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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.


: Russian President Vladimir Putin (L) shakes hands with French President Francois Hollande (R) prior to their meeting at the Elysee Presidential Palace on October 2, 2015 in Paris, France.
Sasha Mordovets | Getty Images
: Russian President Vladimir Putin (L) shakes hands with French President Francois Hollande (R) prior to their meeting at the Elysee Presidential Palace on October 2, 2015 in Paris, France.

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.

Otilia Dhand, senior vice president of global advisory firm Teneo Intelligence, adds that Europe is equally on the hook.

"(It) has to do with the EU's dependency on Russian gas, and on Russia's dependence on the European market," Dhand told CNBC. Even with Russia pivoting east to develop a new energy trade agreements with China, she argues, it won't be enough to sustain Russia in the short-term.

"Before Europe can be replaced by China as customer, with the low oil prices Russia needs every hydrocarbon penny it can get," Dhand said.

Sowing the seeds of cooperation

But farmers could be a formidable force within the EU, with pressure from the agricultural sector potentially turning the tide on sanctions, Daragh McDowell, a principal analyst for Europe and Central Asia at Verisk Maplecroft told CNBC in a phone interview.

"The strongest lobby would be agribusiness. It's easy to underestimate the degree to which that agricultural import ban has affected European farmers, especially in the periphery, where economic concerns are much sharper," he said.

Those concerns materialized earlier this month when over 5,000 European farmers descended on Brussels and were subsequently met with water cannons during a protest demanding further emergency aid to compensate for Russia's EU food import ban. Enacted in August last year, the ban has shut out an increasing number of fruits, vegetables, meat and dairy products from the EU, U.S., Norway, Canada and Australia.

Agricultural exports to Russia are estimated to be worth 5.5 billion euros, according to European farmer associations Copa and Cogeca.

Alongside calls for a strong export strategy and export insurance for the EU's beef, pork and milk markets to help cover trade risks, "priority must also be given to re-opening pig meat and dairy trade with Russia," Copa President Albert Jan Maat said in a September 15 press release.

"These exports that would seem low-margin ... are keeping quite a few people working," McDowell said. "That's probably where the most initial surge would be, and [agribusiness] would benefit most if sanctions were lifted."


A window of opportunity?

With the latest set of European sanctions on Russia set to expire January 31, there may be an opportunity to ease tensions and renew political dialogue.

Dhand said small inroads could be made, even if it's reducing sanctions renewal periods from six to three months.

"We can see steady improvement in relations, but they're fragile and exposed to accidents or incidents in both Ukraine and Syria," Dhand explained.

New signed Ukraine ceasefire agreements — put forward at a Paris meeting between Ukraine, Russia, France and Germany on October 2 — which postpone local elections in rebel-held territories until early 2016, could provide a window of opportunity for restoring relations between Russia and Europe, Dhand explained.

The deal may not end the conflict, but will likely bring it to a standstill. Subsequently, if elections go off without a hitch, it would be an easy way to take the conflict off of both EU and Russian hands, Dhand explained.

This would increase the chances of Europe lifting sanctions and lower the risk of Russia launching retaliatory measures on the west.

Friendly ties, though, may simply rely on a change in attitude from the Kremlin.

"It's very fluid concept as to what could improve relations … Russia just needs to appear cooperative," she said.