World in Five

Your 5-minute update in risk appetite | June 2022

Country Risk: How the Russia-Ukraine conflict impacts the energy sector.
Why Europe risks to be particularly affected.

The invasion of Ukraine by Russia has a major impact on the energy sector (besides many other industries, especially the agri-food sector). There is a broad spectrum of effects: disrupted production and distribution, bans and sanctions countered by export stops, shifting supply chains, and fluctuating prices due to supply and demand uncertainties. 

Important medium- to long-term implications are to be expected.

The EU region could be strongly affected. In a worst-case scenario, including a stop in Russian oil and gas exports, the GDP loss in 2023 could amount to 3%, according to the IMF World Economic Outlook of April 2022.
 

Energy dependence on Russian exports 

Russia is the world’s largest exporter of oil to global markets and the second-largest crude-oil exporter (after Saudi Arabia) (source: IEA). It is also the largest natural-gas exporter in the world. European countries remain particularly dependent.

Western bans and Russian countermeasures

Major shifts in the supply chain

Supply deficits could further increase oil and gas prices and lead to disruptions in deliveries. In the medium to long term, a large-scale reorientation of trade flows will take shape. 

The impact of weaning Europe off Russian gas

What if Russia would put an immediate stop to all gas supplies?

  • As Germany is the industrial engine of the eurozone economy, a slowdown would occur in other European countries as well.
  • To meet the possible gas shortage next winter, the industrial sector would likely be asked to contribute to the effort, implying production cuts, rising costs, and adjustments in production processes.

How will the ‘RePower EU’ plan affect matters?

  • The European Commission’s plan to progressively cut reliance on Russian gas is bound to impact the region’s economic activity
  • To decrease Russian gas imports by two thirds by the end of the year, Europe needs extra supplies. It could also require reducing gas demand from various sectors of the economy and from households. 
  • The major source for energy replacement needs to come from increasing imports of LNG. The EU hopes to replace one third of Russian gas imports by LNG: 50 billion cubic metres. 
  • An increase in LNG imports would mainly benefit Australia, the US and Qatar
  • To sufficiently increase LNG imports, many hurdles must be overcome: from upscaling and adapting LNG terminals and pipelines to acquiring substantial extra LNG supplies.
  • It is doubtful that the EU will be able to acquire the entire 50 billion cubic metres of LNG in time. Energy experts warn that energy rationing and blackouts this winter would almost be inevitable if Europe wants to stick to its plan. 
  • The EU ambition is to replenish gas stocks to 90% before the coming winter. According to ICIS calculations, EU stocks had already reached 47% in May. However, given the increasingly restrictive attitude of Russia towards energy supplies, reaching the target is becoming more uncertain. 

For more information on the effects of the conflict on sectors and countries, please contact your Account Manager.

 

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