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

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A financial shock could be on the cards if there’s a “trade rupture” between Russia and Germany, warned S&P Global’s chief economist on Tuesday.

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

“This is not just cutting off the gas — whether Germany stops buying or Russia cuts it off,” he added.

Many world powers have responded to Russia’s unprovoked invasion in Ukraine. Canada, Japan, the U.S. and others. hit Moscow with sanctions. The European Union has begun to consider whether it should ban Russian oil imports. pledged to eventually cut its reliance on Russian gas by two-thirds.

Russia has for its parts demanded it so-called “unfriendly” countries pay in rubles for gasThese sanctions are imposed to punish Russia for its aggression in Ukraine.

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

That would feed through to … lower GDP, lower employment, lower confidence — and then we would get a kind of a macro financial shock out of that.

Paul Gruenwald

chief economist, S&P Global

Gruenwald said: “We have the energy complex. We’ve got commodity price. We’ve got industrial inputs. Europe imports nickel, titanium, and other such things.”

Wood Mackenzie Consulting, an international research firm, also warns that there could be “more permanent changes” in the world economy with trade potentially being altered by the crisis.

Peter Martin, research director of the University of Michigan wrote that the Covid-19 epidemic highlighted the need to reduce supply chains. The war in Ukraine also underscores the importance for reliable trading partners.

These forces may lead to a permanent realignment in global trade. The global economy becomes more regionalised — shorter supply chains with ‘reliable’ partners.”

Germany-Russia trade

A trade rupture between Germany and Russia could put a dent in German manufacturing – one of three global manufacturing centers besides the U.S. and China, Gruenwald said.

“That would feed through to … lower GDP, lower employment, lower confidence — and then we would get a kind of a macro financial shock out of that. “That’s what we worry about, that could drive the needle,” he said.

In 2021, Russia and Germany trade grew significantly compared to last year. According to Germany’s Federal Statistical Office (Germany), the value of goods grew 34.1% to 59.8billion euros ($65 Billion).

Last year’s increase in Russia imports by Germany was remarkable. They increased 54.2% over 2020. Exports also rose but at a slower pace than imports – rising 15.4%.

According to the agency vehicles, machinery, trailers, and chemicals were the main exports from Germany to Russia. Russia exports the majority of its crude oil and natural gas to Germany, as well as metals, coal, and other chemicals.

Russia was responsible for 2.3% total German foreign trade and was fourth in importance for German imports from countries outside the European Union by 2021.

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