Russia-Ukraine Crisis: Three macroeconomic scenarios – ABN Amro

Yesterday, Russia launched a full-scale invasion of Ukraine from multiple fronts. The crisis immediately plunged financial markets into risk-off mode. Strategists at ABN Amro focus on two key scenarios. They also offer an additional third, very negative scenario.

The price shock scenario (probability: 75%)

“Commodity prices continue their surge higher, and prices remain elevated for the foreseeable future until we see some moves to de-escalate the conflict. Price spikes will have macro-economic implications – primarily by pushing inflation higher, but with second-round effects likely dampening economic activity. With regards to monetary policy, while elevated inflation limits the scope for a significant easing of policy, the downside risks to growth make the risk even greater that the ECB will abort its planned end of asset purchases and rate hikes that we currently have in our base case for December.”

The supply shock scenario (probability: 20%)

“In addition to the price shock, physical supplies of gas are disrupted, perhaps as a counter-response to western sanctions. This depends naturally on just how severe western sanctions become. As well as even bigger gas price spikes, electricity markets would also see significant price surges as a spillover effect. As well as pushing inflation higher still, this would cause contractions in economic activity – i.e. we would essentially be facing a stagflation scenario. This would likely lead to the ECB stepping up asset purchases to stem spread widening.”

The severe supply shock scenario (probability: <5%)

“Western governments impose a ban on Russia’s use of the SWIFT payments system, causing major disruptions to all Russian commodity exports (i.e. not just gas, but also oil, metals and food). Alternatively, Russia itself imposes an export ban against Europe/the US. Either scenario would probably result in a global bottlenecks crisis. This would lead to even bigger shortages and price surges. For the global economy, we would expect the effects on growth (downward) and inflation (upward) to be intensified.”