The effects of global risks on the economy

There is a common belief among economists that 2019 and 2020 will be very tough years for the world economy. The number of reports from various institutions in this direction is also increasing. That is why, even though it may not be directly related to the economy, any development which has the potential to affect the economy has started to garner the attention of economists. One of these developments was the tension between Russia and Ukraine which occurred last weekend. Tough days await the European Union (EU) which has already suffered greatly from Brexit and has not still come to the expected levels in terms of indicators.

EU, energy, and the Russia-Ukraine tension

In the Fourth EU Energy Summit that took place in Brussels in last April, the EU commissioner for climate action and energy said in his speech, “Looking at our short-term geopolitical and energy situation, it is clear that Russia will remain a key energy supplier for the EU.” This statement once again stressed the EU’s dependency on Russia in terms of energy.

Russia is a very important natural gas provider for the EU. Thirty-seven percent of natural gas comes from Russia and this gas is coming through Ukraine. Europe was left without any natural gas when an energy crisis broke out between Russia and Ukraine in 2009. That is why any distress between Russia and Ukraine is causing great worry in the EU.

In the previous crisis, Europe was left without any natural gas in the middle of winter when Russia stopped providing natural gas to Ukraine. During those days, there was reports stating that Europe without natural gas is a “human tragedy”. In this respect, even a minor crisis related to natural gas constitutes a serious risk for the EU economy, which is already experiencing an economic slowdown.

The European central bank is worried

The day following Sunday night when the hot conflict occurred between Ukraine and Russia, the President of European Central Bank Mario Draghi made a speech in the European Parliamentary Commission and stated that the data available since September is lower than expected levels. While Draghi said that risks related to protectionism, the vulnerabilities of the developing markets and the volatility in the financial market stressed the need to continue a significant amount of monetary incentives. Although it seems that an agreement was reached, we still have not seen the clear effects of Britain’s exit from the union. Moreover, when we consider the fact that there is still the problem of Italy’s unapproved budget and the possibility that this problem will create a domino effect, we can say that things don’t seem good in the “Western” front.

It seems that growing global risks, Trump’s protectionist policies (to put it mildly), oil prices, regional risks, and negative expectations are going to be determining factors with regards to monetary policies.

Could the decrease in oil prices make Russia more aggressive?

Of course, oil prices concern Russia very closely as an energy provider. In this sense, the downward trajectory of oil prices has a critical importance in relation to the Russian budget. However, the views that link the decreasing oil prices to the Ukrainian crisis are not so realistic. Because, in the federal budget for 2018-2020 which was accepted by Duma, it is predicted that the price of a barrel of oil will decrease to $43,8 in 2018, and in 2020 it will decrease to $42,4. On the other hand, it is also predicted that the share of oil and natural gas sectors is going to be around 33 percent in 2020, while it is around 39 percent today. In this respect, the latest tension between Ukraine and Russia has more geopolitical reasons than economical, however geopolitical risks nowadays are affecting the economy more than the economic indicators.

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