WHAT IF RUSSIA SHUT OFF UKRAINES GAS AGAIN?
A COMPUTABLE GENERAL EQUILIBRIUM MODEL

Michael P. Barry


Michael P. Barry, J.D., LL.M., Ph.D., Associate Professor of Economics and Law at Mount St. Marys University, (Emmitsburg, Maryland, U.S.)


ABSTRACT

This paper asks the question: what would happen to the economies of the world should Russia completely shut off natural gas shipments to the Ukraine. Significant findings of this model include the following:

The impact of the gas shutoff is overwhelmingly concentrated in Ukraine and Russia, whose economies would suffer GDP declines of 2.47 percent and 2.16 percent, respectively. Perhaps surprisingly, the model suggests Eastern Europe would experience only a small decline in GDP (0.13 percent) and Western Europes GDP would be unaffected. The GDP of gas-pruducing republics of the Other Former Soviet Union (FSU), major gas suppliers through the Russian pipelines, would decline by 0.75 percent.

While the impacts to overall GDP are possibly smaller than expected, effects to individual industry sectors in many countries are quite large. One response of Ukraine and Europe to the cessation of Russian gas is an attempt to replace supplies with domestically-produced gas. While output of natural gas decreases by 4.86 percent in Russia and 11.6 percent in the Rest of the Former Soviet Union, gas production increases in Ukraine, Eastern Europe, and Western Europe by 140.1 percent, 88.1 percent, and 12.0 percent, respectively (though note that each region starts with a small base). Production of natural gas increases in Africa (6.9 percent), the Middle East (5.2 percent), the United States (2.0 percent), and the Rest of the World (2.2 percent).

Industry sectors within the Ukraine are forced to adjust to the decrease in gas imports. While ouput of Ukrainian domestic gas increases by 140.1 percent, Ukraininan ouput of many sectors significantly decrease, including Heavy Manufacturing (12.5 percent), Light Manufacturing (5.3 percent), Utilities and Construction (5.0 percent), capital goods (4.7 percent), and processed food (2.4 percent).

While Russia suffers a major decline in its massive gas inductry (4.9 percent), the domestic surplus of gas provides for cheaper production in other Russian industries. Russian output in several sectors significantly increases, including that in Heavy Manufacturing (3.9 percent), Light Manufacturing (3.1 percent), Oil (1.0 percent), and extraction (1.5 percent). Perhaps surprisingly, other than in.


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