Russia-Ukraine crisis exacerbates supply chain disruption

• Buyers of key Russian exports such as energy, mineral and metals will be forced to cut off trade to comply with sanctions
• Russia’s top positions in oil, natural gas and mineral production and exports will increase price pressures globally
• EU, China and UK have notable exposures to Russia’s oil and gas trade

Even as they struggle to recover from higher shipping costs and pandemic-induced delays, global supply chains will be further disrupted by Russia’s military actions in Ukraine and the barrage of economic and financial sanctions that followed.

In the wake of Russia’s invasion of Ukraine, the United States (US), United Kingdom (UK), European Union (EU) and partner nations imposed a slew of economic and financial sanctions on the aggressor country. These include constraints on Russia’s energy and mining sector, sanctions on large domestic financial institutions, including barring some banks from the global financial messaging platform SWIFT as well as restricting its central bank from accessing foreign financial markets.

Cumulatively, the crisis and Western punitive measures will impact trading partners of Russia and Ukraine as well as disrupt supplier relationships of global companies as they cease trade and business activities to comply with the imposed sanctions.

Particularly, constraints on the energy sector will exacerbate ongoing global price pressures given Russia’s position as the third-largest producer of oil and second-largest of gas. Russia’s total oil production stood at 11.3 million barrels per day in 2020 and roughly about 60% of Russia’s oil find export market in Europe, and another 20% are exported to China.

Based on latest available data on monthly oil imports, Europe imported 34% of its total oil supply from Russia, followed by the Americas at 17%. In addition to oil, disruption of gas supply directly to Europe and indirectly to UK, where Russia accounts for more than one-third (32% in 2021) of their total gas imports would precipitate an energy crisis. The scale of the crisis has already sent oil prices climbing to their highest levels since 2014. Benchmark US crude surged to $108.6 per barrel, despite an announcement by the members of International Energy Agency to release 60 million barrels of oil from their emergency reserves.

Supply chain pressures from the crisis will not be limited to energy trade flows. With more than 25% of the world’s wheat export originating from Russia and Ukraine combined, global agricultural supply chains will also be hit hard. Russia is also among the top five producers of commodities such as nitrogen, potassium and phosphate which are used as inputs in the production of fertilisers. Supply disruptions, therefore, will also weigh on global food prices through spike in prices of these inputs. 

In response to sanctions, global shipping companies are also halting delivery of cargo shipments to and from Russia. Maersk announced that it would temporarily suspend all shipments to and from Russia by ocean, air and rail, with the exception of food and medicine. Ocean Network Express, Hapag-Lloyd and MSC, the world’s other major ocean carriers, have announced similar suspensions. 

These disruptions represent unavoidable additions to costs that will be absorbed by manufacturers somewhere in the supply chain and passed on to end consumers. The risks for European, Chinese and UK buyers of Russian oil and gas remain elevated as each import significant proportion of energy from Russia as a proportion of world’s total. Latest available data showed that the EU relies heavily on energy from Russia as it imports 25.3% of total oil and 31.4% of total gas that Russia exports to the world. The supply chains of Russia’s top energy importers, EU, China and UK, are expected to come under stress with the imposition of these sanctions.

To ensure steady supply and access to reliable/stable sources, companies should look at the acquisition of intermediate input facilities to minimise supply chain disruptions. Having a more direct oversight over parts of the supply chain will ensure resiliency. From a long-term perspective, companies should also consider increasing their share of local sourcing while at the same time diversifying their global supplier base to stabilise their supply chain inputs.