How The War In Ukraine Will Impact Canada's Economy

After months of speculation, Russia invaded Ukraine on February 24, 2022.

The move shocked the world and sparked an immediate response from Canada, the United States and their allies, including the European Union and Japan.

To date, the most significant response to Russia’s actions has focused on crippling their economy.

But you’re probably wondering: how will these sanctions affect me? In this article, we’re going to breakdown what sanctions the West has imposed and how they could impact Canadians.

Let’s start with the sanctions...

What are the sanctions that the West has imposed on Ukraine?

The sanctions imposed by the West have been focused on weakening the Russian economy while minimizing damage to their own economies. The three most impact sanctions to date have been:

Kicking Russia off SWIFT: SWIFT is the system that banks use to communicate with each other. Removing Russian banks from the SWIFT system will make it harder for them to move money around, and ultimately make them less useful as, well, banks.

  • For example, without access to SWIFT it will be harder for a Russian company to purchase equipment from overseas suppliers, as exchanging their rubles for foreign currency (via a Russian bank) will be more difficult.

  • It may also interfere with credit card payments for ordinary consumers whose bank has been sanctioned.

However, the SWIFT ban does have a major carve-out for transactions relating to the energy sector (by far Russia’s most important export).

  • Capturing energy transactions in the SWIFT ban would drive up energy costs for European countries that import large amounts of Russian gas — around US$600 million per day, accounting for a third of the EU’s energy supply.

Freezing the central bank’s reserves: Likely more impactful than the SWIFT ban is the announcement that the US and EU would sanction Russia’s central bank.

  • The central bank has built up US$640 billion in reserves to cushion the impact of sanctions. If the value of the ruble falls, it can buy them to prop up the currency’s price and prevent it from collapsing.

But a large amount of those reserves — up to US$300 billion by some accounts — is held in accounts that will be impacted by the sanctions. Without access to them, the central bank will not be able to defend the value of the ruble for as long as it may have hoped, and the currency could eventually collapse.

Banning Russian oil: Lastly, the US and Canada have banned the import of Russian crude and petroleum oil. The US doesn't import much Russian oil (and Canada imports none) so this is more of a symbolic move than a material one, but it will still have an impact.

What are the non-economic sanctions?

In addition to the sanctions listed above, the federal government has banned Russian aircraft—including their flagship commercial airliner Aeroflot—from Canadian airspace.

  • This makes it really inconvenient for Russians to fly to North America, as you can see in this awkwardly routed Moscow to Cancun flight.

The G7 and European Union, including Canada, have also sanctioned the personal assets of Russian President Vladimir Putin, other senior government figures, and Russian oligarchs (super-rich Russians).

Now, you might be thinking, “so what? why should I care that some Russians have to spend an extra two hours in the air before going on their Mexican vacation?” And to be honest, you don’t really need to. These are what experts call targeted sanctions and they’re designed to inflict maximum damage on their intended subjects with minimal damage to the countries imposing them.

Okay so those are the sanctions you need to know about, now let’s get to the good stuff—how will you be personally affected?

How will Canadians be impacted by sanctions on Russia?

Although sanctions are designed to have the maximum impact on Russia, Canada’s Finance Minister Chrystia Freeland conceded that “there could be some collateral damage in Canada”.

Here are three ways the war in Ukraine could impact you directly:

  • Higher prices at the pump: Even before the sanctions, the invasion rattled global energy markets and sent oil prices through the roof. Sanctions have already limited the supply of Russian oil in global markets and oil has spiked past US$100 per barrel. The International Energy Agency is now warning that a combination of energy producers pulling out of Russia and falling demand in the country will reduce Russian oil output by 30% by the spring, sending oil prices even higher.

  • Food will get more expensive: Ukraine and Russia are two of the world’s largest producers of the commodities that fuel the agriculture sector. The combination of war and Western sanctions—which spared food exports but have impacted shipping and other aspects of the supply chain—has severely eroded the supply of those goods in global markets, sending prices through the roof. 

  • Everything else could be more expensive, too: In retaliation for banning Russian aircraft from the West’s airspace, Russia closed their own airspace to 36 countries. This is forcing shipping planes to divert to roundabout routes which will force them to spend more on gas. And who’s going to pay for all the extra costs of shipping? You know it... you!

    More importantly, higher oil prices will add inflationary pressure to the economy because almost every part of the economy depends on fuel to operate. If fuel gets more expensive, then the cost of doing business for almost everyone gets more expensive, and those costs get passed on to you in the form of higher prices.

What's next 

The longer the war in Ukraine goes on, the more pronounced its impact on the global economy will be. As Russia's economy continues to falter under the weight of sanctions, the global supply of oil and key commodities like wheat, corn, potash, and rare minerals will become more strained, driving up prices. 

Western countries, including Canada, have a number of policy mechanisms open to them to respond, including: 

  • Raising interest rates in a bid to tame inflation—though this could send the economy into a recession.

  • Ramp up production of key resources, like wheat and corn, from domestic sources—though this will take time to accomplish. 

  • Find new suppliers for key products, which could take the form of lifting sanctions on Venezuela and Iran or successfully pressuring OPEC to increase production.

Even the end of the conflict may not necessarily restore normalcy to the global economy, as it's unclear whether sanctions would persist beyond the war. 

Between this war and the lingering effects of the pandemic, we are in uncharted waters, and Canada will need to adapt to the new economic reality.