How will the Russia invasion of Ukraine impact supply chains?
MARCH 2, 2022
The eyes of the world are closely watching the Russian invasion of Ukraine. Beyond the human devastation, there are already various degrees of disruption beyond Ukraine and Russia in global financial markets, oil markets and currency markets. While it’s too soon to assess the ultimate impact on the Ukraine economy or the Russia economy, supply chains are starting to feel the stressors.
Many global logistics businesses have paused operations in Ukraine and nearby regions to protect their laborers and workforces. Supply Chain Dive has reported that key companies are halting operations in the region due to the escalating conflict.
As of this writing, among them are Maersk, which is halting shipments for the time being while it monitors the situation, FedEx, who’s suspended activity in Ukraine, and UPS, which has suspended services to Ukraine, Russia and Belarus. The crisis has also stopped many international buyers from handling transactions.
This work stoppage will no doubt exacerbate existing supply chain challenges further. All of this could have far-reaching implications for the global supply chain for months — even years — to come.
Why are there supply chain issues?
Industries affected by war
A lengthy war between Ukraine and Russia could have a massive adverse effect on thousands of companies who work with suppliers in the Ukraine supply chain and Russia supply chain. Among U.S.-based companies, supplier relationships with firms in Russia and Ukraine break down by industry this way (via stats from Interos):
- 13% — Software and IT services
- 7% — Consumer services
- 6% — Trading and distribution services
- 4% — Industrial machinery
When it comes to oil, the ongoing situation is volatile. According to S&P Platts Global Analytics,
the U.S. imported an average of 484,000 barrels per day of Russian oil in 2021. Russia had been our country’s third largest oil supplier after Canada and Mexico, but imports have slowed in the weeks since the crisis began.
Companies directly linked with Tier 1 or Tier 2 supplier connections in Russia or Ukraine could be heavily impacted by the conflict. But even those companies without direct connections to suppliers will likely see disruption across industries, from energy to agriculture.
If the conflict continues, it will also affect shipping capacity on the world’s waters. Demand will still exceed current transportation capacity limits, and this will lead to delays and, in turn, more price inflation, according to reports in Freightwaves.
Supply chain woes
The supply chain is still looking for the resiliency it enjoyed before the COVID pandemic, coping with things like delivery delays, higher input costs, and supply shortages. But a prolonged war in Ukraine and the accompanying geopolitical risk, threatens even more challenges.
The most immediate risk in all this uncertainty is the cost of oil, which would impact transportation and drive up the cost of most other goods and services. Last week, The Wall Street Journal reported, oil prices climbed to $100 a barrel for the first time in nearly a decade.
In addition, Russia and Ukraine are top suppliers of the world’s wheat exports. Wheat futures prices climbed this week to their highest level since 2008, per CNBC. Russia is the largest exporter of wheat owning 17% of the international wheat trade, Ukraine just behind at 12%.
With a breakdown of supply, the cost of products that incorporate wheat will go even higher in the short term. For businesses that rely on these products, the higher costs could be especially painful across the board.
Metals are also under siege. Prices for aluminum are up more than 20% this year. Palladium — used in the manufacture of fuel cells, catalytic converters, electronics equipment like cell phones and mobile computers, and whose market is Russia-dominated — is showing a jump of 26% since last year.
Also in play are fears of economic warfare. Many economists are watching the ruble in comparison to dollars and other global currencies this week, after major Western countries (the U.S., the EU, Canada, and the UK) agreed to punish Russia for its actions by pulling the plug on “selected” Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication).
A massive decline in the ruble’s value would severely impact the average Russian’s standard of living, as imported goods or commodities to Russia will become much more expensive.
The EU has already shut down airspace for all Russian air flights. This, notes The Wall Street Journal, means that costs to fly cargo will become prohibitively high for some companies. At the same time, land transportation in the region has all but halted.
Economists and business leaders fear that moves like these will hit supply chains very deeply, especially for those seeking key elements to make semiconductors. The auto industry is likely to be hit hard, too: Germany’s car factories have shut down due to their inability to get Ukraine-produced steel parts.
Business experts are watching the situation closely, and noting that it may still be too early to see the full impact on supply chains over the coming months. But as this is being written, during the first week of March, it may be difficult to pinpoint just how extensive and prolonged we can expect these supply chain issues to be.