Russia cutting off oil and natural gas to Europe can trigger another recession: Report

Russia is suspending natural gas service to Poland and Bulgaria which is believed will not do immediate damage to the European economy. However, economists have opined that Europe could face a growth slowdown if the cutoff spreads to other countries or if Europe imposes an embargo on Russian gas.

Just as Europe was recovering from a pandemic-induced recession, Russia’s Ukraine invasion is again hitting the continent hard, lashing energy prices and hurting manufacturers. The International Monetary Fund last week cut its 2022 growth forecast for the countries that use the euro to 2.8%, from a 3.9% estimate in January, with Germany, the largest economy, taking a big hit.

The euro fell below $1.06 on Wednesday for the first time in five years amid rising concerns about energy security and a slowdown in European growth. The currency has slumped nearly 4% against the U.S. dollar in April alone.

Analysts said that European companies are already facing higher energy costs, which are threatening profit margins and squeezing consumers’ purchasing power.

The action this week by Gazprom, Russia’s oil monopoly, to turn off the gas taps to two European Union nations was unlikely to tip Europe into a fresh recession immediately. This is in part because Europe “still has many diplomatic and fiscal policy responses available” to combat one, said Mark Haefele, chief investment officer at UBS, in a note to clients.

The European Union has been drafting plans for an embargo on Russian oil but made no mention of it in the hours after Gazprom’s cutoff. Europe put in place a ban on Russian coal this month. And while Germany in particular has resisted embargoes on Russian oil or gas because of the outsize costs to its industry, officials have recently reconsidered.

Germany’s five leading economic research institutes said this month that a full energy embargo, were one to be enacted immediately, would reduce annual economic growth in the European Union this year and the next by a cumulative 3%, while raising inflation by roughly 1 percentage point in both years.