Julien Holtz, Pictet Wealth Management.
The Ukrainian war has entered a grinding third phase where the forces on the ground appear more evenly balanced than before and real military breakthroughs are lacking. There appears to be little willingness to negotiate a ceasefire on either side, and moves by Russia to organise referendums to formally annex occupied territories could sap ceasefire hopes even further.
The implications of the war have vastly outgrown the conflict’s strict geographic boundaries. The Ukrainian economy is undoubtedly the most affected; the longer the war goes on, the larger the impact on the country’s ability to sustain economic activity. Professional forecasters currently estimate that Ukraine’s GDP could shrink by as much as 35% in 2022.
The huge sanctions imposed by the West also mean that Russia is paying a heavy price for its ‘special military operation’. Although it often takes time before sanction regimes have a real effect, the Russian economy is already showing signs of weakness. For instance, car production has been hurt by a lack of parts, while retail sales have likely been impacted by a rapid rise in inflation and shortages of imported goods . While high energy prices are helping the state budget—and by extension the country’s war effort —the International Monetary Fund (IMF) estimates that Russia’s GDP could contract by 6% in 2022 and 3.5% in 2023.
High energy prices are also reverberating throughout the world, weakening the current-account balances of energy importers and affecting the cash positions of energy-intensive industries. Europe is particularly exposed in this regard, not just because of high prices, but also because of the risk that Russia continues to restrict gas exports, leading to energy shortages during the winter. In short, we expect natural gas markets to remain volatile in the coming months as the Kremlin continues to maximize its leverage against Europe. A recent IMF study assessed that the GDP of the EU could drop by at least 1% and perhaps up to 2.7% should Russian gas imports fall to zero, with Germany, Italy and eastern European countries particularly at risk. A recession in the EU caused by energy issues would not be without consequences for the global economy at large.
