The war in Ukraine is
threatening further disruption to already stretched supply chains. Ukraine and
Russia may only account for a small proportion of the imports of major manufacturing
nations like Germany and the US, but they are essential suppliers of
raw materials and energy for many crucial supply chains.
Though the economic
consequences of a war that threatens the lives and livelihoods of many
Ukrainians will always be secondary to the looming humanitarian crisis, here
are five areas likely to see trouble ahead:
Many European countries
are heavily dependent on
Russian energy, particularly gas through several vital pipelines, and this may
have coloured their approach to the crisis. Russian gas reliance has been
suggested as the reason Europe has been reluctant to
remove Russia from the international payments system SWIFT, for example, though
it’s worth pointing out that the Germans have indefinitely suspended new
Baltic gas pipeline Nord Stream 2.
While a complete
suspension of Russian gas flows is unlikely at the moment, even small
disruptions will have a significant impact. Global
gas reserves are low due to the pandemic and energy prices are already rising
sharply, impacting consumers and
With gas an essential
input to many supply chains, disruptions to such a fundamental supply will have
widespread economic consequences. When gas prices first surged in autumn of
2021, for instance, fertiliser plants in the UK shut down as high
energy cost made production untenable. This led to shortages of carbon dioxide,
which is essential for everything from medical procedures to keeping food
fresh. Such consequences are likely to magnify with rising oil and gas prices.
food prices already rose sharply
during 2021 due to everything from higher energy prices to climate change. Food
producers are likely to come under further pressure as prices of key inputs rise
Russia and Ukraine
together account for more than a quarter of global
wheat exports, while Ukraine alone makes
up almost half of exports of sunflower oil.
Both are key commodities used in many food products. If harvesting and
processing is hindered in a war-torn Ukraine, or exports are blocked, importers
will struggle to replace
Some countries are
particularly dependent on grain from Russia and Ukraine. For example, Turkey
and Egypt rely on them for almost 70% of their
wheat imports. Ukraine is also the top supplier of corn to
Stepping up production in
other parts of the world could help to reduce the impact of interruptions to
food supplies. However, Russia is also a main supplier of key ingredients for fertilisers, so trade
sanctions could affect production elsewhere. Meanwhile, we can also expect
diversions to trade flows: China has already said it will begin importing Russian
wheat, for instance.
With global transport
already severely disrupted in the aftermath of the pandemic, a war could create
further problems. The transport modes likely to be affected are ocean shipping
and rail freight.
Since 2011, regular rail
freight links between China and Europe have been established. Recently,
the 50,000th train made
the journey. While rail carries only a small proportion of the total freight
between Asia and Europe, it has played a vital role during recent transport
disruptions and is growing steadily.
Trains are now being
rerouted away from Ukraine, and rail freight experts are currently optimistic that
disruptions will be kept to a minimum. However, countries like Lithuania are
expecting to see their rail traffic severely
affected by sanctions against Russia.
Even prior to the
invasion, ship owners started to avoid Black Sea shipping
routes, and insurance providers demanded notification of any such voyages.
Although container shipping in
the Black Sea is a relatively niche market on the global scale, one of the
largest container terminals is Odessa. If this is cut
off by Russian forces, the effects on Ukrainian imports and exports could be
considerable, with potentially drastic humanitarian consequences.
Rising oil prices due to
the war are a worry to shipping more
generally. Freight rates are
already extremely high and could rise even further.
There is also a worry
that cyber attacks could target global supply chains.
As trade is highly dependent on online information exchange, this could have
far-reaching consequences if key shipping lines or infrastructure are targeted.
The ripple effects from a
supply chain cyber attack can be enormous.
Russia and Ukraine lead the global production of
metals such as nickel, copper and iron. They are also largely involved in the
export and manufacture of other essential raw materials like neon, palladium
Fears of sanctions on
Russia have increased the price of these metals. With palladium, for example,
the current trading price of almost US$2,700 per ounce, up over
80% since mid-December. Palladium is used for everything from automotive
exhaust systems and mobile phones to dental fillings. The prices of nickel and copper, which
are used in manufacturing and building respectively, have also also been
The aerospace industries
of the US, Europe and Britain also depend on supplies of titanium from
Russia. Boeing and Airbus have
already approached alternative suppliers. However, the market share and product
base of leading Russian supplier VSMPO-AVISMA make it impossible to fully
diversify away from it, with some of the aerospace manufacturers having signed
long-term supply contracts up to 2028.
For all these materials,
we can expect disruptions and potential shortages, threatening to lead to
increased prices for many products and services.
Shortages of microchips
were a major problem throughout 2021. Some analysts had been predicting that
this problem would ease in 2022, but
recent developments might dampen such optimism.
As part of the sanctions
towards Russia, the US has been threatening to
cut off Russia’s supply of microchips. But this rings hollow when Russia and
Ukraine are such key exporters of neon,
palladium and platinum, all of which are critical for
About 90% of neon, which is used
for chip lithography, originates from Russia, and 60% of this is purified by
one company in Odessa. Alternative sources will require long term investments prior
to being able to supply the global market.
Chip manufacturers currently
hold an excess of two to four weeks’ additional inventory, but any prolonged
supply disruption caused by military action in Ukraine will severely impact the
production of semiconductors and products dependent on them, including cars.