Russia could be Europe's route to future growth

Russia is reverting to its pre-First World War role as supplier of raw materials and people to the West

This has been an extraordinary transformation. Nato, long the bulwark against the massed Warsaw Pact forces, eyeball to eyeball across the Iron Curtain, is now to meet once a month with Russia to ensure our security.

We are, in political and military terms, on the same side again in a way that we have not been since the end of the Second World War. But we are also on the same side in another way, in economic terms, and this time not since the First World War. North America, Western Europe and Russia are joined in the single ideology of the global market system. The European Union is extending east to embrace the former satellites of Russia, with the leading candidates being accepted maybe as early as next year. But the intriguing possibility raised by the Nato-Russia council is that the EU will start to recognise that Russia can bring more to Europe than greater security: it can bring greater prosperity too.

The security story can be swiftly told. All efforts up to now to build a practical link between Nato and Russia had failed. Nato had extended its frontier eastward with the membership of the Czech Republic, Hungary, Poland and of course the former East Germany. Russia was naturally suspicious of the eastward creep. But since 11 September such doubts were subsumed by the common threat of terrorism. This new council, with its monthly meetings and a ministerial meeting four times a year, became possible. It is a hugely important moment, a formal end to a half-century of suspicion.

But now look forward. The speed at which the EU extends its boundaries to the east is not clear but what is very clear is the re-emergence of a single integrated European economy, rather like the economy that existed before the First World War. German firms in particular are building plants in Hungary, the Czech Republic and Poland. People don't make jokes now about Skodas. The Baltic states are integrating their economies with Finland. Even Romania and Bulgaria have adopted market reforms.

Eastern Europe been showing some remarkable growth rates: Hungary last year 3.8 per cent, the Czech Republic, 3.6 per cent, and while Poland managed on 1.1 per cent, that was after 4 per cent in 2000. In fact Eastern Europe came through the world downturn in much better shape that Western Europe.

And the great bear, Russia? Well, it has been doing pretty well too. Of course the country has benefited hugely from the boom in the oil price and it is still far too dependent on energy exports. But it grew at 5 per cent last year and looks like managing 4 per cent this year. Its foreign exchange reserves have risen from $10bn in 1999 to $40bn today. It has a budget surplus. It also is unusual in the world in having a small surplus on trade in intellectual property.

You see, Russia is reverting to its pre-First World War role as a supplier of raw materials – and clever people – to the richer countries to its west. In the first decade of the 20th century, Russia was the fastest-growing economy in Europe; that is why it issued vast amounts of tsarist bonds to western European lenders, bonds that were subsequently repudiated by the communists. With the possible exception of Ireland, it looks like being the fastest growing European country in at least the first five years of this century.

Where does the Nato-Russia council fit in to this economic picture? There are two crucial points.

The first is that institutions lag behind. Just as it has taken a decade for the institutional structure of this security agreement to adapt to the new military reality, so it will take years for institutions to adjust to the new economic reality. But that does not alter the fact that the balance of military power shifted seismically when the Warsaw Pact disbanded in 1991.

The balance of economic power is shifting now. That is not to say that the Russian economy will soon be larger than any Western European one. At the moment its nominal GDP is not much larger than Switzerland's and at purchasing power parity, GDP is only the size of Spain. But the fact remains that if you are looking at where growth in Europe is generated, look east. Over the next few years, Eastern Europe in general and Russia in particular will become a much more important element in the European economy.

The second point is that the EU sees Eastern European nations almost as supplicants. Potential members have to go through various hoops to make sure they have adapted enough to fit the rules of the club. In return, they are offered, to start with, a form of associate membership. Yes, they can join but there won't be free trade in agricultural goods, nor initially at least will there be free movement of workers. Given the choice, most countries say yes.

But it won't be like that for Russia. That is partly because the country has too strong a sense of its history, its size, its culture and its merit to behave as a supplicant. But it is also because of the balance of power. Its natural resources alone give it enormous authority in a world where the principal alternative source of oil and gas is the Middle East. World oil production will probably peak in the next five to 10 years. So not only is the country growing faster than Western Europe. The EU's economic prosperity depends on a friendly Russia. Welcome to the Nato council.