German economists have calculated the possible losses from the sanctions against the Kremlin in the case of escalation of the situation in Ukraine. Their conclusion: the West can afford to be assertive.
“The economics of sanctions: the West can afford to show assertiveness,” is the name of the investigation published recently by the analytic center Deutsche Bank (DB Research). A group of experts of the biggest bank in Germany, led by its head economist David Wolkerst-Landau, calculated the possible losses from the economical sanctions against Russia, to which the European Union and the USA may resort in case of further escalation of the situation in Ukraine.
The main conclusion of the investigation is already reflected in its name: the leading Western economists are able to withstand the consequences of both the sanctions against Russia and the possible responsive action on Moscow’s part without significant losses for themselves. Only a full suspension of export to the EU of Russian energy resources or a default of the Russian Federation would constitute real danger. However both of these options are considered to be highly improbable by the German experts. Meanwhile they are pointing out the problems that may arise in individual EU states and European economical industries as a result of the ‘sanction war.’
To begin with, Deutsche Bank experts are analyzing the current state of the Russian economy. They name capital outflow as one of its typical characteristics, which has been observed in Russia for many years now, however which has increased significantly in the recent time. This is a “severe blow for the already weakened Russian economy,” emphazises the investigation. Another consequence of the conflict with Ukraine and an indirect result of the sanctions already imposed against individual people, banks and companies, was the significant price increase on financial resources for loaners from Russia.
The Russian Recession and European Export
The authors of the investigation note that as a result of devaluation of the ruble, inflation has increased on one hand. However, on the other hand, this augmented the revenues of the budget of the Russian Federation, as a result of which “the government received certain opportunities to augment state expenditures.” This will allow the Russian government to “limit the economical consequences of the further escalation of the current crisis,” notes the investigation.
“A long-term conflict in Ukraine and the continuation of uncertainty are already enough by themselves to provoke recession,” opine the experts of DB Research. However, if the West is to implement ‘significant’ financial and economical sanctions against Russia, the country, taking everything into account, “will fall into deep recession,” says the investigation. Its authors do not exclude that in this case economical stagnation in Russia may reach 10%, just how it has been after the default in 1998 or during the crisis of 2008-2009.
The possible recession in Russia will influence European exporters, however quite unequally. The fall in demand will be felt the most by “some small countries at the eastern borders of the Eurozone,” for example, Estonia and Finland, whose export to Russia constitutes over 10%. Meanwhile, for France, Italy and Spain, the losses will be insignificant, as the Russian part in their export does not surpass 2,5 percent, and the export percentage in the GDP of these countries itself is relatively small.
Risks for Germany
“The only big country of the Eurozone which has significant trade connections with Russia is Germany,” emphasizes the investigation of DB Research. 3,3% of German export go to the Russian market. It is most important for German equipment builders (5% from all export supplies) and car builders (4%). However, German clothing producers are most dependent on Russia (5,5%).
Taking this into account, even a dramatic fall of the Russian market will lead, according to the calculations of the authors of the investigation, to the slowing of economical growth in Germany within the limits of 0,5 percent points. “This should not be disregarded, however this can be dealt with,” think DB Research experts.
The Biggest Losses are Threatening French Banks
As to the financial sector, in absolute numbers the biggest risks from the “sanction war” will be suffered by French banks. Their loan demands to lenders in Russia and investments into Russian stocks constitute about 51 billion US Dollars. If one is to speak of relative numbers, the biggest measures are demonstrated by Austria, the Netherlands and Italy. Such risks of the German and Spanish banks are called “quite limited” by the authors of the investigation.
However, overall the European bank sector is much more vulnerable to the implementation of much harsher sanctions against Russia than the American or Japanese one. The worst case scenario, according to the analysts, would be Russia’s inability to pay or its full isolation from the international finance system. However even in this case the consequences for the Russian economy would be much more serious than for the Western countries, DB Research experts are convinced. – DW