Download Economic Consequences of the Ukraine Conflict

Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
www.wiiw.ac.at
Economic Consequences of the Ukraine
Conflict
13 October 2014
Peter Havlik, Vasily Astrov
The Vienna Institute for International Economic Studies (wiiw)
2
Outline
Consequences for Ukraine
Consequences for Russia
Consequences for the EU
Sanctions and their impacts

Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
www.wiiw.ac.at
Consequences for Ukraine
4
Gross regional product
2012, in % of total
Crimea &
Sevastopol:
3.8
the role of Crimea is modest
but Donbass:
Donbass:
15.7
– 16% of Ukraine’s GDP
– 6.5 million population
– home to coal-mining
and metallurgy
Rest of Ukraine:
80.5
Source: wiiw based on national statistics.
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5
Foreign trade by region
2013, in % of total
Imports of goods
Exports of goods
Crimea & Sevastopol
Donbass
Rest of Ukraine
Crimea & Sevastopol
1.6
Donbass
Rest of Ukraine
1.5
7.7
25.2
73.2
90.8

Source: wiiw based on national statistics.
6
GDP per capita, EUR at PPP, 2012
Ukrainian average: EUR 6,800
Luhansk
Kyiv
Donetsk
Crimea
Sevastopol
Source: wiiw based on national statistics.

7
Economic costs of the war in Donbass
Economic damage currently estimated at USD 7-8 billion (6% of GDP)
Industrial production in August 2014 dropped by
60% in Donetsk and 85% in Luhansk (year-on-year)
largely on account of power cuts and railway disruptions
Over 1 million refugees
including some 320 thousand to other regions of Ukraine
and nearly 900 thousand to Russia
may undermine long-term recovery prospects
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8
Economic prospects
This year: 8-10% GDP recession
Exports dynamics in January-July 2014
– war-related destructions in Donbass
% change year-on-year
– restrictions on military and dual-use
goods exports to Russia
– inflation erodes purchasing power
– investments collapse
20,0
15,0
10,0
5,0
0,0
-5,0
-10,0
Prospects for stabilisation highly
uncertain
-15,0
– conflict settlement crucial
-30,0
-20,0
-25,0
EU
Russia
Rest of the
world

Total
Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
www.wiiw.ac.at
Consequences for Russia
16
GDP growth: current (realistic) scenario; contributions of
main components to GDP growth, in pp
15
Private consumption
State consumption
Net exports
GDP growth, in % (rhs)
Gross capital formation
Costs of the conflict: about 1% of GDP in 2014 (close to EUR 20 billion),
due to lower GDP growth (-1 pp), falling investments (-6 pp) compared to
the pre-conflict scenario
15
8,5
10
7,2
10
7,3
5,1
5
8,2
6,4
10
5,3
4,3
4,7
3,4
4,5
5
1,3
0,5
1,3
1,9
2,0
0
0
-5
-5
-10
-7,8
-10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: wiiw Annual Database, national statistics, own estimates.
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17
Russia was ‘stuck in transition’, economy close to stagnation
already before Ukraine crisis. Key challenges (old and new):
Energy exports and growth sustainability
-
Increased pressures on energy supply diversification (both in the EU and RU)
-
Sectoral sanctions already start to bite, no longer largely symbolic
-
Investment climate already suffers, imports and FDI down, capital flight
Diversification and modernisation of the economy under threat
-
Growing reform pressures owing to sanctions?
-
Yet modernisation is more difficult without more FDI!
Stability of the ruling elite
-
Putin’s ratings grow, Russia’s ratings fall, rouble and MICEX fluctuate
-
Yet this may change with more hardship …
Integration on the post-Soviet space derailed/fails?
-
Crimea not really helpful for Putin’s Eurasia integration project
-
New design/reset of EU neighbourhood policies?
Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
Consequences for the EU

www.wiiw.ac.at
23
Share of Russia in EU goods exports, in % of total, 2013
20
18
NMS, FI, DE, AT, IT more exposed than others
16
14
12
10
8
6
4
2
0
Source. wiiw Annual Database, EU Comext.

24
Share of goods exports to Russia in % of GDP, 2013
15
12
Baltics, SK, SI, CZ, FI, HU, RS, PL are more exposed
than others;
AT: 1.4%
9
6
3
0
Source: wiiw Annual Database, EU Comext.

25
Share of domestic value added of exports to Russia in %
of GDP, 2013 (estimated)
5
4
Baltics, SK, SI, BG, PL, CZ, FI, HU, DE are more
exposed than others; LT, EE, SK, LV net exports to
Russia are more than 2% of GDP (AT: 0.6%)
3
2
1
0
Source: EU Comext, WIOD, own estimates.

