Can the Ukraine conflict plunge US, Europe into recession?

The entry of Russian forces in the Crimean region of Ukraine has sparked a war-like situation between the two countries.

While analysts are hoping that the situation will defuse soon, given the way major global players such as US and other Western nations have denounced the move and have warned of action, a worsening of the situation could have an impact for both the Russian and the global economy at large.

The biggest impact on the global economy could be on prices of natural gas. Russia is the world’s largest exporter and the second-biggest producer of natural gas in the world, according to a Wells Fargo report.

“Roughly one-half of Europe’s natural gas consumption is imported and the region is very sensitive to developments in the market for natural gas,” the note says.

If Russia wanted to punish the West for its support for Ukraine, it could potentially impose an embargo of energy exports that could have “crippling repercussions” for EU economies, Wells Fargo Global Economist Jay H Bryson writes.

Bryson adds that not only would an energy embargo impart a significant blow to European industrial production by forcing factories to close temporarily due to lack of energy, but higher energy prices would weaken consumption expenditures via negative effects on consumer purchasing power.

“Europe would probably plunge back into recession again,” he writes.

Higher petroleum prices could have a cascading on US consumer spending, and a recession in Europe could cause US exports to weaken, the economist builds in in his worst-case scenario. “Depending on the size and longevity of the shock, the U.S. economy could slide back into recession.”

Russia to get impacted too

But an energy embargo would not be pretty for the Russian economy too, and could impact its balance of payments.

“However, the country does not need to use its ample foreign exchange reserves (nearly $500 billion) to defend a currency peg as it did in the weeks preceding the August 1998 financial crisis. The country can simply allow its currency to depreciate. Indeed, the ruble has weakened roughly 10 percent against the dollar and the euro since the beginning of the year,” the report says.

Energy exports to the European Union may be equivalent to 10 percent or so of Russian GDP, according to rough estimates. “With the Russian economy barely growing at present--real GDP was up only 1.2 percent on a year-ago basis in Q3-2013--any energy embargo on Europe would plunge Russia into recession as well. Therefore, any decision by the Russian government to embargo energy exports would not be taken lightly.”

Financial markets should recover quickly from the recent bout of volatility should the crisis get resolved quickly, Bryson writes, but adds volatility will increase if “Russia decides to play the energy card. The world could potentially be facing another oil shock á la the Arab oil embargo of 1973-74.”