Russia’s suspension of natural gas supplies to Poland and Bulgaria will not do any immediate damage to the European economy, but Europe could face a sharp slowdown in growth if the shutdown spreads to other countries – or if Europe imposes an embargo on Russian gas, economists said.
Russia’s war on Ukraine is already spreading across Europe, raising energy prices and hurting manufacturers just as the bloc was recovering from a pandemic-induced recession. The International Monetary Fund last week cut its 2022 forecast for countries using the euro to 2.8 percent from an estimate of 3.9 percent in January, with Germany, the largest economy, taking a major hit.
The euro fell below $1.06 on Wednesday for the first time in five years amid mounting energy security concerns and a slowdown in European growth. In April alone, the currency fell almost 4 percent against the US dollar.
The action this week by Gazprom, Russia’s oil monopoly, to turn off gas taps for two European Union countries is unlikely to plunge Europe immediately into a new recession. That’s partly because Europe “still has plenty of diplomatic and fiscal responses available” to combat one, Mark Haefele, chief investment officer at UBS, said in a note to clients.
But the specter of an open energy war – including a possible European embargo on Russian gas and oil – looms at a perilous time. According to analysts, European companies are already facing higher energy costs that are threatening profit margins and weighing on consumers’ purchasing power.
The European Union has drawn up plans for an embargo on Russian oil but hasn’t mentioned a word in the hours after Gazprom’s shutdown. Europe this month enacted a ban on Russian coal. And while Germany in particular has resisted embargoes on Russian oil or gas because of the excessive costs to its industry, officials have recently had a rethink.
“This is a thinly veiled threat to Germany – Berlin is currently weighing how far it and the EU can go in sanctioning Russian energy exports, and the Russian threats aim to change its calculus,” said Jonathan Hackenbroich, Policy Fellow at the European Council on Foreign Relations.
Still, a full gas shutdown for Germany would have “devastating consequences for the German and European economy,” he added. “Factories would have to reduce production or even close. Some key industries could be lost forever and it is indeed difficult to assess the full range of consequences. But Russia is also heavily dependent on energy export revenues as they are its last major lifeline,” Hackenbroich said.
An embargo on Russian energy is likely to trigger a European recession, and high inflation “would lead to even higher inflation,” said Carsten Brzeski, global head of research at ING Bank.
“All of this is clearly negative for the near-term outlook,” he said. “But to make matters worse, high energy and raw material prices and disrupted supply chains will endanger Europe’s international competitiveness.”
The Russia-Ukraine War and the World Economy
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Deficiency of essential metals. The price of palladium, used in car exhaust systems and cellphones, has skyrocketed amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another important Russian export, has also risen.
Financial turmoil. Global banks are bracing for the impact of sanctions aimed at restricting Russia’s access to foreign capital and limiting its ability to process payments in dollars, euros and other currencies vital to trade. Banks are also on the alert for retaliatory cyberattacks by Russia.
Germany’s top five economic research institutes said this month that a full energy embargo, should one come into effect immediately, would reduce annual economic growth in the European Union by a total of 3 percent this year and next and increase inflation by about 1 percentage point in both years .
Because natural gas would probably have to be rationed from the beginning of next year and parts of European industry “then shut down for four months so that households can still heat in the cold season,” says Holger Schmieding, chief economist at Berenberg Bank.
He said it was “at least conceivable” that rationing could begin even earlier in the event of an immediate Russian gas lockdown.
“My best guess remains that the damage to European growth would be quite severe,” Mr Schmieding said. “Whether or not it is worth curtailing Russia’s ability to sustain a long war is ultimately a political judgment that goes far beyond mere economic calculation.”
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