The Supply Chain War

The Supply Chain War

The Russian invasion of Ukraine is causing widespread ripple effects around the world, across many aspects of life; one of the most notable being turmoil in the energy markets. This instability is worrisome for the average consumer and only adds another challenge to the already strained supply chain that has been breaking down since the beginning of the pandemic.

As of this writing, Russia, despite indiscriminate targeting of civilians, has not been able to make significant inroads in Ukraine. Rounds of negotiations have not gone anywhere. The war continues and the West has been attempting to counter Russia through crippling sanctions.

Along with this strategy, many US-based global companies decided to withhold operations in Russia – not just energy companies such as Shell, which buys Russian oil and gas, but iconic consumer brands such as McDonalds and Starbucks. A full list can be viewed here.

This war could be called the “Supply Chain War,” as logistics and supply chain issues have hurt Russia’s attack on Ukraine. Spring, the muddy season when snow melts, is fast approaching and could seriously impact Russia’s war efforts. Indeed, mud has already played a serious role in bogging down vehicular movements.

Supply chain challenges are also relevant on the Ukrainian side, in that their forces are relying on military and humanitarian aid from the West to hold out against the Russians. Closer to home, we’re dealing with supply chain issues this war has only made more challenging.

Shipping problems on the Black Sea

We are not yet out of the pandemic, with new variants already visible on the horizon. Though media coverage has focused exclusively on Ukraine, Covid-19 drastically impacted the global supply chain. This war, however, has impacted many industries, specifically grain, metals, and auto manufacturing.  

This Fox Business article reports “This shock to global grain supply is the biggest supply shock since the OPEC oil cuts in the 1970s,” said Salvatore Mercogliano, a professor at Campbell University in North Carolina and former merchant mariner. “It will mean food shortages in the Middle East and Africa, and inflation across the world.”

A major bottleneck is the result of threats of violence by Russian forces, which has hobbled cargo ships now stationed in the Black Sea. As cargo ships are unable to transport commodities such as wheat, there hasn’t been a naval bottleneck and hit to the food supply chain like this since World War II.

Russia’s strategy, which in the south of Ukraine has been more successful than the north, has been to cut access to the ports and strangle the economy. The Russian navy has also been accused of using cargo ships as cover in their invasion from the Black Sea.

Transportation supply chain challenges

An area which could impact business as well as our daily lives is the supply chain around auto manufacturing. This industry is dealing with a shortage of metals used in the production of cars and computer chips, along with rising energy prices which will impact everyday personal transportation decisions.

As this Reuter’s article notes, “The conflict’s impact on shipping, rail and air freight has been compounding problems in the European auto supply chain at a time when inventory levels were already low and carmakers were still reeling from a chip shortage and soaring energy prices. As well as high-grade nickel, the price of metals used in car production, from aluminum in bodywork to palladium in catalytic converters, has also soared since the invasion.”

And this CNN article covers how much of the world’s metals are exported from Russia, and their key to the supply chain: Moody’s pointed out that Russia supplies 40% of the world’s palladium, a key resource used in the production of semiconductors. Moreover, Moody’s said Ukraine produces 70% of the world’s neon, a gas used in making computer chips.”

Food supply chain challenges

Ukraine has traditionally been a supplier of wheat (along with Russia): “According to Commerzbank AG, Russia and Ukraine together account for almost a third of the world’s wheat exports and almost 20% of its corn exports.”

The war will cause prices for basic commodities to rise and could impact regional stability. Price increases for basic foods as a result of inflation and food scarcity could challenge stability as so many live under the poverty line in politically unstable places like the Middle East.

Thanks to its abundance of natural resources, the United States has the ability to cope with a supply chain crisis. While there are many positives to a globalized economy, reliance on bad actors such as Russia could see countries moving to a self-sufficient model. This will take time, and we will have to sacrifice paying more in the meantime. 

On a positive note, similar to green energy initiatives kicking into high gear as a result of the need for energy independence, localized farming could also take off in many developing countries to solve hunger challenges. 

While supply chain challenges will not end soon and may worsen, the silver lining is finding creative solutions to these challenges, which may usher in a period of rapid innovation.