Ukraine

a) The fallout from the Russian invasion of Ukraine will be stagflationary in that it will noticeably reduce global growth and raise global inflation over the next year.

b) The economic and financial sanctions already implemented will lead to a deep recession in Russia.

c) Targeting the Russian economy through a total ban on oil and gas imports carries a high risk of recession in European economies.

d) Weaponizing dollar finance is likely to lead to a significant shift away from the dollar as the dominant international currency.

Of our 43 US experts, 40 participated in this survey; of our 48 European experts, 41 participated – for a total of 81 expert reactions.

Potential stagflationary effects of the invasion

On the first statement about whether the fallout from the invasion will both reduce global growth and raise global inflation over the next year, more than three-quarters of the panel agree, and the rest are uncertain.

Weighted by each expert’s confidence in their response, 16% of the US panel strongly agree, 65% agree, 19% are uncertain, and 0% disagree or strongly disagree. Among the European panel (again weighted by each expert’s confidence in their response), 34% strongly agree, 44% agree, 22% are uncertain, and 0% disagree or strongly disagree.

Overall, across both panels, 26% strongly agree, 53% agree, 21% are uncertain, and no one disagrees.

Among the short comments that the experts are able to include in their responses, Karl Whelan at University College Dublin, who strongly agrees, says: ‘This is a classic negative supply shock. As we know from the 1970s, these shocks raise inflation and reduce output.’ Robert Shimer at Chicago, who says he is uncertain, accepts the diagnosis but not necessarily the outcome: ‘It’s an adverse supply shock. Whether that is inflationary depends on the monetary policy response.’ Larry Samuelson at Yale, who agrees with the statement, comments: ‘A protracted conflict, on top of existing supply-chain woes, will be detrimental to the world economy.’

Others who agree point to the likely drivers of lower growth and higher inflation. Christopher Pissarides at the London School of Economics (LSE) explains: ‘The effect will be through oil and other resources. Supply will be reduced so prices and production costs will rise.’ Franklin Allen at Imperial College London notes: ‘The invasion is affecting inflation already with oil, gas and many other commodities reaching high levels. Output may also fall.’ Markus Brunnermeier at Princeton adds: ‘Russian economy is not large, but the increase in energy prices will have adverse effects on several emerging markets and the European Union’. And Anil Kashyap at Chicago mentions: ‘Lots of disruptions, energy, neon, palladium (both important for chips), wheat.’

Among those who say that they are uncertain, Antoinette Schoar at MIT remarks: ‘There will surely be large economic repercussions, but I am not entirely sure that it will be stagflation.’ Olivier Blanchard at the Peterson Institute states: ‘I am reasonably confident about inflation, but less sure about output. Demand may be strong for other reasons.’ And Eric Maskin at Harvard observes: ‘Stagflation seems a plausible outcome, but I wouldn’t want to make a point prediction that it will happen.’

Others who are uncertain explain why. Kjetil Storesletten at the University of Oslo replies: ‘Russian inflation will reduce world growth. Unclear what it will do to inflation.’ And Jan-Pieter Krahnen at Goethe University Frankfurt comments: ‘Consequences of the war go both ways: supply chain and energy prices lower growth; energy substitution and military buildup do the opposite.’

Potential effects of sanctions on Russia’s economy

On the second statement about whether the sanctions implemented to date will lead to a deep recession in Russia, over 90% of the panelists agree and again none disagree.

Weighted by each expert’s confidence in their response, 16% of the US panel agree, 77% agree, 8% are uncertain, and 0% disagree or strongly disagree (totals don’t always sum to 100 because of rounding). Among the European panel (again weighted by each expert’s confidence in their response), 45% strongly agree, 49% agree, 6% are uncertain, and 0% disagree or strongly disagree. Overall, across both panels, 32% strongly agree, 61% agree, 7% are uncertain, and none disagree.

Comments from those who agree include Larry Samuelson, who says: ‘One already sees signs of disruption, though it is less clear that the effect will be a deep recession.’ Karl Whelan notes: ‘Russia runs a large non-energy current account deficit. Loss of access to supplies and services will hurt the economy.’ Jan-Pieter Krahnen suggests: ‘While I expect to see a recession because of global pull out from Russia, there are also some counter effects from rising energy revenues.’ Franklin Allen adds: ‘There is uncertainty about how effective sanctions will be and how much China will help avoid them. But it seems likely output will fall.’

