Europe’s economy is vulnerable to ripple effects from the crisis in Russia and Ukraine.
As the European Union, the U.S. and Canada look to take coordinated action to pressure Russia to back off its annexation of Crimea, economists at Morgan Stanley and Deutsche Bank AG released reports yesterday analyzing the potential for fallout on Europe’s economy should the crisis spread.
The impact could be transmitted through finance if Russia grabs assets or if the creditworthiness of its assets declines, said Gilles Moec and Marco Stringa, London-based economists at Deutsche Bank. Among other channels, world trade may be roiled by a drop in Russian imports or if Russia holds back exports of its energy.
“On all these counts, the European Union would come firmly first among those affected,” said Moec and Stringa.
Using data from the Bank for International Settlements, Deutsche Bank noted French banks are the most exposed, with $51 billion in claims over Russia in the third quarter of last year. As a share of total bank assets, Austria has the highest ratio at 1.4 percent, followed by the Netherlands and Italy.
The share of euro-area foreign direct investment assets held in Russia were 3 percent of the total in 2012, according to Morgan Stanley economist Olivier Bizimana in London.
If trade took a hit, then euro-area merchandise exports to Russia might fall from the 2.5 percent of total shipments in 2013, said Bizimana. Germany is the most exposed: about 3.3 percent of its exports head east.
On energy, Germany gets one-fifth of its coal and a quarter of its oil from Russia, while Finland gets 100 percent of its natural gas and more than two-thirds of its oil from there, said Moec and Stringa.
“In order for European growth to be materially impacted, an extreme scenario would need to unfold with a deep recession in Russia — similar to what was seen at the time of the Ruble crisis in 1998 — and large spillover to the eastern part of the European Union,” said the Deutsche Bank economists. A more likely risk would arise if uncertainty spread in Europe when emerging markets are already wobbling, they said.
An economic downturn in Russia would also shave the foreign affiliate sales of euro-area companies, which on average generate 1.5 percent of their revenue from the Russian market, said Bizimana. France’s Danone and Adidas AG of Germany are among the most exposed.
Europe also has “little room” in fiscal and monetary policies to respond if there were a downturn in external demand, said Bizimana.