Russian Special Military Operation in Ukraine: Impact on the Provincial Economy - Scenario Analysis 

Introduction and Background 

In an August 18, 2022, Economist magazine article, “A Remote Canadian Province Luxuriates in the Global Supply Crunch” the author noted that Saskatchewan is one of the few jurisdictions to benefit from the Russia/Ukraine conflict. The following is an attempt to quantify the impact in terms of output, gross domestic product, jobs, and labour income.  

As Russia continues its special military operation in Ukraine, Canadian provincial and federal governments along with major exporters are closely monitoring the situation to gauge the impact on Saskatchewan. It is still uncertain what the long run impacts of the situation may be, but spikes in commodity prices such as oil and fertilizer are already being seen. Economic sanctions placed upon Russia is contributing to the uncertainty felt within these and other sectors. 

Sanctions placed on Russia by most western countries have left a hole in the supply of energy which Russia used to fill, primarily in European nations. Those within the oil and gas sector say Canada should be the one to fill that hole, however, the current state of Canada’s energy infrastructure would reportedly make that difficult to achieve. Despite its stores being more than enough to provide for itself, Canada relies mostly on imported oil while canceling energy projects such as the Energy East Pipeline. Developing more capable energy infrastructure would not only allow for Canada to break its dependence on foreign oil, but allow for European countries to break the significant dependence on Russia for energy.    

While increases in price for some products may bode well for producers and governments, the same benefit is not guaranteed to be experienced by the general population as inflation and interest rates continue their rise with few signs of slowing down. It is commonly held that high rates of inflation and interest rates often spell doom for the prepared and unprepared alike. Without proper forethought, rises in interest and inflation rates can significantly hamper the value of one’s savings and investments.  

Price increases for products such as oil and wheat are causing consumer and input price surges for gasoline and food. Canadian firms will also suffer from increased interest rates, as inflation increased, business investment typically falls. In the April release, the Bank of Canada revealed that inflation had risen past forecasts to a 31 year high of 6.7%, nearly doubling the rate of 3.4% seen in April 2021. Interest rates are also increasing with the Bank of Canada increasing it to 1% as of March. On July 13, the Bank of Canada increased the rate once again, by 1%, bringing the bank rate to 2.75% with a further hike of 0.75% on September 7 to 3.5%. 

The initial direct impact for Saskatchewan seems inconsequential as the province has relatively little trade with Russia. In 2021, exports from Saskatchewan to Russia totaled $11.6 million (0.03% of total exports) while imports from Russia to Saskatchewan totaled $7.5 million (0.075% of total imports). Provincially, the sanctions have little effect on Saskatchewan’s financial make up, however, the situation is different for individual firms with contracts related to Russia. While firms such as Nutrien, a major Saskatchewan producer, claims that in the long run the conflict will likely lead to increased prices for commodities thus higher return, it is just as likely to see a shortage in the short run.  

Despite the forecasted increase in prices for commodities, some major producers of potash and uranium have laid off a significant amount of their workforce within the province, while it is difficult to say with certainty, a combination of news reports and official press releases allow for a general estimation. Approximately 1,750 positions were lost within the potash and uranium sectors in the late Q4 2021 and Q1 2022, due reportedly to poor financial performance as well as mine closures.  It should be noted that 550 of those positions are said to only be a temporary lay-off, though no major rehire initiatives have been announced.   

While there have been no official reports of rehiring initiatives for employees laid off due to financial strain or plant closures, forecasted increases in production, such as Nutrien’s production increasing by close to 1 million tonnes and expecting more, and demand for mining products could indicate an incoming increase in positions.  

Year to date 2022 average spot prices for key Saskatchewan minerals and energy are approaching recent peak or near levels for oil (peaking at $101.59), potash ($489.32 against $558.48 in 2009), and uranium ($50.41 against $99.24 in 2007). 

Table 1: Oil and Selected Mineral Prices  

Source: Oil price: https://www.statista.com/statistics/266659/west-texas-intermediate-oil-prices/                     

Potash price: https://www.worldbank.org/en/research/commodity-markets                     

https://ycharts.com/indicators/potassium_chloride_muriate_of_potash_spot_price                     

Uranium price: https://fred.stlouisfed.org/series/PURANUSDA                     

Price increases are spurring increased production across key Saskatchewan commodities, notably potash and uranium. 

Table 2: Saskatchewan Mineral Production 2022 Year to Date Vs. 2021 Year to Date 

Source: https://www.saskatchewan.ca/business/agriculture-natural-resources-and-industry/oil-and-gas/oil-and-gas-news-and-bulletins/oil-and-gas-statistical-reports 

https://dashboard.saskatchewan.ca/business-economy/business-industry-trade/mineral-sales#by-production-tab 

While employment in mining has been relatively subdued since 2018 in potash and 2013 in uranium, increased prices and production for these two commodities suggest that a number of laid off employees are likely to be re-hired if present trends continue. 

