As the world watches the events that unfold in Russia and the Ukraine, it could be argued that no one is more directly affected than Europe from an energy standpoint. Depending on Russia for most of their energy needs, Europe has been hesitant at best to head up the sanction charge behind President Obama. Now, stress cracks are starting to show in Europe’s largest economy.
Germany’s economy has been whizzing along until recently, according to the Institute for Economic Research, or IFO, for short. The IFO compiles a monthly business climate index that’s used to forecast and quantify the country’s morale and outlook on future investments. The higher the index, the better the morale within the 7,000-plus companies that are surveyed.
The results of the March 2014 index shows that the Crimean crisis is weighing heavily upon business expectations in Germany. The report stated that companies expressed far less confidence in future business developments, with the index dropping below 111 points after four successive increases.
Considering the bilateral trade relationship between Germany and Russia, it’s no wonder why Germany is feeling down in the dumps right now:
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Thirty-six percent of Germany’s crude oil supplies are from Russia. Thirty-five percent of natural gas supplies? You guessed it – from Russian reserves. In total, over 84% of German imports are oil and energy related. To say that Germany’s relationship with Russia is important is an understatement.
Any escalation of sanctions or events involving Russia could be catastrophic for both sides. While Germany receives petroleum and natural gas, Russia receives mostly machinery and equipment. It’s also important to note however, that German chemical giant BASF provides chemicals to Germany that aid in refining its crude oil. Without the mutually beneficial exchanges gained by each party, the whisper of instability found within IFO’s business climate index could increase into a roar for both Germany and Russia.