A Russian invasion of Ukraine has the potential to cause “extensive and debilitating” supply chain disruption across the globe, according to research.
Russia and Ukraine are “key” to global supply chains, a report by risk management company Interos has found, and it warned conflict between the two countries could put “thousands” of companies across the globe at risk.
The report comes after Russia placed 100,000 troops near the border with Ukraine, partly in protest against the expansion of Nato throughout eastern Europe since the 1990s and the fall of the Soviet Union.
Interos found more than 1,100 US-based firms and 1,300 European firms have at least one direct supplier in Russia. More than 400 firms in both the US and Europe have tier one suppliers in Ukraine.
Software and IT services account for 12% of supplier relationships between US and Russian/Ukrainian companies. Trading and distribution account for about 9% of relationships and oil and gas 6%.
More than 5,000 firms in the US and Europe have Russian or Ukrainian suppliers at tier three. This represents 2.76% and 2.37% of their respective supply chains.
It is “key” supply chain leaders review their dependence on Russian and Ukrainian suppliers at multiple tiers and this was an essential “first step in assessing risk exposure in the region and ensuring operational resilience".
In order to mitigate any disruptions that arise from a conflict, the report urgered procurement teams to evaluate required levels of inventory and labour in the short to medium term; discuss business continuity plans with key suppliers; and prepare to switch to, or qualify, alternative sources for essential products and services.
These are some of the ways conflict between the two countries could impact on global supply chains.
1. Gas prices
Geopolitical tensions between Russia and Ukraine risks inflation to global gas prices.
Russia supplies over a third of the EU’s natural gas supplies, and threats to this supply could “force up prices when companies and consumers are already facing higher energy bills”.
The report warned pressures on natural gas supplies could trigger volatility across other energy markets. It said a Russian invasion of Ukraine could see oil prices soar to $150 a barrel, which would lower global GDP growth by almost 1% and double inflation. Furthermore, it explained, even if oil were to rise by $100 a barrel, this would cause input costs and consumer prices to soar.
2. Food prices
The conflict may also result in food price inflation. Ukraine is set to be the world’s third-largest exporter of corn according to the International Grains Council, while Russia is the world’s top wheat exporter. Ukraine is also a top exporter of barley and rye.
Rising food prices would “only be exacerbated with additional price shocks, especially if Russian loyalists seize core agricultural areas in Ukraine,” the report said.
British MP Tobias Ellwood, chair of the House of Commons Defence Select Committee, told Times Radio: “There will be huge impact on gas and oil prices and grain as well. The price of biscuits, can you believe it, will actually increase simply because Ukraine produces a third of the world’s grain.”
Additionally, of the 14 countries that rely on Ukraine for more than 10% of their wheat imports, the majority already face food insecurity and political instability.
3. Cyber security
The report highlighted previous Russian cyber attacks on Ukraine, and warned conflict in the area could result in further cyber attacks on supply chains.
It said Russian attacked Ukraine’s electricity grid in 2015 and again in 2016, leaving hundreds of thousands of Ukrainians without power. However, these attacks don’t simply impact Ukraine, but such “destructive attacks on the country’s infrastructure could also spark significant collateral damage in global supply chains”.
In 2017, Maersk, Merck and FedEx lost a combined total of $7.3bn after a cyber attack on Ukrainian tax reporting software spread across the world in hours. The attack disrupted ports, shut down manufacturing plants, and hindered government agencies.
The research said the US Cybersecurity Infrastructure and Security Agency (CISA) urged companies to prepare for potential Russian cyber attacks.
CISA said: “If working with Ukrainian organisations, take extra care to monitor, inspect, and isolate traffic from those organisations; closely review access controls for that traffic.”
4. Export controls and sanctions
US and European export controls could exacerbate commodity cost pressures. “The use of such controls to restrict certain companies or products from supply chains has soared over the last few years,” said the report. “While many have been aimed at Chinese companies, a growing number of Russian firms have been earmarked for export controls for 'acting contrary to the national security or foreign policy interests of the United States'.”
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