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Deutsche Bank
Research
Europe
Data Flash
Economics
Date
20 March 2014
Gilles Moec
Marco Stringa, CFA
Chief Economist
Economist
(+44) 20 754-52088 (+44) 20 754-74900
gilles.moec@db.com marco.stringa@db.com
Who is exposed to Russia?
We see three main channels through which the ongoing crisis in Ukraine could
impact the economy in the rest of the world. First, non-resident financial
institutions could be affected if, in retaliation for sanctions, Russia decided to
embark on asset grabbing, or if the creditworthiness of Russian assets materially
declined as a consequence of an escalating crisis. Second, world trade could be
affected by a drop in Russian imports, either as a consequence of some trading
bans, or more likely through contraction in Russian demand stemming from a
sudden stop in external financial flows. Third, in retaliation for sanctions,
disruptions in Russian supply could impair economic activity in countries that are
dependent on Russian energy. These channels are naturally mutually reinforcing
(e.g., a drop in the Russian supply of energy would reduce import growth and
creditworthiness in Russia).
On all these counts, the European Union would come firmly first among those
affected.
However, we believe that in order for European growth to be materially
impacted, an extreme scenario would need to unfold, with a deep recession in
Russia – similar to what was seen at the time of the Ruble crisis in 1998 – and
large spillover to the Eastern part of the European Union.
More than such a dramatic scenario, our main concern is that the Ukrainian
crisis creates a diffuse sense of uncertainty in Europe, adding to the questions
hanging over the emerging markets in general and China in particular, as well as
to the difficulties of making sense of the recent dataflow in the US, potentially
creating a “wait-and-see attitude”, which would be detrimental to the ongoing
subdued recovery in the Euro area.
The financial channel: who could be hit?
Freezing Russian assets held in the US and the EU could be one of the next
steps in terms of sanctions. Here we need to consider a case in which Moscow
might retaliate by freezing foreign assets in Russia, or where the
creditworthiness of Russian assets could materially decline as a consequence
of an escalating crisis. BIS statistics provide a good indication of the
implications of such a move for the international banking sector.
Figure 1: Banks’ claims over Russia in 2012/2013
Claims (USDbn)
% of total bank
assets
Other potential
claims (USD bn)
% of total bank
assets
France
50.9
0.5
12.5
0.1
Germany
23.7
0.2
3.9
0.0
Italy
28.6
0.5
5.7
0.1
Spain
1.0
0.0
0.2
0.0
Netherlands
17.6
0.6
nd
nd
Austria*
16.9
1.4
nd
nd
Sweden
14.0
0.6
2.0
0.1
UK
19.1
0.2
42.1
0.3
US
36.7
0.2
92.9
0.6
Japan
16.3
0.1
2.3
0.0
*2012 data
Source: BIS, Deutsche Bank. The data pertain to Q3 2013 for “ordinary assets” (except for Austria) and to Q3 2012 for “other potential
claims”.
________________________________________________________________________________________________________________
Deutsche Bank AG/London
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.
20 March 2014
Data Flash: Who is exposed to Russia?
In absolute terms, French banks are – by far – the most exposed, with USD
51bn claims (loans and securities) over Russia in Q3 2013.
However, these claims must be compared with total bank assets in each
country to get a sense of the systemic impact that an asset freeze or
deterioration in the creditworthiness of Russian assets could have. Austria then
comes out with the highest ratio (1.4%), followed by the Netherlands and Italy.
Still, at 0.5% of total bank assets, we would regard the French ratio as
significant, especially in a period of pressure on capital ratios
We suspect these risks are fairly tightly concentrated in a small number of
banks in each country – which adds to the systemic risk – since lending
outside of the Euro area is not an operation on which “bread and butter”
institutions would easily embark.
At the other end of the European spectrum, in Germany and even more so in
Spain, exposure to Russian risk through the financial channel is very limited
(respectively 0.2% and less than 0.1%).
In aggregate, the sensitivity of the European banking sector to Russian risk is
significantly larger than that of its American and Japanese counterparts. True,
the picture changes once one adds to claims over Russia what the BIS
classifies as “other exposure” (derivative contracts, guarantees and trade
credit). Indeed, the US banking sector’s “wealth at risk” on Russia then rises
by USD 92bn, to a grand total twice as large as France’s. Yet, the
overwhelming majority of this “other exposure” comes from “guarantees”,
which probably reflect CDS contracts underwritten by large international banks
located in the US (as well as in the UK). As long as Russia does not default on
its securities, this contingent liability would have little impact on the
international banking sector.
