With Russia’s imminent march on Ukraine, global supply chains are on shaky grounds

Russia and Ukraine have been marked instrumental to the health of global supply chains and with the news about Russia’s near at hand invasion of Ukraine spreading fast as a wildfire, the global supply chains are feared to experience a major blow. According to a report by risk management company Interos, more than 1,100 and US based and more than 1,300 Europe based firms are dealing with Tier-1 suppliers in Russia and more than 400 firms in both US and Europe are dealing with Tier-1 suppliers in Ukraine. Additionally, from both Russia and Ukraine, more than 1,000 firms in US and Europe have Tier-2 suppliers, while around 1,200 US and Europe based firms are involved with Tier-3  suppliers. Dissecting on the basis of services that US and Europe receive, 12% software & IT services, 9% trading and distribution and 6% oil and gas, comes from Ukraine and Russia. Plus steel and metal products are other common items.

The Russia Ukraine issue: In a nutshell

Russia has been showing its disagreement with Ukraine becoming a part of the NATO military alliance. It is also unhappy about NATO’s expansion, particularly in Eastern Europe. The US, so far, has not been able to ease the situation between Russia and Ukraine and has ordered Americans to leave both the countries in the next 48 hours. According to sources, Moscow has denied marching onto Ukraine, however, there are almost a 100,000 soldiers stationed on Ukrainian borders, along with movement of tanks, missiles and even fresh blood.

How does the Russia Ukraine issue impact global supply chains?

As per the Interos report, Russia’s imminent march over Ukraine can place the global supply chains on shaky ground, causing ‘extensive and debilitating’ supply chain disruptions across the globe. A major impact is anticipated on the global gas and oil supply, considering that Russia is the world’s biggest non-open supplier of gas and crude oil, exporting about 5 million barrels of crude oil each day – 60% oil exports to Europe and 30% to China. In a situation of war, it can declare ‘force majeure’ on their oil contracts, resulting in a sharp spike in inflation. To add to the critical situation, global oil demand is on the rise since before the pandemic and the OPEC+ has lately been unable to meet the global oil demand and supply gap. If Russia goes through with its war plans, the prices could reach almost USD 150 a barrel, doubling the inflation on already high fuel prices.

Ukraine and Russia are also world’s largest exporter of food grains (Barley, Rye, Wheat, etc.), and Ukraine is also set to become world’s largest exporter of Corn. If it comes to a war between the two, there is bound to be an explosion in the prices, especially if Russia takes over the Ukranian core agricultural areas.

Metal markets may also continue to be squeezed. Russia controls roughly 10% of global copper reserves, and is also a major producer of nickel and platinum. Nickel has been trading at an 11-year high, and further price increases for aluminum are likely with any disruption in supply caused by the conflict.

The Interos report talks about Russia’s previous cyber attacks on Ukraine in 2015 and 2016, causing massive electricity blackouts in Ukrainian cities. Such “destructive attacks on the country’s infrastructure could also spark significant collateral damage in global supply chains”. In 2017, Maersk, Merck and FedEx were shaken by a major cyberattack, NotPetya, on Ukrainian tax reporting software, causing port disruptions, shut down of manufacturing plants and handicapping government agencies. The attack collectively cost USD 7.3 billion to the three organizations. The US Cybersecurity Infrastructure and Security Agency has also warned companies about possible cyberattacks making them collateral damage in the ongoing conflict.

CISA said: “If working with Ukrainian organisations, take extra care to monitor, inspect, and isolate traffic from those organisations; closely review access controls for that traffic.”

From a bird’s eye view, the effects of Russia marching into Ukraine will not be limited to the Ukrainian borders. Just as global oil and gas supply chain is anticipated to get disrupted, there will be a huge bulge in food inflation, especially in Africa and Asia. There is also a possibility of a refugee crisis in Europe as thousands flock away from Ukraine, looking for a safe haven. World leaders should take in consideration the worst-case scenario and prepare contingency plans to ensure minimum damage to the supply chains. In order to mitigate any disruptions that arise from a conflict, the report urged procurement teams to evaluate required levels of inventory and labour in the short to medium term; discuss business continuity plans with key suppliers; and prepare to switch to, or qualify, alternative sources for essential products and services.

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