Prospects for a supply chain recovery in 2022 suffered a devastating setback this week when Russian forces invaded Ukraine.
Analysts expect the conflict to immediately drive up already high oil prices, which surged past $100 a barrel on Feb. 24 for the first time in nearly a decade. Russia is the world’s third-largest oil producer and the second-biggest exporter.
“This will not be good for energy prices, production, or trade,” World Trade Institute Managing Director Joseph Francois told Bloomberg. “Certainly, we will have, and are already seeing, a spike in energy prices. This will have knock-on effects on production, especially in Europe, which will dent the recovery of trade from the COVID recession.”
But higher energy prices won’t be the only economic aftershocks. Additional fallout will almost certainly include higher shipping costs (including insurance) and increased cyber threats.
According to the World Trade Organization, Russia’s the 16th largest goods exporter. Interos, a supply chain start-up, found that “More than 2,100 U.S.-based firms and 1,200 European firms have at least one direct (tier-1) supplier in Russia. In addition, more than 450 firms in the U.S. and 200 in Europe have tier-1 suppliers in Ukraine.”
Ukraine is also known as the “breadbasket of Europe,” Keelvar CEO Alan Holland told CNBC, and the invasion will hit the regional food supply chain hard. Analysts explain that Ukraine produces and exports wheat, barley, rye, and corn to several European, African, and Asian countries. In 2021, Ukraine surpassed the United States as China’s largest corn supplier. Corn and wheat futures have already jumped by double digits since the start of the year, and supply disruption in Eastern Europe will only make things worse.
Russia is also the world’s top exporter of wheat, and, along with Ukraine, the two countries make up nearly 30% of the world’s wheat exports.
Response Could Be Just as Disruptive
President Biden quickly announced another round of “sweeping financial sanctions and stringent export controls that will have a profound impact on Russia’s economy, financial system, and access to cutting-edge technology,” according to the White House.
The European Union, Britain, Australia, Canada, and Japan also announced sanctions on Russia, while Germany said it would halt the certification process of the Nord Stream 2 gas pipeline. These sanctions will almost certainly further constrict an already-strained supply chain, as the world’s largest markets cut off Russia.
Over in the private sector, Nestlé, the world’s biggest food manufacturer, announced it would halt production and distribution in Ukraine. The company operates three plants and employs more than 5,000 in the former Soviet republic.
“We have recommended to our employees to stay at home and follow the latest official guidance from the government and local authorities,” Nestlé announced in a press release. “At this time, all our colleagues are safe, and we remain in constant contact with them and are doing everything we can to prioritize their safety, adapting our plans in line with the changing environment. We remain committed to continuing to serve the local people and have contingency plans in place to ensure we can restart the supply of our products as soon as safe conditions allow.”
TraceGains remains committed to our customers and suppliers worldwide in our collective mission to drive a more adaptable and diverse food supply ecosystem. Alongside our global network of manufacturers and suppliers – more than two dozen of which operate in the region – we join in the hope for a speedy and peaceful resolution to the Ukraine crisis.