Note that beyond asset freezes or deterioration in credit worthiness, the
international financial system may have to deal with the potential disruptions
stemming from a possible ban on trading with Russian financial institutions.
This could have implications for liquidity and profits, but data on this type of
relationship is too patchy to make any attempt at quantification worthwhile.
The exports channel: who could be hit if Russian demand
declines?
The political uncertainties in Russia have already triggered capital outflows,
resulting in a decline in equity prices, an increase in bond yields and
depreciation in the Ruble. The Russian central bank has already reacted by
hiking its policy rate to 7%, bringing it into positive territory, in real terms, for
the first time since a fairly brief period between January and June 2012. This is
occurring against an already challenging macroeconomic background for
Russia, where GDP grew by a paltry 0.6% yoy in Q3 2013. Investment growth
has been in negative territory since Q1 2013.
Page 2
Deutsche Bank AG/London
20 March 2014
Data Flash: Who is exposed to Russia?
Figure 2: Financial conditions are
tightening in Russia…
Figure 3: …where the economy had
already weakened before the
Ukraine crisis
16
15
14
10
40
30
20
12
5
10
10
0
0
8
‐10
-5
6
2
0
Jan-04
Jan-07
‐20
-10
Key policy rate (new)*
Key policy rate (old)*
Inflation
Sovereign yield >1y
4
GDP
Investment
(RHS)
-15
1996 - Q1 2000 - Q1 2004 - Q1 2008 - Q1 2012 - Q1
Jan-10
‐30
‐40
Jan-13
* In September 2013 the Bank of Russia streamlined its interest
rate structure equating the one-week depo and repo rates and
introducing this as the bank's key policy rate. Historically the
overnight refinancing rate had effectively been the key policy rate.
Source: Bank of Russia, Haver, Deutsche Bank
Source: Federal Statistics Service, Deutsche Bank
If the turmoil continues, Russia may have to choose between two fairly
uncomfortable solutions: either tolerating further depreciation in the currency,
fuelling internal inflation, or resisting it by continuing to tighten monetary
policy and thus dampening domestic income. In both cases, Russian
purchasing power with respect to the rest of the world would decline.
Russia accounts for a small share of world growth and imports (see Figure 4).
Russia is about the same “economic size” as Brazil, and is smaller than France
or Germany. China’s share in world imports is five times larger than that of
Russia. This means that the first-round impact of a slump in Russian economic
activity on the global economy could be relatively muted. However, Russia
matters a lot for some exporters.
Figure 4: The weight of Russia in the
Figure 5: …but Russian imports are
global economy should not be
overstated…
concentrated in a few suppliers
12.0
% of world GDP
(current USD)
10.0
Others
17%
% of world imports
8.0
6.0
EA
31%
CIS
13%
4.0
UK + Sweden
4%
Japan
5%
2.0
0.0
Russia
China
Turkey
Brazil
Poland
Source:IMF, Deutsche Bank
France Germany
South Korea US
3% 5%
China
16%
Eastern EU
6%
Source: Customs data, Deutsche Bank
Indeed, Russian imports are heavily concentrated in geographical terms.
Nearly one-third comes from the Euro area (31%); the Eastern EU members
outside of the monetary union (Poland, Czech Republic, Hungary, Bulgaria,
Romania) account for another 6%. China is also a large supplier to Russia (16%
of total imports) and, quite intuitively, CIS countries (13%), including Ukraine
itself (6%). Conversely, the US and Japan play only a marginal role (5% each).
What matters then is the mirror image of this breakdown, e.g. how important
Russia is for its main suppliers.
Deutsche Bank AG/London
Page 3
20 March 2014
Data Flash: Who is exposed to Russia?
A slump in Russian demand, taken in isolation, is unlikely to trigger any
significant macro impact on the Chinese economy, since Russia absorbs only
2.4% of total Chinese exports, equivalent to only 0.5% of GDP.
Russia absorbs 4.7% of total Euro area exports. This is far from negligible, as it
is equivalent to roughly two-thirds of the share of China in Euro area exports.
