What happens when politics ensnares supply chains?

1 June 2022

Amid Russia’s war on Ukraine, already stretched global supply chains went into meltdown over access to commodities and how suppliers reflect political alliances.

When fuel giant Shell released a statement saying it was unable to end its reliance on Russian oil, Ukrainian foreign minister Dmytro Kuleba tweeted at the company: “Doesn’t Russian oil smell [like] Ukrainian blood for you?”, starkly summing up how commodities and supply chains quickly become weaponised in times of war.

Shell’s subsequent U-turn and attempts at an apology highlighted the pressure procurement teams encounter when reshaping supply chains in response to geopolitical tensions. 

Not for the first time since the pandemic, supply chains have become politicised and multinational companies face tough decisions over whether to cut ties with Russian suppliers, a move publicly viewed as choosing a side. Because today, in the same way consumers expect businesses to reflect their stance on ESG, they also demand that global supply chains reflect their politics. 

Politicising commodities

While many countries offered supply support to Ukraine, they avoided direct action to prevent triggering a third world war. However, when Brent crude oil hit $139 a barrel in the second week of the invasion, prompting the highest oil prices since the financial crisis in 2008, its global impact was clear.

George Filis, assistant professor of international economics at the University of Patras, Greece, told Supply Management: “Political instability in major economies tends to create significant uncertainty to the real economy, which translates into uncertainty in the energy markets in general, and oil markets in particular. Obviously, military conflicts tend to create the largest impact. However, we can see that other political events could also lead to turbulent times for oil prices.”

Indeed, oil markets are vulnerable to being heavily weaponised, as in the 1970s, when prices rocketed after OPEC countries halted exports in response to US president Richard Nixon taking the US off of the gold standard. The subsequent oil price shocks were widely blamed for causing the 1973-1975 recession.

Coming back to the present, before Russia invaded Ukraine, Fatih Birol, head of the International Energy Agency (IEA), accused Russia of compounding Europe’s energy crisis by withholding up to a third of its gas. Analysts estimated Europe’s gas prices could have been cut by half if Russia had increased its exports by 20%.

Meanwhile, Covid-related disruptions highlighted the interdependencies  of energy decisions and world food supplies. Energy shortages in Asia caused China to limit its fertiliser exports, driving up prices for farmers.

David Laborde, a senior research fellow at the International Food Policy Research Institute who is co-leading the organisation’s response to Russia’s war in Ukraine, told SM: “There is a long history of countries using food supplies and food shortage in geopolitical conflict, and food has been used to shape geopolitical relations. Food supplies, and even famine, have been used for political reasons either across nations or within nations.”

As such, the war in Ukraine has highlighted the dangers of becoming reliant on a small number of suppliers concentrated in one region, especially if they are at high risk of geopolitical actions. For instance, 40% of the European Union’s gas supply comes from Russia, while Lebanon imports 50% of its wheat from Ukraine, followed by Libya at 43%, and Yemen at 22%. Almost half of the countries that rely on Ukraine for wheat imports were suffering “severe food insecurity” before war broke out, according to the Centre for Strategic and International Studies. 

The impact of ideologies on supply

However, it isn’t just political conflict that creates volatility for global supply chains, but political trends and ideologies. The rise of former US president Donald Trump and the UK’s decision to leave the EU represented a period of renewed nationalism in western politics. Trump’s economic policy enabled US businesses to prioritise domestic manufacturing and supply chains by reducing imports and investments from other countries.

Trump’s “America first” agenda set out to make the country less reliant on globalised supply chains, particularly Chinese goods and labour, and promised to “bring back millions” of manufacturing jobs to the US. In a post-pandemic world, this initiative could be considered shrewd, but as Trump made international commodities less appealing to US businesses by imposing high taxes, such as a 25% tax on foreign steel and 15% on aluminium, China retaliated with its own tariffs, embroiling the countries in a trade war, which continued under current president Joe Biden.

Remi Charpin, assistant professor in the department of logistics and operations management at HEC Montreal, cautioned against using economic nationalism to “weaken” others economies. He said: “I think it’s very important to differentiate between economic nationalism, which has the intention to improve the economic conditions in the home country, while national animosity is when you’re going to leverage those policies to punish or try to weaken a foreign country.”

As Charpin said, politicising supplies can be a matter of life and death, as the pandemic demonstrated with the race to secure vaccines and PPE. “European integration would suggest you’re going to have supply chains within Europe and countries sharing resources and exploiting each other’s advantages. But when the coronavirus hit we saw it was the opposite. There was not much unity.”

Modern warfare: a battle of supplies

Ultimately, supply chains have become a form of non-military attack during political bargaining. Charpin said: “For the most powerful countries, they’re not going to face each other on the military ground, so it has become more economic and financial. Cutting off countries’ supply and demand is like the most powerful sanction that we can impose.”

It’s more important than ever that procurement teams consider geopolitical relationships when establishing and diversifying their supply chains and pursuing multi-tier visibility. “What you need to do is try to source from other countries, but from safe countries in terms of political alignment because of this national animosity,” said Charpin. “For firms, they should be at least aware of this, and say, okay, if we know one country might be at odds at some point with our government, we have to be careful or have another way to source.”

Dr Ioannis Koliousis, associate professor of logistics and supply chain management at Cranfield School of Management, said it’s difficult to plan for geopolitical tensions and while they are one-off events, unfortunately “we have too many of them happening right now”.

However, there are fundamental steps procurement managers can take to help future proof their supply chains from geopolitical uncertainty. “You need to diversify your supply, but you need to be careful not to have a supply chain that is very extended, because you end up relying on different actors in between different stakeholders,” said Koliousis.

Preparing to respond to political conflict within supply chains requires stringent due diligence, for procurement teams to develop specific risk profiles of suppliers to highlight any risk associated with that area, and to be able to establish a backup plan for those suppliers.

While it’s difficult to find optimism in the current situation, he said the circumstances offer opportunity for change and to strengthen global supply chains. “Once things go back to some sort of normality, we can start with designing the landscape in general. Where are we going to get energy from? What sources of energy will you have? I think now we have to clearly and robustly start thinking about other energy sources like solar and wind, or even nuclear.”  

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