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Natural gas compressor station in Volovez, Ukraine: »Cascade effects for other companies too«
Photo:
Pavlo Palamarchuk / dpa
In light of the Russian invasion of Ukraine, many political and cultural celebrities are calling for an immediate embargo on energy imports from Russia.
And science has also spoken out.
For example, the authors of a statement by the Leopoldina write that “a short-term stop to the supply of Russian gas would be manageable for the German economy”.
In fact, however, there is some evidence that this formulation downplays the economic and social consequences of a short-term stop to Russian energy imports.
It is more likely that an abrupt halt to deliveries – the so-called “cold turkey” – would cause a new economic crisis.
Similar to the corona crisis, economic activity is likely to collapse and unemployment or at least short-time work is likely to skyrocket.
In addition, there would be an additional surge in inflation with a further increase in the cost of living.
First of all, a delivery stop should lead to production interruptions in the industry.
In the short term, no alternative sources of supply, especially for Russian gas, but also for coal from Russia, can be developed that even come close to completely compensating for the loss of supply.
Industrial companies with high energy consumption would have to reckon with rationing and shut down operations or stop production altogether.
This would not only affect those companies that need natural gas for process heat, but potentially also steelworks that burn Russian coal and large electricity consumers because natural gas and Russian coal are used to generate electricity.
Sharp surge in inflation
This would also have cascading effects for other companies: As we have painfully seen over the past two years in the automotive industry, for example, a small disruption in the complex value chains of a modern economy can have a significant impact on the production of downstream companies and related industries.
When parts from Italy were missing in the first wave of corona in the auto industry in spring 2020, production came to an almost complete standstill at times.
And when semiconductors became scarce in 2021, the automotive industry was unable to build around 1.5 million cars and the German economy lost tens of billions of euros in added value, even though orders for it were received and the production capacities existed.
This scenario could easily repeat itself with the import embargo on Russian energy.
Production and jobs in the chemical, steel and automotive industries would be particularly affected by such effects.
On top of that.
The rising oil and gas prices would lead to a violent surge in inflation.
It is already becoming apparent that inflation in Germany will likely be more than five percent this year.
If private households are suddenly confronted with - in extreme cases - several hundred euros in additional expenditure for fuel, heating and electricity per month, people will limit their spending on other things.
This weakens the demand for goods and accelerates the economic downturn.
Don't be fooled
Unemployment, short-time work and turbulence on the financial markets due to the production losses had a similar effect: Loss of income and assets lead to consumer restraint and further weaken aggregate demand.
Although these can be cushioned by an appropriate monetary and fiscal policy response, they are far from being offset.
The oil crises of 1974 and 1979/80 showed how dramatically sudden energy shortages can affect developed economies.
Of course, all this does not mean that an embargo on Russian energy imports must be ruled out.
Foreign and security policy considerations can lead to the conclusion that an embargo makes sense despite the enormous economic costs.
It is the job of the politicians to weigh this up.
But they should be aware of the costs associated with such a step and not be lulled by the term "manageable".