In Western Europe, Germany is the most exposed to the trade risk. Russia
accounts for 3.1% of total German exports1 and 1.5% of GDP. French, Italian
and Spanish exposures are much more limited, not necessarily so much when
looking at the share of Russia in their exports, but rather because overall
exports represent a smaller share of their GDP than in Germany. However,
even in these cases Russia is not completely insignificant. The French
government stated on Monday of this week that “it could contemplate”
cancelling the shipment of two military ships built in France to Russia, for a
value of EUR1.2bn. Given the less-than-robust state of French foreign trade
(and the French economy in general), this is a sensitive issue. We also need to
highlight the situation for Finland. While it accounts for a small share of Euro
area GDP, its sensitivity to Russian demand is the highest in the Euro area
(9.9% of total Finnish exports). In addition, Finland is also one of the most
dependent countries across the EU on Russia for energy (see the next section).
It is very difficult to quantify how much Russian imports could fall if turmoil
continues. We propose here some “backward reasoning”: what kind of decline
in Russian GDP would be needed to generate a drop in imports that would
have a significant impact on German GDP?
For the direct impact on the German economy to reach 0.5% of GDP – ignoring
the positive second-round effects on German imports and the negative secondround effects on German employment and investment – we calculate that
exports to Russia would have to fall by some 30%. As can be seen in Figure 7,
the elasticity of overall imports to GDP growth is high in Russia (3.1). To be
more specific, the statistical relationship between Russian GDP growth and
German exports to Russia is less tight (see Figure 8), but the elasticity is a bit
higher (3.5) than on total imports, which probably reflects German exporters’
specialization on capital goods (capex is the most volatile component of GDP).
With an elasticity of 3.5, we calculate that it would take a contraction in
Russian GDP of 8.6% to elicit the chains of events that in the end would shave
0.5 pp off German GDP.
Figure 6: % of Russia in total exports
of goods
Country
A ustria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
UK
E U27
Exports
2.5
1.6
2.7
0.7
3.1
1.9
10.7
9.9
2.1
3.1
1.7
3.0
0.7
2.6
11.5
18.9
1.1
0.7
1.3
5.5
0.7
2.3
4.2
3.5
1.3
2.0
1.8
2.7
Source: National Customs, UNCTAD, Deutsche Bank
1
Note that Eurozone export figures do not comprise intra-EA trade, whereas national exports do, hence
the share of Russia in German exports looks weak relative to the Euro area figure.
Page 4
Deutsche Bank AG/London
20 March 2014
Data Flash: Who is exposed to Russia?
Figure 7: Strong elasticity of imports
to GDP growth in Russia
Figure 8: Specifically, imports of
German products seem to be
particularly sensitive to cyclical
gyrations
50
Import growth
30
20
60
40
20
10
0
0
-10
GDP growth
y = 3.1x + 0.3
R² = 0.83
-20
GDP growth
-20
-60
-40
-10
-5
y = 3.5x + 1.1
R² = 0.47
-40
-30
-15
German exports to Russia
80
40
0
Source: Deutsche Bank
5
10
15
-15
-10
-5
0
5
10
15
Source: Deutsche Bank
This is obviously quite extreme, but not unprecedented. Even before the Great
Recession of 2008/2009 (Russian GDP fell 10.7% yoy in Q2 2009), GDP
contracted by 8.9% yoy during the Ruble crisis of 1998, triggering a decline in
German exports to Russia of 57% yoy (i.e more than what the average
elasticity would have predicted, which is understandable given the
depreciation in the Russian currency).
A replication of the ruble crisis would be at the extreme of the political
outcomes we might expect from the ongoing turmoil. Our EM economists
have lowered their forecasts for Russian GDP growth in 2014 from 2.4% to
0.6%, nowhere near the range that would be consistent with an 8-10% shock.
To witness such a massive decline in GDP, we would likely need to see a
complete collapse in the Russian financial system, which is hard to imagine
without a dramatic escalation in tension between Moscow and the West. This
would probably be a configuration where Russian supply of energy to the rest
of Europe would be disrupted.
The energy channel and the second-round effects from
Eastern Europe
Europe’s dependence on Russian energy supply (gas in particular) is now wellknown. Much is being said about Germany in particular. However, while the
share of Russia in German energy imports is significant, it is not overwhelming
(1/5th for coal, a bit more than 1/4th for oil and a bit more than 1/3rd for gas). In
northwestern Europe, Finland is the most dependent (100% for gas and more
than 2/3 on oil). But the most striking feature is the dependence of the Eastern
part of the EU (with the exception of Romania, which can count on its own
resources) on imports from Russia.
