Before we begin, we want to express our sadness at the events unfolding in Ukraine. The thoughts of everyone at CNECT are with those who are affected by this unnecessary violence.
The tragic situation in Eastern Europe is having a global impact. As governments decide on their response and issue sanctions for Russia’s actions, businesses are doing their best to protect themselves against the potential repercussions of the war. One particularly concerning area for businesses is the global supply chain.
Already weakened by two years of chaos, and with doubts over a potential recovery in 2022 lingering, the supply chain is certain to be further disrupted by the conflict. In this article, CNECT looks at the potential threats to global supply.
Over-Reliance on Russian and Ukrainian Imports
For a variety of commodities, Ukraine and Russia are primary suppliers. More than 72% of the world’s sunflower oil comes from one of the two countries, along with more than 25% of barley and wheat1. As a result, a shortage of some grains and foodstuffs is likely, and prices will inevitably increase. The effects have been felt quickly, and on March 1, wheat futures trading on the Chicago Board of Trade reached their highest levels since the global financial crisis2.
Another big concern for the U.S. is that Russia produces 12% of the world’s oil and 17% of the world’s gas. Initial uncertainty was reflected in the market almost immediately. Less than a week after Russian troops invaded Ukraine, gas prices in Los Angeles soared above $6 per gallon3, and the average gas price across the U.S. climbed nearly 8 cents4. Then, on March 8, President Joe Biden announced a complete ban on Russian oil, gas, and coal imports5, which will result in gas prices rising even further.
It’s not just gas prices that are soaring; essential metals are also becoming increasingly expensive. Russia is the fifth-largest global producer of steel, while Ukraine ranks 13th on the list6. In the first week of March, benchmark steel prices in Europe surged 22%7, as a number of Ukrainian steel producers were forced to idle their plants and Russian firms faced difficulties in exporting their product. On March 8, the price of Nickel on the London Metal Exchange (LME) increased exponentially, doubling to a total surpassing $100,000 per ton, which forced LME to halt nickel trading and cancel trades8.
Halted Manufacturing of Worldwide Goods
The fighting in Ukraine is not just impacting the cultivation of agricultural commodities; it’s also brought manufacturing to a halt. With Russia shelling cities across Ukraine, and people seeking refuge in safe spaces, plants and factories are limiting or stopping their operations. Among the manufacturers who have already taken action are multinational companies such as Carlsberg, Coca-Cola, ArcelorMittal, and Mondele9.
The automotive industry is one that has instantly felt the effects of halted manufacturing in Ukraine. Five of the world’s top 100 auto suppliers have manufacturing operations in the country which will be affected by Russia’s invasion. A shortage of crucial electronic components produced in Ukraine has already resulted in Volkswagen, BMW, and Porsche slowing production of their vehicles in Europe10. On the other side, Russia is a key exporter of the materials used to make automotive catalytic converters, and the world’s third-largest producer of nickel ore, which is commonly used in electric vehicle batteries, alloys, stainless steel, and casting11. As the conflict continues, and further sanctions are placed on Russia, the automotive supply chain will be directly affected.
The healthcare industry is also expected to feel the impact. The global availability and pricing of plastics will be directly impacted by the stifled supply of Russia’s gas and oil, two important resources in the plastic production process. These plastics are used to produce many common healthcare items, including trays, syringes, specimen bottlers, pill containers, and sharps containers11. Further concerns surround the availability and pricing of key base metals, including nickel, as mentioned above, as well as aluminum, titanium, neon gas, and iron ore. These commodities are used in the production of surgical instruments, orthopedic implantable products, and durable medical equipment11.
Along with the automotive and healthcare sectors, the following industries will potentially be affected12:
- Consumer Electronics
- Oil & Gas
- Industrial Chemicals
- Cosmetics & Skincare
- Power & Energy
- Power & Energy
- General Manufacturing
- Life Sciences
- Food & Beverage
- Furnishing Goods
- High Tech
- Natural Resources & Mining
The Threat of Cyberattacks
Even before Russian President Vladimir Putin ordered the invasion, Ukraine was being hit by Russian-led cyberattacks. On February 23, several Ukrainian government websites were hit by a distributed-denial-of-service (DDoS) attack, including the country’s Ministry of Foreign Affairs and Cabinet Ministry13. This followed reports a week prior from the Ukrainian government of other cyberattacks14.
Though cyberattacks on Ukrainian websites are unlikely to have a direct impact on the supply chain, futures attacks might. As countries across the world place sanctions on Russia — which we’ll come to soon — it is widely expected that Russia’s retaliation could come by way of cyberattacks, with risk analysts suggesting that they may target critical supply chain companies and infrastructure in the aerospace, defense, energy, and agriculture sectors15.
Concerns about the threat of Russian cyberattacks were heightened in late February, when the government’s Cybersecurity & Infrastructure Security Agency (CISA) issued a rare ‘shields up’ warning16. At the time, CISA said:
“While there are no specific or credible cyber threats to the U.S. homeland at this time, Russia’s unprovoked attack on Ukraine, which has involved cyber-attacks on Ukrainian government and critical infrastructure organizations, may impact organizations both within and beyond the region, particularly in the wake of costs imposed by the United States and our Allies. Every organization—large and small—must be prepared to respond to disruptive cyber activity.“
The Impact of Sanctions
The global response to Russia’s actions has been to issue severe, wide-ranging sanctions on the country and its citizens. They have been led by the U.S. and the European Union, with countries including the UK, Japan, New Zealand, Australia, and even historically neutral Switzerland also ordering their own sanctions. Some of the most impactful sanctions issued by the U.S. include:
- Joining with the EU, the UK, and Canada to ban certain Russian banks from SWIFT, a high-security network that facilitates financial payments across the globe.
- Barring Russian financial institutions from making transactions in American dollars and cutting off 13 major state-owned companies from raising money in the U.S.
- Banning all imports of Russian oil, gas, and coal.
- Blocking software and technology exports to Russia.
While these sanctions17 are designed to weaken President Putin’s position and eventually lead to Russia’s withdrawal from Ukraine, they will also have a global impact. The removal of Russian firms from the SWIFT system will make international transactions extremely difficult, stymying global trade. Meanwhile, prohibiting software and technology exports will directly affect companies with manufacturing facilities in Russia, disrupting their operations and further reducing the production and subsequent availability of goods.
Another concern is Russia’s response. It is yet to be seen what, if any, retaliation President Putin will order. But, with the Russian rouble trading near record lows in early March18, and the Russia central bank raising its key interest rate from 9.5% to 20%19, the effects of the global sanctions is almost certain to lead to some form of action.
The effects of Russia’s invasion of Ukraine on the global supply chain will be felt for a long time to come, so now is the time to ensure your organization’s supply chain is resilient enough to withstand the impact.
Last Updated: March 9, 2022