Russia-Ukraine Crisis Threatens Europe Economy: Cutting Research

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.

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The European Central Bank may have inadvertently provided insight into how much it can bear a rising euro.

With the currency at about its highest since 2011 against the dollar and the Chinese yuan, economists at Credit Suisse Group AG reworked an analysis in the ECB’s latest monthly bulletin. It measured the effects of a 10 percent appreciation by the euro on prices of non-energy industrial goods and services over a four-year period.

Those results suggest to the economists, including London-based Neville Hill, that a 10 percent gain in the trade-weighted euro would shave 0.5 percentage point from inflation over three years, by hurting exporters and making imports cheaper.

Using the ECB’s latest forecast, if the euro were to rise 10 percent relative to its level this month, that would translate into inflation of 1.3 percent in the final quarter of 2016 rather than the 1.7 percent the ECB now projects. A 4 percent gain would be enough to leave inflation at 1.5 percent.

The ECB’s inflation goal is just less than 2 percent. The study comes as ECB President Mario Draghi warns the euro rising is “increasingly relevant to our assessment of price stability.”

A gain in the euro to $1.44 from $1.38 yesterday “may be a sensible level for markets to expect the ECB to back its strong words with actions,” the economists said in the March 14 report.

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The stronger the economy of an emerging market, the more it’s hurt when the Federal Reserve debates withdrawing stimulus.

That “intriguing” finding is in a study released this week evaluating the effects on developing nations of news about the Fed’s so-called tapering of quantitative easing.

The paper, published by the National Bureau of Economic Research, showed statements about tapering from then-Chairman Ben S. Bernanke were associated with much larger declines in currencies and stocks of “robust” emerging markets such as Israel and China. Declines were smaller in more fragile counterparts like Brazil and Turkey, which have large current account deficits.

“A possible interpretation is that tapering news had less effect on countries that received fewer inflows of funds in the first instance during the quantitative years and had less to lose in terms of repatriation of capital and reversal of carry-trade activities,” said Joshua Aizenman of the University of Southern California, Michael M. Hutchinson of the University of California Santa Cruz and Mahir Binici of Turkey’s central bank.

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The global economy could be poised for one of its longest postwar expansions, in the eyes of Morgan Stanley. That’s partly because the recovery from recession is so weak and disjointed.

Global growth is set to extend its five-year run for the foreseeable future, Morgan Stanley economists Joachim Fels and Manoj Pradhan wrote in a March 14 report.

Since 1970, they identify expansion periods as 1970-1974, 1976-1979, 1983-1990, 1994-2000, 2002-2008 and since 2010.

The reason the current expansion may last is the world’s recovery has been anemic, inflation is low in the advanced world and monetary policy will stay easy, Fels and Pradhan said. Economies around the world also are out of sync, lowering the risk of a joint overheating, they said.

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Failure by central banks to coordinate macroprudential regulation, their new crisis-fighting tool, could trigger a “capital war” that depresses global interest rates.

That’s the warning of a new study of those policies written by Olivier Jeanne, a professor at Johns Hopkins University in Baltimore and published by the NBER. Such regulation assesses the risks posed to the whole financial system rather than individual companies.

It’s key to understanding why authorities “failed to perceive and contain the financial vulnerabilities that were building up during the boom,” Jeanne said.

In an effort to analyze the risk of spillovers from differing policies around the world, Jeanne said a restriction on finance in one country, such as lending curbs, would deflect capital toward other nations, forcing them to act in response. The result could be akin to an “inefficient arms race” in which together, the policies are too intense.

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The euro area, South Korea and U.K. face the highest risk of deflation while Japan has escaped the threat, according to a vulnerability index from Societe Generale SA.

Adopting work from the International Monetary Fund, bank economist Herve Amourda designed the gauge around 14 factors, including inflation expectations over the next year and disposable income growth.

The deflation index was at minus 0.36 in the euro zone at the end of last year and minus 0.29 in the U.K. By contrast, Japan’s was 0.07, up from minus 0.71 in 2010.

Societe Generale assigns a 15 percent chance of deflation in the euro region.

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Looks count for entrepreneurs trying to attract investors.

A study published this month in the Proceedings of the National Academy of Sciences found attractive men have disproportionate success in obtaining venture capital funding for startup businesses, compared with women and other men.

In pitches, male entrepreneurs are 60 percent more likely to succeed than women and gender explains 42 percent of this variance. Physical attractiveness as rated by the audience produces a 36 percent increase in success.

The results were generated by a controlled experiment in which identical business-plan videos were narrated by men and women. The group of 521 participants picked the pitch narrated by males 68 percent of the time.

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