LONDON — Natural gas is one of several commodities caught in the crossfire of the conflict in UkraineIf Russia stops its exports, it could cause a serious economic impact on Europe.

The war has created extreme volatility in global commodity markets. In recent weeks, oil, nickel, and wheat have surged alongside natural gas due to supply-side risk.

Once again, natural gas is front and centre. Russian Deputy Prime Minister Alexander Novak warnedMoscow might stop its Nord Stream 1 pipeline exports to Germany, and other European countries.

He made these comments partly in reaction to Germany’s recent decision to stop certification of Nord Stream 2 and the associated highly controversial Nord Stream 2 pipelines. barrage of economic sanctions that have been imposed by Western powersSince then, the goal has been to cripple Russia’s economy.

The U.S. has announced that all Russian oil and gas imports are prohibited. Meanwhile, the U.K. said it plans to phase out Russian imports at the end of this year. The European Union has plans to cut Russian gas imports by two-thirds but its move isn’t quite as severeThis is due in large part to its dependence on Russian oil.

About 25% of the energy produced in the Euro area comes from natural gases, and Russia is responsible for about a third of all imports. According to Goldman Sachs, any further disruptions in gas imports could have serious knock-on effects on the euro area’s economic output and inflation.

Sven Jari Stehn (Goldman) and his colleagues presented various scenarios in Monday’s research note and looked at how they could impact Europe’s economy.

They included one in which no additional supply disruptions are occurring beyond the flow reduction that began last September; another where gas imports via Ukraine are stopped for the remainder of 2018, and yet another scenario in which all Russian-pipeline imports into Europe are halted through 2022.

Stehn explained that by mapping out gas price fluctuations and physical supply limitations into GVA effects (gross values added), we can estimate that 2022 will see a drop in GDP growth for the Euro area by 0.6pp, and the U.K. of 0.1pp relative our baseline forecast, assuming no additional gas supply disruptions.

Stehn said that Germany’s impact is more likely (-0.9pp) due to their high dependence on Russian gas.

“Russia could stop all exports of its pipelines, which would result in a drop in Euro-area GDP growth by 2.2pp per year in 2022 relative the baseline forecast. This scenario has significant impacts on Germany (-3.4pp), and Italy (-2.6pp).

The scenario that gas flows through Ukraine would be halted adds 0.7 percentage points on the inflation side to Goldman Sachs’ Euro area inflation forecast peaking in December 2022.

Stehn explained that gas prices could increase due to Russia’s pipeline shutdowns. Our headline inflation forecast could go up to 1.3pp, with possibly significant transfer-through into the core price.

“In the U.K. we anticipate a range between 22%-90% for October’s price cap in the three scenarios. This signales two-sided risk surrounding our current assumption that 55%.

The regulator for the United Kingdom will examine October’s U.K. energy price caps. From April 1 this year, the cap is set to rise by 54% from its previous level to £693 ($906) per year to account for soaring energy prices even before Russia’s invasion of Ukraine. Goldman expects a 55% increase to be made in October. A 90% rise is possible in case of total import shut down.

The potential for further increases in energy prices has fuelled fears of a “stagflation” periodIn this country, high inflation and low economic growth are threatening the world’s economy.

Unlikely to be total cut off

BCA Research’s strategists said Wednesday, that Russia’s dependence on European exports and shrinking revenue sources elsewhere was a reason for concern.

“Even though Moscow struck a new agreement with Beijing to provide China’s CNPC an additional 10 million cubic meters of gas per year, construction on the planned new pipeline will still take between two and three years,” stated Mathieu Sabary, BCA Research chief European strategist.

Russia’s dependence on Europe for funding its incursion into Ukraine will be necessary in the interim to ensure stability at home.

Savary said, however that Novak’s threat continues to highlight the danger of disruption in European energy supplies. This will continue upward pressure on natural gasoline prices in the short term.

Savary stated that “until the risk premium in oil prices and natgas price dissipates”, high energy costs would lead to periods of stagflation within the Eurozone.

“Investors need to be cautious about European risk assets in the short-term.”