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Russia invades Ukraine - what does it entail?


Our Chief Economist Jens Magnusson answers six questions about the potential consequences of Russia's invasion of Ukraine.

What is your view of what is happening right now?

"What is happening now is a tragedy that will first and foremost mean great human suffering for Ukraine and the Ukrainian people. Although similar Russian actions have previously given us some prior warnings, it is still with a sense of horror that we now see full-scale Russian attacks inside Ukraine. But now, the war is a fact, and the scenario that first looked unlikely and then became our main scenario has become reality. And in addition to the human aspects of war, which must always come first, we will also see economic consequences that can have great significance."

What are the immediate effects?

"The news of a Russian invasion was met, as might be expected, with a reduced global risk appetite. This entails falling stock markets, lower interest rates and a strengthening of the largest and safest currencies (especially the US dollar) at the expense of smaller ones. At the same time, we can conclude that we are not seeing a free fall even if stock markets are noticeably down. This suggests that some of what we now see was, after all, expected and already priced in. In addition to share prices falling, the oil price rose sharply and passed USD 100 per barrel."

How will the world economy be affected in the longer term?

"It is quite common that we overestimate how much conflicts, natural disasters, and similar events mean for the economy in the longer term. But one thing that can be important is if the energy supply is threatened. If this happens, it can have a significant negative impact on the economy, and there is an obvious risk that this will be the case. Europe gets about 40 per cent of its natural gas from Russia, and in addition, Russian oil is imported. What’s more, a significant part of Europe’s gas supplies are delivered via pipelines that run through Ukraine. If this flow is stopped or reduced, it will have a major impact on energy prices in Europe. There are a number of ways in which this can happen:

"Either through sanctions where the EU stops buying Russian gas or through Russia restricting sales in response to other sanctions from the West. Suppose the already high energy prices in Europe become even higher due to the war. In that case, there is a significant risk that not least European growth will be significantly lower than we would otherwise have thought. There is also a risk that the gas pipelines will be physically damaged or destroyed in the war, creating major supply disruptions."

"In addition to the energy issue, sanctions and Russian countermeasures will both negatively affect the world economy also in other ways. Reduced trade, export bans, boycotts, possible trade wars, travel bans, frozen assets, and the exclusion of banks always entail costs. How high these costs will be depend, among other things, on the length and nature of the war and the design of sanctions and countermeasures. At this early stage, these questions are impossible to answer."

How is Sweden affected?

"Neither Russia nor Ukraine belongs to our largest trading partners, and we also import almost no natural gas. In that way, we are not one of the countries most affected by this conflict. At the same time, we are part of the global economy. The immediate effects of this morning's news are falling share prices here, too, and a weakening of the krona. In addition, energy prices are increasingly global, and rising prices in Europe result –  as we have seen in the past year – in  higher electricity and petrol prices also in Sweden."

"There are, of course, also individual companies that both import, export or conduct business in Russia and Ukraine. The war and the sanctions can have considerable consequences for these companies, their employees and owners. At the same time, we should keep in mind that when it comes to Sweden, the starting point is good. Public finances are strong, and should certain households or companies experience significant problems, the government and parliament have very good possibilities to use fiscal means to provide support. It provides a good cushion when we now enter an uncertain time."

What should we keep an eye on now?

"The developments in the next few days will be important for our understanding of where we are heading. We will of course pay close attention to the development in Ukraine but also on news about sanctions from the US, NATO, and the EU – and how Russia chooses to respond to these sanctions. We will also look at the market reactions to understand what events may have come as a surprise and which ones have already been taken into consideration. Another player to keep an eye on now is China. How China reacts and to what extent it helps Russia get around Western sanctions could also have a major impact on the course of events."

Are there any glimpses of hope?

"Right now, the situation feels gloomy, but it is also important to keep an eye out for the first signs of a turn of events. Because they will come. Resumed negotiations or a temporary ceasefire may come sooner than we think. It could provide the chance for breathing space and reflection and change the picture. Russia is not unaware of the enormous costs that the war and the sanctions will entail and if they also give rise to domestic opposition to the war, it could also help change the situation.  The fact that this happens now, when the pandemic is beginning to release its grip on the world, also provides some slight relief. That’s because it makes it somewhat easier for European countries, for example, to address the problems that Russia’s invasion of Ukraine results in."