The Russian Invasion - Impact on Supply Chains​

As the world observes with horror the situation unfolding in Ukraine and prays for a speedy and peaceful resolution, there is also a need to prepare ourselves for a long, drawn out conflict that will have implications around the globe.

We need to prepare for whatever is next, whether that be expansion of the conflict to involve other parties, or the repercussions of the economic sanctions issued by multiple states and unleashed on the Russian Federation in recent days.

As a nation we need to minimise the impact of these actions that our governments MUST deploy. Our role, as businesses within the economy, is key to stabilising and reducing that impact.

As Russia’s invasion of Ukraine continues, the UK has ramped up a series of economic sanctions put in place as a response. The sanctions placed on Russia will adversely affect the country’s economy and the US is expected to impose even tougher measures than the UK in due course.

According to the Department for International Trade, Russia was the UK’s 19th biggest trading partner in the year 2021. Concerns are focused around commodities like: crude oil, refined oil and gas. The critical fossil fuel supplies that’re vital to the UK’s basic standard of living.

Russia Supply Chain

A closer look at the numbers published by the Office for National Statistics in December 2021, shows the percentage breakdown of Russia’s exports to the UK for that year:

Therefore the UK only relies on Russia for a relatively small portion of its natural gas supplies. Opting instead for a diverse portfolio of gas imports so’s not to be heavily reliant on a single supplier. Likewise, only 6% of the UK’s crude oil comes from Russia.

The prime minister Boris Johnson has been abundantly clear that the sanctions are intended to “squeeze Russia from the global economy” and ultimately motivate economic chaos within Putin’s country to deter him from continued military action.

Johnson’s confidence in managing this risk likely stems from the relatively low percentage of fossil fuel imports the UK accepts from Russia and the fact that there are no direct gas pipelines linking the UK with Russia.

Controlling costs

The bigger challenge will be the UK’s exposure to volatile global gas prices, especially seeing as the European Union relies on Russia for around 40% of its gas. The government’s recent statement also confirmed that their £90 billion investment in renewable energy would further mitigate this exposure. A move away from fossil fuels in general is expected to incentivise cheaper, cleaner energy alternatives within UK borders.    

Another essential commodity that’s exposed is of course food. Both Russia and the Ukraine combined supply the global economy with over a quarter of its wheat. Ukraine alone provides nearly half of the world’s sunflower oil exports.

Given the likelihood of harvest disruptions as a result of the Russian invasion, replacing the losses of wheat and sunflower oil will be a huge challenge for importers around the globe. These challenges will likely manifest in a significant price increase for foods that use these ingredients (of which there are many).

Russian Invasion Impact on Supply Chains - Alternative Routes ​

While production of these key food commodities can be increased in other areas of the world to compensate, transportation within supply chains will also be a factor. The global transportation of goods was, and still is, being adversely impacted by the pandemic. The Russian invasion will have a far reaching impact on the global supply chain.

While rail supply lines are being redirected away from Ukraine, they only carry a small proportion of the total freight that moves between China and Europe. Luckily, many ocean freight ships were already avoiding routes through the Black Sea. However, if Russia were to leverage the large container terminal in Odessa by closing it off from global supply chains; the knock-on effects could have serious humanitarian consequences.

Securing Natural Assets​

Another area in the global supply chain that’s likely to be negatively impacted further is the shortage of microchips. As per recent news headlines, both Europe and the US are investing heavily in microchip production as a result of the bottleneck in supplies coming from Asia. These microchips are crucial to UK industries because of their many applications, particularly in the automotive industry.

And while Europe and the US can focus on making headway with their chip producing hubs, it’s worth noting that around 90% of the neon used to manufacture these chips currently comes from Russia. Not only that but 60% of this neon supply is purified by a single company in Odessa, Ukraine.

What other areas in UK supply chains do you think the Russian invasion will impact?

What steps do you think the UK should take to further mitigate the effects of the Russian invasion on supply chains?

STAR Specialists

Rick Sanderson

Head of Partnerships

Rick Sanderson

Jamie Jarczewski

Senior ESG Lead

Jamie Jarczewski

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