Plans being formulated by Russia to start trading energy products with the European Union in euros instead of dollars shouldn't affect oil markets unless Organization of Petroleum Exporting Countries follow Moscow's example, analysts say.
Russian Prime Minister Vladimir Putin on Thursday confirmed Moscow wants to work with the EU to examine mechanisms to start trading oil and gas products in euros.
"If our European colleagues are able to put together a relevant system, we stand ready to work with the euro with regards to gas and oil," he said.
At the same press conference, European Commission President Romano Prodi said that with the expansion of the EU from 15 to 25 members next year "naturally it will be more convenient for imports and exports to be denominated in the same currency to avoid currency risks."
The Commission feels it makes economic sense for Russia to trade oil in euros and it would logistically be relatively easy to arrange bilateral trade in the single currency.
But at the same time, it is Moscow that is making the running on this matter. Indeed, the executive has made no formal proposal to Moscow, and has no immediate plans to.
And pressure is probably not coming from EU importers to fix trade in euros now as they are doing well from the recent rise in the value of the currency. With the euro trading at $1.137 and oil prices now around $31 a barrel, euro holders would pay around E29 a barrel of oil. When the euro was weaker two years ago, the same barrel would have cost E35.
Russia boasts the world's biggest natural gas reserves and is the number two oil exporter after Saudi Arabia. Based on data for 2000, Russia was the largest supplier of natural gas to the EU with 78,484 million metric tonnes (41.1% of the total), and the second largest non-EU oil importer with 573.9 million barrels, or 16.1% of total for the EU.
A switch to euro invoicing would not affect the price of oil, but it could encourage Middle Eastern exporters to follow suit and have a powerful effect on market psychology at a time when the dollar is already under intense pressure.
Putin stressed it might "raise some problems" for the world economy to move away from trading oil in dollars. But analysts say this would only be true if other major oil exporters wanted to do the same.
Kevin Norrish, an oil analyst at Barclays Capital in London, has looked at the issue and concluded EU-Russia oil trade in euros would not have any real impact on exchange rates or oil prices and supply.
Iran, the world's fifth largest oil exporter, has openly mulled a move into euros. And after the war in Iraq, there is growing debate in the United States' traditional ally Saudi Arabia on a switch, too, according to analysts, although its government has not come down firmly on one side.
Youssef Ibrahim, managing director of the Strategic Energy Investment Group in Dubai and a member of the U.S. Council on Foreign Relations, recently said a general move to price oil in euros would be a "catastrophe" for the United States.
"There are already a number of countries within OPEC (Organization of the Petroleum Exporting Countries) that would prefer to trade in euros," he told the Moscow Times. He said the Saudis are revising their strategic relationship with the United States.
"Already, they're buying more [French-made] Airbuses," he said. "The Saudi Crown Prince [Abdullah Bin Abdul Aziz Al-Saud]'s visit to Russia was of great significance and the regime is talking about closer cooperation with LUKoil and other Russian companies."
Under Saddam Hussein, Iraqi oil was traded in euros. "This was another reason [why the U.S. attacked]," Ibrahim said. "There is a great political dimension to this. Slowly, more power and muscle is moving from the United States to the EU, and that's mainly because of what happened in Iraq," he said.
Putin originally brought up the proposal to switch to euros as prime minister in October 1999 at a meeting of EU leaders in Helsinki. Since then, however, Russia's ties with the United States have warmed considerably - and it is unclear whether Putin would risk damaging that relationship by going ahead with the euro move, analysts said.
However, there is no doubt that Russia's government and business are overall facing the fact that the euro will become an increasingly important unit of exchange in their economy.
The Russian central bank has been amassing euros since early 2002, increasing the euro share of its $65 billion foreign reserves from 10% to more than 25%, according to the finance ministry.
The move has set off a chain reaction in the private sector, leading to a fourfold increase in euro deposits in Russian banks this year and sending Russian citizens scrambling to change their stashes of greenbacks into euro notes.
Maxim Shein, from BrokerKreditService in Moscow, said the switch to euros makes sense for Russia since it supplies half of Europe's energy needs. But the move is also part of a global realignment stemming from the Iraq war, which threw Russia, Germany and France together into a new Triple Entente.
LUKoil vice president Leonid Fedun said Thursday that he saw no problem in the euro switch.
"There is no problem ... If the state decides to do this, then we will support this initiative. From the point of view of the economy, there's no difference," Interfax quoted him as saying.
But Fedun put a political price tag on the move. "We are ready to move to the euro if the country will be included in a visa-free regime with Europe," he said.
Putin may also be angling for EU concessions on other issues such as terms for Russia's WTO accession.
OPEC declined to comment on the matter.
Author: Sam Maxwell
