French economy exposed to war

Russia’s brutal invasion of Ukraine has transformed potential conflicts into open, real, brutal and unpredictable wars. The economic impact it has on other parts of the world is enormous and ridiculous compared to what Ukrainians and Russians experience. But it is uncertainty that is dominant and makes it unpredictable.

There is nothing stable about the current situation. It can quickly lead to escalation-but the appeasement scenario is not ruled out-and a long stalemate can be imposed in the procession of atrocities. One of the two parts can collapse, tilting the current situation into a new universe. It is impossible to build military or geopolitical scenarios and predict the reaction of everyone, especially the rise of economic and counter-sanctions in the multipolar world.

Nonetheless, an analysis of the economic impact is essential because the economy is one aspect of global conflict and, in itself, one of the stages of operation. Understanding the initial results, risks, and their dissemination is the first step. Investigating possible options and their impact on various parties is second, and opening up a peace outlook may shed light on options for ending the extreme violence of aggression as soon as possible. ..

Rising energy prices

The first channel of economic impact on European countries, especially France, is the higher energy tariff channel. The announcement of the dispute causes the price of natural gas, which almost tripled between February 7, 2022 and March 7, 2022, to rise by 50% in the same period. Was enough. , Or wheat and other raw materials imported from Russia or Ukraine.

Compared to France, the consequences of rising oil and gas prices are significant. (Net) imports of petroleum and other petroleum products slightly exceeded € 21.9 billion in 2019. This is a more typical year of consumption than confinement.

The average price of oil in 2019 was 57 euros per barrel, but now it is around 100 euros per barrel. This represents an increase in oil prices of over € 15 billion for the full year.

For natural gas, France imported nearly 60 bcm (1 billion cubic meters). At a price of € 100 / MWh or € 977 million per bcm, this will lead to an increase in natural gas prices of more than € 40 billion annually. The increase in energy prices will be 2.5 points of GDP for the whole year.

The mechanism of increasing energy prices is well known. It is a transfer to a country of origin and therefore a loss of national income. It is difficult in the short term and is partially amortized by alternatives that can have a lasting effect by inducing an inflation spiral.

To combat inflation, central banks must raise key rates to trigger a slowdown in activities that reduce wage and price increases. In the first year, about one-third of the relocation leads to loss of activity and the rest is taken from the accounts of economic agents.

Therefore, 2.5 GDP points of energy charges It induces a decrease in activity of almost 1 point in GDP and up to 2.5 points in the next year. This is approximately the result of an analysis by the Bank of France, published March 13, 2022, and Insee, published March 16, 2022.

Nothing will happen to the delivered quantity unless the European Union ends the import of gas and oil.

However, the supply of natural gas and oil appears to be largely unimpeded by conflicts and sanctions, so it is unlikely that the recently observed price increases will continue. There are few “insufficient” quantities, the European Union has never put an end to gas and oil imports, and has no impact on supply. Under these circumstances, prices should go down even if the dispute continues without reducing the volume. This will greatly reduce the impact on the French economy.

Russia is benefiting from this strange price increase without reducing its volume as it supplies Europe with about 0.34 bcm of gas per day and a little over 8 mb / d of oil. At current prices, € 1.1 billion per day indirectly funds the invasion of Ukraine.

Russia default

Beyond the energy bill, the financial aspects of the war in Ukraine could affect France. On March 4, 2022, the Moscow government allowed Russian resident debtors to meet their debts, regardless of denomination, at the official discount rate of the Central Bank of Russia.

This potentially constitutes a credit event. The freezing of foreign assets and the loosening of the ruble of the Central Bank of Russia are all factors that make the general default of Russian debt inevitable. Since the annexation of Crimea, Russia has been forced to reduce its exposure abroad, minimizing its impact on the western banking system.

According to the Bank for International Settlements (BIS), Russia’s debt to foreigners is on the order of $ 100 billion, some of which is denominated in euros. Defaults can be absorbed without problems, especially if the western central bank provides the required liquidity, especially as it is spread across multiple countries and multiple creditors.

In the long run, this default may be resolved by the process of sedation. Or, in the event of a long dispute, it could be resolved by mobilizing assets that could exceed $ 400 billion, such as the assets of the Central Bank of Russia. To date, Russians have repaid some of their debt in dollars.

Moderate impact

Receiving refugees in Europe, especially in front-line countries (Poland, Romania, Moldova, Hungary, Balkans) will cost 3 million refugees € 30-40 billion. Again, the order of magnitude across the European Union is low, at 0.2% of full-year GDP.

By embargoing Russia’s oil and gas, and especially by reducing consumption as quickly as possible, developed countries can gradually deplete one of the essential sources of income for the Russian economy.

Therefore, the direct or indirect economic impact of the Ukrainian aggression is modest. However, this approach is not correct. The economy is an important means of this crisis. By imposing bans on Russia’s oil and gas, and especially by reducing natural gas and oil consumption as quickly as possible, developed countries will gradually deplete one of the essential sources of income for the Russian economy. can do.

The European Commission announced the REPower EU plan on 8 March. At a reasonable cost, natural gas consumption could be reduced by 60% of European imports by the end of 2022. But this is too little to affect Russia. Slight demand from Europe.

To go further, we need to agree to force an energy shift and significantly reduce demand, especially in the short term. This was done, for example, in Japan after the accident at the Fukushima nuclear power plant, reducing power generation by 10%.

In this scenario, it is no longer a matter of economic impact, but a matter of efforts to resolve disputes of much greater scope. Reducing fossil fuel consumption as much as imported from Russia could put pressure on Europe’s GDP. Therefore, France’s GDP increases by 3-4 points of GDP.