Table 3: Selected Mining Industries - Saskatchewan - Employment 

*Uranium 

Source: Statistics Canada Table 383-0033 

Table 4: Oil Price, Drilling, and Oil and Gas Employment - Saskatchewan  

Source: Statistics Canada Table 383-0033 

https://www.statista.com/statistics/266659/west-texas-intermediate-oil-prices/     

https://www.saskatchewan.ca/business/agriculture-natural-resources-and-industry/oil-and-gas/oil-and-gas-news-and-bulletins/oil-and-gas-statistical-reports 

Methodology 

In order to transform commodity prices into economic output and jobs, several adjustments were made. In the case of uranium and potash mining, the number of positions impacted by layoff recalls is unclear. Instead, with prices near recent peaks, it is assumed that employment will return to recent peak levels. The difference between 2021 employment and recent peak employment was multiplied by output/employee to estimate incremental output.  For oil, the relationship between oil price and drilling was determined as well as the relationship between drilling and oil and gas employment. Estimated oil and gas employment was multiplied by output/employee to estimate incremental output. In the case of retail trade, it was theorized that the bulk of retail trade in rural (outside of Saskatoon, Regina, and the 8 smaller cities, census agglomerations) was highly dependent on farm incomes, after adjusting for COVID). The provincial farm input price index was used as a proxy for farm income and the mathematical relationship between farm incomes and rural retail sales was used to estimate new retail trade. 

New retail trade is measured in constant dollars to remove the impact of inflation. Inflation driven increase in retail are not expected to generate any incremental employment. Other mining and energy economy model inputs remain in current dollars, because, unlike retail trade, price increases drive new employment and new output. 

These, in turn, were used as economic model inputs. The Praxis economic model uses the latest provincial input-output tables available. Input-output analysis (I-O) is a form of macroeconomic analysis based on the interdependencies between different economic sectors or industries. This method is commonly used for estimating the impacts of positive or negative economic shocks and analyzing the ripple effects throughout an economy. The Praxis Saskatchewan model contains 35 industries and 66 commodities (aggregated to 25 industries in detailed results by industry) and based on a standardized method (Statistics Canada’s) and will yield results similar to Statistics Canada’s inter-provincial model and the Conference Board of Canada’s STEAM Model. 

Analysis 

Oil and Gas  

Based on regression results, and assuming that the average annual price per barrel will remain over $100USD for 2022, it is expected that 2,293 new wells will be drilled over the course of 2022-23. This will result in 1,984 new jobs in the industry and new output of $5,170 million. 

Figure 1: Regression Analysis Results – Oil Price and Drilling 

Figure 2: Regression Analysis Results – Drilling and Oil and Gas Employment 

Potash 

Returning to peak employment (6,480 in 2018) from 4,160 in 2021 (Table 3) will result in an additional 2,320 new potash mining jobs and $2,203 million in new output. 

Uranium 

Returning to peak employment (2,810 in 2013) from 1,930 in 2021 (Table 3) will result in an additional 880 new potash mining jobs and $443 million in new uranium output. 

Agriculture and Retail Trade 

It was assumed that the bulk of retail trade in rural is highly dependent on farm incomes, after adjusting for COVID. The provincial farm input price index was used as a proxy for farm income and the mathematical relationship between farm incomes and rural retail sales was used to estimate new retail trade. 

Figure 3: Regression Analysis Results – Farm Prices and Retail Trade  

Based on regression analysis results, rural retail trade is expected to increase by $780.2 million as result of higher prices for unprocessed Saskatchewan agricultural products. 

Investment 

The impact of higher interest rates is likely to have a negative impact on new home construction. However, so far in 2022 housing starts are running counter to expected trends and are virtually level with 2021 starts (-0.4% or 9 units behind). 

Business investment should be dampened by higher borrowing rates; however, this is likely to be offset by higher commodity prices, in uranium, potash, and oil in the shorter term. 

Conclusion 

Results below are the sum of direct, indirect, and induced impacts of rising commodity prices on the provincial, and economies for 2022-23.  Direct impact is the total initial output shock. Indirect impact is the secondary impact that includes inter-industry transactions: purchases of inputs from supporting industries.  Induced impact is the additional impact from changes in household spending as industries add labour in response to higher levels of demand for output.  Gross Output measures total expenditures on local goods and services as well as payments to labour and business profits.  Gross domestic product (GDP) measures net economic activity within a prescribed geographic area.  It represents the payments made to final factors of production: labour, unincorporated business profits, and other operating surplus (corporate profits, interest income, inventory valuation adjustments, and capital consumption allowances).  GDP excludes the value of intermediate goods and services used in production.  Direct, indirect, and induced employment impacts are measured in positions.  Labour income includes wages, salaries, and employer contributions to pensions and benefit packages. 

Table 5: Total Impacts- Saskatchewan-Rising Commodity Prices