Date
20 October 2017
Workers carry the body of a victim at the site of the crash of a Malaysia Airlines plane in eastern Ukraine. Photo: AFP
Workers carry the body of a victim at the site of the crash of a Malaysia Airlines plane in eastern Ukraine. Photo: AFP

Global impact of rising tensions over Ukraine

The shooting down of a Malaysian airliner over Ukraine last week has heightened international tensions over the situation in Ukraine. Over recent weeks, fighting in eastern Ukraine has continued between the Ukrainian armed forces and separatists.

The separatists have been receiving assistance from Russia, and early evidence points to them having been responsible for the downing of the airliner. As a result, western governments have condemned Russia’s involvement in the airliner’s destruction and a further tightening of sanctions against Russia is now being discussed.

Developments in Ukraine retain the capacity to damage the global economy, especially European economy, particularly through their impact on global energy markets.

The potential for energy and financial markets to be disrupted was illustrated back in March, during a previous peak in tensions. Oil prices rose 2 percent on March 3, while European gas prices rose by as much as 10 percent at one point. European stock markets, meanwhile, slipped by 2-3 percent before recovering. In Russia, stocks fell by as much as 10 percent.

These effects could be repeated and magnified if the situation in Ukraine deteriorates further. This would be especially the case if the military conflict escalates, for example with Russia stepping up its assistance to the separatists or becoming directly involved by moving its forces into Ukraine. The latter development would lead to major concerns about disruptions to energy supply as well as likely actual interruptions of gas supply through Ukraine.

Gas supply interruptions matter because Russia supplies around a third of Europe’s gas, much of it piped via Ukraine. Even countries which do not source their gas from Russia face the prospect of higher gas prices if there is substantial disruption to supplies.

Assuming Russia becomes more directly and intensively involved in the conflict in eastern Ukraine, leading to a halting of gas supplies from Russia via Ukraine, but no trade sanctions against Russia, gas and oil prices are expected to surge.

Rising energy prices would contribute to a decline in business and consumer confidence, centered on Europe and with eastern European states especially hard hit. Eurozone GDP would fall and global stock markets may tank.

Given the considerable uncertainty about the reaction of Russia to the latest developments and the extent to which the international community will go in imposing economic and financial sanctions against Russia, it is also possible to construct more severe downside economic scenarios, especially in case trade sanctions are imposed on Russia which would imply serious disruption to global energy markets.

But the very negative potential impact of a scenario involving sanctions goes some way to explaining why there has been considerable resistance to this approach in many major economies. But given the serious negative effects seen in Russia even in a scenario without sanctions, it may be enough to tighten existing targeted sanctions step by step to force Russia into concessions.

The writer is senior economist at Oxford Economics.

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CG

Senior economist at Oxford Economics

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