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Why China’s Trade Deal with Iran May Hurt Russian Energy Exports

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Jan. 26 2016, Updated 9:19 a.m. ET

Russian energy exports

Germany (EWG) and China are two important trading destinations for Russian energy exports. China’s growing ties with Iran may create problems for Russian oil and gas companies. Russia is already facing problems in the European Union because of sanctions. In the past, China shifted toward Russia to replace Saudi Arabia as the most prominent player in the Chinese crude oil market. However, Iran’s new economic agenda will open up paths for Chinese investment in the Middle East.

[marketrealist-chart id=996868]

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Russian economy is highly dependent on energy exports

The graph above compares the VanEck Vectors Russia ETF RSX to the United States Oil Fund (USO). According to Russia’s state statistics, in 2014, the mining of energy-producing minerals attracted 14.7% of the total fixed capital investment in the country. Per the EIA (U.S. Energy Information Administration), in 2013, crude oil constituted 68% of Russia’s total exports and 16.4% of its GDP (gross domestic product). Also, Europe (FEZ) and Asia account for a significant portion of Russia’s crude oil and natural gas exports. Russia’s main trading partners are Germany and China. In 2014, Russia (RSX) exported 4.7 million barrels per day of crude oil and lease condensate.

The Russian economy has a strong correlation to crude oil prices. Experts have observed that when crude oil prices plunge, the Russian economy contracts. The Russian economy is also paying the price for the price war between Saudi Arabia and US shale oil producers. Gazprom Pao (OGZPY), Lukoil (LUKOY) and Tatneft (OAOFY) represent large cap Russian ADRs (American depository receipts).

In the next part of this series, we’ll discuss how Iran is emerging as a leading player in the international energy market.

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