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Explainer-Europe braces for economic hit from Ukraine conflict

By Mark John

Reuters: Russia's invasion of Ukraine and how the world reacts could have wide-ranging repercussions for the European economy, from rising energy and food prices to economic sanctions that hit trade and investment.

That in turn will affect how quickly the economy gets back on its feet after two years of the coronavirus pandemic and the ability of policy-makers, among them the European Central Bank, to wind down emergency support measures. Following are some key variables and vulnerabilities.

WHAT IS THE LIKELY IMPACT ON INFLATION?

The escalation of tensions into outright conflict has the potential to generate immediate and rapid fuel and food price inflation.

European Union countries buy 41.1% of their imported gas from Russia and 27% of their oil: thus, any restriction of supplies would quickly lead to higher energy prices. That would ripple through the economy from higher heating and fuel bills to costlier transport and power for businesses.

Food supplies would also likely be hit. Natural gas is the main component in many fertilizers, so higher gas costs would likely push up all crop prices. Separately, Ukraine exported over 33 million tons of grain last year so any disruption there would reverberate across global markets - including in Europe.

Overall, Bank of America Securities estimates an escalation could push euro zone inflation up 1 point to 4% for 2022.

AND ON TRADE AND INVESTMENT?

This will depend on the new sanctions due to be studied by EU leaders at an emergency summit on Feb. 24. They will be "the harshest package of sanctions we have ever implemented", the bloc's foreign policy chief, Josep Borrel said.

The euro zone's export exposure to Russia has roughly halved since the confrontation over Crimea in 2014, as European firms looked to secure alternative trading partners.

EU exports to Russia now amount to 80 billion euros ($89.31 billion) worth of goods annually, worth 0.6% of EU GDP. They are mainly machinery and cars, chemicals and manufactured goods.

Among EU countries, Germany is both Russia's biggest exporter and importer; France, the Netherlands, Poland, Italy, Belgium all have sizeable trade.

"Coming with strong sanctions against Russia is going to have some impact on the EU economy and we need to be ready for this," European Commission Executive Vice President Valdis Dombrovskis told Reuters on Feb. 23.

The EU is also the largest foreign investor in Russia with total direct investment of 311.4 billion euros in 2019. That pales though compared with 2.16 trillion euros EU companies have invested in the United States.

Russian investment in the EU is yet smaller at 136 billion euros. Depending on the severity of any sanctions and counter-sanctions, some or all of the European presence in Russia could be impacted.

"On paper it is a lot, but this is only a small fraction of overall foreign direct investment of EU companies," said Daniel Gross, head of the CEPS think tank in Brussels, who added he saw little risk of Moscow wanting to expropriate plants run by EU companies because of the complexities entailed in running them >>>