27
Scenario (Ia): estimated loss of GDP (in %) if domestic
value added of exports to Russia drops by 10%
0,0
-0,1
-0,1
-0,2
-0,2
-0,3
-0,3
-0,4
-0,4
Baltics, SK, BG, PL, CZ, FI, HU, DE most exposed;
Lithuania would lose 0.4% of GDP, Austria 0.06% of GDP
-0,5
Source. Own estimates based on wiiw Annual Database, EU Comext.

29
Scenario (IIa): estimated loss of GDP (in %) if domestic
value added of exports to Russia drops by 50%
0,0
-0,5
-1,0
-1,5
Baltics, SK, BG, PL, CZ, FI, HU, DE more exposed
than others; Lithuania would lose up to 2% of GDP
-2,0
-2,5

Source: Own estimates based on WIOD Database, EU Comext.
30
EU export exposure to Russia: 5 key industries and
12 major exporting countries, EUR mn, 2013
25000
AT
CZ
DE
EE
FI
HR
HU
LT
LV
PL
SI
SK
20000
15000
10000
EU28
5000
0
CB Textiles,
apparel, leather,
related products
CF Pharmaceuticals,
medicinal chem
& botan.products
Source. wiiw Annual Database, EU Comext.
CJ Electrical
equipment
CK Machinery and
equipment n.e.c.
CL Transport
equipment
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31
Share of Russia in goods imports, in % of total, 2013
30
Energy accounts for 80% of EU imports from Russia
25
20
15
10
5
0

Source: wiiw Annual Database, EU Comext.
32
EU import exposure to Russia: 5 key industries and
12 major importing countries, EUR mn, 2013
140000
EU28
AT
CZ
DE
EE
FI
HR
HU
LT
LV
PL
NL
SK
120000
100000
80000
60000
40000
20000
0
B Mining and
quarrying
CD Coke and refined CE Chemicals and
CH Basic metals, CC Wood and paper
petroleum products chemical products fabricated met.prod.,
ex mach.& equip.
Oil and gas: Austria, Germany and the Netherlands estimated.
Source: wiiw Annual Database, EU Comext.

38
Scenario (II): estimated GDP loss (in %) if exports (both
goods and services) to Russia drop by 50%
0,0
-1,0
-2,0
-3,0
-4,0
-5,0
-6,0
-7,0
-8,0
Baltics, Cyprus, SK, FI, SI, CZ more exposed than
others; Lithuania would lose nearly 9% of GDP
-9,0
Source. Own estimates based on wiiw Annual Database, EU Comext.

40
Scenario (I): estimated GDP loss (in %) if domestic value
added of goods and services exports to Russia drops by 10%
0,0
-0,2
-0,4
-0,6
-0,8
-1,0
Cyprus, Baltics, BG, SK, FI, PL, CZ would lose most;
Cyprus would lose more than 1% of GDP
-1,2
Source. Own estimates based on wiiw Annual Database, EU Comext.

41
Estimated GDP loss (in %) resulting from Russia’s August
2014 food import ban
0,0
-0,1
-0,1
-0,2
-0,2
-0,3
-0,3
-0,4
-0,4
-0,5
-0,5
Lithuania could lose about 2.6% of GDP
Source. Own estimates based on wiiw Annual Database,
(http://ec.europa.eu/agriculture/statistics/trade/2012/annex4 en.pdf).
Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
Sanctions and their impacts

www.wiiw.ac.at
45
Western sanctions and their impacts (I)
Sanctions unlikely to have desired effects – whatever these might be
(change Russian behaviour?)
But sanctions still painful for all sides (UA, RU, EU)
Russia retaliates, some EU countries suffer more
Russian investment and GDP growth down
Import substitution and export diversion
Capital flight, exchange rate fluctuation and inflation
Russia turning inwards and even more assertive?
Greater medium-term reform pressures?

46
Western sanctions and their impacts (II)
Eurasian integration derailed?
Lasting damage to East-West relations
Serious medium- and long-term repercussions on Russian growth, living
standards and stability
Trade and energy supplies diversification
Russian modernisation hampered without more FDI, technology imports
and better East-West relations
What about Ukraine, Crimea and Novorossia?
Sanctions’ effectivenness versus impact

57
Thank your for your attention!

58
Country codes
AT
Austria
IE
BE
Belgium
IT
Ireland
Italy
BG
Bulgaria
LT
Lithuania
CY
Cyprus
LU
Luxembourg
CZ
Czech Republic
LV
Latvia
DE
Germany
MT
Malta
DK
Denmark
NL
Netherlands
EE
Estonia
PL
Poland
ES
Spain
PT
Portugal
FI
Finland
RO
Romania
FR
France
RS
Serbia
GB
Great Britain
SE
Sweden
GR
Greece
SI
Slovenia
HR
Croatia
SK
Slovakia
HU
Hungary
NMS
New Member States
RoW
Rest of the World
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