Despite efforts in recent years to transition away from Russian gas, many of Europe’s economies are still heavily dependent on it. The IMF has released a report indicating that the loss of Russian gas supplies could cause economic contractions of up to 6 percent in some nations, including Czechia and the Slovak Republic. The IMF reports:
Dependence on Russia for gas, and other energy sources, varies widely by country.
— IMF (@IMFNews) July 19, 2022
European infrastructure and global supply have coped, so far, with a 60 percent drop in Russian gas deliveries since June 2021. Total gas consumption in the first quarter was down 9 percent from a year earlier, and alternative supplies are being tapped, especially LNG from global markets.
Our work suggests that a reduction of up to 70 percent in Russian gas could be managed in the short term by accessing alternative supplies and energy sources and given reduced demand from previously high prices.
This explains why some countries have been able to unilaterally halt Russian imports. However, diversification would be much harder in a total shutoff. Bottlenecks could reduce the ability to re-route gas within Europe because of insufficient import capacity or transmission constraints. These factors could lead to shortages of 15 percent to 40 percent of annual consumption in some countries in Central and Eastern Europe.
We gauge impacts two ways. One is an integrated-market approach that assumes gas can get where it is needed, and prices adjust. Another is a fragmented-market approach that is best used when the gas cannot go where needed no matter how much prices rise. However, estimation is complicated by the fact that the hit to the European economy is already happening.
Using the integrated-market approach—as the market remains so—to estimate the direct impact to date suggests that it may have amounted to a 0.2 percent reduction for European Union economic activity in the first half of 2022.
When we consider a full Russian gas shutoff from mid-July, we focus on the impact relative to a baseline of no supply disruption this year. This simplifies the estimation and makes it comparable with other economic research.
We derive a broad range of estimates of impact over the next 12 months. Reflecting the unprecedented nature of a full Russian gas shut-off, the right modeling assumptions are highly uncertain and vary between countries.
If EU markets remain integrated both internally and with the rest of the world, our integrated-market approach suggests that the global LNG market would help buffer economic impacts. That is because reduced consumption is distributed across all countries connected to the global market. At the extreme, assuming no LNG support, the impact is magnified: soaring gas prices would have to work by depressing consumption only in the EU.