Moody’s: The Impact of the Interruption of Russian Gas Flows in the EU – Greece’s Exposure and ‘Readiness’

Her Eleftherias Kourtali

Russia’s threats to cut energy supplies to “unfriendly” countries and repeated calls for further tightening of EU sanctions on Russia increase the risk of a sharp and sudden cut in Russian energy supplies to Europe, according to Moody’s. This in turn increases the risk of further sharp rises in energy prices and inflation across Europe, as well as the imposition of an energy card in countries that are heavily dependent on Russian energy imports, especially gas.

Although the direct effects on European economies will be mitigated by the recent end of the winter heating season in most Member States of the European Union, the energy bulletin and the consequent reduction or cessation of energy-intensive industrial production cannot be ruled out. That, Moody’s warns, could push the European economy into recession this year.

While the country believes that European countries are resilient to a recession that could be caused by the temporary interruption of Russia’s energy supply, a sharp and permanent reduction in gas supplies could risk a negative impact on economic strength and indirectly on fiscal strength. countries that are more dependent on Russian gas. Further sharp rises in energy prices and inflation would also increase social risks for some European countries.

The risks of a sharp and sudden decline in Russian energy supplies to Europe have increased

More specifically, as Moody’s notes, on March 31, the Russian government announced that payments for the delivery of Russian energy should be made in rubles and not in euros and dollars, the currencies in which the energy contracts of most European countries are expressed. The possibility of making payments in euros or dollars, which are then converted into rubles into accounts with Russia’s Gazprombank, could provide a compromise solution to the dispute. However, some countries may still consider it a breach of contract, leading to the cessation of Russian energy supplies next month.

More generally, this demand from the Russian government shows its growing willingness to use Europe’s dependence on Russian energy in retaliation for European sanctions imposed on Russia following its invasion of Ukraine, according to Moody’s. This, combined with ongoing calls for further tightening of European sanctions against Russia, raises the possibility of a significant and sudden reduction in Russia’s energy supply or a further acceleration of European plans to reduce dependence on Russian energy.

European countries are largely resilient to a recession, but …

The house expects that a significant and sudden reduction in Russian energy supply to Europe could risk a complete recession for the European economy this year. Although the immediate impact on European economies will be mitigated by the end of winter and the depletion of gas reserves, energy-intensive industries would face the risk of energy bills, and reserves would have to be rebuilt for the 2022 winter heating season. 2023. The energy bulletin, in turn, could lead to a reduction or cessation of industrial production, while further sharp increases in energy prices and inflation will erode the purchasing power of consumers and reduce private consumption. In addition, the turmoil and uncertainty resulting from the shock to Europe ‘s energy supply would also significantly reduce economic confidence.

According to the House, although the economic impact of such a shock will vary depending on each state’s dependence on Russian energy imports and the energy intensity of their economic structure, the ratings of most European countries will be resilient to such a negative macroeconomic scenario. The 27 EU Member States, in particular, are mostly developed economies with a high level of economic and institutional strength that support their underlying shock resistance. This is evidenced by their ability to cope with the shock of the coronavirus pandemic in 2020-21, says the house, during which no European country has been downgraded. The policy coordination mechanism of the EU institutions, including the plans for the joint procurement and storage of gas, combined with possible joint monetary and budgetary support, would also support the resilience of EU states to such a negative scenario.

However, Moody’s points out that exposure to rapidly declining Russian energy flows varies considerably between European countries. Although many European countries rely on Russia for their oil and some also for their coal supply, high dependence on Russian gas is now a particular danger. This is because there are fewer gas suppliers than oil in the world and Europe does not have the infrastructure to quickly move away from Russian deliveries via gas pipelines. In 2020, the European countries that depended most on Russian gas for their total energy supply were Hungary, Slovakia, Latvia, Austria, the Czech Republic, Italy, Germany, Lithuania, Bulgaria and Greece. , notes Moody’s.

More “ready” Greece and Italy

However, a permanent cessation of Russian gas supplies would increase the risks to the economy in the most exposed countries, the house said. The readiness of countries that are more dependent on Russian energy to adjust their energy supply to a rapidly declining supply of Russian gas also varies considerably. The European Commission has presented plans for a phasing out of Russian gas, oil and coal, with a view to ending the EU’s dependence on Russian gas “long before” 2030. Plans like Germany’s to end its dependence on Russia Russian gas by the summer of 2024, mainly with the construction of the country’s first terminals for the import of Liquefied Natural Gas (LNG), are already an ambitious goal, the house notes. If the EU or some of its individual Member States decide or are forced to further accelerate the phasing out of Russian energy, questions will be raised about the feasibility of such plans, as well as the implications for the stability of energy supply.

However, many of the countries that depend most on Russian gas flows are landlocked countries in Central and Eastern Europe, such as Slovakia, Hungary, the Czech Republic and Austria, so they cannot build their own terminals. LNG usually delivered by sea. In the short term, these countries therefore depend much more on a common European solution or individual bilateral solutions to provide additional gas supplies. Greece and Italy, on the other hand, have direct access to domestic LNG terminals and are therefore less dependent on common solutions. Italy has said it wants to end its dependence on Russian energy imports by 2025.

A gas supply shock also carries budgetary and social risks

Although the direct impact of a gas supply shock in European countries is mainly on their economic power, it would also have a negative impact on the budgetary power of the most affected countries, Moody’s points out. Even a temporary supply shock that triggers a recession in Europe this year would lead to a weakening of the budget due to – among other things – the need to provide financial support to the most exposed households and industries, while a prolonged supply shock would further exacerbate pressures.

The further sharp rise in energy prices and inflation that would result from a gas supply shock would also increase social risks due to the disproportionately negative impact that this would have on the living standards of the most economically vulnerable households, the house notes. This, in turn, could also raise political risks in the hardest-hit Member States, Moody’s concludes.