LONDON (Reuters) – The risk of material credit rating pressures from the current tensions between Russia and Ukraine is low, Moody’s (NYSE:MCO) said on Wednesday, unless the situation continues for an extended period or escalates to other countries.
Reliance on Russian oil, gas and coal means energy supply is likely to be the dominant channel through which Europe’s economies would be impacted by a conflict, Moody’s said, although some countries are also vulnerable to trade disruption and security risks, especially cyber attacks.
“Our baseline view is that Russia-Ukraine tensions will stop short of an outright military conflict,” Moody’s said in a report on the broader impact of the crisis.
“And the risk of material credit pressures emerging is low unless such a conflict were to carry on for an extended period or escalate into outright conflict beyond Ukraine”.
It added that countries in the Baltics and central and eastern Europe were most exposed to the energy, trade and security strains, but that those risks were largely accounted for in their current credit ratings.
If the situation worsened there could be problems though.
Russia provides 38% of Europe’s natural gas, 26% of its crude oil and 46% of its solid fuels such as coal, Moody’s cited.
Any move by Moscow to reduce those supplies to gain political leverage or in response to European sanctions would “have major implications”, especially as the European Union’s liquefied natural gas (LNG) terminal capacity, at best, only covers about a quarter of total demand.
“Even a relatively short reduction in gas supply would likely lead to a further increase in energy prices, which have already soared,” the report said.
An intensification of inflationary pressures could push the European Central Bank and other central banks to raise interest rates, slowing economies and potentially increasing debt levels.
“The knock-on effects for tax revenue would also weigh on the public finances. Pressures would intensify if governments decided to introduce additional support measures like (energy cost) price caps or subsidies,” Moody’s added.
The big risk, though, would be other former Eastern Bloc countries also become involved in conflict with Russia.
“In a very unlikely and extreme scenario, an outbreak of armed conflict between Russia and Ukraine could spill over into EU countries neighbouring them,” Moody’s said, flagging Baltic states and Poland because of their geographical proximity and history of tense relations with Russia.
“Although unlikely, in part because of the permanent presence of NATO troops in the most exposed EU countries, such a scenario could have far-reaching consequences for their credit profiles”.
Source: Economy - investing.com