ifo President Fuest Warns of Price Shock for Oil and Gas in the Event of Russian Invasion

ifo President Clemens Fuest has warned of a price shock for oil and gas if Russia invades Ukraine. “Even if the supply of gas isn’t restricted, there would still be a price shock, at least temporarily. This would affect private households and industry in Germany in equal measure. Currently, we are forecasting an inflation rate of 4 percent for 2022. If war breaks out, it could be even higher.”

At the same time, Fuest referred to the mutual interdependence of both sides. Western Europe needs Russian oil and gas, while Russia relies on the money paid for those exports. Fuest believes it is unlikely that Russia will cut off the supply of gas, as it still wants to sell gas to Europe in the future. Otherwise, the EU would seek to source its gas elsewhere, for instance by importing liquefied gas transported by tankers. Expanding the infrastructure for this in Germany would be a good idea in any case, he continues, but there is still the risk of short-term supply bottlenecks.

Beyond the energy market, Russia’s economy is not that significant, he says: the country’s GDP is equivalent to the combined economic output of Belgium and the Netherlands. Moreover, economic relations are already limited as a result of existing sanctions already in place. “The sanctions that were imposed because of the occupation of the Crimea reduce German economic output by around EUR 5 billion per year, or 0.16 percent of German GDP. The damage to Russia from the sanctions is greater, equating to 1.2 percent of Russia’s economic output. If further sanctions were imposed, they could put an additional strain on the German economy, but a much greater one on the Russian economy,” says Lisandra Flach, Director of the ifo Center for International Economics.

Fuest added that a slump in consumer demand in Germany due to the Ukraine crisis was rather unlikely. Currently, it’s Omicron that is slowing things down. “Nonetheless, private households have built up significant savings, and they would like to spend them despite higher energy prices.”