- Economists warn of a possible stagflation in Europe and a continuing rise in consumer prices in Bulgaria
- Bulgaria imports from Russia 90% of the natural gas and 60% of the oil it needs
- The big question remains whether Russian gas flow will stop
The war in Ukraine broke out at a moment when Bulgaria's economy was gaining momentum after the Covid-19 crisis. Many companies were planning expansion and even new investments. However, the Russian invasion which began on February 24 will change many of these intentions. The war casts doubt over the current forecasts for economic growth in Europe and in particular in Bulgaria. Expectations were for a continued recovery in Bulgaria (3-4% GDP growth in 2022) and a gradual slowdown of inflation which reached 9.1% on an annual basis in January. Many economists now warn of continuing inflation in the second half of the year and economic growth at half the pre-war forecast. Specialists often mention stagflation (economic stagnation combined with high inflation) when talking about the eurozone.
Still, it is early for detailed forecasts. It all depends on the outcome of the war and its duration. But, surely, Bulgaria will be hit by the negative consequences of Ukraine's tragedy: millions of refugees, closed borders and diverted cargo flows, Europe's (and Bulgaria's) dependence on Russian gas and oil weighing heavily on the economy, and sanctions against Russia in general.
The bigger picture
The war in Ukraine began amid rising energy prices and continuous disruptions in supply chains, which boosted US inflation to record high 7.5% year-on-year in January. Euro area annual inflation went up to 5% in the same month. Now the military conflict will intensify these adverse effects on the EU. Russia is Europe's largest supplier of gas and oil, so the big question is whether Putin is ready to stop exports.
Bulgaria receives 90% of the natural gas it needs from Russia and 60% of the country's motor fuels currently originate from Russian oil. "Bulgaria is dependent on Russian gas, but at the same time, it is a large producer and exporter of electricity. This allows some flexibility. The gas link to Greece and the access to Azeri gas and liquefied gas through the terminals in our southern neighbor are important," says Georgi Angelov, senior economist at the Open Society Institute in Sofia.
Cereals are also a source of accelerating inflation in the current conetxt. Bulgaria exports a lot of wheat, corn and sunflower seed, and domestic consumption is not directly threatened by shortages, but food prices on international markets are likely to rise further.
A local banking analyst speaking on condition of anonymity to discuss the impact of the war on the economy told Capital Weekly that inflation in Bulgaria may not slow in the second half of the year, as predicted in most forecasts before the war. According to him, Bulgaria should be happy if inflation remains in the single digits. "I do not believe that we will fall into stagflation for purely structural reasons, but the expected growth target may not be met," adds the analyst.
Angelov says economic growth in both the EU and Bulgaria will slow down. "Some countries may enter a recession, at least for a short time," he says.
Тhe pieces of the puzzle
Many Bulgarian businesses that export to Russia and Ukraine will be directly affected by the war. "Trade will stop almost completely; the only exception is energy supplies, which are excluded from the sanctions. Bulgarian exports to Russia account for some 1.2% of total exports, exports to Ukraine also stands at nearly 1.2% of all. So, this makes 2.4% of total exports. That's why the direct impact on the Bulgarian economy will not be that strong. But some Bulgarian companies work as subcontractors to EU partners, and the Union's exports to Russia have a share of nearly 4% of total exports, to Ukraine - 1.2%, which makes over 5%. This is the more serious number and it will undoubtedly have a negative effect," adds Angelov.
Bulgarian imports from Russia and Ukraine will also stop, which will at least temporarily disrupt supply chains. For example, Burgas steel producer Promet Steel is completely dependent on imports of raw materials. The company, owned by Ukraine's Metinvest, uses blanks from Ukraine, and its annual production is about 500,000 tons. The decision on whether the production process will continue now depends on the situation in Ukraine. The sales of the Bulgarian company will not suffer a direct hit, as it exports its products mainly to the European Union.
The Russian retail chain Beryozka also has problems. "We import from the Baltic republics, Ukraine, Russia, Belarus, Georgia, Armenia and we have problems right now. Our trucks have been detained at the Romanian-Ukrainian border and we are trying to pull them out. But we continue to work. We are looking for alternative supply options," says the owner of the chain, Viktor Bakurevich.
Tourism will also feel the war. Bulgaria has not been among the top 5 destinations for Russian and Ukrainian tourists recently, but a few years before the Covid-19 crisis more than 800,000 tourists from these two countries visited Bulgaria each year, accounting for about 13% of all overnight stays, according to national statistics. This year, Bulgaria will not expect tourists from Ukraine and Russia but the military conflict raging so close to the Black Sea may discourage other tourists to visit the country.
Some businesses may benefit from the war. Examples are grain producers, companies that manage to attract Ukrainian refugees as their employees, or niche producers. In general, however, the negatives will be much more than the positives.