© . FILE PHOTO: A woman in a protective mask walks along the skyline of the financial district during sunset as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, Oct. 26, 2020, REUTERS/Kai Pfaffenbach/ By Mike Dolan LONDON ( ) – The blow to Europe from an economic war with Russia over the 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 Western retaliatory sanctions against Russian leaders, companies and central bank, Moscow raised the bar 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 are still scratching their heads over how this would work or what its use would be for a country where energy exports are one of the last remaining sources of much-needed foreign exchange. Some think it’s just an artificial way to prop up the ruble through forced foreign demand, indirectly funneling hard money back to a sanctioned central bank – the ultimate purveyor of rubles – in the hopes of avoiding an inflationary collapse that is already a third of the value of the currency has wiped out this year. Others see it as a contractual minefield and possibly just a ruse to complicate payments while putting pressure on the European gas importers most dependent on Russia – such as Germany, Austria, Hungary and Slovakia. It may also have been a threat to avoid an EU oil embargo. But many also fear it’s just a pretext to cut off gas supplies altogether if European countries subsequently refuse to pay in rubles — as leaders meeting in Brussels this week insisted they wouldn’t. For Silvia Ardagna, chief economist at Barclays (LON:) there is little doubt about what would happen in that case. “If you tell me that Russia’s gas supply will be cut off completely tomorrow, there will definitely be a recession – not just this year but well into the next,” she said. Ardagna already lowered its forecast for eurozone growth this year by 1.7 percentage points to 2.4% as a result of the war in Ukraine and its consequences. Quarter-on-quarter growth almost stalled in the second quarter and rose 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. And before that, Ardagna said the best rule of thumb was an ECB bulletin from last month showing that rationing 10% of total gas supply to the bloc’s industries would reduce gross value added by about 0.7 percentage points in subsequent quarters. . And this hit doesn’t take into account the likely additional rise in gas and oil prices as a result – European gas prices have already risen more than 500% in the past year. However, it also does not take into account the fiscal aid or the ongoing struggle to get the EU off of Russian gas altogether. Earlier this month, the EU outlined plans to cut its dependence on Russian gas by two-thirds this year and end its reliance on Russian fuel supplies well before 2030. Moreover, the differences in dependency vary widely. Unicredit (MI:) estimates that Russian gas accounts for 8% of gross energy consumption in the EU and the Eurozone – but it is a whopping 25% in Hungary, almost 15% in Germany and Italy, and just 2% in France. And while second-order effects on household or business confidence would bolster things, they are partially offset by the momentum behind pandemic reopening and relatively healthy labor markets. PROBLEMS AHEAD Undoubtedly painful roads ahead. But there are also potential long-term positives for Europe, not least in its greater coherence in energy security and defence, fiscal support and more common loans for future investments. “These will take time and are unlikely to change the economic outlook for 2022,” said Barclays. “But the ongoing war on the EU’s borders, perhaps even more so than the European debt crisis and the pandemic, could well prove to be a force for further European integration.” And for Russia? Selling gas in rubles may be a bull’s eye for an international payment system dominated in dollars and euros, but stopping gas exports would hardly do much to improve an already bleak prognosis for its economy. Benjamin Hilgenstock and Elina Ribakova of the Institute of International Finance expect the effect of war, sanctions and “self-sanction” from global companies avoiding censorship to reduce Russia’s gross domestic product by 15% by 2022 and by another next year. 3% – almost wiped out 15 years of growth. And they say the medium-term impact of a likely “brain drain” of young educated emigrants from Russia and a lack of foreign investment there could be even more serious for Russia’s growth potential in the coming years. If that were to pass and the ruble continued to fall, Russia would plummet from the 11th largest economy in the world last year to December 19 – a country of 144 million people with a GDP roughly equal to the Netherlands’ 17 million inhabitants. Everyone loses in a war. But some much more than others. The author is editor in chief for finance and markets at News. All opinions expressed here are his own (by Mike Dolan, Twitter (NYSE:): @reutersMikeD)
