The escalation of the conflict in Ukraine and the Russian invasion of the country have caused turmoil in the financial markets and significantly increased uncertainty about the global economic recovery two years after the start of the Covid-19 pandemic. Given the impact of the military conflict on the Russian economy, credit insurer Coface has significantly increased Russia’s business risk rating to D.
At the end of February 2022, Russia invaded Ukraine. As a result, the West imposed harsh sanctions on Russia. Therefore, Russia’s economic recovery last year will return to recession. Higher commodity prices will exacerbate the threat of high long-term inflation, which will increase the risks of stagflation and social unrest.
Some sectors, such as the car industry, transport and the chemical industry, will also suffer. In 2022, Coface forecasts a deep recession of 7.5% for the Russian economy and raises Russia’s business risk rating to D (very high). Only countries such as North Korea, Afghanistan, Syria, Iraq, Iran, Libya, Sudan and similar countries have an even higher level of risk.
European economies will suffer from rising prices
Russia is the world’s third largest producer of oil, the second largest producer of natural gas and one of the world’s five largest producers of steel, nickel and aluminum, so any significant reduction in energy and metal supplies is likely to drive up global prices for these goods.
For this reason, on the day the invasion of Ukraine began, financial markets around the world fell sharply, while prices for oil, natural gas, metals and foodstuffs (especially grain) rose.
“Although high commodity prices were one of the risks we had previously identified as a potential threat to economic recovery, the escalation of the conflict between Russia and Ukraine increases the likelihood that commodity prices will remain significantly longer. This exacerbates the threat of persistent and high inflation beyond basic necessities, thus increasing the risk of social unrest in both developed and emerging economies. Industries such as the automotive industry, transportation, the chemical industry and virtually all industries that use the above-mentioned raw materials are particularly vulnerable, ”says Mindaugas Sventickas, Director of Coface Baltics.
As Europe is dependent on Russian oil and, above all, natural gas, it is most vulnerable to the consequences of this military conflict. While it is virtually impossible to replace all of Russia’s natural gas supplies to Europe (~ 40% of total European consumption) in the short to medium term, current price levels, if maintained until the end of the year, will already have a significant impact on inflation.
“Our estimates suggest that inflation will increase by a further 1.5 percentage points in 2022 compared to the previous forecast for eurozone countries. This will reduce household consumption and GDP growth. Although some countries, such as Germany and Italy, are more dependent on Russian natural gas, the interdependence of trade between eurozone countries could result in a general downturn. A complete disruption of Russian natural gas supplies in 2022 could result in zero annual GDP growth, ”concludes Sventickas.
Overall, Coface forecasts that inflation in European markets could increase by at least 1.5 percentage points in 2022, while GDP growth could decline by 1 percentage point. If Russia cut off natural gas supplies, it could “pay” at least 4 percentage points of GDP to EU countries in 2022, bringing EU GDP growth to near zero and possibly even negative.
Mr Sventickas points out that inflation and disrupted global trade will not spare any region of the world: As always, as commodity prices rise, net importers of energy and food products will be particularly affected, and further escalation of the military conflict could lead to major supply disruptions. The fall in demand in Europe will also make global trade more difficult, ”comments M. Sventickas.
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