ChainMail | Ukraine Attacked

The supply chain goes to war

ChainMail | Ukraine Attacked

War is hell, with economic consequences.

Vladimir Putin’s invasion of Ukraine triggered international condemnation and sanctions designed to punish and isolate Russia. If the United States and Europe inflict enough financial pain to end or limit Putin’s crazed attack, the global supply chain will play a critical role. If Russia can’t get goods to market, or pay its bills, Putin and his war machine — along with the Russian public — will feel the pressure.

Conflict in Europe invariably impacts the global economy. Russia is the 11th-largest country by GDP, according to the World Bank, and the 16th-largest goods exporter, according to the World Trade Organization. Ukraine is ranked 57th in GDP, 48th in exports. 

Both countries are integrated into the global supply chain in many ways. Russia is a major energy producer. It supplies Boeing and Airbus with titanium for use in landing gear, blades, and turbine discs, and about 40% of the global supply of palladium for catalytic converters. Ukraine’s big exports include grains, iron, and steel. Important air freight routes crisscross the tense region.

In this war, the supply chain is a weapon against Russia’s aggression and a victim of the chaos. Ukraine’s small but vital auto components industry manufactures electric vehicle wiring harnesses. Without them, some European automakers already have had to halt or slow production

 As I write, Ukraine is fighting back hard with major support from the West. Even if Kyiv falls, brave Ukrainians appear willing to keep up the battle. It’s an imprecise comparison, but 30 years ago in Europe, on April 5, 1992, Bosnian Serbs laid siege to Sarajevo; the blockade lasted nearly four years.

The U.S., European Union, and other countries are constructing their own blockade of Russia, prompting retaliations and costly disruptions. Russia’s banks have been sanctioned. The country’s access to foreign reserves has been limited, spurring a sharp decline in the ruble, while Russian banks’ usage of SWIFT, the messaging system used to settle international interbank payments, has been curtailed. 

Financial sanctions “reduce the ability of supply chain operators to pay for goods from Russia or to receive payment from Russian counterparties,” Flexport said in a report

Name a product associated with Russia or Ukraine and there are impacts up and down the international supply chain. Prices on the world market for oil, natural gas, grains, aluminum, and other raw goods have jumped. Russia supplies 43% of natural gas to the E.U., while Russia and Ukraine together account for nearly a third of the world’s traded wheat, the Financial Times reported. Russia is also a major exporter of fertilizer. Russia’s invasion could result in prolonged disruptions to the global supply of potash and nitrogen crop nutrients, Reuters reported.

The U.S. has banned Russian flights from its airspace. International cargo flights are now having to loop around Russia, which adds flight time and cost on important routes such as Frankfurt to Beijing.  

A full embargo of Russia hasn’t yet been implemented, so the war’s overall impact is uncertain. Oil and natural gas are still flowing, but some refiners have made their own decisions to reject Russian oil, while some banks have refused to finance shipments of Russian commodities, The Wall Street Journal said. In one reported incident, a Georgian oil tanker in the Middle East rejected a Russian ship’s plea for refueling. “You have oars – row,” the Georgian at the helm said. “Glory to the heroes, glory to Ukraine!”

Such is the emotional state of the conflict. If Russia gets shut out of the West’s energy market, a global crisis is possible. “This is go­ing to lead, as it did in the 1970s, to a mass scram­ble to re­jig­ger lo­gis­tics,” oil expert Daniel Yergin told The Journal.  

The great promise of globalization in the post Cold War-era was supposed to be that trade and investment would link countries to everyone’s benefit. Economic interdependence would keep the peace. Russia’s invasion brings that era to a cruel end.

Read the complete Issue 5 of ChainMail here.

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