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Speculations on the Macroeconomic Consequences of a Nuclear Attack on Moscow David I. Levine Haas School of Business University of California, Berkeley March 30, 2005 These notes are in response to a scenario planning exercise “The Big Bang.” This set of scenarios first addresses the immediate, short, and longer-term effects of a Moscow catastrophe on the Russian economy. The major uncertainty here is how the political system reacts to the disaster. I then turn to a more speculative analysis of the effects on the global economy. The major uncertainty here is whether investors perceive high likelihood of (or experience) a nuclear attack on the West. What happens to the Russian economy? You noted: There is an expected financial profile to major catastrophe -- local impact is huge, but national impact and global impact tends to be small. In fact, 1-2% of GDP is as big as weve ever seen, and dampens out of the trend line in a few quarters to a few years. My scenarios posit a more severe macroeconomic crisis in Russia due to the weak political system. Thus, a major earthquake in Tokyo might not reduce Japanese living standards in the long term, but in Russia capitalism has a weak toehold. Thus, a modest economic shock can have long-term consequences. Immediate reaction (1 day) Russian asset prices would fall immediately. Stock market values collapse Asset markets that were not destroyed would close. Thus, the price decline would show up in harder-to-observe ways, often with offers to sell and no buyers. Capital flight and decline in value of the ruble. Rising prices for commodities where Russia is a major producer. Oil (modestly) Gazprom produces a fourth of world natural gas output. It only exports a modest share, but that share is hard to substitute in the short run for its specific customers. Russia is a major exporter of some metals: for example, aluminum, palladium, platinum, nickel, rhodium, and diamonds. You asked: What are the pros