Monday, June 30, 2008

Russia and EU to Strengthen Trade and Oil Ties

Sources: BBC, Financial Times, Bloomberg

Several changes are on the brink of bringing Russia and the European Union closer together. On July 4, the two governments will officially begin negotiations on a strategic partnership to replace the ten-year trade deal that expired in 2007. Currently, half of Russia’s exports go to the EU, making the country the EU’s third biggest trading partner. Since the EU is Russia’s largest consumer of oil and natural gas, energy naturally played a key role in talks between the countries. The European Commission said it “wants the new partnership agreement to establish a level playing field for energy relations.”

Talk of energy relations between the EU and Russia are quite punctual as Russia’s newest oil province, Timan Pechora, in Russia’s far north, recently began shipping the crude commodity from its new export terminal. Several other Russian fields are expected to begin producing oil within the next couple years to offset slowing productions in western Siberia. However, Russia’s economic growth is expected to increase domestic demand for oil thus decreasing the amount of oil available for export.

Still, the EU may not be too far from a “level playing field for energy relations.” The Russian state-owned oil company OAO Rosneft proposed the idea of a joint oil venture with European companies Royal Dutch Shell Pic and Total SA. The Russian company would provide the oil while the European companies would provide the refineries and marketing. A year ago, Rosneft and Shell signed a strategic alliance and agreed to study the possibility of an assets swap but the companies have not made further plans. European Union Energy Commissioner Andris Piebalgs said that the governments should support this kind of energy cooperation between companies. The Commissioner added, however, that the companies themselves should make the ultimate venture decision.

1. Is it possible for the strategic trade alliance between the two governments to foster a commercial relationship for oil and refining companies?
2. Will the new trade alliance have a significant impact on trade as anticipated by the governments or will the trade patterns established during the previous ten-year accord simply continue?
3. What effect would a joint oil venture have on oil prices and economic growth?

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