As raw materials such as oil, gas and wheat become scarcer, this will have an impact on the rest of the supply chain (Getty Images/South_agency)
The Russia-Ukraine war has already had a major impact on many countries around the world. We asked David-Alexandre Brassard, chief economist at CPA Canada, to explain its implications for the global economy and what we can expect here in Canada.
CPA CANADA: Could Canada be impacted by resource and other shortages caused by the conflict in Ukraine?
David-Alexandre Brassard (DAB): Russia plays an important role on the world stage because of its extensive oil and gas resources. Although its GDP is relatively modest, it stands out from other countries because of its positive trade balance: it exports much more than it imports. (China is its main source for imports, accounting for 20 per cent of its total.) Overall, it aims to minimize its dependence on other countries.
Russia’s European trade partners were quickly affected by the growing resource scarcity stemming from the war. For example, Russian natural gas accounts for nearly 40 per cent of the European Union’s gas supply—and even more in some countries such as Germany, Poland and Italy. Many emerging countries are also heavily reliant on wheat imports from Ukraine, which is a major producer.
Canada is in a fairly good position, since our trade with Russia and Ukraine represents only 0.23 per cent of our imports and exports. But that doesn’t mean we won’t feel the impact of the war. As raw materials such as oil, gas and wheat become scarcer, this will have an impact on the rest of the supply chain.
CPA CANADA: The federal government has announced that it wants to sell more oil to Europe. Is this realistic?
DAB: The main issue for Canada is export capacity, not production capacity. Any oil we send would first have to be transported by pipeline to a port on the Atlantic coast and then shipped to Europe. Given the costs involved, it is very hard to imagine that we could manage to be competitive, especially since Europe is not looking to replace its energy dependency on Russia by becoming dependent on another country. Not only will other suppliers come forward that are closer geographically, but Europe will make renewables a priority in its energy transition.
As a country, Canada has chosen not to grow our hydrocarbon production: we did not go ahead with certain natural gas and pipeline projects, such as Energy East. So, we need to be consistent.
That said, Canada will not lose out entirely. Saskatchewan will benefit from high wheat prices. And, if the price of oil rises around the world, it will rise here, too, especially since production in the western provinces will not be affected by the conflict. These high prices will benefit provinces such as Alberta, which is planning to return to a balanced budget in 2022–2023, after seven years of deficits. What we need is for corporations as well as the provincial and federal governments to invest a portion of the profits from higher prices into reducing the carbon footprint of the oil and gas industry.
CPA CANADA: High prices mean inflation, presumably.
DAB: Yes, inflation could remain high for the remainder of the year, given the strong and sustained pressure on the productive capacity of our economies. The Central Bank of Canada has begun to raise its prime rate, but this takes time to have any effect, especially since provinces like Quebec and British Columbia are still facing labour shortages. In Ontario, where the auto industry plays a major role in the economy, it is the supply side that it more likely to suffer. For example, Ukraine produces 70 per cent of the world’s neon gas, which is needed to produce the semiconductor chips used in cars.
As is often the case, it’s lower income people who will suffer the most from inflation. These are the people who have no choice but to commute to work, and who spend a large portion of their income on transportation and food. This is especially true given that not all salary increases have been high enough to match inflation this year.
Given the current international context, people may travel less in the coming months and possibly spend some of that money on goods (as they did during the pandemic). This will increase demand pressures, even as production capacity remains limited.
CPA CANADA: What role is Canada playing in the conflict?
DAB: Among other actions, Canada is showing its support for the people of Ukraine through its authorization for emergency travel, which allows a visa applicant from Ukraine to stay in Canada for up to three years instead of the six months allowed for regular visitors.
Newcomers will be able to join the 1.3 million other people of Ukrainian descent who already live in Canada.
In terms of defence, Canada’s spending currently represents 1.4 per cent of our GDP, or $23 billion in 2020-2021. It’s true that the 2022 budget announced an increase of more than $7.2 billion over a five-year period, with annual amounts maxing at around $2 billion. But that is less than a 10% annual increase. If we wanted to meet NATO’s target we would need to increase our budget by 40 per cent—or at least $10 billion to $15 billion more every year. That’s a large sum.
CPA CANADA: Would you say there is a moral component to this conflict?
DAB: Yes, and it’s one that needs to be emphasized. By putting their activities in Russia on hold, many companies have voluntarily made decisions related to environmental, social and governance (ESG) issues.
This is still quite rare. Of course, there is social pressure to do the right thing, but it is encouraging to see that these companies were able to act ethically without being forced to do so.
DELVE DEEPER INTO INFLATION AND OTHER ISSUES
Find out why inflation could continue into 2022—and what can be done about it. To learn more about environmental, social and governance issues, check out CPA Canada’s sustainability resources as well as this interview with Mark Carney, United Nations special envoy for climate action and finance.