The chances of a complete embargo on Russian gas are increasing and the scenario of the cessation of flows to Europe becomes more probable, as Russia escalates its aggression, Bank of America analysts estimate. The financial cost of such a scenario will be high – but manageable – the house predicts and now speaks of a bulletin in energy consumption next winter in Europe, something that will make the recession almost inevitable.
In any case, Germany is the country that will receive the heaviest blow, but this shock will be less than the pandemic, notes BofA.
Will Russian gas finally be cut off?
The central scenario of the investment house at the moment does not foresee the cessation of all energy imports from Russia, either because Europe will impose such sanctions (embargo) or because Moscow will close the tap. But analysts say the risk is growing as Russian aggression escalates on one side and the Kremlin stops flowing into Poland and Bulgaria on the other.
So, analysts are considering making the gas embargo their basic scenario, but for now they are waiting, as there are still many uncertainties on the technical front (as they explain, technically, payments through double accounts in Gazprombank are actually made in euro) but also as to the policy that Russia wants to pursue.
In any case, BofA believes that the markets have underestimated the risk of an embargo.
The financial cost
If Russian gas is cut off, one way or another, the economic costs will be high, but manageable, and will complicate policy choices, analysts say. If gas flows are completely cut off, energy consumption (bulletin) restrictions will need to be imposed in Europe next winter, which means a recession will be inevitable.
For Germany, the shock to GDP is estimated at around 3%, which as BofA notes is large, but smaller than that of the pandemic. The blow will be similar for Italy, while France and Spain will suffer more because of the economic weakening of Germany and Italy and high inflation, and less because of the embargo itself.
Europe’s answer
As Europe faces a shock similar to that of the coronavirus (a common external shock that strikes countries and industries unevenly, creating a great need for fiscal support measures), the difference is that this time, monetary policy is in tightening phase.
Therefore, a common European fiscal response will be needed, but even faster and even bigger, Bank of America points out. “We are cautiously optimistic that it can be implemented,” analysts said.
Moneyreview
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