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Russian Slump Less Risky Than Energy Squeeze, Central Bank Says

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May 2 (Bloomberg) -- A shrinking Russian economy would have a “very small” effect on the euro area compared with the impact of rising oil prices as the bloc’s trade links are less relevant than its energy dependence, according to a study of economists at the Austrian central bank.

A 1 percent contraction of the Russian economy would damp the euro area’s output by 0.15 percent after three years, according to the study published in the bank’s Konjunktur Aktuell newsletter this week. A 20 percent rise in the oil price would lower gross domestic product by 0.26 percent, the economists said.

The scenarios are “quite moderate” because “they assume no further major escalation of the international crisis” and “don’t represent the impact of potential future sanctions against Russia and possible countermeasures of the Russian authorities,” according to the report dated April 29.

The European Union and the U.S. widened sanctions against Russia for its actions in Ukraine this week, adding officials such as Deputy Premier Dmitry Kozak and the head of oil company OAO Rosneft to a list of people facing travel bans and asset freezes. The U.S. also targeted 17 companies linked to allies of President Vladimir Putin and the EU said preparations for sanctions on broad sectors of the Russian economy are advanced.

Penalty Warning

The EU and the U.S. say Russia hasn’t lived up to an accord signed April 17 in Geneva intended to defuse the confrontation between the Ukrainian government and Russian-backed separatists. European governments and the U.S. administration are threatening penalties on Russian industry if Putin sends troops into Ukraine.

“The measure that would harm Russia most would be an EU energy (oil or gas) embargo, which could cripple Russia’s trade and budget revenues” and erode Russia’s still-high foreign-exchange reserves, the central-bank economists said. “Furthermore, given Russia’s voiced intention to resort to ‘symmetrical sanctions’ (countermeasures), EU and Western interests in the Russian energy sector could be affected.”

Russian imports account for 18 percent of the euro area’s natural-gas consumption and 27 percent of its oil use, according to the analysts. Trade links are more limited, with 2.5 percent of euro-area exports going to Russia.

“A trade war between Russia and the West would definitely be very severe for the Russian economy, while the West, particularly the EU, would be affected seriously but not vitally,” they said.

European investment in Russia is at a similar level, the researchers say. Direct investment by euro-area investors was 174 billion euros ($241 billion) at the end of 2012 or 3 percent of the region’s total, while Russian direct investment in the euro area stood at 71 billion euros. Including portfolio investment and banking exposures, euro-area investment in Russia was 315 billion euros, or 2 percent.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Tony Czuczka, James Hertling

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