IMF: How a Russian Natural Gas Cutoff Could Weigh on Europe’s Economies

Russia’s invasion of Ukraine has further darkened the global growth outlook, with the European economy facing a serious setback given trade, investment, and financial links with the warring countries. Now, Europe is enduring a partial cutoff of natural gas exports from Russia, its largest energy supplier.

The prospect of an unprecedented total shutoff is fueling concern about gas shortages, still higher prices, and economic impacts. While policymakers are moving swiftly, they lack a blueprint to manage and minimize impact.

Three new IMF working papers examine these important issues. They examine how fragmented markets and delayed price pass-through can aggravate impacts, the role of the global liquefied natural gas market in moderating outcomes, and how such factors could play out in Germany, Europe’s largest economy.

Our work shows that in some of the most-affected countries in Central and Eastern Europe—Hungary, the Slovak Republic and the Czech Republic—there is a risk of shortages of as much as 40 percent of gas consumption and of gross domestic product shrinking by up to 6 percent. The impacts, however, could be mitigated by securing alternative supplies and energy sources, easing infrastructure bottlenecks, encouraging energy savings while protecting vulnerable households, and expanding solidarity agreements to share gas across countries.

What determines exposure?

Dependence on Russia for gas, and other energy sources, varies widely by country.

European infrastructure and global supply have coped, so far, with a 60 percent drop in Russian gas deliveries since June 2021. Total gas consumption in the first quarter was down 9 percent from a year earlier, and alternative supplies are being tapped, especially LNG from global markets.

Our work suggests that a reduction of up to 70 percent in Russian gas could be managed in the short term by accessing alternative supplies and energy sources and given reduced demand from previously high prices.

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