Deutsche Bank AG/London
Page 5
20 March 2014
Data Flash: Who is exposed to Russia?
Figure 9: The Eastern members of the EU – as well as Finland – are very
dependent on imports of energy from Russia
Imp ort s f rom Ru ssi a, % of t ot al i mp ort s: 2012*
Country
Coal
Petroleum
Gas
A ustria
2.8
7.0
61.8
Belgium
21.9
9.1
23.8
Czech Republic
2.0
35.0
66.0
Finland
41.5
68.5
100.0
France
12.6
15.1
16.1
Germany
19.3
28.6
34.6
Greece
4.8
29.4
79.3
Hungary
1.9
78.6
81.4
Ireland
0.6
N.A
N.A
Italy
11.8
16.3
20.4
Netherlands
11.7
29.7
14.5
Poland
51.3
83.7
82.6
Slovakia
19.5
71.6
92.7
Spain
13.4
14.2
N.A
UK
34.8
10.1
N.A
E U27
19.2
24.5
29.4
Source: UNCTA D, BP Statistical Review
* 1. Natural gas data is from BP statistical review, as UNCTA D
data was underestimating gas imports
2. Natural Gas data is for Europe (continent) and not EU27
Source: UNCTAD, BP statistical review, Deutsche Bank
Two different possibilities have been frequently mentioned. First, a “mild”
scenario where only the share of Russian gas supply transiting via Ukraine is
hit as part of the ongoing conflict with Ukraine. This would create specific
issues for southeastern Europe but not for Germany as the northern route
would still be open. Second, a “peak scenario” in which Russia would cut or
reduce its supply to Europe across the board. The latter would be particularly
harmful to Moscow itself since exports of energy to Europe account for 38% of
total Russian exports.
The GIE (Gas Infrastructures Europe) – federation of EU gas operators – sent
out a reassuring communique last week, pointing to: i) the versatility of the
European grid, which would allow some West/East flows and bring liquefied
gas (possibly from the US) to replace what would be lost from a cut in Russian
supply, and (ii) the high level of stocks after a mild winter. However, the
statement was ambiguous as to the capacity to deal with a complete
severance of Russian gas supply, i.e. including the North Stream.
Using the GIE data, we can estimate how long Germany could hold out
without any Russian supply. Current gas inventories represent around 15% of
annual consumption. Two-thirds of gas imports come from non-Russian
suppliers. This means that, should Russia completely turn the tap off (again, a
decision that would be extremely costly for Moscow), Germany would be
roughly 20% “short” on its annual consumption (which could probably be
plugged by more shipments from non-Russian suppliers, assuming no
technical issues arise). Tensions would probably not emerge before next winter,
since gas consumption is low during spring and summer. One issue, however,
would be how gas could be brought to the more dependent Eastern European
neighbours of Germany in this manageable but still tense configuration in
Germany alone.
The issue for us, though, is not necessarily what would happen in a
“catastrophic” scenario where energy supply in eastern EU would be severed,
triggering so much disruption in economic activity there that a recession would
Page 6
Deutsche Bank AG/London
20 March 2014
Data Flash: Who is exposed to Russia?
ensue, with large spill-over effects for Western Europe given the extreme trade
integration of the two sub-regions. After all, even at the height of the cold war,
Russia always supplied energy to the West. We are more concerned with the
negative confidence effect that the crisis could trigger.
Indeed, the Ukrainian crisis creates a diffuse sense of uncertainty in Europe,
adding to the questions hanging over the emerging markets in general and
China in particular, as well as to the difficulties of making sense of the recent
dataflow in the US, potentially leading to a “wait-and-see attitude”, which
would be detrimental to the ongoing subdued recovery in the Euro area.
Deutsche Bank AG/London
Page 7
20 March 2014
Data Flash: Who is exposed to Russia?
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
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Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Gilles Moec
Page 8
Deutsche Bank AG/London
20 March 2014
Data Flash: Who is exposed to Russia?
Regulatory Disclosures
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countries:
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relating
to
our
obligations
under
MiFiD
can
be
found
at
http://www.globalmarkets.db.com/riskdisclosures.
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Page 9
David Folkerts-Landau
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Member of the Group Executive Committee
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Research
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