Chronicle: The financial balance sheet of Europe in the victory of an economic war

Chronicle: The financial balance sheet of Europe in the victory of an economic war

Arrangement of various world currencies including the Chinese yuan, Japanese yen, US dollar, euro, British pound, Swiss franc and Russian ruble pictured in Warsaw January 26, 2011. REUTERS/Kacper Pempel (POLAND – Tags : BUSINESS)

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LONDON, March 25 (Reuters) – The blow to Europe from an economic war with Russia over its invasion of Ukraine pales in comparison to the blow to Moscow – but another recession could still be the price to pay.

After a month of war and retaliatory Western sanctions against Russian leaders, businesses and the central bank, Moscow upped the ante again this week when President Vladimir Putin demanded that ‘unfriendly’ countries pay for their gas in rubles rather than dollars or euros.

Most bankers and economists still wonder how it would work or what good would it do for a country where energy exports are one of its last sources of badly needed foreign currency.

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Some believe this is just an artificial way to prop up the ruble via forced foreign demand, indirectly redirect cash to a sanctioned central bank – the ultimate supplier of rubles – and hope to avoid an inflationary collapse that has already erased a third of the currency’s value this year.

Others see it as a contractual minefield and perhaps just a ruse to complicate payments while pressuring European gas importers most dependent on Russia – such as Germany, Austria, Hungary and Slovakia. It can also be a threat to prevent an EU oil embargo.

Yet many also fear it is just a pretext to cut off gas supplies altogether if European nations then refuse to pay in rubles – as leaders meeting in Brussels this week have insisted they will not. wouldn’t do. Read more

For Silvia Ardagna, Chief European Economist of Barclays, there is no doubt what would happen next in this case.

“If you tell me that the Russian gas supply will be completely cut off tomorrow, then there will definitely be a recession – not only this year but well into next year,” she said.

Ardagna has already cut its euro zone growth forecast this year by 1.7 percentage points to 2.4% due to the war in Ukraine and its fallout – seeing quarter-on-quarter growth almost stagnate in the second quarter and pick up to about 0.5% in the fourth quarter.

Unlike the futures markets, she does not see the European Central Bank raising interest rates this year as a result.

But to model the impact of a Russian gas shutdown, you have to go back to the drawing board again. And for that, Ardagna said the best rule of thumb was an ECB bulletin last month which showed that a 10% rationing of overall gas supply to industries in the bloc would reduce gross value added by around 0. .7 percentage points in subsequent quarters.

And that blow doesn’t even take into account the likely further rise in gas and oil prices that will result – gas prices in Europe have already risen by more than 500% in the past year.

However, that also ignores fiscal supports or the ongoing scramble to completely wean the EU off Russian gas.

Earlier this month, the EU announced its intention to reduce its dependence on Russian gas by two-thirds this year and end its dependence on Russian fuel supplies. well before 2030. read more

In addition, variations in dependency vary widely. Unicredit estimates that Russian gas accounts for 8% of gross energy consumption in the EU and the euro zone – but it reaches 25% in Hungary, almost 15% in Germany and Italy, and only 2% in France.

And if second-order effects on household or business confidence amplify things, they are partly offset by the dynamics of pandemic reopenings and relatively healthy labor markets.

Soaring energy prices in Europe
The ruble is slipping this year


Painful roads ahead, no doubt. But there are also potential long-term benefits for Europe, including greater cohesion in energy security and defence, fiscal support and more common borrowing for future investment. Read more

“It will take time and is unlikely to change the economic outlook for 2022,” Barclays said. “But the ongoing war on the EU’s borders, perhaps even more so than the European debt crisis and the pandemic, may well prove to be a force for further European integration.”

And for Russia? Selling gas in rubles may be a blow to a dollar- and euro-dominated international payments system, but cutting off gas exports would do little to improve an already dire prognosis for its economy.

Benjamin Hilgenstock and Elina Ribakova of the Institute of International Finance expect the effect of war, sanctions and “self-sanction” of global corporations avoiding censorship will see Russia’s gross domestic product contract by 15% in 2022 and another 3% next year – wiping out almost 15 years of growth.

And they say the medium-term impact of a likely ‘brain drain’ of educated young emigrants from Russia and a lack of foreign investment there could be even more severe on Russia’s growth potential. for the coming years.

If this were to pass and the ruble continued to fall, Russia would fall from the 11th largest economy in the world last year to 19th in December – a country of 144 million people with a GDP roughly equal to the 17 million inhabitants of the Netherlands. .

Everyone loses in a war. But some much more than others.

Europe is highly dependent on energy imports
Austria and Slovakia set to suffer most if gas supply cuts
UniCredit chart on EU energy dependency

The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own.

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by Mike Dolan, Twitter: @ReutersMikeD

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