How to Save EU-Russian Relations: Oil and Grain

As global tensions increase over Syria and Ukraine, it’s hard to imagine a future where Russia and Europe are friends rather than foes — but the oil and agriculture sectors could help do just that.

Analysts suggest pressure from Russia’s dwindling oil revenue and a growing lobby from Europe’s agricultural sector may spark greater cross-border cooperation — providing the timing is right.

“The most important thing is, of course, that lots of businesses are still cooperating. And obviously for businesses, politics is sort of secondary,” Liza Ermolenko, an emerging markets economist at research consultant Capital Economics told CNBC by phone.

Political relations have rapidly deteriorated over the past 18 months following Russia’s annexation of Crimea from Ukraine and the crash of Malaysia Airlines passenger plane MH17, which has been widely blamed on Russia-backed rebels in east Ukraine. But sanctions launched by both Brussels and Moscow haven’t completely dried up trade.

Data compiled by Capital Economics shows relatively robust exports from Russia to the European Union (EU) in 2014, which totaled $209 billion compared to $224 billion a year earlier, which marked the highest export total over the previous 14 years.

Russian imports from the EU took a similar drop, hitting $87 billion, against the 14-year peak of $100 billion logged in 2013.

But with crude prices slumping over 50 percent between June and December 2014 to around $50 per barrel, extra economic pressure has been piled on oil-exporting Russia. The country is now suffering from 15.7 percent inflation with its economy expected to contract 3.8 percent this year by the IMF.

With many investment banks like Goldman Sachs forecasting low oil prices into 2016, Russia’s dwindling petro-dollars might be the catalyst for further cooperation with the bloc.

“Russian policymakers are not in position to have very big conflicts and ruin business with Europe … It’s likely the Kremlin will try maintain — maybe not necessarily make steps to repair — but take steps to help relations from deteriorating further,” Ermolenko says.

CNBC

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.