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How will the war in Ukraine impact the cost of living in Austria?

Economic sanctions imposed on Russia in response to the invasion of Ukraine are already leading to rising fuel costs. How could the situation further impact Austria?

People demonstrate in support of Ukraine in Copenhagen
Western countries have placed economic sanctions on Russia for invading Ukraine. How will they impact Austria? Photo: Thomas Sjørup/Ritzau Scanpix

As energy prices continue to rise following Russia’s invasion of Ukraine and the subsequent economic sanctions imposed by western countries, there are concerns about the impact on domestic economies in Europe.

A recent report by the Austrian Institute of Economic Research (WIFO) states Austria is most at risk in relation to its energy supplies, with Russian natural gas imports accounting for more than three quarters of Austria’s entire gas supply.

Some Austrian banks are also impacted by sanctions against Russia due to high credit claims by Russian customers.

What does this mean for Austria’s economy? And how could an escalation of the conflict or new sanctions further impact Austria?

READ MORE: How reliant is Austria on Russia for energy?

Energy

On Tuesday (March 8th), Russian Deputy Prime Minister Alexander Novak threatened to stop the supply of Russian gas to Europe as western nations considered escalating sanctions against Russia, including a ban on Russian oil imports.

According to British newspaper The Guardian, Novak made the threat in connection to Germany’s decision last month to halt the certification of the Nord Stream 2 pipeline.

Novak said: “We have every right to take a matching decision and impose an embargo on gas pumping through the Nord Stream 1 gas pipeline.”

Austria currently sources 80 percent of its natural gas from Russia. An interruption to gas imports would be acutely felt in the alpine republic and could even impact the chemical, fertiliser, pharmaceutical and plastic industries.

In this scenario, WIFO anticipates there would be gas shortages in the country by late autumn, although Austria could source alternative supplies from other countries.

READ MORE: EXPLAINED: Why isn’t Austria in NATO?

However, WIFO estimates that Austria’s economy could be hit harder by restrictions on gas than the EU average, with a potential 1.25 percent loss on overall economic value added (estimate of economic profit). The average EU loss is predicted to be 0.7 percent.

The report states: “The risks are therefore considerable and could unfold a significant negative impact on economic development.”

In the short term, energy prices are already rising following the announcement of economic sanctions imposed on Russia by the EU, UK and USA on February 22nd.

Gas prices could rise even further if the conflict in Ukraine intensifies with the possibility of a 50 percent increase in energy prices compared to the fourth quarter of 2021.

But WIFO also sees the potential for rapid restructuring of the supply of energy in Europe, albeit with significant investment.

The report states: “One can therefore see the energy crisis provoked by Russia as an opportunity to push ahead with the restructuring of the European energy system much faster and much more than previously planned. International cooperation is essential for the success of such a project.”

Banking

The economists behind the WIFO report have ranked Austria as the most affected country in western economies when it comes to the impact of sanctions on banks.

This is due to high credit claims by Russian customers in Austrian banks. Raiffeisen is particularly affected and Reuters reports that the bank is considering leaving Russia.

READ ALSO: Nehammer on Russian sanctions: ‘Austria is and will remain neutral’

In fact, Austria ranks third in the amount of money outstanding by Russian customers at almost €18 billion. Only banks in France and Italy have been hit harder with both countries recording outstanding credit of more than €25 billion.

Despite the large amounts, WIFO says the situation is unlikely to cause systematic damage to Austria’s domestic banking system. Instead, the analysts expect the Russian financial sector to be impacted more than Austria or other EU countries. 

For example, Austrian investments in Russia currently total around €4.6 billion, but Russian investments in Austria are approximately €21.4 billion.

Food

Ukraine is one of the world’s largest exporters of wheat, which means grocery prices are set to rise in Austria, according to Der Standard. This will especially impact products like bread and pastries.

The Kronen Zeitung reports that both Russia and Ukraine are also big producers and exporters of corn (30 percent and 20 percent respectively), so the price of corn will rise.

Additionally, the conflict is expected to impact already constrained supply chains for other products (including agricultural parts and machinery), as well as affect supplies of ammonia for fertiliser, which is obtained from natural gas.

This will further raise the cost of food in supermarkets.

FOR MEMBERS: UPDATED: How Austria could be impacted by the war in Ukraine

Trade

Trade flows between Austria and Ukraine total around €90 million and the most damaging impact could be an interruption in the import of oil crops. Rapeseed is of particular importance for Austria as it is used for the production of biofuels.

Ukraine is also one of the largest exporters of rapeseed in Europe and, prior to Russia’s invasion, was anticipating one of the most profitable winter crops after favourable autumn weather conditions.

Elisabeth Christen, Senior Economist at WIFO, told The Local that trade flows between Austria and Russia are not as high with just 1.5 percent of imports and 1.5 percent of exports flowing between the two countries. This amounts to €2.2 billion in trade.

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COST OF LIVING

Cost of living: Why glühwein costs more at Vienna Christmas markets this year

Visiting a Christmas market in Vienna is a must-do seasonal activity. But this year – like everything else – it will cost more money. Here’s why.

Cost of living: Why glühwein costs more at Vienna Christmas markets this year

When buying a glühwein (mulled wine) at a Christmas market in Austria for the first time, you might be surprised at the price.

The good news is that the first cup of glühwein is not really twice the price – you have to pay the deposit (Pfand) for the mug, as well as pay for the drink. But the bad news is that this year the prices have gone up, especially the cost of the Pfand.

Viennese Christmas Markets operators are justifying the high deposit prices for the Christmas mugs with inflation costs, broadcaster ORF reported. 

FOR MEMBERS: How to save money and still go skiing in Austria

In some markets, the deposit can cost up to €5 (Stephansplatz market prices). A glühwein, for example, might be advertised as costing €4,90, but once you get to the stand, you will be asked to pay €9,90. 

“Inflation and the cost of producing the cups and also the logistics of the whole cleaning service have gone up a lot now, and that’s why the four euros,” explained Hannes Dejaco, who runs several large Christmas markets in Vienna.

How can I get the Pfand back?

The deposit for a glühwein mug is only temporary, so when you return the cup you get your €5 back. 

Most Christmas markets have a set area to return the mugs (called Pfand Rückgabe) and get your money back. But if not, simply return the mug to any stand that sells beverages.

READ ALSO: IN PICTURES: A guide to the main Christmas Markets in Austria

Of course, if you want to keep the mug as a souvenir, then it will cost the €5 that you paid for the deposit.

Finally, a top tip for anyone attending the markets for the first time: take cash.

Many Austrian businesses still like to operate in cold, hard cash and there’s no guarantee that the market you visit will accept card payments. So visit the ATM before heading for a glühwein.

Useful vocabulary

Mulled wine – Glühwein

Deposit – Pfand

Deposit return – Pfand Rückgabe

Cash – Bargeld / Bar

Christmas market – Weihnachtsmarkt / Christkindlmarkt

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