EXECUTIVE SUMMARY

• The escalation of the conflict between Russia and the Ukraine is likely to have important economic and financial consequences. through three main transmission channels — energy, trade, and the financial sector — depending how current and future sanctions will play out. Note that Russia is in a stronger position than it was in 2014 economically speaking.
• As the world reopens from Covid19 with higher inflation, disrupted energy and supply chains, and sensitive financial markets, our scenario “Conflict escalation” highlight impacts on Europe’s inflation (+100bps), growth (-0.5pp), equity markets (-10%), sovereign and corporate spreads (+20-60bps), and policy outlook (dovish pivot, fiscal support reloaded to offset impact). Severity of sanctions is a clear gradient for economic and financial markets outcomes.
• In an extreme “Black-out” scenario in which Russia turns off Europe’s gas supply, the natural gas price would rise to an average of 140 EUR/MW, because alternative suppliers are limited; this would add up to +2.5pp to our current Eurozone inflation forecast of 3.8% this year. As for the headwinds to economic growth, a recession will be all but certain.