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Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute forInternational EconomicStudies

www.wiiw.ac.at

Peter Havlik, Vasily AstrovThe Vienna Institute for International Economic Studies (wiiw)

Economic Consequences of the Ukraine Conflict

13 October 2014

2

� Consequences for Ukraine

� Consequences for Russia

� Consequences for the EU

� Sanctions and their impacts

Outline



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Consequences for Ukraine

4

� the role of Crimea is modest

� but Donbass:

– 16% of Ukraine’s GDP

– 6.5 million population

– home to coal-mining and metallurgy

Source: wiiw based on national statistics.

Gross regional product2012, in % of total

Crimea & Sevastopol:

3.8

Donbass: 15.7

Rest of Ukraine: 80.5

5


Foreign trade by region2013, in % of total

1.6

25.2

73.2

Crimea & Sevastopol Donbass Rest of Ukraine

Exports of goods

1.5

7.7

90.8

Crimea & Sevastopol Donbass Rest of Ukraine

Imports of goods

6

KyivLuhansk

Donetsk

Crimea

Sevastopol

Ukrainian average: EUR 6,800


GDP per capita, EUR at PPP, 2012

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

8

Economic prospects

� This year: 8-10% GDP recession

– war-related destructions in Donbass

– restrictions on military and dual-use goods exports to Russia

– inflation erodes purchasing power

– investments collapse

� Prospects for stabilisation highly uncertain

– conflict settlement crucial-30,0

-25,0

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

EU Russia Rest of the world

Total

Exports dynamics in January-July 2014

% change year-on-year



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Consequences for Russia

16

10

5,14,7

7,37,2

6,48,2

8,5

5,3

-7,8

4,54,3 3,4

1,30,5

1,3 1,9 2,0

-10

-5

0

5

10

15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Private consumption State consumption Gross capital formation

Net exports GDP growth, in % (rhs)

GDP growth: current (realistic) scenario; contributions of main components to GDP growth, in pp

Source: wiiw Annual Database, national statistics, own estimates.

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

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?



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Consequences for the EU

23

Share of Russia in EU goods exports, in % of total, 2013

Source. wiiw Annual Database, EU Comext.

0

2

4

6

8

10

12

14

16

18

20

NMS, FI, DE, AT, IT more exposed than others

24

Share of goods exports to Russia in % of GDP, 2013

Source: wiiw Annual Database, EU Comext.

0

3

6

9

12

15Baltics, SK, SI, CZ, FI, HU, RS, PL are more exposed than others; AT: 1.4%

25

Share of domestic value added of exports to Russia in % of GDP, 2013 (estimated)

Source: EU Comext, WIOD, own estimates.

0

1

2

3

4

5Baltics, 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%)

27

Scenario (Ia): estimated loss of GDP (in %) if domestic value added of exports to Russia drops by 10%

Source. Own estimates based on wiiw Annual Database, EU Comext.

-0,5

-0,4

-0,4

-0,3

-0,3

-0,2

-0,2

-0,1

-0,1

0,0

Baltics, SK, BG, PL, CZ, FI, HU, DE most exposed; Lithuania would lose 0.4% of GDP, Austria 0.06% of GDP

29

Scenario (IIa): estimated loss of GDP (in %) if domestic value added of exports to Russia drops by 50%

Source: Own estimates based on WIOD Database, EU Comext.

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

Baltics, SK, BG, PL, CZ, FI, HU, DE more exposed than others; Lithuania would lose up to 2% of GDP

30

EU28

0

5000

10000

15000

20000

25000

CB Textiles, apparel, leather,related products

CF Pharmaceuticals, medicinal chem

& botan.products

CJ Electrical equipment

CK Machinery and equipment n.e.c.

CL Transport equipment

AT CZ DE EE FI HR HU LT LV PL SI SK

EU export exposure to Russia: 5 key industries and 12 major exporting countries, EUR mn, 2013

Source. wiiw Annual Database, EU Comext.

31

Share of Russia in goods imports, in % of total, 2013


0

5

10

15

20

25

30

Energy accounts for 80% of EU imports from Russia

32

EU28

0

20000

40000

60000

80000

100000

120000

140000

B Mining and quarrying

CD Coke and refined petroleum products

CE Chemicals and chemical products

CH Basic metals,fabricated met.prod.,

ex mach.& equip.

CC Wood and paper

AT CZ DE EE FI HR HU LT LV PL NL SK

Oil and gas: Austria, Germany and the Netherlands estimated.


EU import exposure to Russia: 5 key industries and 12 major importing countries, EUR mn, 2013

38

Scenario (II): estimated GDP loss (in %) if exports (both goods and services) to Russia drop by 50%


-9,0

-8,0

-7,0

-6,0

-5,0

-4,0

-3,0

-2,0

-1,0

0,0

Baltics, Cyprus, SK, FI, SI, CZ more exposed thanothers; Lithuania would lose nearly 9% of GDP

40

Scenario (I): estimated GDP loss (in %) if domestic value added of goods and services exports to Russia drops by 10%


-1,2

-1,0

-0,8

-0,6

-0,4

-0,2

0,0

Cyprus, Baltics, BG, SK, FI, PL, CZ would lose most; Cyprus would lose more than 1% of GDP

41

Estimated GDP loss (in %) resulting from Russia’s August 2014 food import ban

Source. Own estimates based on wiiw Annual Database, (http://ec.europa.eu/agriculture/statistics/trade/2012/annex4 en.pdf).

-0,5

-0,5

-0,4

-0,4

-0,3

-0,3

-0,2

-0,2

-0,1

-0,1

0,0

Lithuania could lose about 2.6% of GDP



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Sanctions and their impacts

45

� 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?

Western sanctions and their impacts (I)

46

� 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

Western sanctions and their impacts (II)

57

Thank your for your attention!

58

Country codes

AT Austria IE Ireland

BE Belgium IT 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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