Executive Summary

• Global trade exposure to the Russian and Ukrainian economies is limited and has been declining over the past year, which will restrict the direct impact of the war to certain countries (eg. Belarus, Moldova, Poland, Turkey) and sectors (oil & gas, fertilizers, metals, agrifood).
  
• However, the indirect impact will be global, massive and immediate: The entire global economy will suffer from the current surge in energy and commodity prices, and from additional disruptions in supply chains.
• If oil and energy prices, as well as non-energy commodity prices, remain at current levels, we find that the metals and power sectors are most at risk of a profitability shock and could lose over 20pp of EBITDA margins that were around 30% in 2021.
• A further +50% to 70% rise in non-energy commodity prices could actually wipe out all profits in six out of the nine sectors under analysis. Higher prices could also spark a decline in demand, which would hit the power, metals, household equipment and machinery & equipment sectors the hardest (see Figure 1).
• As governments become increasingly concerned about a prolonged conflict and the increasing negative confidence effects, we expect increased state support measures that could delay a full insolvency normalization in 2022.
  

Figure 1 – Revenue vs commodity cost risk mapping

In this context, a sharp decline or even a total interruption in trade relations with Russia would only have a limited direct impact on the global economy. Such a scenario could materialize through heightened sanctions (i.e. wider embargos), voluntary corporate decisions because of reputational risk or just plain solidarity with Ukraine.

However, both Russia and Ukraine are key partners for their respective neighbors in the region. Using ITC data to calculate vulnerability indices based on trade dependencies, we find that the most vulnerable countries are first and foremost Belarus and Moldova, ahead of the other countries of Central and Eastern Europe ( Poland, Hungary, Serbia, Romania, Turkey), the Baltics (Lithuania) and the Nordics ( Finland, Norway, see Table 1). Belarus is by far the most dependent on trade with Russia, both in terms of imports (dependency at 39%) and exports (dependency at 44%), ahead of North Korea (17% and 2%, respectively) and Finland (13% and 5%). Belarus, Moldova and to a lesser extent Lithuania are the most dependent on trade with Ukraine.
                                                                     
Table 1 – Trade dependencies on Russia (left) and Ukraine (right)

When it comes to sectors, energy products (oil and natural gas) and raw materials for the upstream side of the metals and agrifood sectors display the largest dependencies to Russia and Ukraine, as well as fertilizers and wood. Indeed, the vulnerability index for mineral fuel imports is estimated to be 11%, the highest percentage. As far as exports are concerned, dependencies do not seem to be as concentrated. The highest export vulnerability index is only 3%. Hence, the dependence on exports to Russia appears to be less significant than that on imports from Russia. In Ukraine, cereals had the highest vulnerability index.  All in all, direct and immediate exposure to trade in goods is (very) concentrated. On the services side, those most vulnerable to services trade dependency are EU countries both on the import and export side; travel and transport sectors together account for over half of Russian services imports/exports.

However, the indirect impact will be massive, global and immediate: The entire global economy will suffer from spillover effects due to a surge in energy and commodity prices, and additional disruptions in supply chains. While the invasion of Crimea in 2014 did not lead to a significant shock on commodity markets, the current war is sending out a tremendous shockwave. Russia accounts for about 10% of global oil, and Russia and Ukraine combined account for a quarter of global wheat exports. Russia is also a key player in many industrial metals. As markets started to worry about the supply of these commodities, prices increased sharply. Although there were seven historical oil-supply disruptions more severe than the current one, oil prices have already come close to their all-time high, European natural gas prices touched the historic EUR300 mark, wheat prices are now up +40% since the beginning of the year and nickel trading had to be halted on the London Metal Exchange on 08 March. Since then, most commodity prices have retracted from their highs of early March but they remain at elevated levels.

Figure 3 – Commodity prices (Jan-22 = 100)

An input-output analysis reveals that Russia is a significant supplier in global value chains. Energy is by far the most important channel (ahead of metals and agrifood), and Europe is the most exposed to the risk of a sudden stop in production – though the effects of this should be limited. In Western Europe, the energy, metals and chemicals sectors are the ones most at risk. Russian inputs represent slightly more than 2% of Western Europe’s energy output (see Figure 4). Although this figure can seem relatively low, we must keep in mind that energy is an essential input for many other segments of the economy and the resulting snowball effect could cripple wider economic activity – depending on the scenario, we estimate the shock to Eurozone GDP growth to range between -1.2pp and -2.3pp .

Figure 4 – Russian energy, metals and agrifood inputs used in Germany, France, Italy and Spain, (%of total sectoral output)

If the war intensifies, pushing the global economy into our black-out scenario  and consequently driving up commodity prices even higher, retail and recreation services would take a hit. A prolonged crisis leading to increased state support could also delay insolvency normalization. The latest mobility data reveal that we are already seeing consumers in the US, France, Germany and the UK reducing their trips to stores, restaurants etc. With food inflation biting and fuel prices increasing, it is not surprising to see consumers postpone or cancel spending (see Figure 8). Should this context last for long, the confidence shock could lead the global economy towards stagflation.

Figure 8 – Mobility for retail & recreation and diesel prices