Russia’s potential retaliation by cutting off gas supplies will lead to a surge in inflation and a sharp contraction across most European markets

As we predicted soon after the invasion, the EU has enacted sanctions on Russian oil. MNCs should expect a significant softening in demand opportunities and, in some cases, are likely to see a contraction across several key European markets. While Q1 2022 has likely been a strong quarter for firms, rising external challenges and an impending economic shock suggest that MNCs should revisit their customer segmentation strategies and focus on consumer and industrial segments that will be more resilient to the expected surge in inflation.


After over a month of debate, the EU agreed on a deal to end the import of shipped Russian oil (accounting for 66% of all imports of Russian oil into the EU) with immediate effect. Pipeline oil will still be permitted for now, in light of opposition from Hungary. The European Commission said the ban would affect an increasing share of oil in due time, as Germany and Poland (another 25% of Russian oil) are set to wind down pipeline imports to zero by the end of the year. The remaining 10% of Russian oil is likely to be curtailed in a future sanctions package. Russian gas exports are not a part of the sanctions package, but may be included in the future, while Moscow has threatened to cut off gas. Sberbank, Russia’s largest bank, was also cut off from SWIFT in this most recent sanctions package.

Our View

Russia may continue to maintain harsh capital controls to support the ruble and cut interest rates, as it has since the invasion, which has sustained consumer confidence while limiting energy export revenues in rubles and therefore budget revenues. Alternatively, Moscow can let the ruble weaken notably, further driving up inflation and hurting demand sentiment in order to protect export revenues and thus fiscal spending to support the declining economy. Most likely, the government will find a middle ground, weakening the ruble from its current highly overvalued rate but not drastically to cause economic panic domestically. In addition, having already noted that Russia is engaged in a proxy war with the West in Ukraine, Putin may effectively declare economic warfare against the EU and retaliate with a ban on gas exports, causing a severe rise in inflation across the continent.

The oil embargo also confirms our base case for European markets, which was contingent on the introduction of punitive measures on Russian energy. As such, most European markets will see contractions in H2 2022, with the depth of the recession severe enough in Germany, Italy, and the Netherlands that GDP for all of 2022 will be negative. The oil embargo will significantly increase energy prices across Europe, leading to a surge in inflationary pressures, and prompting additional government support to consumers. While some supply of oil remains, given that the sanctions do not affect imports via pipelines, the overall uptick in prices will still affect countries that have continued access to Russian supplies. Industrial output will also experience a notable shock, with many industrial sub-segments likely to reduce the number of working hours amid an acute rise in commodity costs and easing in both domestic and external demand.

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