Ukraine-Russia crisis and its consequences

The invasion of Ukraine by Russian troops has far-reaching political and economic consequences. The crisis also highlights the European economy's dependence on raw materials from this region. This brief study examines the effects of a sharp rise in the price of natural gas and the suspension of exports to Russia and Ukraine.

The analysis assumes a significant increase in the price of natural gas. Taking into account market expectations and company procurement strategies, the main scenario assumes an increase to an average of around EUR 80 per MWh in 2023. A second scenario assumes a more permanent price increase, so that an average price of around EUR 130 is assumed for 2023. Austria's gross exports (goods and services) to Russia and Ukraine amount to around 0.9% of GDP. A loss of these exports is expected to have a noticeable dampening effect on growth.

The analysis of these two shocks using the E-PuMA macro model shows that the economic recovery following the COVID-19 crisis will be significantly dampened in the main scenario. Employment is likely to fall by around 40,000 people compared to the baseline scenario, unemployment (international definition) is likely to rise by up to 30,000 people and investment is likely to slump by 3%. GDP will be around 1.3% lower this year and next year than in the scenario without the Ukraine-Russia crisis.

In the scenario with a longer-term effect on natural gas prices, employment could be around 60,000 people lower in 2023 than in the scenario without the crisis, while unemployment increases by more than 35,000 people according to the model simulation. This will have an even greater impact on companies' investment activity. GDP will be almost EUR 8 billion lower in the coming year.

As the crisis recedes, the effects will decrease significantly. Nevertheless, noticeable effects, lower employment and a reluctance to invest can still be expected in subsequent years.

It should also be noted that no other potential risks were considered. A sharp rise in the price of oil, the impact of higher inflation on monetary policy, further sanctions by the EU or a backlash from Russia are significant risks that could further weaken growth significantly.