A financial shock could be imminent if there is a “trade break” between Russia and Germany, S&P Global’s chief economist warned on Tuesday.
“If you look at a downside scenario … there are different ways to play that, but we think the one that would really move the macro needle is some kind of trade break between Russia and Europe,” Paul Gruenwald told CNBC’s “Squawk Box Asia “.
“It doesn’t just mean turning off the gas – whether Germany stops buying or Russia shuts it off,” he added.
Following Russia’s unprovoked invasion of Ukraine, several world powers, including the US, Japan and Canada, have imposed sanctions on Moscow. The European Union is considering banning oil imports from Russia and has pledged to eventually reduce its reliance on Russian gas by two-thirds.
For its part, Russia has demanded that so-called “unfriendly” countries pay for gas in rubles, referring to those who have imposed heavy economic sanctions to isolate Russia over its unprovoked attack in Ukraine.
The European Union gets about 40% of its natural gas from Russian pipelines, and about a quarter of that flows through Ukraine. Germany gets about half of its natural gas from Russia.
That would lead to… lower GDP, lower employment, lower confidence – and then we would get some sort of macro financial shock from it.
Paul Grunwald
Chief Economist, S&P Global
Gruenwald added, “We have the energy complex, we have commodity prices, we have industrial inputs that Europe imports like nickel and titanium and things like that.”
Research and consultancy firm Wood Mackenzie also warned that the global economy could experience “more permanent changes”, with global trade potentially being transformed by the crisis.
“If the Covid-19 pandemic has highlighted the need to shorten supply chains, the war in Ukraine underscores the importance of reliable trading partners,” research leader Peter Martin wrote in a statement Tuesday.
“These forces could lead to a sustainable realignment of world trade. The global economy is becoming more regionalized – shorter supply chains with ‘reliable’ partners.”
Trade between Germany and Russia
A break in trade between Germany and Russia could affect German manufacturing — one of three global manufacturing hubs alongside the US and China — Gruenwald said.
“That would lead to … lower GDP, lower employment, lower confidence – and then we would get some kind of macro-financial shock from it. So that’s the kind of scenario that we’re worried about and that could move the needle,” he warned.
Trade between Germany and Russia increased significantly in 2021 compared to the previous year, with the value of goods increasing by 34.1% to 59.8 billion euros ($65 billion), according to the Federal Statistical Office.
Germany’s imports from Russia increased significantly last year, increasing by 54.2% compared to 2020. Exports also grew, but at a slower pace than imports, up 15.4%.
According to the agency, the most important products that Germany exported to Russia included vehicles, machines, trailers and chemical products. Russia’s most important exports to Germany included crude oil, natural gas, metals and coal.
Russia accounted for 2.3% of all German foreign trade and was the fourth most important country for German imports outside the European Union in 2021.