The impacts of the military and political crisis in Ukraine on the Czech Republic
This box discusses the estimated impacts of the military and political crisis in Ukraine on the Czech Republic. First, we quantify the immediate direct impacts of the drop in foreign trade with Ukraine and Russia caused by the trade sanctions that have already been adopted. In addition, the NiGEM global economic model is used to simulate the effects of a hypothetical sharp decrease in Russian imports in order to more broadly quantify the economic impacts on the Czech Republic if the economic and political situation deteriorates further.
Foreign trade turnover with Russia and Ukraine accounted for 4.5% and 0.8% respectively of the Czech Republic’s total foreign trade in 2013. The escalation of tensions between the West and Russia, which has resulted in mutual trade restrictions,1may have an adverse effect in the shape of a drop in Czech machinery exports to both countries and possibly also a decline in tourism revenues. On the import side, this would necessitate a re-direction of supplies and an increase in imports of oil, gas, iron ore and semi-finished products from alternative territories. The immediate direct impact of the EU’s trade sanctions against Russia and the Russian sanctions on food imports can be expected to be insignificant from the macroeconomic perspective (but may be sizeable for individual corporations or sectors). The drop in exports will not exceed CZK 1 billion in 2014 and will stay below CZK 2 billion in 2015.
The impact of the Ukraine conflict on the Czech economy was further simulated using the NiGEM global economic model, assuming a hypothetical decline in Russian real imports of 20% for one year (from 2014 Q4 to 2015 Q3). In addition to trade sanctions, the drop in imports may stem from lower growth of the Russian economy and depreciation of the rouble (see Charts 1 and 2). According to the simulation, this negative demand shock would adversely affect the Czech economy not only via the direct trade channel, but also indirectly through a negative impact on the euro area, whose growth would be 0.2 percentage point slower in 2015 as a result. The effect on euro area inflation would not materialise until 2016, when price growth would be 0.1 percentage point lower. The effect on oil prices and the dollar-euro exchange rate would be almost negligible. The Czech economy would also record slower growth in 2015 (by 0.4 percentage point), followed by a slight acceleration in 2016 (see Table 1). As in the euro area, the effect on inflation would be negligible. The 3M PRIBOR would be slightly lower.2
Chart 1 (BOX) GDP and inflation outlooks for the Russian Federation for 2014 according to CF
The outlooks for the Russian economy have been worsening as a consequence of increasing tensions in Ukraine and subsequent sanctions
(annual percentage changes)
Chart 2 (BOX) Exchange rate of the rouble against USD and EUR and Brent crude oil prices
Capital outflows from the Russian Federation and a fall in the oil price have caused the rouble to weaken
(January 2012 = 100; right-hand scale: USD/barrel)
Table 1 (BOX) Simulation of the effect of lower Russian imports on the Czech Republic in the NiGEM model
A drop in Russian imports of 20% lasting one year has no substantial impact on the Czech economy
In the event of a permanent shock to Russian imports of the same magnitude (a 20% decrease), the impact on the Czech Republic in the near future would be comparable to that in the one-year shock scenario. Differences between the two scenarios are visible only in the longer term – the effects of the permanent shock do not fade away quickly in 2016, but decrease only gradually over a longer period of time. In such case, Czech GDP would then slow in 2015 to roughly the same extent as in the previous scenario and would be 0.1 percentage point lower year on year in 2016 (compared to growth of 0.1 percentage point in the one-year shock scenario). The impact on inflation would remain negligible. A slightly larger effect would be observed for the 3M PRIBOR in 2016 (towards a lower level).
1 In the third phase of the EU’s sanctions against Russia in September 2014, restrictions on trade in weapons, exports of dual-use goods and technology and exports of technology for the oil industry and related sectors were adopted (relating to new contracts only, not existing ones).
2 This simulation does not take into account the existence of the zero lower bound on interest rates. The scenario from the g3 core prediction model which takes into account the aforementioned 20% drop in Russian real imports on foreign variables implies very similar second-round effects on the Czech economy.