In a note published Thursday, February 24, economists from the insurer Allianz and its subsidiary Euler Hermes explore three scenarios for the development of the conflict between Russia and Ukraine: a ceasefire and the search for a solution diplomatic; an escalation of the conflict and sanctions; a “blackout”, with the cut off of Russian gas supplies. Ano Kuhanathan, economist at Euler Hermes, deciphers for L’Express the economic consequences of these different configurations.
L’Express: According to you, the most likely scenario is that of an escalation of the conflict and financial and commercial sanctions. Who would suffer the most?
Ano Kuhanathan: Indeed, we estimate this scenario to be 65% probable. The most affected geographical area would of course beUkraine, which would enter into recession, then Russia, which would lose 1.5 points of growth from 2022 because of the sanctions. For the European Union, the impact would be a little less significant, with a loss of 0.5 points. But inflation could accelerate sharply (+1 point), due to the rise in the price of energy and raw materials. Russia would also experience high inflation, linked to the depreciation of its exchange rate, which will increase the cost of its imports.
This resurgence of inflation, which comes on top of an already significant rise in prices for several months in the European Union, will it force the European Central Bank (ECB) to tighten its monetary policy more quickly?
No. As this is an exogenous shock, the ECB should not change its tune, but slow down the normalization of its monetary policy. On the other hand, if we enter the “black-out” scenario, it could decide to conduct an even more accommodating policy, because the European Union would then risk experiencing a very sharp deceleration in its growth. It would stand at 2.5% (against 3.8% in the event of a ceasefire): such a rate may seem high if we refer to the years preceding the Covid, but given the context, that of emerging from the pandemic, it is actually very low…
We would then risk finding ourselves in a situation close to “stagflation”, which combines weak growth and high inflation. But the impact of this scenario would be even greater for the Russia, which would enter a recession for two years, and experience an explosion in prices. Given the cost of such a scenario for the Russian population and businesses, and the energy dependence of Europeans, we consider it unlikely (20%).
You believe that the last scenario, that of a quick ceasefire, is even less likely. Because of the economic solidity acquired by Russia since 2014?
The ability of the Russians to resist sanctions is indeed much stronger today. Oil and gas prices are higher, the public accounts are almost in balance, the current account is in surplus and foreign exchange reserves are more substantial. They can now cover more than 15 months of imports, compared to 9 months in 2014.
If this scenario were to materialize despite everything, would the economic consequences of the conflict be quickly erased?
Yes, there would be no long-term structural effect. After a month, or even a quarter in the worst case, the situation would normalize. But in our view, the probability of such a scenario occurring is only 10%.