Baltic economies take a hit from Ukrainian crisis

It is becoming increasingly evident that the Russian economy is going to take a very hard hit from the ongoing Ukrainian-Russian crisis – mostly due to the substantial capital outflows from Russia, but also due to the tightening of monetary conditions in Russia as a result of heavy intervention in the currency markets by the Russian central bank to prop up the Russian rouble. However, the wider European economy is also being affected negatively. While overall we believe that the overall negative impact on the European economy overall is fairly small – so far – there are major difference between the EU countries.

To assess how vulnerable different EU countries are to the crisis, we have constructed a Russia/Ukraine ‘vulnerability’ index.

The index focuses on the impact on three factors which can affect the growth and financial outlook for different EU countries. First, we look at the dependence on gas and energy imports from Russia. This is very important for countries such as the Baltic countries, which import all their gas from Russia. Second, we look at how much each country exports to Russia (and Ukraine) and how important this is for each economy. Finally, we look at how much of the total consumption basket is food and energy. Hence, food and energy prices are particularly sensitive to the crisis – due to uncertainties about Russian energy exports and due to uncertainties about Ukrainian corn and wheat exports.

The graph above shows the scores for each EU country. The score has been ‘calibrated’ so the average score for the EU countries overall is zero. The picture is very clear – nearly all the countries with above average ‘vulnerability’ to the Russian-Ukrainian crisis are Central and Eastern European countries. By far, Lithuania is the country most vulnerable to the crisis. The two other Baltic countries – Estonia and Latvia – are also very vulnerable.

At the other end of the scale are the UK and Ireland, which are likely to be economically and finally relatively unaffected by the crisis. The Scandinavian EU countries – Denmark and Sweden – are equally relatively protected from the economic and financial effects of the crisis. This is contrary to their northern neighbour, which, like the Baltic countries, is very vulnerable to the Ukrainian-Russian crisis.