As people in the Ukraine and around the world anxiously monitor the threat of war with Russia, supply chain managers must take stock of the risks to their supply chains and focus on potential mitigation measures. Of course, business disruptions cannot be weighed on the same scale as the deaths and human suffering that would result from a war. But the risk of war is already impacting supply chains, and an invasion of Ukraine by Russia would trigger extensive and enduring disruptions which supply chain and procurement managers should assess and prepare for.
Disruptions will be both direct and indirect—with the most significant indirect impacts already manifesting in the form of upward pressure on oil and gas prices. “Oil prices have risen to well over $90 a barrel — their highest levels since 2014 — in recent days as fears of war have grown,” reported the New York Times last week. Russia produces about 12% of the world’s oil and is Europe’s largest natural gas supplier. An invasion would send prices for both fuels higher, leading to more inflation, rising costs for a wide range of commodities including food, as well as freight surcharges and impacts on downstream markets.
Other potential indirect risks include Russian cybersecurity attacks on the U.S. and Europe, refugee crises in Europe and even popular uprisings among the poor in countries that rely on Ukrainian grain exports. Direct impacts on corporate supply chains would include loss of access to Russian and Ukrainian suppliers due to combat in the Ukraine and economic sanctions against Russia—GlobalTradeMag.com estimates that more than 5,000 U.S. and European firms have tier 1, 2 or 3 suppliers in Russia or the Ukraine. Delays and shortages would also arise for many materials, parts, and components as supply chain executives make risk buys in anticipation of disruptions.
But an effective and efficient supply chain risk management response to the crisis should weigh different scenarios. In a recent Supply Chain Special Risk Report: Russia-Ukraine Crisis, Resilinc analysts estimated supply chain impacts and suggested mitigation actions for three scenarios: a best case in which there is no immediate invasion but continuing uncertainty about future Russian escalations; a mid-case involving a limited Russian incursion; and a worst-case large-scale invasion, Russian-engineered regime change, and enduring changes to the geopolitical landscape in Europe.
The mid-case scenario forecasts constraints and price increases for critical metals such as titanium, nickel, copper and palladium, as well as aluminum which is sensitive to energy prices. Energy shortages in Chinese provinces that import Russian natural gas would worsen. And electronics, automotive, aerospace, food, healthcare, and other industries would see supply allocations and revenue impacts. The worst-case scenario includes all these impacts, plus stronger effects on energy and commodity prices, the loss of Russian and Ukrainian suppliers and severe macroeconomic and geopolitical challenges worldwide.
Suggested action plans are most extensive for the mid- and worst-case, and as occurred in the pandemic and other widespread disruptions, the companies that have already invested in multi-tier supply chain mapping and developed playbooks for alternate sourcing and other measures will fare the best.
An historical analysis of past geopolitical conflicts between Russia and the West indicates that disruptions in trade may not endure long. U.S.-Russian trade has dropped in recent conflicts, especially Russian aggression in Chechnya and Georgia. But after short-term declines, trade has resumed and even grown, according to Resilinc’s analysis of data from PONARS Eurasia. Despite conflicts, trade and supply chains proved to be resilient due to mutual interdependence for fuels, materials, parts and components; Russia’s desire to avoid deep economic damage; and pressure from industries that are dependent on supply chains with Russian dependencies.
This history may be upended with a deadly and prolonged war between Russia and the Ukraine, but the potential for disruptions to be short term should be considered in scenario planning. Not only will most of the world celebrate a best-case outcome, supply chain managers would have done all they could to manage risks while avoiding costly and redundant mitigation actions.
