Prime Minister Justin Trudeau and United States President Joe Biden have both announced sanctions against Russia in response to its “horrific” attack on Ukraine. Russia launched a large-scale invasion of Ukraine on February 24, escalating the Russo-Ukrainian War and marking the largest conventional warfare operation in Europe since World War II. Though the conflict is still ongoing, and the death toll continues to rise, economists are already predicting a large impact on economies in the West.
Russia supplies about 10 per cent of the world’s supply of crude oil every day. Among other repercussions, Russian President Vladimir Putin has threatened to cut off this supply in response to the sanctions, something Canada would be unable to cover. According to Toronto-based investment firm, Ninepoint, pipeline and export capacity for oil and natural gas are already stretched to their limits.
On the topic of Canada exporting more oil to fill the gap left by the Russian supply, Ninepoint partner and portfolio manager Eric Nuttall stated, « That’s an impossibility. » North America’s decision to limit pipeline expansions have limited its ability to move crude oil, observed Nuttall, to the point where both Canada and the U.S. still import oil from overseas. According to the Canadian Association of Petroleum Producers, Canada imports around $550 million of Russian crude oil a year, most of which goes to Eastern Canada.
The uncertainty surrounding the conflict has already pushed oil prices to around $100 per barrel, but if the conflict continues, the global economy will slow down, and oil prices will plummet.
« No one should be giddy about oil, » said Barry Schwartz, chief investment officer at Baskin Financial. « It’s possible that oil prices continue to rise as world events continue to be uncertain, but ultimately if [the] invasion continues, if it worsens, the economies around the world are going to slow dramatically and that is a terrible scenario for oil. »
Aside from oil, global food markets will also take a hit. Ukraine and Russia are both major crop suppliers, growing a combined 25 per cent of the world’s wheat. Russian naval manoeuvres are putting Ukraine’s ports at risk of shutting down, meaning European markets are going to look elsewhere for wheat. As a major grain exporter, Canada will be one of their first stops, meaning a further rise in price in domestic markets. Wheat prices have already risen by 15 per cent in the past month.
Higher food and energy prices have been driving inflation up to multi-decade highs, even without the conflict. With the sudden outbreak of war in Ukraine, Desjardins economist Royce Mendes says plans have changed. The Bank of Canada is expected to raise its benchmark rate by at least a quarter of a percentage this Wednesday.
« Rock bottom interest rates seem inconsistent with elevated levels of inflation, so we expect the normalization process for interest rates to begin in the next few weeks and actually continue at least gradually throughout the year, » Mendes said. « A conflict that can seem so far away at times for many Canadians might hit home in terms of the prices they’re paying for everyday goods. We should expect that we’re going to see higher prices at the pump and potentially higher prices at the grocery store as a result of this conflict. »
Not even sudden military conflict in Europe will deviate from plans to curb inflation, but Canadians should brace for uncertainty both abroad and at home.