Russia’s brutal invasion of Ukraine has turned a latent conflict into an open, real, brutal and unpredictable war. The economic consequences this will have for the rest of the world are numerous and ludicrous compared to what Ukrainians or Russians are experiencing. But it is uncertainty that dominates and makes any forecast impossible.
There is nothing stable in the current situation: it could quickly escalate – but appeasement is not ruled out – and a long stalemate with a series of atrocities could be imposed. The collapse of one of the two parts is quite possible, and the current situation will turn into a new universe. Designing military or geopolitical scenarios, anticipating the reaction of everyone and, in particular, strengthening economic sanctions and counter-sanctions in a multipolar world is impossible.
However, economic impact analysis is necessary because the economy is one aspect of global conflict and, as such, one of the theaters of war. Understanding the initial consequences, risks, their distribution is the first step. Examining the options and their implications for the various parties is the second task that is likely to shed light on options to end the extreme brutality of the invasion as soon as possible, opening up the prospect of peace.
Rising energy prices
The first channel of economic impact on European countries and France in particular is through higher electricity bills. The announcement of the conflict was enough to trigger a rise in the price of natural gas, which almost tripled between February 7, 2022 and March 7, 2022, and crude oil, which rose by 50% over the same period. , or wheat and other raw materials imported from Russia or Ukraine.
Compared to France, the impact of rising oil and gas prices is significant. (Net) imports of oil and other petroleum products in 2019 amounted to just over 21.9 billion euros, a more representative year of consumption than during the lockdown.
In 2019, the price of oil averaged 57 euros per barrel, while today it is about 100 euros per barrel. This represents an increase in oil spending for the full year of more than 15 billion euros.
As for natural gas, France imported almost 60 billion cubic meters. At a price of €100/MWh, or even €0.977 billion per bcm, this would increase natural gas bills by more than €40 billion over the course of the entire year. The increase in the electricity bill for the full year will be 2.5 points of GDP.
The mechanism for increasing the electricity bill is well known: it is a transfer to producing countries and therefore a loss of national income. It is partly amortized by replacements, which are difficult in the short term and can have a lasting effect, setting off an inflationary spiral.
To fight inflation, the Central Bank must raise the key rate to cause a slowdown in activity, which reduces the growth of wages and prices. In the first year, about a third of the transfer results in a loss of activity, the rest is taken from the accounts of economic entities.
So 2.5 points of GDP on the electricity bill will lead to a reduction in activity by almost 1 point of GDP, to 2.5 points in subsequent years. This is roughly the result of an analysis by Banque de France published March 13, 2022 and Insee published March 16, 2022.
Until the European Union stops importing gas and oil, nothing will happen to the delivered volumes.
But since the supply of natural gas or oil seems to be little disrupted by conflict and sanctions, it is difficult to think that the price increase observed in recent days will continue: there are almost no “missing” volumes, and until the EU stops importing gas and oil, with volumes delivered nothing will happen. Under these conditions, and without volume cuts, even if the conflict persists, we should see price softening. Then the impact on the French economy will be significantly reduced.
Russia is benefiting from this bizarre price increase without cutting volumes, as it supplies Europe with about 0.34 billion cubic meters of gas per day and just over 8 million barrels of oil per day. At current prices, this is 1.1 billion euros per day, which indirectly finance the invasion of Ukraine.
Default on Russian debt
Beyond the electricity bill, the financial dimension of the war in Ukraine could have implications for France. On March 4, 2022, the Moscow government allowed any debtor-resident of Russia to repay their debts in rubles at the official rate of the Central Bank of Russia, regardless of their face value.
This potentially represents a credit event. The freezing of foreign assets of the Russian Central Bank and the weakening of the ruble – all these elements together make a general default on Russian debt inevitable. After the annexation of Crimea, Russia was forced to reduce its presence abroad, which minimizes the impact on the Western banking system.
According to the Bank for International Settlements (BIS), Russia’s debt to foreigners is about $100 billion, some of which is denominated in euros. A default, especially given that it spans multiple countries and multiple creditors, could be easily repaid if Western central banks provide the necessary liquidity.
In the longer term, this default could be resolved through appeasement or, in the event of a protracted conflict, asset mobilization, such as that of the Russian Central Bank, which could exceed $400 billion. To date, the Russians have repaid part of the debt in dollars.
The reception of refugees in Europe, especially in the first line countries (Poland, Romania, Moldova, Hungary, the Balkan countries), will cost between 30 and 40 billion euros for 3 million refugees. Here again, the orders scattered throughout the European Union are low: this is 0.2% of GDP for a full year.
By imposing an embargo on Russian oil and gas and, above all, by reducing consumption as quickly as possible, developed countries can gradually deprive the Russian economy of one of its most important sources of income.
Thus, the direct or indirect economic consequences of the invasion of Ukraine are moderate. But this approach is not correct. The economy is an important tool in this crisis. By imposing an embargo on Russian oil and gas and, above all, by reducing the consumption of natural gas and oil as quickly as possible, developed countries can gradually deprive the Russian economy of one of the main sources of income.
The European Commission presented the REPowerEU plan on 8 March. At a moderate cost, natural gas consumption could be reduced by 60% of European imports by the end of 2022. But this is too little to affect Russia, especially since it will be able to reconfigure its supplies to compensate for the slightest demand from Europe.
To go further, we must agree to force the energy transition and, above all, in the short term, to a sharp reduction in demand. This was done, for example, in Japan after the accident at the Fukushima nuclear power plant, which reduced electricity generation by 10%.
In this scenario, it would no longer be about economic consequences, but about efforts to resolve the conflict, the scale of which would be much larger: reducing the consumption of fossil fuels by an amount equivalent to what we import from Russia could affect European GDP, and hence France’s GDP by 3–4 GDP points.