Romania and the Russia–Ukraine conflict

The Ukrainian revolution of February 2014 and the annexation of Crimea by Russia have resulted in increased international tension in the region and may have longer-term economic consequences for the trading partners of both countries. Romania is a next-door neighbour and may be more affected than other EU members especially if the conflict escalates.

Limited trade and investment dependence

Economic cooperation between Romania and Ukraine is very limited. The Ukrainian market accounts for only 1.9% of total Romanian exports and 0.8% of imports (2013). Romania has had a growing trade surplus with slowly increasing exports and imports with a downward trend (Table 1). The composition of exports and imports is not very sophisticated, it contains mainly primary products.


The significance of Russia has been somewhat higher, 2.8% in the case of exports and 4.3% in the case of imports (2013). Romanian exports to Russia more than doubled between 2008 and 2013, growth being continuous following a minor setback in 2009 (Table 2). The main driving force has been the automotive sector. The exports of Dacia cars have been a real success story overall and also to Russia although some similar Renault models are assembled in Moscow. The exports of machinery and electrical equipment reached their peak in 2010 and dropped in 2012 when the other Romanian flagship exporter, Nokia, stopped production. Another important feature is that the composition of Romanian exports has become more diversified over the past five years. The two main categories mentioned above had a share of 72.6% in 2008 which fell to 59.5% in 2013. The upcoming export items were of lower value added such as chemicals, wood and metal products (12.9% combined share in 2008 and 21.2% in 2013). Imports are much more concentrated than exports; close to 90% is constituted by mineral products (see section on energy below). Imports fluctuate in line with Romania’s economic performance, covering the excess needs over the local production.


It is worth noting that, among the NMS, Romania has the smallest dependence on trade with Russia next to Slovenia. This may have two reasons; one is the country’s high rate of self-sufficiency in terms of oil and gas. The other dates back to the pre-transition period. Romania was more self-relying in its industrial capacities and did not participate in the CMEA division of production in the same way as other members did (the Soviet Union accounted for only 22% of exports and 32% of imports in 1988. Western technology and autarchic solutions dominated the development. For example, the nuclear power station was built with Canadian and not with Russian technology). 



Despite the modest trade dependence, Romanian exporters may be hurt by growing insecurity of trade and diminishing demand in the conflict-ridden economies. In case of a 10% fall in the value of exports to Ukraine and Russia, Romania’s GDP would decline by 0.16% according to the calculation of the National Bank of Romania (Romania: Recent Macroeconomic & Banking System Developments’, speech held by NBR Governor Mugur Isarescu, Bucharest, 16 April 2014).


Romania is a net receiver of FDI from the world. The inward stock amounted to EUR 58.9 billion in 2012, the latest year for which data are available. This is 22% higher than in 2008 as a result of continued FDI inflows during the crisis (Table 3). The outward FDI stock was less than EUR 1 billion in 2012, somewhat lower than before the crisis as a result of capital withdrawals. There was some modest Romanian investment activity in Ukraine in 2010 and 2012 while FDI outflow to Russia has been negative or insignificant since the outbreak of the financial crisis. Also inward investment from the two countries has been negligible. Russia holds only 0.1% of the FDI stock in Romania, which is one of the lowest among the new Member States, not much different from Poland or Hungary. Russian investment is more significant through holding companies or subsidiaries registered outside Russia. TMK owns the Resita steel tube producer, Vimetco (Vitaly Mashitsky) the ALRO Slatina aluminium works together with the alumina producer ALUM Tulcea. The oil refinery Petrotel Ploiesti belongs to Lukoil, which also owns two concession areas in the Black Sea. Gasprom through its subsidiary NIS Petrol has exploitation concessions in two fields in the West of Romania. In March 2013 it purchased Marine Bunker Balkan, an oil storage facility in the port of Constanta.


Romania has been a frequent destination for greenfield foreign direct investment projects as reported by the fdimarkets.com database. The significance of Russia and especially of Ukraine is rather small but higher than indicated by the balance of payments statistics. In 2003-2013 Romania received 23 greenfield projects from Russia, only 1.1% of the total, and this was also the share in terms of invested capital (Table 4). In 2011 and in 2013 four new projects were established in each of the years; there was no new project in 2012. None of the recent projects were established in manufacturing but mainly in trade and business services.


As an impact of the Russia–Ukraine conflict, growing insecurity of foreign property there may divert some investment from these countries to Romania. Although the number of projects that are not serving the local market in these countries is quite small, for such FDI Romania could be an alternative location.





Low energy dependence

Romania has the third lowest overall energy dependence among the EU-28 with 22.7% in 2012. Also in the case of petroleum products (51.7%) and of natural gas (21.2%) Romania registers the third lowest dependence rate (Eurostat: ‘net imports divided by the sum of gross inland energy consumption plus bunkers’). The gross import dependence is higher than the energy dependence; 34% of the gross consumption is imported and 11% of it is exported.


In the boom period before the crisis, energy dependence was higher than more recently. As soon as Romanian economic growth accelerates, the need for imports may rise again, but depending on the new energy resources and energy efficiency. In recent years the share of renewable energy has been on the rise due to foreign investors’ wind and solar projects. Together with the existing water power stations, renewable energy covers 22.9% of the gross final energy consumption. In the medium run, a higher contribution is expected from traditional fuel coming from offshore explorations, while non-conventional gas may add in the long run. The energy intensity of the Romanian economy (gross domestic consumption of energy divided by GDP) is 2.6 times higher than the EU 28 average and the third highest after Bulgaria and Estonia (Eurostat).. The improvement observed since 2007 is also among the highest with 14%, which means that energy-intensive industries have fallen victim to the crisis and to energy price hikes.


