IMF says Russian gas embargo could hit central Europe hard

WASHINGTON (Reuters) - A Russian natural gas embargo would cause deep recessions in Hungary, Slovakia, the Czech Republic and Italy unless countries can cooperate more to share alternative supplies, the International Monetary Fund said on Tuesday.

IMF researchers said in a blog posting that some countries could face shortages of as much as 40% of their normal gas consumption in the event of a total cut-off of Russian gas.

Hungary would suffer the most economically from such an embargo, with a reduction of more than 6% in gross domestic product, while Slovakia, the Czech Republic and Italy could see GDP shrink by 5% if alternate gas supplies, including liquefied natural gas, is impeded from flowing freely to where it is needed.

Under the more optimistic scenario of a fully integrated market, the economic damage is reduced, with Hungary seeing a GDP reduction of more than 3%, Slovakia and Italy suffering a GDP reduction of more than 2% and the Czech Republic's GDP shrinking less than 2%.

Germany's GDP would shrink by the high 2% range under the more dire scenario and just over 1% under the more optimistic scenario, due to access to alternative energy sources and the ability to lower consumption.

But German economic activity could be reduced by 2.7% in 2023, with higher wholesale gas prices pushing German inflation up by another 2 percentage points in 2022 and 2023.

The IMF researchers said European infrastructure and global supply have coped so far, with a 60% drop in Russian gas deliveries since June 2021. Total gas consumption in the first quarter, during which Russia launched its invasion of Ukraine, triggering Western economic sanctions, was down 9% from a year earlier, and alternative supplies are being tapped, especially LNG from global markets.

"Our work suggests that a reduction of up to 70% in Russian gas could be managed in the short term by accessing alternative supplies and energy sources and given reduced demand from previously high prices," the researchers said.

(Reporting by David Lawder; Editing by Paul Simao)