As MNC executives responsible for Western Europe dissect the events unfolding in Ukraine’s Crimea region, they will fall under more pressure to digest mounting media news and interpret current events’ impact on their business. To address the localized impact of increasing hostilities in Crimea, our latest podcast, introduced in the preceding blog post, focuses on the factors that will impact multinationals’ Ukraine and Russia business regardless of the scenario that unfolds in Ukraine’s Crimea region.
However, the impact of Ukraine’s crisis is extending to the regional level, and could impact European recovery. Executives should act now to consider how the following possible impacts will affect their ability to meet targets in 2014:
- Any disruption in gas lines will push up prices in Europe. A Gazprom (Russia) decision to cease gas flow to Ukraine would disrupt gas flows to Europe, which only has 18 days of gas reserves and easily could be outlasted by a political crisis. Decreased gas flows would thus increase energy prices and hurt any chance of recovery as consumers focus on inelastic energy costs and away from elastic purchases of goods and services. Europe is Russia’s largest export market, creating disincentives for a gas cutoff that would leave a large hole in the government budget. The Russian government, however, has often put political concerns ahead of economic ones
- Germany could be the worst hit. Most of Germany’s gas supply flows directly through Ukraine, and constitutes about one-third of its energy mix. German consumers also suffer from the highest electricity prices in Europe, meaning that the country’s exposure to increased energy prices would force the government to abandon its new energy rebalancing policies in favor of keeping prices manageable for its citizens and industry. The result would be increased short-term energy costs and a return to government deficit. Furthermore, Germany’s reliance on exports means that lower demand due to regional volatility would reduce its prospects for outperforming the eurozone in 2014
- Even European bank exposure to Ukraine could reduce lending activity in Western Europe. While the Ukrainian credit market is almost entirely dominated by local players ─ only Raiffesen of Austria is heavily exposed ─ the European banking system is so sensitive that one bad bank could accelerate the credit contraction already taking place in Europe
- Continued crisis in Ukraine could disrupt supply chains, which would increase costs. Companies should consider what disrupted supply chains would mean for getting their products to market, and include distributors in the conversation to gain local knowledge and buy-in, and ensure adherence to any contingency plans
Now is the time for executives to build contingency plans, particularly focusing on what increased activity in Ukraine would mean for pricing. Companies that are able to course correct strategic plans and allow for increased costs will be better-equipped to address regional volatility, meet their 2014 targets, and gain market share.