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EU Sovereigns: Politicization of Energy Risk in a Russia-Ukraine Conflict

The geopolitical situation between NATO members and Russia, currently focused on Russia's military build-up close to its border with the Ukraine, is complex and dangerous. Our base case scenario is that the situation de-escalates through diplomatic means. However, in the event that the situation escalates, the risk of sanctions by the US and Europe likely followed by counter-sanctions by Russia, will rise significantly. This is particularly true if Russia invades the Ukraine, but may also occur if Russia continues to build-up its military presence at the border. DBRS Morningstar outlines how for Europe, Russian energy dependence is a key economic vulnerability. Precedent exists, in January 2009, supplies through the Ukraine were stopped in a Russia/Ukraine pricing dispute, that affected gas supplies to the majority of EU member states. Secure energy supplies are important for the well-being of citizens, for maintaining industrial production and for generating economic growth. The economic and fiscal fall-out from the use of energy policy as a political weapon, for example sanctions/counter sanctions or deliberate action to withhold supply, and/or pipeline disruptions in a conflict zone, could lead to negative rating implications for some EU sovereigns.


Key Highlights

-- Energy politicization would be a key risk to European recovery
-- Most of Europe and Russia would face adverse macro-economic effects, to varying degrees
-- Severe energy supply disruptions could lead to negative ratings implications for some EU sovereigns
-- Russia and Europe stand to lose from a loss of confidence in secure energy supplies

Quote:

“Energy supply cuts, pipeline disruptions or financial sanctions that inadvertently disrupt European trade, will exacerbate existing supply shortages, raise prices and might add to the monetary policy challenge for the ECB in preventing higher inflation from becoming embedded in expectations. It will also pose a material threat to some governments' fiscal re-balancing targets. Severe disruption to energy supplies could delay re-balancing fiscal accounts and delay various countries' debt sustainability improvement,“ said Nichola James, DBRS Morningstar Co-head of Global Sovereign Ratings.