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‘Trade rupture’ between Russia, Germany could cause financial shock: S&P Global

There could be a financial shock if there is a “trade rift” between Russia and Germany, S&P Global’s chief economist warned Tuesday.

“Looking at a downward scenario… there are different ways to play that, but we think the one that would really move the macro needle is some sort of trade rift between Russia and Europe,” Paul Gruenwald told CNBC’s “Squawk Box” Asia.”

“This isn’t just shutting down the gas — whether Germany stops buying or Russia cuts it,” he added.

Following Russia’s unprovoked invasion of Ukraine, several world powers, including the US, Japan and Canada, have hit Moscow with sanctions. The European Union is considering banning oil imports from Russia and has pledged to eventually cut its dependence on Russian gas by two-thirds.

Russia, for its part, has demanded that so-called “unfriendly” countries pay for gas in rubles, citing countries that have imposed heavy economic sanctions to isolate Russia over its unprovoked attack on Ukraine.

The European Union receives about 40% of its natural gas from Russian pipelines and about a quarter of it flows through Ukraine. Germany gets about half of its natural gas from Russia.

That would lead to… lower GDP, lower employment, lower confidence — and then we’d have a kind of macro-financial shock.

Paul Gruenwald

chief economist, S&P Global

Gruenwald added: “We have the energy complex, we have commodity prices, we have industrial inputs that Europe imports, like nickel and titanium and other things like that.”

Research and consultancy Wood Mackenzie also warned that the global economy could undergo “more permanent changes”, with global trade potentially changing as a result of the crisis.

“If the Covid-19 pandemic revealed the need to shorten supply chains, the war in Ukraine underlines the importance of reliable trading partners,” study director Peter Martin wrote in a note on Tuesday.

“These forces could lead to a lasting realignment of world trade. The global economy is becoming more regionalized – shorter supply chains with ‘trusted’ partners.”

Trade between Germany and Russia

A trade rift between Germany and Russia could put a dent in German manufacturing — one of three global manufacturing centers alongside the US and China, Gruenwald said.

“That would lead to… lower GDP, lower employment, lower confidence — and then we’d have some kind of macro-financial shock from that. So that’s the kind of scenario that we’re worried about that could move the needle ,” he warned.

Trade between Germany and Russia rose significantly in 2021 compared to the previous year, with the value of goods rising 34.1% to 59.8 billion euros ($65 billion), according to Germany’s Federal Statistical Office.

Germany’s imports from Russia rose significantly last year, up 54.2% from 2020. Exports also rose, but at a slower pace than imports – up 15.4%.

The main products Germany exported to Russia were vehicles, machinery, trailers and chemical products, the agency said. The main exports from Russia to Germany were crude oil, natural gas, metals and coal.

Russia accounted for 2.3% of total German foreign trade and was the fourth most important country for German imports outside the European Union in 2021.

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