IMF: The Loss of Russian Gas Would Hit Central and Eastern Europe Hard

The suspension of Russian gas deliveries would severely impact the economies of Central and Eastern Europe, although alternative supply sources and liquefied gas would mitigate the blow, according to a study by the International Monetary Fund (IMF).

Reduced deliveries of Russian gas are already affecting economic growth in Europe, but the consequences of a complete shutdown could be significantly more severe, the authors of the study, published on Tuesday on the IMF’s official blog, believe.

European infrastructure and global markets are currently managing to ‘cover’ a 60% reduction in Russian shipments since June last year, alongside a nine percent decrease in overall consumption in the first quarter compared to the same period in 2021 and alternative supply sources, particularly LNG.

Even a 70% reduction in deliveries from Russia would be manageable in the short term through alternative supply and energy sources and reduced consumption influenced by high prices.

Diversification would be much more difficult if Russia completely halts deliveries, as bottlenecks would complicate the rerouting of gas in Europe, given insufficient import capacities and transport restrictions.

– These factors could lead to a loss of 15 to 40 percent of annual consumption in some Central and Eastern European countries – conclude IMF experts.

If Russia halts deliveries, the IMF’s fragmented market model, which assumes that gas would not reach where it is most needed regardless of how much prices rise, would hit the economies of Central Europe and Italy the hardest.

The Hungarian economy could shrink by more than six percent, and a strong decline in activity would also be recorded in the Czech Republic, Slovakia, and Italy, by more than five percent. At the EU level, GDP could decrease by between 1.8 and 2.7 percent according to this model.

Croatia should not suffer negative economic consequences in the event of market fragmentation, nor should Belgium, Portugal, Ireland, Britain, Denmark, and Sweden, according to IMF experts’ calculations. Integrated gas markets at the European and global levels would mitigate the blow that the loss of Russian gas would deal to the economy, with EU GDP falling by between 0.3 and 1.4 percent.

Hungary would also record the largest GDP decline according to this model, by just over three percent, followed by Slovakia with an estimated activity decline of just over two percent. Italy would also see a similar decline. The German economy would fall by between 0.4 and 1.3 percent in this case.

In the event of a loss of Russian gas, Croatia would see a decline in activity ranging from 0.7 to 2.2 percent, according to a scenario based on the assumption of integrated markets, the study shows.

If markets remain integrated at the EU and global levels, the LNG market should mitigate the economic consequences of the loss of Russian gas, as reduced consumption would be distributed across all countries with access to the global market, the IMF explains. Without LNG support, the economic consequences would be far greater, and the price spike would only reduce consumption in the EU, they add.