Some panelists who agree note the significance of the coverage of sanctions and the length of time that they may be in place. Kenneth Judd at Stanford declares: ‘Yes, IF we maintain them. We cannot retreat. We must maintain this united squeeze on Putin.’ Daron Acemoglu at MIT says: ‘Yes, but recall that they are not fully comprehensive (yet). The West should halt all gas imports and exclude all Russian banks from Swift.’ Christopher Udry at Northwestern adds: ‘But stronger sanctions are still available and should be implemented.’

Among those who say they are uncertain, Markus Brunnermeier notes: ‘Growth was already low beforehand in Russia. Sanctions will take time to work.’ Patrick Honohan at Trinity College Dublin states: ‘Gas/oil exports can still pay for Russia’s imports. Recession more likely to be driven by collapse of domestic confidence.’ Christopher Pissarides says: ‘For as long as Russia can sell its oil it will have the revenue. It can then trade with Asia. But switching markets will be costly.’ And Robert Hall at Stanford observes: ‘Imposing autarky does not necessarily lower activity.’

Potential effects of banning oil and gas imports on Europe’s economy

On the third statement about whether a total ban on oil and gas imports risks recession in European economies, 70% agree, and most of the rest are uncertain. It is worth noting that there are considerably stronger expectations of a recession among the European panel. At the same time, several panelists express the view that even if an energy embargo were to be costly for Europe’s economies, it may still be desirable to implement one.

Weighted by each expert’s confidence in their response, 19% of the US panel strongly agree, 42% agree, 40% are uncertain, and 0% disagree or strongly disagree. Among the European panel (again weighted by each expert’s confidence in their response), 16% strongly agree, 61% agree, 19% are uncertain, and 3% disagree.

Overall, across both panels, 17% strongly agree, 53% agree, 27% are uncertain, and 2% disagree.

Among those who agree or strongly agree, Luigi Guiso at the Einaudi Institute for Economics and Finance notes: ‘Europe is heavily dependent on Russian gas, substituting it takes substantial time’. Christopher Pissarides concurs: ‘Germany is totally dependent on them. A recession in it and some others will bring recession to Europe.’ Similarly, Lubos Pastor at Chicago points out that: ‘Several large European economies, including Italy and Germany, are highly dependent on Russian gas.’ And Jose Scheinkman at Columbia explains: ‘Recessionary effect will come mostly from banning gas imports, since the effect from oil will be partially diluted by reshuffling supplies.’

Others who agree about the costs to Europe of an embargo recognize that it may be still be warranted. Jan-Pieter Krahnen argues: ‘Unfortunately, yes. I would nevertheless advocate closing Nord Stream 1, the existing gas pipeline, and to substitute via renewables.’ Barry Eichengreen at Berkeley says: ‘Note that this is not necessarily an argument against such a ban.’ And Ricardo Reis at the London School of Economics concludes: ‘But it is worth it.’

Some of those who are uncertain take a similar line. Christian Leuz at Chicago states: ‘Possible but hard to know. It should still be considered for political and humanitarian reasons. It might be a price worth paying.’ And Anil Kashyap comments: ‘Probably? But doubt we won’t try, and hard to gauge how much substitution is possible. Continued purchases are helping with foreign exchange for Russia.’

Others who are uncertain acknowledge the downsides but are not sure that they will lead to recession in Europe. Daron Acemoglu says: ‘Of course, it will be more costly for Europe, but not clear whether it will push them into severe recession.’ Jean-Pierre Danthine at the Paris School of Economics suggests: ‘Would clearly lead to a slowdown, possibly recession in some more dependent economies.’ And Karl Whelan responds: ‘Unsure. It is a negative factor but the recovery from the pandemic has been strong and household balance sheets are in good shape.’

