Kremlin's attack impacting Estonian economy via energy products

TALLINN - Raoul Lattemae, head of the fiscal policy department at the Estonian Ministry of Finance, says the Kremlin's aggression against Ukraine can affect the Estonian economy in many ways, first and foremost via energy products. 

First, according to Lattemae, exports and imports of goods and services from Russia, Belarus and Ukraine will decrease due to sanctions, counter-sanctions and military action.

Second, we are affected by what is happening in the world's financial and commodity markets and the global economy. And third, military action undermines confidence globally, in Europe and in the countries bordering Russia.

"The impact of exports and imports on Estonia, Europe and the world is likely to remain limited. Russia's share in Europe is high for certain products, notably commodities such as oil and gas, but Russia's overall share in global trade is relatively small," Lattemae said. 

Russia's share of the global economy is nearly 2 percent, and is about as small in Estonia's foreign trade.

"By comparison, the Scandinavian and Baltic countries bordering on the Baltic Sea account for the same proportion of the world economy. Thus, Russia's military aggression against Ukraine currently affects us primarily through energy products, but the impact of other trade deteriorations on both the world and Estonia is likely to remain subdued," the official said. 

Russia's attack on Ukraine was met by the global financial markets with a rise in commodity prices and a fall in share prices. As a first reaction, price movements remained in the single digits in percentage terms. Oil prices had risen by nearly 8 percent as of midday on Feb. 24; gas prices were up nearly 6 percent. Global stock markets had fallen by nearly 4 percent in Europe and nearly 2 percent in the rest of the world.

"It is very difficult to give an unambiguous answer to the question of how high oil or gas prices could go. It is, however, appropriate to take a look back at how the global economy has behaved in previous military conflicts related to Russia," Lattemae said.

According to Wikipedia, Russia has been involved in 13 military conflicts since the break-up of the USSR. The world market price of oil has been quite volatile in this century, but the relationship between price movements and military conflicts is not entirely uniform.

Oil prices did react by a temporary doubling to the Gulf War, which took place more than 30 years ago and in which Russia did not participate. However, later, and especially in this century, other factors -- in particular the growth/decrease in demand in Asia and the world as a whole -- have played a more important role in price volatility.

In 2014, after the occupation of Crimea, global oil prices fell due to the arrival of large quantities of US shale oil on the market. The current 8 percent price increase is within the range of the volatility seen in the last 20 years, but could still accelerate price increases globally and in Estonia alike, Lattemae said. 

The link between gas price movements and Russian military conflicts has been even smaller in the past. It is noteworthy, of course, that gas prices in Europe have been driven up by Russia since April last year. Since gas and oil revenues make up a significant part of Russia's fiscal receipts, higher prices have helped to fill the Russian treasury.

"It is very difficult to speculate at this point whether or not gas supplies could be temporarily halted in the current conflict, but the price of gas could be a potential lever that could be used to inflict some economic damage on energy-dependent Europe. In previous Russian military conflicts gas supplies have not been cut off by Russia, as they are an important source of revenue for Russia's state budget," Lattemae said. 

"All in all, the reaction of the world's financial markets has remained within expectations and, despite the appallingness of the current conflict, reflect quite accurately Russia's role in the global economy. Over the past 30 years, the private and public sectors in Estonia have repeatedly been confronted with situations of similar and even greater magnitude and impact, and have been able to withstand these impacts successfully," Lattemae added.