Berlin The threat of a military escalation caused stock prices worldwide to fall on Monday. The growing fear of a Russian invasion of Ukraine is also becoming an economic risk. The German economy in particular could suffer in the event of a war in Ukraine: Supply chains could tear, sanctions against Russia could be met with counter-sanctions, and supply bottlenecks could lead to the energy crisis in the 1970s.
German companies are already alarmed: “No one wants to imagine a hot conflict between Russia and NATO,” says Oliver Hermes, head of the German Economic Committee on Eastern European Economic Relations, to the Handelsblatt. “In addition to the unimaginable human suffering, it would set our entire continent and the European economy back by decades.”
It is therefore “good that Chancellor Scholz is fully involved in international crisis diplomacy”. Scholz travels to Moscow this Tuesday to meet Russian President Vladimir Putin. But what if Scholz’s talks don’t lead to anything and Putin actually attacks Ukraine? The Handelsblatt analyzes the consequences of a possible war for the German economy.
How strong would sanctions against Russia backfire?
That depends on the scope of the sanctions. One thing is certain: the imposition of severe sanctions against Russia would also mean additional costs for the EU and Germany. “Should the situation deteriorate extremely due to economic sanctions and counter-sanctions, the global economic upswing could be severely dampened,” warns Volker Treier, chief economist at the German Chamber of Industry and Commerce (DIHK).
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Sanctions on the energy supply in particular could hit Germany noticeably. “Sanctions have very different effects here than, for example, the sanctions imposed on Iran,” says Treier.
There would also be serious consequences if the West were to decouple Russia from the dollar. “Then companies and banks in the West would have to set many claims to zero. That would extremely weaken the financial system,” said Treier.
However, if sanctions are to be credible, it is essential that sanctions also hit the sanctions sender. “And not imposing sanctions would also have costs,” says economist Katrin Kamin from the IfW Kiel: Those would then be high reputation costs that go hand in hand with a loss of credibility. This is precisely what the EU cannot afford at a time when it wants to position itself geo-economically stronger.
What would be the consequences of a war for Germany’s energy supply?
The Federal Republic is currently taking 16 percent of Russian gas exports and is therefore heavily dependent on Russia. The supply situation has recently deteriorated, and the level in German gas storage facilities is at a record low. Should the Russian government respond to Western sanctions with an energy embargo, gas prices would continue to skyrocket and there would be a risk of supply bottlenecks.
Germany is currently taking 16 percent of Russian gas exports.
(Photo: Getty Images)
The economists at Commerzbank have calculated scenarios for the further gas supply that are available to the Handelsblatt: If Russia were to stop all gas deliveries after the start of a war, the reserves would be sufficient for six months. “So there is no immediate threat of an energy crisis, but there will be in the medium term,” says Commerzbank chief economist Krämer. “In any case, we can’t go into next winter without supplies.”
However, many observers are convinced that even in the event of an invasion, Putin will not simply turn off the gas tap. Even during the Cold War, Russia would always have supplied the West.
And: Not only Germany is dependent on Russian natural gas, but vice versa, Russia is also dependent on natural gas supplies to the European market. “This is often underestimated in the debate about energy supply security,” says IfW researcher Kamin. Gas exports cannot simply be diverted to other countries.
Is the global economy threatened with a new shock of uncertainty?
Military conflicts have high economic costs for the country concerned. “Production is lower, which slows down trade and growth,” says IfW researcher Kamin. However, the effects, especially for the global economy, depend heavily on the type of conflict.
>> Read here: The growing importance of Ukraine for the German economy
As bad as the conflict would be for Ukraine, unlike in other conflicts such as in Syria, the dispute would be limited to a clearly defined geographical area and two parties. “Of course, the conflict is not confidence-building, you can see that in the uncertainty on the financial markets,” says chief economist Krämer. “I don’t see a shock of uncertainty like that after the financial crisis from a Russian attack on Ukraine. This would be the case if Russia attacks a NATO member country.”
How badly would a war affect the export economy?
Germany exported goods and services worth 26 billion euros to Russia in 2021, which was 1.9 percent of total German exports. The importance of Russia for the German economy has decreased overall, the largest country in the world is only number 15 among the buyers of German exports. Chinese machine builders have even taken over Germany’s previous top position as Russia’s most important machine supplier.
The level of German investments in Russia is also far from previous records. Only 3651 German companies are represented in Russia. In 2011 there were still 6301, which corresponds to a decrease of 42 percent.
“It is obvious that even more companies will pack their bags in 2022 if solutions are not found soon to stabilize the business climate,” says Matthias Schepp, head of the German-Russian Chamber of Commerce in Moscow. All in all, the Russian export market is already too small “for a military conflict to be able to severely impair German economic growth,” says economist Krämer. Economist Kamin also believes that the damage to the German export economy would be “limited” in the event of war because of the manageable foreign trade with Russia.
Would a war break supply chains?
A bigger problem is with supply chains. Companies with suppliers in Russia or Ukraine have “a problem,” warns Jennifer Bisceglie, CEO of the supply chain start-up Interos. More than 1100 US companies and 1300 European companies have at least one direct supplier in Russia, over 400 companies in the US and Europe in Ukraine. If the indirect suppliers in Russia or Ukraine were added, the number would increase to more than 5,000.
These companies could have problems in particular with the supply of raw materials. In addition to oil and gas, other important raw materials also come from Russia. 40 percent of the palladium imported by the EU, an important material for catalysts, for example. 30 percent of vanadium, which is mainly used in the steel industry, comes from Russia.
The US government is also concerned about critical raw materials. The White House is said to have already called on US chip manufacturers to review their supply chains for fear of a supply shortage. The risk in Ukraine relates primarily to agricultural products: the country is one of the world’s largest wheat producers, but also Europe’s largest supplier of sunflower oil and an important source of honey and other products.
According to Bisceglie, the greatest risk is a blockade of the Ukrainian seaports. Because of the maneuvers around the annexed peninsula of Crimea, large parts of the northern Black Sea are already closed to civilian ships. Ukraine has also become an increasingly important location for outsourcing IT and programming services.
In addition, more and more German automotive suppliers have recently set up factories in western Ukraine. The foreign subsidiary of Hamburger Hafen und Logistik AG (HHLA) operates a container terminal in the port of Odessa. Airlines could also be hit by Russian retaliation against Western sanctions. Should Russia close its airspace to European aircraft, airlines flying to destinations in Asia could face high additional costs. Hermes, the head of the German Economic Committee on Eastern European Economic Relations, demands that “everything really has to be done to stay in dialogue and to break through the current escalation dynamic”.
More: If Russia gets serious – how will the stock market react?