A MATHEMATICAL MODEL FOR ASSESSING THE MACROECONOMIC CONSEQUENCES OF THE CESSATION OF RUSSIAN GAS EXPORTS TO EU COUNTRIES

Abstract

A year after Russia's invasion of Ukraine, the global energy landscape has changed dramatically. Regions around the world have faced a rapid rise in liquefied natural gas (LNG) prices, which has had a negative effect on the global energy market against a geopolitical backdrop based on global energy security. The paper presents a mathematical model for determining the effect of a price shock of LNG supply on the total production volume under the assumption of a complete long-term cessation of Russian gas supplies to the European Union (EU). A second-order approximation of a multi-sectoral open economy model with multifactor linkages between costs and output is used. The proposed approach involves taking into account microeconomic aspects in the general equilibrium model. The model includes endogenous variables in the shares of gas expenditures and identifies price and quantity responses of gas consumption at the relevant market scale. The second-order approximation of the production function is applied to nonlinear characteristics. To estimate the economic impact of the shock from the termination of Russian gas supplies to the EU, the approximation combined with the LNG model is used. Approximate forecast estimates of the macroeconomic consequences of a sudden long-term cessation of Russian LNG supplies to the EU countries for a one-year period are calculated. The shock effect is calculated for the minimum and weighted elasticities. It has been found that the global LNG market smooths out the consequences of the cessation of Russian gas exports for the aggregate production of importing countries. The estimates do not take into account constant LNG prices, spillover effects on individual sectors of the economy, country-specific risks, and additional demand effects, and do not address long-term effects. This can lead to uncertainty for quantification in a linear model.