A driver in Berlin fills up his taxi with gasoline last week; European leaders are reportedly considering joining the U.S.-led embargo on Russian oil in response to the invasion of Ukraine. (Photo credit: Getty Images/Carsten Koall)
From a supply chain context, Russia’s invasion of Ukraine impacts many economies, industries and companies. The two countries supply crucial metals, rare earth minerals and other commodities that could be hard to source elsewhere, and a prolonged crisis could adversely impact European energy supplies as well as food supply, a recent report by Dun & Bradstreet states.
According to Russia-Ukraine Crisis: Implications for the Global Economy and Businesses, “Russia’s invasion of Ukraine has exposed several geopolitical fault lines: a breakdown in supply chains, inaccessibility of critical raw materials, and an impending commodity crisis.” Trade and trade-route disruption and rising commodity, production and manufacturing costs are just some of the implications.
“As a global supply chain, it now only takes one weak link to disrupt an already fragile supply chain,” says Brian Alster, general manager of finance and risk solutions at Dun & Bradstreet. “The world was focused on globalization over the past two decades, and when an incident like this occurs, we’re all reminded of the interconnectedness that comes with countries linking resources and commerce together, and our reliance of each other as contributors to the global supply chain.”
There are 14,745 Tier-1 and 7.6 million Tier-2 supplier relationships with Russian entities globally, Alster says. “Furthermore, Dun & Bradstreet data shows that at least 374,000 businesses worldwide rely on Russian suppliers, and over 90 percent of these businesses are based in the U.S.,” he says.
One industry that is affected is chip manufacturing. “The impacted region is a key source of mission-critical materials that are used to develop semiconductors,” Alster says. The report notes that more than 90 percent of the neon used in chip lithography comes from Russia, which is also the primary supplier of neon, palladium and other rare earth minerals to Europe. Ukraine has been a big supplier of such metals as iron ore, manganese and titanium.
According to Dun & Bradstreet data, global merchandise export value from Russia and Ukraine is low, with Russia accounting for just 1.9 percent and Ukraine 0.3 percent. But the two countries combined are some of the largest global exporters of certain commodities, including:
- Sunflower oil (59 percent)
- Wheat (26 percent)
- Iron or non-alloy steel (36 percent).
Many countries are highly dependent (defined as importing more than half of its supply of a commodity) on Russian and Ukrainian exports. “By that definition, 25 countries have a high dependency for wheat and meslin, 24 countries for coal, 16 for petroleum gases, and 10 for crude petroleum,” the report states.
Dun & Bradstreet data also shows that nearly 400 companies have critical suppliers (defined as supplying at least US$100,000 in goods and accounting for at least 5 percent of all invoices) in Russia. Of those, U.S., China, India, Japan and United Arab Emirates represent the top five countries.
Playing ‘the Long Game’
The report suggests alternate sourcing countries for numerous key commodities. For example, it lists the U.S., Canada and France as alternatives for wheat; the United Kingdom, South Africa and the U.S. for palladium; Brazil, India and Vietnam for iron and steel; and China, Japan and South America for rare metals.
The need for alternate suppliers has been paramount since the start of the coronavirus pandemic. “The emergence of COVID-19 two years ago was the first wake-up call for supply chain leaders as they clamored to secure products and resources when inventory was low, particularly across key industries such as retail where store shelves were left empty,” Alster says. “Since then, we’ve seen more and more companies take ‘the long game’ — balancing their time trying to remedy the issue of the moment with making data-driven technology investments for the future.”
Such investments quickly pay dividends as supply chain leaders gain greater visibility into their supply chains while having the ability to monitor supplier activity in real-time to identify risk, Alster says. Plus, they better understand all tiers of suppliers so that they can pivot at any time, he says.
“Validating and onboarding alternative suppliers is key to the success of a long-term, more agile management strategy, and every unprecedented event that occurs is just another reminder of why leaders need to build a strong and diverse supply chain to withstand any condition.”
The Energy Impacts on Europe
Sanctions — including against entities and individuals, the freezing of Russian bank reserves and import/export restrictions — also are contributing to supply disruption and economic uncertainty. Russia has claimed that due to sanctions, it may pay its debt obligations in rubles, rather than U.S. dollars. The New York Times reported that on Wednesday, US$117 million in interest payments on debt were due; the Russian government owes around $40 billion in debt while Russian businesses have accumulated about $100 billion in foreign currency debt.
The Dun & Bradstreet report, published in late February, notes that sanctions are likely to negatively impact companies in Russia. Additionally, the report states, “As the crisis worsens, Europe’s energy security will represent a key risk to markets. The threat or reality of supply disruption to hydrocarbon flows will lead to an increase in prices.”
Oil prices rose substantially at the start of the invasion and have been volatile since. Monday, Brent crude was up $4 a gallon to more than $111 a gallon. Reports indicated that European leaders are considering joining the U.S.-led embargo on Russian oil; last week, they were reportedly working on proposals to end the European Union’s dependence on Russian energy imports by 2027. Prices for other commodities also have gone up.
Preparing for Crises to Come
To manage the volatility and uncertainty of prices and supply of critical commodities, Dun & Bradstreet recommends creating a plan that includes:
- A risk-based assessment to determine existing and potential productivity and supply impacts
- Monitoring suppliers (particularly Tiers 1 and 2)
- Finding alternate sources of supply, including examining the time to onboard them and logistics consequences
- Investing in data and technology to facilitate supply chain agility and a more flexible network.
The Russia-Ukraine war is only one crisis impacting today’s supply chains, Alster says: “There are multiple crisis-level events occurring around the world right now that are creating great stress on global supply chains and the economy at large. In addition to the Russia-Ukraine crisis, we’re also seeing other events such as the most recent lockdowns across key electronics manufacturing hubs in Asia as a result of COVID-19, new interest rate hikes and the threat of inflation all playing into the ongoing fluctuation of trade and the availability of goods around the world.”
He continues: “Since this is an ever-changing, dynamic environment, it is too soon and tell what the long-term effects of all of these events will be. However, as we reflect over the past two years, we can see that more unexpected events will occur over time, reminding us that it’s never too soon to invest in data-driven solutions that help supply chain leaders identify risk and create greater opportunity to become nimble.”