DBRS Morningstar: Politicization of Energy Risk in a Russia-Ukraine Conflict

The geopolitical situation between NATO members and Russia, currently focused on Russia's military build-up close to its border with the Ukraine, is complex and dangerous. Our base case scenario is that the situation de-escalates through diplomatic means. However, in the event that the situation escalates, the risk of sanctions by the U.S. and Europe likely followed by counter-sanctions by Russia, will rise significantly. This is particularly true if Russia invades the Ukraine, but may also occur if Russia continues to build-up its military presence at the border. DBRS Morningstar outlines how for Europe, Russian energy dependence is a key economic vulnerability. Precedent exists: In January 2009, supplies through the Ukraine were stopped in a Russia/Ukraine pricing dispute, which affected gas supplies to the majority of EU member states. Secure energy supplies are important for the well-being of citizens, for maintaining industrial production and for generating economic growth. The economic and fiscal fall-out from the use of energy policy as a political weapon, for example sanctions/counter sanctions or deliberate action to withhold supply, and/or pipeline disruptions in a conflict zone, could lead to negative rating implications for some EU sovereigns.

Key Highlights:

• Energy politicization would be a key risk to European recovery
• Most of Europe and Russia would face adverse macro-economic effects, to varying degrees
• Severe energy supply disruptions could lead to negative ratings implications for some EU sovereigns
• Russia and Europe stand to lose from a loss of confidence in secure energy supplies

“Energy supply cuts, pipeline disruptions or financial sanctions that inadvertently disrupt European trade, will exacerbate existing supply shortages, raise prices and might add to the monetary policy challenge for the ECB in preventing higher inflation from becoming embedded in expectations. It will also pose a material threat to some governments' fiscal re-balancing targets. Severe disruption to energy supplies could delay re-balancing fiscal accounts and delay various countries' debt sustainability improvement,“ said Nichola James, DBRS Morningstar Co-head of Global Sovereign Ratings.

To read the full report, click here: https://www.dbrsmorningstar.com/research/391808/eu-sovereigns-politicization-of-energy-risk-in-a-russia-ukraine-conflict

The DBRS Morningstar group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany)(EU CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(UK CRA, NRSRO affiliate, DRO affiliate). For more information on regulatory registrations, recognitions and approvals of the DBRS Morningstar group of companies, please see: https:// www.dbrsmorningstar.com/research/highlights.pdf. The DBRS Morningstar group of companies are wholly-owned subsidiaries of Morningstar, Inc. © 2022 DBRS Morningstar. All Rights Reserved. The information upon which DBRS Morningstar ratings and other types of credit opinions and reports are based is obtained by DBRS Morningstar from sources DBRS Morningstar believes to be reliable. DBRS Morningstar does not audit the information it receives in connection with the analytical process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS Morningstar ratings, other types of credit opinions, reports and any other information provided by DBRS Morningstar are provided “as is” and without representation or warranty of any kind. DBRS Morningstar hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS Morningstar or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Morningstar Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS Morningstar or any DBRS Morningstar Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. No DBRS Morningstar entity is an investment advisor. DBRS Morningstar does not provide investment, financial or other advice. Ratings, other types of credit opinions, other analysis and research issued or published by DBRS Morningstar are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness, investment, financial or other advice or recommendations to purchase, sell or hold any securities. A report with respect to a DBRS Morningstar rating or other credit opinion is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS Morningstar may receive compensation for its ratings and other credit opinions from, among https://www.dbrsmorningstar.com/disclaimer/ others, issuers, insurers, guarantors and/or underwriters of debt securities. DBRS Morningstar is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS Morningstar shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS Morningstar. ALL DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT https://www.dbrsmorningstar.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON https://www.dbrsmorningstar.com. Users may, through hypertext or other computer links, gain access to websites operated by persons other than DBRS Morningstar. Such hyperlinks are provided for convenience only, and are the exclusive responsibility of the owners of such websites. DBRS Morningstar does not endorse the content, the operator or operations of third party websites. DBRS Morningstar is not responsible for the content or operation of such websites and DBRS Morningstar shall have no liability to you or any other person or entity for the use of third party websites.

View source version on businesswire.com: https://www.businesswire.com/news/home/20220203005521/en/