Rising Energy Prices: Those Companies Hurt by Sanctions Against Russia…and Those Who Win

At the industrial park in Lubmin, Germany, on March 1, 2022, a container is decorated with a map showing the Nord Stream 2 gas pipeline, which would supply Russian gas to European households.

At the industrial park in Lubmin, Germany, on March 1, 2022, a container is decorated with a map showing the Nord Stream 2 gas pipeline, which would supply Russian gas to European households.


Domino Effect

According to a new study by economics professors from Sciences Po (Paris), the University of Quebec in Montreal and the University of Michigan, economic sanctions and restrictions on gas and oil imports from Russia will have heterogeneous effects on business. The least exposed companies will gain market share compared to the most exposed companies.

Atlantico: The possibility of new sanctions against Russia that would manifest as a total shutdown of gas and oil imports is on the table. We know that the impact of restricting or stopping Russian energy imports will have an impact on the GDP of the various countries involved. This will apparently be moderate, in the details of companies the situation is more complex. To what extent can the analysis of supply chain disruptions during the onset of the Covid crisis provide relevant information on how companies will respond to a halt in Russian energy imports? What are the contributions and limits of this equation?

Raphaël Lafrogne-Joussier, Andrei Levchenko, Julien Martin and Isabelle Méjean: First, it should be remembered that the estimates of the impact of a cessation of energy imports from Russia should be viewed very cautiously, as there is great uncertainty both about the economic impact of the embargo and about the counterfactual to be considered. in a scenario without an embargo. These uncertainties are the subject of lively debate, including among economists. One source of uncertainty concerns how the industrial fabric might or might not adapt to a rationing of available gas in the economy. Under the currently considered scenarios, while an embargo on Russian imports would lead to a sharp increase in energy costs, it would also lead to a decrease in the quantities of gas available in the economy, as these imports would be difficult to replace with gas produced elsewhere, which is less true in the case of oil. Our work contributes to these debates by highlighting the diversity of the possible effects of such rationing on the companies that make up the industrial fabric of a country like France.

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The difficulty with these questions stems from the fact that corporations are not isolated islands that are part of the economy. On the contrary, modern production systems involve strong interdependence between companies, which use inputs bought from other companies, domestic or abroad, to resell their production to partners who may themselves be located anywhere. Thus, to anticipate the impact of energy rationing, we need to both identify which firms are likely to be directly exposed and understand how production adjustments by directly exposed firms will be passed on to the rest of their value chain. It is here that our work on value chain disruptions in the Covid crisis can provide useful lessons.

In a recently published article (Lafrogne-Joussier, Martin, Méjean, 2022) we study in detail what happened in the very first months of the Covid crisis. As of January 2020, the virus has been largely confined to China and has prompted a strong response from the Chinese authorities through containment measures. Our research uses this “natural experiment” to study the propagation of this productivity slowdown in China among French companies exposed through their value chain. More precisely, we compare the evolution of the purchases and sales of French companies dependent on Chinese inputs with that of a “placebo” group of French companies in the same sector that were not exposed to the shock because they buy countries. Four important conclusions can be drawn from this study. The most obvious is that not all companies are equally exposed to these types of shocks. Even within an industry, some companies got most of their input from China, while for others China was a fringe supplier. We show that the most exposed companies experienced a 7% drop in revenue compared to the least exposed companies in the months following the lockdown in China. In addition, some of the exposed companies were or were able to put in place strategies to mitigate the shock. Part of the shock was absorbed by companies that had sufficient stock. Finally, some companies were able to replace Chinese inputs with inputs produced in other countries, even in situations of heavy reliance on China at the time of the shock.

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Even if the situation is very different from the current one, such results can feed our reflections on the possible effect of an embargo. First, and while it may seem obvious, the heterogeneity of direct exposure to the embargo is a key element, which standard quantifications often neglect for lack of detailed data to fuel these models. Then the statistical analysis shows adjustments after a supply shock, in a situation where these adjustments are far from obvious. Indeed, our analysis is interested in a very short span of time, on the order of one to two months, and in a population of companies engaged in rather rigid international value chains, because of the importance of the necessary investments for the establishment of international production. Chains. Faced with a sudden supply shock, some companies manage to adapt their production methods, partially limiting the spread of the shock to the rest of the chain. Such adjustments, if any, are decisive in the event of an embargo.

Your study published on VoxEU (“Beyond the Macro: Firm-Level Effects of the Russian Power Cut”)notes that the effects at the firm level will be very heterogeneous. What will be the determinants that will play a role? What makes more or less exposed?

The first source of heterogeneity lies in the differences in the use of Russian energy by European companies. If there is no off-market allocation mechanism, a company whose technology relies heavily on Russian gas will be mechanically affected more than a company that only uses electrical energy. Similarly, the use of inputs produced from gas further down the value chain implies indirect exposure to the embargo. A second source of heterogeneity lies in the possibilities of replacing Russian gas: can the company adapt its production process to consume less gas or less gas-dependent input? While the substitution possibilities for a directly exposed company are likely to be slim – using oil or coal to power a gas-fired technology is by definition impossible – substitution is actually easier down the production chain, especially via international markets: if European fertilizer companies are forced reduce their production, the companies that use these fertilizers can partly compensate for this by purchasing their inputs abroad. Finally, substitution possibilities also exist between firms producing the same goods. If exposure to the embargo is indeed heterogeneous between companies in the same industry as the company statistics suggest, then the production difficulties of certain companies will be partially offset by gains in market share of companies that are less present.

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What will be the consequences of this heterogeneity of business situations? Especially in the markets? Does this have long-term consequences?

Quantitative studies suggest that stopping Russian energy imports will have a modest effect on GDP just through the supply chain channel. The estimates of the Council of Economic Analysis quantify the effects between 1 and 5% of GDP for the Member States of the European Union, if economic policy manages to reduce the macroeconomic effects of the increase in the costs of the economy through the savings goes through to neutralize and investment channel. Nevertheless, the heterogeneity described above implies that some companies will suffer a lot and with it the economic ecosystems they feed. Those who can do without Russian energy will gain market share against the most exposed companies. Limiting this heterogeneity could be a government objective, which could include interventions in the allocation of the available quantities of gas in the economy or individualized support for the adaptation of production processes.

In the longer term, this crisis, as well as the consequences of the pandemic, may have more structural consequences for the organization of international value chains. Such adjustments are costly to businesses, making them largely irreversible. The war in Ukraine and the pandemic have shown the limits of the organization to be very effective, but not very shockproof. Faced with logistical, climatic and geostrategic risks, companies could seek to reorganize their supply chains into more diversified and arguably more regional structures.

To find the study by Raphaël Lafrogne-Joussier, Andrei Levchenko, Julien Martin and Isabelle Mejean published on VoxEU: click HERE

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