out whether the carrot is worth it.

A free-trade zone presupposes the liberalization of the terms of trade. For Russia, Europe's third-largest trading partner at 163 million euros ($209 billion) per year, the liberalization of tariffs would help exports. On the other hand, Europeans will want access to Russian oil and gas fields and pipelines.

On the eve of the G8 foreign ministers' meeting, Standard & Poor's published an analysis of possible natural gas strategies for Europe. S&P's analysts determined that the level of dependency on Russian energy among European countries varies.

The majority of Gazprom's profits are generated in countries that have access to alternative supplies, like Germany, Italy and France. The countries of Central and Eastern Europe, like the Czech Republic and Poland, are unable to diversify from Russian gas because the investment costs are too high. Former Soviet states that have grown accustomed to subsidies are in the worst shape.

The odds that the EU will be able formulate a united energy policy aren't good, but S&P believes that this would be the best course.

Judging from Barroso's announcement, the EU is not ready to take this step. This weakness allows Russia to take advantage of a seller's market. The day after Barroso's announcement, President Vladimir Putin said that Russia will abrogate any voluntary commitments it has made if it is not granted WTO membership quickly.

But it's not that simple. In the short term, Europe is more dependent on Russia, but this will change in the long term. The EU is not only offering a carrot, but also accelerating work on the Nabucco project to deliver Caspian gas to Europe and on liquefied natural gas, which will more likely come from Norway than Russia. Diversification of supply, increased cooperation with Gazprom and further negotiations on the Energy Charter are complementary strategies the EU is already implementing.

Russia should also think about the road ahead. It should, for example, integrate with the EU under present conditions, while it is still more expensive for Europe to move to alternative energy suppliers than to be dependent on Russia.

This comment appeared as an editorial in Vedomosti.