Russia’s aggression against Ukraine broke the supply chains

Nobody believed that war in Europe could be possible in the 21st century. When it happened, according to the initial forecasts, Russia’s aggression against Ukraine was expected to end after a few days. After a week, the count of the days of Ukraine’s resistance began. At the same time people started forecasting how the war will remodel the distribution of power in the world and how badly damaged the economy will get. For example, disruption to supply chains is currently the most serious problem for the transport sector.

Russia attacked Ukraine militarily while Europe, the USA and the rest of the world responded with economic warfare. The war and the related sanctions imposed on Russia immediately affected the flow of goods and services. The economic bans imposed on Russia have already affected the global economy.

The most important military threats to supply chains

According to Interos1 experts, the following factors have the greatest impact on the stability of supply chains that run to Russia and Ukraine:

  • Drastic increases in commodity prices – raw materials, energy and agricultural commodity prices skyrocketed shortly after the Russian troops entered Ukraine as the flow of these goods has suddenly become questionable, and it is almost certain that the supply chains destroyed by the war will be difficult to reconstruct quickly; there are  more and more forecasts of an increase in oil prices to $150 a barrel, of a global GDP decline of nearly 1% and of a doubling of inflation rates.
  • Geopolitical instability in the world – the Russian invasion may destabilise the geopolitical situation: Europe is threatened by a refugee crisis (and consequently also a humanitarian one), Asia and Africa may suffer from famine (the effect of breaking the supply chains of agricultural produce from Ukraine and Russia), China  may try to seize the territory of Taiwan due to the USA’s preoccupation with the Ukrainian conflict.
  • Export control – effective enforcement of sanctions imposed on trade with Russia requires intensified border controls – they will result in a general destabilisation of supply chains from which selected companies or products have already been excluded.
  • Cyber ​​attacks – the war is taking place not only in real life, but also in the virtual world: European and American companies may become the target of Russian cyberattacks.

Key ties of the USA and European countries with Russia

How seriously may the global supply chains be disrupted? The data in the Interos report shows the possible scale by assessing the current number of links between the USA, European countries and Russia  – more than 2,100 companies from the USA and 1,200 from Europe have at least one direct supplier in Russia, while the same ties with Ukraine connect 450 American and 200  European companies. These are mostly companies providing software and IT services, industrial machinery, oil and gas products, and steel and non-ferrous metal products.The number of American and European companies having indirect relationships with suppliers at tier-2 and tier-3 in Russia and Ukraine exceeds 300,000. 

Which industries were affected most quickly by the war in Ukraine?

The war has created chaos in supply chains that have not yet fully recovered from the disruptions of the COVID-19 pandemic. It was the automotive industry which was affected by both crises first and to the highest extent. Porsche, Volkswagen, BMW and MAN were the first companies to reduce production. The reason was the disruption of the supply chain in the war zone. There were no supplies of cable harnesses produced in Ukraine. As a result, Volkswagen had to suspend the assembly of electric cars, and Porsche suspended production of the Taycan.

The pandemic and war also hit semiconductor supplies due to the shortage of neon needed in its production. Most of the American semiconductor production was based on neon which was a by-product of Russian steel manufacturing, cleaned in Ukrainian plants and shipped all over the world. After the outbreak of the war, production has been stopped.

The third industry that has literally stopped is wheeled transport – road and rail. Air transport is not possible for obvious reasons. The territory of Ukraine has become inaccessible to transport.

The entire European economy is experiencing the effects of war more and more painfully. The threats to the economy may be even bigger when it turns out that this year there will be no supplies of wheat, maize and oilseeds from Ukraine and Russia. The crisis will spread to all European countries, reaching Africa and the Middle East. No-one is able to predict the consequences of this situation.

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Sources:

1 https://www.interos.ai/supply-chain-disruption-from-the-russia-ukraine-conflict/