Against the background of an unstable macroeconomic context, Romania will most likely enter a technical recession or a period marked by stagflation – economic stagnation and hyperinflation – as, although trade relations on the Ukraine-Russia-Belarus route have been reduced in significance and therefore with small marginal effect, except for gas, the consequences of the conflict are much wider, it affects all markets and, therefore, the European Union, with which Romania has most of its trade and financial exchanges. For now, Russian gas is still pumping into Europe, but it is hard to imagine what will happen in the markets when the Union decides to give up Gazprom or the pipes will be hit by explosives. Therefore, Romania’s foundations are also difficult to anticipate for the near future, but they can only be worse.
Energy prices had already caused hyperinflation, dropping the poverty index (inflation + unemployment) to unprecedented levels. 11% inflation with Russian gas in April-June, according to the NBR, will now gain new significance, due to the increase in gas and energy prices when (it is a matter of time) there will be no more European imports from Gazprom. One solution would be for European leaders to make decisions about energy markets that would curb speculation, given the major crisis that is looming and an urgent reopening of polluting units, closed on Green Deal grounds.
In times of war, sovereign debt can no longer provide guarantees as in peacetime. Therefore, it is expected that the credit market will suffer, the regional CDS (credit default swaps) and, therefore, Romania’s CDS will be inflamed; we will have access to more expensive money or be downgraded to “junk” – difficult to lend to. At the same time, it is hard to believe that in such situation, Westerners will leave us in the lurch. The NBR will be able to do nothing but keep the exchange rate under control, because a new interest rate hike would mean a pro-cyclical measure, further deepening the local problem, by raising the price of loans. Local commercial banks have already shown evidence of risk response and raised interest rates.
In the event of a brief conflict, if an agreement is reached with Russia, many of the above issues will be resolved on their own, but it is hard to believe that this is the case, as things stand on March 1, at the time of writing this material.
The message of the National Bank of Romania, announcing that it is closely following what is happening in Ukraine and all financial markets, the direct target being to ensure the stability of exchange rates and interest rates, as well as the one through which the NBR claims to provide all necessary cash for the economy to deal with any problems is likely to reduce the potential general panic that drives the population to mass withdrawals from banks (as is the case in Ukraine, for example).
The NBR has enough leeway to intervene on the short-term course, but will not be able to control, without Western aid marked by large-scale market intervention and new rules during the conflict, nor these foundations, in the medium and long term. If the situation is expected to remain within the parameters set by the NBR for the next 6-8 months, however, it is difficult to predict what the exchange rate will be after 12-18 months, especially if things escalate, or what the situation will be on the labor market, following the new crisis that is looming, especially since the new leverage effects of the Union’s policy are not known.
But what is the situation for the next 6-8 months? As we had no exposure to the affected region, other than through gas imports, but not very large, as in other Western countries, and Russian business in Romania was marginal, we will most likely operate in line with the region, ie Hungary, Poland, Czech Republic, when it comes to exchange rate evolution. We will be less affected than some non-gas producing countries, so we will have slightly lower energy prices than Hungary, which is an importing and transit country, and we will be similarly affected in terms of fuel prices with countries in the region. For now, Russia is still pumping to the west, so the energy market has not been sanctioned, so all the fundamentals announced by the NBR are on schedule. There will probably be summit meetings to follow, and it is a good thing that Romania can be represented by a personality with solid international image like Mugur Isărescu, as we thus have a stronger voice and better leverage.
One measure that can rectify the situation is the absorption of European funds – that is, to start work faster, including in energy, which will bring us faster to the position of energy independence and reduce inflation and unemployment in the medium term. For this, political influence must recede and competent people must be nominated to key positions (ie all!) in energy companies and ministries. Another measure is to urgently start the exploitation of the natural gas at the Black Sea and maybe, if there is no other way, reopen the polluting units (the ones that can be reopened). Until then, we need to use the southern interconnectors and imported LNG.
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This article first appeared in the printed edition of Energynomics Magazine, issued in March 2022.
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