Still others comment on potential shifts in the global energy market, Franklin Allen says: ‘Difficult to say at this stage as it may simply be that total supply remains the same and which countries supply Europe changes.’ And Kenneth Judd argues that: ‘We need to get OPEC to increase supplies and change some US policies to increase flow of oil to Europe.’

Jan Eeckhout at Universitat Pompeu Fabra Barcelona disagrees with the statement, noting: ‘There will be transition, but eventually Russian oil/gas will be consumed somewhere (China, India…) if not in Europe.’

Potential effects of weaponizing global finance on the dollar

On the fourth statement about whether weaponizing dollar finance is likely to lead to a significant shift away from the dollar as the dominant international currency, reactions are much more mixed than on any of the other questions.

Weighted by each expert’s confidence in their response, 24% of the US panel agree, 40% are uncertain, 32% disagree, and 5% strongly disagree. Among the European panel (again weighted by each expert’s confidence in their response), 23% agree, 33% are uncertain, 39% disagree, and 4% strongly disagree.

Overall, across both panels, 24% agree, 36% are uncertain, 36% disagree, and 5% strongly disagree.

Among those who agree, Jan-Pieter Krahnen claims: ‘This shift away from the dollar is under way already, as weaponizing of finance has become an element in international politics for years.’ Robert Shimer remarks: ‘More true for countries like Russia and China that may fear future sanctions.’ And Christopher Udry makes a comment similar to those about an energy embargo being costly for Europe but nevertheless worthwhile: ‘Although I am not sure about the “significant”. In any case, a price that is worth paying.’

Others who agree suggest potential alternatives to the dollar. Darrell Duffie at Stanford comments: ‘With weaponization of dollar payments, workarounds would move moderately toward cryptocurrencies and other payment arrangements.’ Lubos Pastor adds: ‘Gold, crypto, and renminbi are likely to gain market share at the expense of western currencies such as the dollar.’ Jose Scheinkman cautions: ‘But since measures also involved the euro, the yen, sterling and the Swiss franc, countries planning to invade democracies would be restricted to gold, crypto or renminbi.’

Among those who say they are uncertain, Maurice Obstfeld at Berkeley comments: ‘Not if it is only in cases like Russia now.’ Franklin Allen explains: ‘Maybe in the long run the role of the dollar will fall, but in the short to medium term network externalities may dominate.’ Jean-Pierre Danthine states: ‘The dollar will remain the (somewhat less) dominant international currency.’ And Abhijit Banerjee at MIT argues that: ‘All the forces that could lead to a move away from the dollar were already there. But may be this could act as a sunspot.’

Several panelists who disagree that the dollar will be diminished in status point to the size of Russia’s economy. Kjetil Storesletten says: ‘While Russia might try to rely less on dollars, the dollar’s dominant role will remain. Russia is too small.’ Pol Antras at Harvard concurs: ‘Russia’s economy is small. Need to see China’s ultimate reaction, though.’ And Pete Klenow at Stanford links to recent data on the Russian share of world GDP and trade: 1-2%.

Others who disagree focus on the absence of realistic alternatives to the dollar, some focusing specifically on China and its currency. Charles Wyplosz at the Graduate Institute, Geneva, asks: ‘Away from the dollar into what? Not renminbi, which is not really fully convertible.’ Daron Acemoglu adds: ‘What’s the alternative? Renminbi? It can be argued that China has ruined its international standing with its full-throated support for Russia.’ Patrick Honohan notes: ‘This is not the first time dollar has been weaponized. And financial sanctions are not just by the US. The renminbi still has a long way to go.’ Kenneth Judd argues that: ‘This use of dollar power is supported by all our friends. It would be difficult for China to end its use of the dollar.’

Finally, some panelists are doubtful about the prospects for any alternatives. Anil Kashyap comments: ‘Highly unlikely in the short run, and the dollar remains “the cleanest dirty shirt”. What is the alternative? Doubt it will be crypto!’ Ricardo Reis at LSE directs us to his research showing that: ‘It is hard to jumpstart alternatives, and then to make them grow.’ And Richard Portes at London Business School concludes emphatically: ‘No serious alternative.’

All comments made by the experts are in the full survey results for the US and European panels.

Romesh Vaitilingam
@econromesh
March 2022