Russian Invasion of Ukraine: More Global Supply Chain Ripple Effects

April 12, 2022

By: Margaret D’Annunzio, Trevor Howe & Michael Eddi

Russia’s invasion of Ukraine has created a humanitarian crisis and is the most profound conflict in Europe since the Second World War and countless supply chain ripple effects. Amid the suffering and chaos, companies and governments are both acting and reacting to the challenges presented, creating a cascading and unpredictable sequence of events.  

Global supply chains that were already stretched by COVID-19 have been significantly and, in some cases, permanently altered. While it is relatively easy to discern what key materials have been immediately impacted by physical and political blockages of goods, the medium- to long-term impact of the invasion is complex and will require ongoing analysis at both the policy and logistics level.  

It is all but certain that second-order and unintended disruptions will occur. Some of the key elements include: 

  • Logistics routes changes and higher costs 
  • Energy sourcing strategy changes and price volatility
  • Realignment of the geopolitical landscape 

Logistical changes: reduced shipping in the Black Sea, altered air and costlier routes 

Ukrainian exports account for a significant part of several commodities’ global trade: Ukraine exports 13% of global corn and 12% of global wheat, and is the fifth largest exporter of iron ore in the world.   

Shipping routes through waters on Black Sea are likely permanently altered. Trade will be affected as enterprises classify the area as an increasingly risky area in which to operate. Even prior to Russia’s invasion, London’s marine insurance market had already added the Ukrainian and Russian waters around the Black Sea to its list of areas deemed high risk.

Since the start of Russia’s invasion, insurers have raised the cost of providing cover for merchant ships through the Black Sea driving up the overall cost of transporting goods through the region which has already experienced upward pressure from elevated fuel costs. 

European airspace closures and global Russian aircraft bans are also expected to create protracted international shipping timelines and increased air-freight costs. These after-effects will manifest as a byproduct of longer contingency routes around restricted airspace, creating longer journeys that, in turn, require greater amounts of fuel to move cargo.  

It is estimated that fuel represents a quarter or more of a given airline or airfreight organization’s cost base.

Energy supplies and the impact of sanctions 

Sanctions against the Russian energy sector were initially avoided, largely due to concerns over the resulting price increases. But as President Putin has relentlessly continued his assault on Ukraine, policymakers in the U.S., U.K. and E.U. announced plans to curb the import of Russian energy in coordinated moves, driving prices even higher. 

President Biden signed an Executive Order to ban U.S. imports of Russian oil, liquefied natural gas, and coal, as well as the prohibition of direct or indirect U.S. investment in Russia’s energy sector.

The British Government announced it will phase out Russian oil and oil products by the end of 2022.  Although many countries have not directly banned oil imports from Russia, sanctions in the Russian finance, banking, insurance and freight industries have targeted their relationships and effectively caused disruptions in the logistics of the oil market, along with elevated costs and market price volatility.  

Geopolitical landscape changes and strengthening alliances 

Russia’s invasion of Ukraine has already had significant ripple effects for countries not actively engaged in the war. Germany has announced several major policy decisions contrary to previously stated positions, leading to an allocation of €100 billion euros in its 2022 budget, one of the largest injections of capital recently seen into the European defense sector.  

The potential spread of the conflict to neighboring countries in the area such as Moldova could further complicate the situation and undermine significant supply chain nodes in the automotive industry. And geopolitical shifts could occur regarding NATO membership for Finland and Sweden, exacerbating tensions between Russia and Northern Europe, as well as potentially more energy price shocks.  

For the first time, there appears to be a majority of the population in Finland and Sweden in favor of NATO membership. 

The war also seems to have driven China and Russia closer together, strengthening an already dangerous alliance. While most of the world is sanctioning Russia, China has signaled its intent to continue to trade with its strategic partner, and in some instances such as for wheat, to step up trade 

With Russia and Ukraine making up 30% of global exports of wheat, food costs have risen. Food shortages and rising energy prices create an even more dangerous environment in some regions of the world, and in a more deglobalized, fragmented economy, growth and demand will stall.  

Changes to the global economic order are already foreshadowed and, with it, ultimately comes possibly profound and fundamental shifts in most supply chains as payment networks are restructured, reserve currency dependencies reconsidered, and energy trade transformed. 

To read our full report, Russian Invasion of Ukraine: Second-Order Developments, click here. To see all of Interos’ analysis and reports related to the war in Ukraine, click here.

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