The total interruption of trade with Russia will weigh more on growth and inflation

The Bank of Spain has warned this Tuesday that a hypothetical interruption of imports of energy raw materials from Russia could have a significant effect on the Spanish economy, which would have an impact on GDP of between 0.8% and 1 .4% and an increase in inflation of between 0.8 and 1.2 percentage points throughout the first year compared to a context without these restrictions.

This is stated in the report 'Economic consequences of a hypothetical trade closure between Russia and the European Union', in the scenario considered most likely for the Bank of Spain, the reduction would be 1.1% of GDP and the increase in inflation of 0.9 percentage points. The supervisor's own forecasts have already been lowered to 4.5% and its estimate of inflation for the whole year stands at 7.5%.

"The difficulty in replacing these products in the short term would mean a reduction in the energy supply and a worsening of the current inflationary episode, which would imply, in both ways, a burden on economic activity," warned the body headed by Pablo Hernández. of Cos in the report.

In any case, the Bank of Spain has underlined that given that dependence on Russian energy is less in Spain than in the rest of the European economies, the effects on the economy would be notably smaller. In this sense, he pointed out that in the case of other European economies, the impact would be between 1.9% and 3.4% for Germany, 1.2% and 2% for France, and 2. 3% and 3.9% for Italy. The impact on the EU as a whole would be between 2.5% and 4.2% of GDP and an increase of between 1.6 and 2.7 points in the inflation rate. "These values ​​should be considered as short-term impacts and whose magnitude would be reduced as the substitution capacity of Russian energy imports increases," the agency pointed out.

Energy raw materials from Russia are the products whose import restrictions could have the greatest impact on the activity and prices of the European economies.

The intensity of the impact would be heterogeneous among the countries of the European Union (EU) depending on their energy dependence on Russia. For example, around 18% of energy mining products (gas and coal) and 9% of oil products consumed in the EU are imported from Russia, compared to 3% and 2.5 %, respectively, in the case of Spain.

However, if the interruption of imports affected only energy mining (which includes both natural gas and coal), the impact would be greater than in the case of the suspension of imports of petroleum products. Specifically, the approximate proportions within the total effects would be, respectively, 70% and 30%.

In general terms, the most affected sectors would be those that are more intensive in energy use, such as transport, the basic metals industry or the chemical industry, while the effect would be more limited for service sectors, such as real estate, whose activity would hardly be affected. However, the contraction of added value in each of the sectors is due not only to the direct impact due to higher energy prices, but also to the propagation of these direct effects through the production chains.

For this reason, the increase in costs in some sectors with a central role in the production chains, such as, for example, transport or the chemical industry, will also affect the rest of the branches, regardless of the energy intensity of the latter.

In addition, the Bank of Spain points out that some sectors of the Spanish economy, such as vehicle manufacturing or pharmaceutical production, have a high level of dependence on their customers and suppliers located in other EU countries. Thus, these sectors would be indirectly exposed to production limitations in the rest of the countries due to energy restrictions.

Finally, in the event of a hypothetical total cessation of trade flows between Russia and the European Union, the impact on Spanish GDP would be -1.8%. In other words, it would imply an additional fall of 0.7 points with respect to the central scenario of cessation of energy imports (1.1%).

Guaranteed supply

The president of Sedigas (Spanish Gas Association), Joan Batalla, has assured that the gas supply is "guaranteed" for next winter thanks to the "diversification" of the Spanish system. Battle's words come just a few hours after the European Union has decided to partially veto Russian oil imports at the end of the year as retaliation for the Russian invasion, and before the negotiations of the community partners to address that same veto in the case of gas, on which Europe depends 40% on Russia.

The head of the gas organization, which is holding its annual meeting in Madrid this Tuesday, recalled that Spain has "a modern and resilient infrastructure" and an increasingly wide range of suppliers, which go beyond Russia, from where Spain imported barely 8% of gas last year. Specifically, gas now arrives from 14 different countries through the six active regasification plants, which represent 25% of all those available in Europe.

Furthermore, in terms of storage, Spain represents a third of all available reserves in Europe. At this time, the system has reserves that represent 66% of all available capacity, at the gates of summer, a stage of lower gas consumption. Looking ahead to winter, the EU recommends up to 80% of available storage, a figure that, according to Joan Batalla, in Spain it will not offer any problem to achieve despite the war conflict in Ukraine and its impact on the energy sector.

The same is not true in terms of prices. The president of Sedigas has recognized that for the remainder of 2022, the average cost of gas in the international market will be around 70 euros/MWh. It is a figure clearly lower than the maximum registered in March, when it reached 210 euros/MWh due to the war, although it will exceed the 2021 reference, when it moved around 40 and 50 euros/MWh, precisely the limit proposed by Spain. and Portugal to Brussels.

Faced with this high evolution of costs, Sedigas insists on applying "the European regulations that are not yet in place", such as the reduction of taxes, in relation to VAT or the Tax on Hydrocarbons. In the first case, the electricity bill has been reduced from 21% to 10% since last June. Joan Batalla has insisted that the limit on the price of gas, which the EU must still endorse for 'Iberian exceptionality', "must recognize the real costs of electricity generation from natural gas." He is referring to the gas used by combined cycle plants, which represent 16% of the entire electricity mix "but are essential for security" of supply. "This is not about aid or a subsidy," Battle stressed, "but about compensating for the real costs" in a country where there are no natural gas resources of its own.

Sedigas also points to long-term structural measures, such as the commitment to renewable gases to turn Spain "into a renewable gas hub at European level". Battle has considered that the current networks can also be used for this renewable product in the future, while insisting on the need to strengthen interconnections with the EU, which are now at a minimum.