Why Russia-Ukraine de-escalation would not be a macro game changer

Today, French president Macron called for a ban on Russian oil and coal imports over what he described as ‘war crimes’ being committed by Russian forces in Ukraine. This followed remarks from European Council president Michel who announced on Sunday that ‘further EU sanctions & support are on their way’. The announcements served to underline that, even though there are some signs of de-escalation in the Russia-Ukraine conflict, with Russian forces having withdrawn from areas surrounding Kyiv, if anything sanctions are likely to be toughened rather than wound down. This is in contrast to the seeming optimism in financial markets over progress in peace talks between Russia and Ukraine in recent weeks. Indeed, we continue to think that even with a ceasefire between Russia and Ukraine, the moves that have been set in motion by the conflict to restructure global trade flows – specifically, for the EU to eliminate its dependence on Russian energy – will be extremely difficult to reverse. The conditions for removing sanctions have not been specified, but particularly in light of developments over the weekend, we think it would be politically difficult – even in the most optimistic scenario for the conflict – to implement an easing of sanctions even beyond the near-term. Another reason for caution is the withdrawal of western oil and gas companies from Russia, which even in a more optimistic environment will mean that future Russian supply will not be as plentiful as it would have been given the brain drain of technical expertise. Just as sanctions are unlikely to be unwound, these companies are also unlikely to return to Russia anytime soon.  All of this means that, in almost any scenario, sanctions will remain in place, commodity prices will remain elevated for at least the coming year, with physical disruptions to supplies an ever-present risk. The question then is one of just how disruptive all of this will be, and how long that disruption will last. While our base case is that a rationing of energy and other commodities will be something driven by markets and the price signal, as opposed to government-directed rationing, this by itself will be disruptive to European industry, with knock-on supply-chain effects coming at a time of already heightened disruption in the global economy (lockdowns in China will also not help). Given this, we continue to think growth will be significantly dampened this year and next by supply disruptions, with below-trend growth expected in the eurozone and UK over Q2-Q3. This, it should be noted, does not incorporate a gas embargo, which would have much more pronounced negative effects on the economy by triggering a government-managed rationing of energy (which some governments, notably Germany’s, have made contingency preparations for). In our March Global Monthly, we outline how a more negative scenario such as this would play out, but we see it as causing technical recessions in the eurozone and UK economies, with growth likely to be c.3pp below that of our base case.