Russian invasion of Ukraine to seriously exacerbate supply chain risks

Russia’s invasion of Ukraine will seriously exacerbate supply chain disruptions, as well as rising commodity and energy prices, which were already challenging European companies. Diversions of flights from Asia and tightly restricted insurance coverage for trade in the region as the crisis deepens will make trade even more difficult. These are the conclusions of Chris Rogers, supply chain economist with Flexport, a US-based technology platform for the global supply chain, shipping and logistics sector. The basic impact of the conflict in Ukraine, combined with sanctions against Russia by the international community, will cause further disruptions to supply chains and reduce the ability for international buyers to transact, said Rogers. In turn, commodity prices are likely to increase, which could further exacerbate ongoing global supply chain inflation. The most significant exports from Russia in 2021 were crude and refined oil (36.5% of total exports), natural gas (12.7%), and iron/steel products (6.6%). For Ukraine, grains and beans account for 34.6% of exports, while iron and steel represent 26.0%. Rogers said there are at least four main areas of risk: physical availability of commodities; rapidly rising commodity prices; physical disruption of logistics networks; and widening sanctions, combined with the loss of adequate insurance coverage, which will complicate customs and billing activities. “The physical availability of the commodities that are produced and exported from Ukraine and Russia may be interrupted by conflict. Natural gas flows to Europe may prove particularly important, given Russia likely accounted for around 46% of EU natural gas imports from outside EU member states in 2020, according to Eurostat data. Much of that is shipped via pipelines that move through Ukraine,” said Rogers. The rapid impact of the invasion on global commodity prices will add to existing supply chain inflation pressures. Crude oil prices have risen to their highest since 2014, after Saudi Arabia stated that it would not look to offset any reductions in Russian exports by expanding its supply. International Monetary Fund data shows oil prices in the three months to January 2022 were 67.6% higher than the same period a year earlier. Natural gas prices, which historically have been tied to oil because of the nature of long-term gas contracts, have expanded even quicker with a 217% increase over the same period, Rogers said. There has been a 10% increase in the past three months in major base metals versus the same period in 2021. Wheat prices are reportedly close to their highest levels since 2013. That pulled total food prices 21.8% higher than a year earlier in the three months to 31 January, versus a year earlier. The third area of risk identified by Rogers relates to the physical disruption of logistics networks. “The carriage of air freight from Asia to Europe has already started to bypass the area of potential conflict. While the availability of bunker fuel might not be restricted directly, the elevated level of oil prices has reportedly had a knock-on effect for bunker fuel prices,” he said. “Insurance costs for shipping in the region may increase or may be coverage-restricted, with the Lloyd’s Market Association Joint War Risk Committee having already listed Ukrainian and Russian waters in the Black Sea and the Sea of Azov as an area of risk. There’s also the potential risk of cybersecurity incursions, which may include logistics firms as collateral damage,” said the supply chain economist. In addition, widening sanctions will complicate customs and billing activities, particularly for energy- and metals-producing firms. “In an extreme case, wide parts of the Russian economy may be excluded from the Swift [payment] system,” concluded Rogers.

Russian invasion of Ukraine to seriously exacerbate supply chain risks

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