The Russia-Ukraine War Supply Chain Disruption and What to Do about It
Today, the greatest risk posed to global supply chains is undoubtedly the Russia-Ukraine conflict. Russia is Europe’s most significant energy supplier in the form of oil and natural gas. The conflict has pushed oil prices above $100 a barrel, directly impacting manufacturing, inflation, and GDP growth across Europe and the world. More specifically, the supply of some strategic raw materials essential for manufacturing a range of industrial products that derive substantially from Russia will be disrupted, and these include: copper (10% of global reserves), nickel, platinum, aluminum, and some rare earths.
Context
After years of skirmishes and ceasefire violations in the self-declared republics of Donetsk and Luhansk that broke off from Ukraine, Russia formally recognized these republics and launched ‘special military operations’ against Ukraine on 24 February 2022. In most of the West this was seen as an invasion and a violation of the territorial integrity of Ukraine. Since then, the conflict has escalated with several rounds of economic sanctions levied on Russia, while attempts at negotiating a settlement continue in parallel, but without high hopes for early resolution.
Predictably, the war itself, and the economic sanctions applied against Russia by the EU, the UK, the US and some of their other allies, have had varying and unfolding negative impacts on the global supply chain. These impacts are remarkable for their Volatility, Uncertainty, Complexity, and Ambiguity (VUCA). This is coming at a time when most of the world is yet to recover from the global COVID-19 pandemic that significantly disrupted global supply chains.
Russia controls almost 44% of global palladium supply, while Ukraine produces about 70% of the global neon supply, and these two key raw materials are required to make chips. In order words, the current pandemic-induced chip shortage will be exacerbated by the current crisis and will further impact the global manufacturing of everything containing semiconductors, including: Laptops, kitchen equipment, mobile phones, washing machines, cars, oilfield equipment, and so on.
The war has also turned the Black Sea marine logistics hub south of Ukraine into a global supply chain bottleneck impacting the export of bulk food items such as wheat, barley and rye. The effects are already reverberating around the world, including in Africa where a number of countries (Egypt, Kenya, Nigeria, and South Africa) depend on both Russia and Ukraine for significant proportions of their wheat imports. Exports to Russia from Africa will also be impacted, for instance in South Africa, where 7% of citrus exports are destined for Russia.
Freight constraint in the Black Sea has also impacted the transportation of essentials such as refined petroleum products, with knock-on effects on petroleum products supply in countries such as Nigeria. Black sea freight rates and insurance have escalated, in some instances by over 200%, raising prices of certain imports by over 10%, and doubling lead times on average.
What to Do about It
Organizations must prioritize the management of their supply chain risk exposure from this war in the following way:
- Map their supply chains to expose points of vulnerability, identify the risks, assess them, rank and prioritize, and generate indicative mitigation measures
- Conduct a stress test of their supply chains for vulnerability, always bearing in mind that the fallout may be closer and deeper than it may appear on the surface, because geographical distance from the epicenter of the crisis is not correlated with the extent of supply chain disruption and impact on operations
- Develop a Response Plan, resource it, and implement
- In parallel, develop a scenario-based Business Continuity Plan (BCP) based on a worst case outcome
In summary, the Russia – Ukraine war has complicated the global supply chain challenges unleashed by the COVID-19 pandemic since Q4 2019. The global supply chain impact is certain to be deep and complex, even while it continues to expand rapidly. Forward looking organizations will structurally assess their exposure to this risk and develop a solid plan to counteract it. At Multus Competentia Limited we can help you navigate this risk, and even transform it into competitive advantage for your organization. Let’s talk.