The impact on global supply chains if Russia invades Ukraine

A Russian invasion of Ukraine has the potential to create devastating disruption to supply chains across industries, from energy to agriculture, high tech, aviation and automobiles. Per Kristian Hong, a partner at strategic operations consultancy Kearney, outlines some of the main supply chain impacts that could be expected.

While US and European supply chains include relatively few tier 1 Russian or Ukrainian suppliers, the risks increase substantially when indirect relationships with suppliers at tier 2 and tier 3 are included, and even further when factoring in raw materials and energy sources.

Dangerous supply disruptions and further price shocks

Russia is the world's second-largest oil exporter after Saudi Arabia, producing more than 5 million barrels of crude per day, nearly half of which is supplied to European countries. Russia also provides over a third of the European Union’s natural gas.

A disruption to these supplies could send energy prices through the proverbial roof. Oil futures have increased by nearly 45 percent since December 1, when crude was trading at around $65 a barrel. Some estimates suggest that a Russian invasion could raise oil prices to $150 a barrel, cut global GDP growth by close to 1 percent, and double inflation. Even a smaller spike to $100 a barrel would send operating costs and consumer prices soaring when companies and consumers already face high energy bills.

In addition, Russia controls roughly 10 percent of global copper reserves and is a major producer of aluminium, nickel, platinum, and other precious metals that are integral to the manufacture of everything from kitchen appliances to laptops to mobile phones, while the chip industry relies heavily on Ukrainian-sourced neon.

Supply disruptions in these and other key commodities will trigger price increases for economically vital products such as batteries, and hinder the manufacture of semiconductors, jet engines, automobiles, and some medicines.

The agricultural sector will also be hit hard, as our interconnected global supply chains are sensitive to even small disruptions in one region. Ukraine is among the world’s largest exporters of corn, barley, and rye; Russia is the world’s top wheat exporter. Food inflation will accelerate significantly with fresh price shocks stemming from increased energy costs, seizures of agricultural areas, and the sweeping economic sanctions promised by Western governments.

For example, natural gas is a critical input into fertilizer. Fertilizer manufacturers across Asia, Europe, and North America have already been curbing output over the past several months due to rising input costs. Rising fertilizer costs and widespread shortages would force many farmers to scale back. The resulting smaller harvests would drive up food prices around the world at a time when global food shortages already pose serious challenges such as increasing risks of famine and mass migration.

Economic sanctions and rising cyber repercussions

The West has promised to impose swift, firm, and “unprecedented” level sanctions against Russian energy producers, key mining and steel manufacturers, and financial institutions. These sanctions will likely include significant restrictions on banks sending and receiving messages through the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which would severely limit access to funding, make access to external borrowing nearly impossible, and halt many business transactions.

Following the first wave of sanctions, deep embargoes on American and European technologies for the energy sector also seem a probable sanctions target, which could hinder oil and gas supply for years to come.

Russia, in turn, would likely view sanctions imposed by the West as economic warfare. In 2014, the last time significant sanctions were levied against Russia for its annexation of Crimea, Russia introduced counter-sanctions, banning food and other imports by “aggressor” countries.

This time around, Russia may well deploy its daunting cyber capability in an indiscriminate, asymmetrical response that could sow chaos across Western economic systems and business enterprises. For years now, Russian cyber forces have been actively probing for vulnerabilities – and they have certainly found them.

The notorious SolarWinds attack in 2020, for example, compromised nearly 30,000 public and private organizations. There is every reason to fear that Russia could (and would) penetrate corporate firewalls to bring down 2nd and 3rd tier suppliers in a chain of attacks that could devastate supply flows.

Global repercussions

Finally, a Russian invasion of Ukraine will almost certainly have wider geopolitical repercussions that could greatly compound the pressures on global supply chains. The squeeze from the West has increased Moscow’s interest in cooperation with Beijing.

This emerging Sino-Russian partnership – with its unstated but transparent goal of reducing Western economic global dominance – is actually the most important consequence from the deterioration of Russian-Western relations, as it will change the face of geopolitics for years to come.

The world is clearly poised on a very dangerous ledge, and the Ukraine crisis may develop into the biggest test yet of the resilience of global supply chains, which are still healing from years of unprecedented stress. The risks envisioned above may represent a worst-case scenario, but events can move very quickly in unpredictable ways. While we may hope for the best, we should prepare for the worst.

Some executives in Europe and the US are taking decisive actions to mitigate the potential impact that a Russia-Ukraine military conflict would have on their operations, including:

• Developing visibility to the entire value chain across primary, secondary, and even tertiary players. Who makes critical parts? Are there alternate sources? What is the suppliers’ inventory status? Discuss business continuity plans with key suppliers.
• Anticipating continued increases in oil and natural gas prices. Secure supply if these are a key input for your products.
• Recognising that transportation costs will increase. Mitigate by ensuring that loads run full, redoubling efforts to find back hauls, etc.
• Building inventories of products most susceptible to shortages of Russian and Ukrainian raw materials. Qualify and prepare to switch to alternative sources for essential goods.
• Deploying scenario planning. The goal is not to gauge “if” a disruption will happen, but rather to shape action plans ready to deploy “when” adverse conditions arise.

No one knows how the Ukraine crisis will unfold. Resilience is about being practically prepared for unforeseeable contingencies. With rigorous analysis, planning, and execution, you can successfully navigate the world’s ceaseless and unsettling twists and turns.

Per Hong is a partner in Kearney’s Strategic Operations practice, helping clients to navigate disruption and build long-term strategic advantage. He’s been with Kearney for 25 years and spent more than six years leading the firm’s Russia unit in Moscow.