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Economic impact of the war in Ukraine

12 April 2022

For more than two years, the pandemic has been putting increased pressure on global supply chains, and since the end of February, the invasion of Ukraine by the Russian army has added to this tension. Overview: 

 

This war, which is challenging the economic order of the last decades and its effects on the Ukrainian territory, coupled with the international sanctions against Russia, are causing disruptions with global consequences 

Several major international organizations such as the IMF or the UN, via the World Food Programme, have warned that this conflict would eventually have a major impact on the world economy. 

 

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Why do commodity prices keep rising?  

The war in Ukraine is further exacerbating the disruptions we were already experiencing with regard to international trade. This conflict is fueling the imbalance between supply and demand for raw materials, while increasing market volatility. This inflationary context is already translating into rapidly rising prices in several industries, starting with oil.  

 

 

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Russia is the world's largest exporter of grain and fertilizer 

 

Russia is a major exporter of raw materials in general and the world's largest exporter of grain and fertilizer. A slowdown in its agricultural exports could have an impact on prices. Note, for example, that wheat reached US$12 per bushel in March, which is the highest it has been since 2008.  Agriculture and Agri-Food Canada expects global wheat production and exports to reach historic lows for the crop year ending July 31. 

 

Despite this, Canada—the world's seventh largest producer—remains a leader in wheat production and could potentially export a portion of its grain to make up for what is unavailable on world markets.1

 

Russia is also one of the world's largest exporters of industrial metals. The country supplies about 40% of the world’s palladium and 30% of its titanium. Nickel, steel, aluminum, wood and coal are also among the country's largest exports. 

 

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Russia is one of the world’s largest exporters of industrial metals    

 

 

Ukraine, for its part, is also a major exporter of agricultural products, metals, machinery and automotive parts.   

Raw materials from both countries are used in the production of a multitude of products around the world. As a result, few sectors of activity are immune to the tension that the shortage of materials and raw materials puts on prices.2  

Canada, however, is well positioned in many of these sectors and should therefore benefit overall from higher export prices.   

 

Threat of shock to the energy market  

The Russian offensive had an immediate impact on the cost of energy, particularly with regard to the price of gas and oil. Russia produces more than 20% of the world's gas and 15% of its oil.3 The price of a barrel of Brent crude oil continues to rise and prices are likely to remain high throughout the year.   

  

Where gas is concerned, it should be noted that 40% of natural gas consumed in Europe comes from Russia, and one third of the supply comes through Ukraine. The energy supply is therefore at risk for the European continent, due to a possible suspension of supply by Russia, in retaliation for the economic sanctions.4

Vladimir Putin has announced that, as of April 1, buyers will have to pay for natural gas deliveries from their bank accounts in rubles, threatening to cancel existing contracts if they refuse.5

 

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The conflict in Ukraine has had an immediate impact on energy prices 

 

Given the current geopolitical situation, Western allies are trying to restrict the extent to which they depend on Russia for energy. It goes without saying, however, that such changes take time. 

 

Since Canada is not very dependent on Russia for its energy, the situation does not represent a major and immediate threat to our economy. On the contrary, Canada has already planned to increase its production to 300,000 barrels per day by the end of 2022 to help Europe offset imports from Russia.6

 

Canada therefore stands to replace about 5% of the gas Europe imports from Russia and 10% of the oil it imports. 

Despite it all, this crisis in Europe could help accelerate the energy transition in the medium term and push several countries to find alternatives to fossil fuels—such as coal, oil or gas.  

 

 

Towards a reconfiguration of supply chains?  

Since the beginning of the pandemic, Canadian companies have already begun repatriating certain activities, in an effort to bring them closer to their local market. Indeed, in response to supply difficulties, they have diversified their sources of import and repatriated production for certain key sectors in order to reduce their dependence on critical goods.7

 

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The return to more stable global supply chains may take some time. Companies that used to source or export mostly to and from Russia will have to be patient, especially when it comes to purchasing raw materials.   

It could take years for companies to find alternatives to importing critical inputs that are not available locally or in large quantities. Similarly, reconfiguring the entire supply chain could reduce the economies of scale previously achieved and will therefore impact costs.  

  

 

A real but potentially limited economic impact in Canada  

It is still difficult to predict the long-term economic impact of the war in Ukraine. One thing is certain, inflation is likely to be ongoing. Some economists even suggest that, if this conflict persists, it will lead to a recession in Europe, or even stagflation, according to the National Bank.   

Stagflation (a contraction of the words stagnation and inflation) occurs when economic activity is stagnant or slightly declining and inflation is rampant, resulting in a significant increase in unemployment.  

 

However, it is important to remember that Canada and Russia are not major trading partners. In making the decision to suspend export permits, Ottawa is targeting $700 million in exports out of a total of $500 to $600 billion in international trade per year.8 Some companies will be affected, but the economy as a whole will be relatively unaffected. 

  

As such, apart from price inflation, the effects of the war will be fairly limited in Canada. In fact, the Canadian economy may very well benefit from the strong demand for raw materials for certain sectors of activity, resulting from the sanctions imposed on Russia.   

In addition, the possible influx of Ukrainian refugees could also represent a temporary labour supply that will help counter the current labour shortage and support production in Canada.  

 

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If you need support with your export processes or the analysis of your supply chain in order to find local solutions, contact Matthieu Garaffini from our Export Department. 

 

Sources

1 Radio Canada

2 EDC

3 Libération 

4 La Presse

5 Les Echos

6 BayStreet

7 Les Affaires

8 Radio Canada

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