Romania has two international connections to import gas from Russia via Ukraine: a smaller one in the North (Mediesu Aurit), and a major one in the East (Isaccea) which is part of the south transit corridor running across Romania to Bulgaria. Romania is exploring the possibility to develop the Azerbaijan–Georgia–Romania Interconnection (AGRI project), which would bring liquefied Azeri gas to Romania across the Black Sea. The Romanian system is interconnected with Hungary and more recently also with Bulgaria with bi-direction pipelines which allows for balancing needs.


Due to the limited role of Russia in Romania’s energy supply, the country would not be particularly hurt in case of trade disruptions and EU sanctions. The question is how long such disruptions may last. Few months of imports can be substituted by reserves, but the country is not yet set to replace Russian imports by alternative resources for a longer time. The disruption of supply would especially hurt some of the energy-intensive industries, but encourage substitution and exploration by which self-sufficiency can be attained in the longer run.


Common strategic interest with Ukraine prevails over past border disputes

Romania is a next-door neighbour to Ukraine sharing 650 kilometres of mainland border. Over the centuries, this border had repeatedly been disputed between Russia and Romania. Some stumbling blocks appeared also following Ukraine’s independence, causing bilateral tensions all through the 1990s. The main problems were sorted out by the Basic Treaty between Ukraine and Romania in 1997, but some smaller border disputes remained unresolved. One was the issue of the Serpent Island (a tiny island/rock in the Black Sea with important oil and gas deposits on its shelves) for which Romania withdrew its claims only in 2003. An International Court of Justice resolution in 2009 provided for the delimitation of the continental shelf and exclusive economic zones which gave Romania an important segment for prospecting deposits. Another recent dispute emerged when Ukraine developed a navigable Danube branch (Bystroye Canal) in the Danube Delta in 2004. Due to Romanian and international objections on environmental grounds the opening has been put on ice.


The above issues have not hampered close cooperation between the two countries in the Black Sea Cooperation and its Business Council. Romania has also supported Ukraine’s negotiations with the EU. The two countries participate in the Joint Operational Programme Romania–Ukraine–Republic of Moldova 2007-2013, one of the EU’s European Neighbourhood and Partnership Instruments financed with EUR 130 million. The programme aimed at creating ‘bridges’ among the three countries and supporting cross-border cooperation. Similar frameworks have been adopted in the Europe 2020 programme for the next financing period.


Romania was among the first to recognise the new authorities in Kiev as a legitimate government and asked Russia to pull its forces out of Crimea. At the same time, Romania asked Ukraine to respect the rights of national minorities, including the Romanian minority. It also signed an agreement boosting military and other forms of cooperation with the new government of Ukraine on 10 March 2014.


Romania has welcomed the EU and US sanctions on Russia. The country has also taken efforts towards exploiting its strategic location along the Black Sea. Already it October, works on an American missile defence base were started in the South of the country, Romania providing the land and NATO covering all other expenditures. The importance of the country has been further upgraded following the Russian annexation of Crimea. NATO aircraft has been deployed on an airbase near the Ukrainian border. Prime Minister Victor Ponta announced on 28 April that the budget for the Ministry of National Defence will be supplemented by 0.2 percentage points to 1.5% of the GDP in order to modernise military capabilities. This is within the available fiscal room and does not seem to endanger reaching the deficit target of 2.4% of GDP in 2014. On the whole, Romania has been able to position itself as a stable country neighbouring the conflict region.


Moldova–Russia conflict – a potential danger
Romanian interest in the region also focuses on the majority Romanian-speaking country Moldova situated between Romania and Ukraine. This is not without hurdles: Moldova has a large Russian minority in addition to its heavy trade and labour dependence on Russia. Moldova’s situation is also complicated by its Russia-friendly Gagauz minority and the frozen conflict with the breakaway territory of Transnistria supported by Russia. While the idea of unification with Moldova is popular in Romania (restoration of ‘historical unity’), it is not so with the Moldovan government and population, although this attitude may change if a window of opportunity opens.


The common interest of the two countries targets the EU integration of Moldova. A Deep and Comprehensive Free Trade Agreement (DCFTA) – similar to the one which led to the conflict between Russia and Ukraine – was initialled between the EU and Moldova on 29 November 2013 and provisional application could start in 2015. Transnistria opposes the EU agreement, as do the Russian-dominated Communist party of Moldova (second largest political force in the country) as well as the Autonomous Territorial Unit of Gagauzia, which voted in a nonbinding referendum for joining the Customs Union of Belarus, Kazakhstan and Russia on 2 February 2014.


Russia has a number of cards to block the DCFTA with Moldova. It has already limited wine imports from Moldova (one of the country’s main export commodities) while providing access to its market for imports from Gagauzia. It also denied work permit for some of the roughly half a million Moldovans working in Russia. These steps indicate that the region’s conflict may spread to Moldova if Russia feels its interests in danger. Transnistria has already asked Russia for annexation similar to Crimea but has received no support from Moscow yet. The position may change under the extreme scenario of a disintegration of Ukraine and separatism strengthening in neighbouring Odessa Oblast. For the time being, the EU accelerates Moldova’s integration by providing of visa-free travel as of 28 April and proposing to sign the DCFTA on June 27. If Ukraine and Moldova get strengthened as EU oriented democracies, Romania may benefit as a country of transit and even as potential investor.