War in Ukraine brings down ‘iron curtain’ on global supply chains

Francis Fukuyama, the American political scientist who once described the collapse of the Soviet Union as the “end of history”, suggested that Russia’s invasion of Ukraine could be called “the end of the end of the story “.

He meant that Vladimir Putin’s assault signals a rollback of the ideals of a free Europe that emerged after 1991. Some observers suggest it could spark a new Cold War, with an iron curtain separating the West of Russia.

As an expert on global supply chains, I think war heralds the end of something else: the global supply chains that Western companies built after the fall of the Berlin Wall more than three decades.

Supply chains – often vast networks of resources, money, information and people that businesses rely on to deliver goods or services to consumers – were already in disarray due to the pandemic. of Covid-19, leading to massive shortages, disruptions and price inflation.

The resulting war and sanctions against Russia put immediate strain on them, causing energy prices to soar and even fears of famine.

But beyond these short-term effects, the war in Ukraine could radically reshape global supply chains in ways the pandemic never has.

Immediate Effects: Fuel and Starvation

Russia accounts for less than 2% of global gross domestic product, while Ukraine only accounts for 0.14%. Therefore, they have little direct impact on global supply chains except in a few very important areas.

Let’s start with the most obvious: energy. Russia provides nearly 40% of Europe’s natural gas supply and 65% of Germany’s. It is the third largest oil exporter in the world, accounting for 7% of all crude oil and petroleum product imports into the United States.

After the Biden administration announced it would stop importing Russian oil, the price of crude rose above $130 a barrel for the first time in 13 years, and consumers in parts of the United States saw the average gasoline prices exceed $5 a gallon.

Less obviously, Russia and Ukraine account for almost a third of all world wheat exports. Several countries, including Kazakhstan and Tanzania, import more than 90% of their wheat from Russia. War has the potential to disrupt the still-recovering global food supply chain and endanger the livelihoods of millions of people.

Even less obviously, Ukraine produces 90% of the semiconductor-grade neon used in the United States. Russia, on the other hand, supplies the United States with more than a third of its palladium, a rare metal also needed to make semiconductors.

Although businesses have enough inventory to meet immediate needs and can find alternative suppliers, some disruption is inevitable. And it comes at a time when the world is still suffering from a severe shortage of chips, which has slowed car production and driven up the prices of new and used cars.

It should also be noted that Russia is a dominant exporter of titanium and titanium forgings, which are popular in the aerospace industry due to their light weight. This war will further strain the aerospace supply chain.

surly trade

While the direct effects of the war on supply chains are relatively limited, the impact on the global movement of goods and services has been significant – I believe even greater than that of Covid-19.

After 36 countries, including EU members, the United States and Canada, closed their airspace to Russian planes, Russia retaliated with the same restrictions. As a result, goods transported by air freight from China to Europe or the Eastern United States may have to be re-routed or use slower or more expensive modes of transport.

The China-Europe rail freight route through Russia, which was booming in 2021 due to congestion at major ports, is now facing increasing cancellations from European customers.

The war has also had a devastating impact on global trade movements, with hundreds of tankers and bulk carriers stuck in ports due to sanctions imposed on ships connected to Russia.

It has also resulted in severe travel and transport restrictions being imposed on Russia and Belarus in an unprecedented, rapid and broad manner, which has been coordinated across multiple nations.

In addition, disruption of China’s route to Europe and the United States could cause serious damage to China’s Belt and Road Initiative. It is the ambitious trillion-dollar project to reshape global trade and assert dominance of a China-centric global supply chain, especially in Europe and Asia.

Since Russia and Ukraine are vital links in the initiative, it will almost certainly have to reduce its size and scope.

Russia went to war with Ukraine – even though both countries had McDonald’s. Photo: AP via The Conversation / Rudi Blaha

New York Times columnist Thomas Friedman, a true proponent of globalization, theorized in 1996 that two countries that both have a McDonald’s would never go to war with each other. McDonald’s has around 850 restaurants in Russia and 100 in Ukraine, all of which have been temporarily closed.

His point was that countries with economies and middle classes big enough to support a McDonald’s “don’t like to go to war; they like to queue for burgers. It was also based on the belief that rational economic calculations would always triumph over geopolitical disputes – that is, the leaders of these countries would not let their differences hinder trade and make money.

And the supply chains companies erected in the decades that followed crisscrossed the globe, ignoring old enemy lines in the name of efficiency and higher profits.

Friedman now admits that Russia’s action shattered that theory. I agree, and in fact the world may be on the cusp of a new type of Iron Curtain supply chain with Russia and its allies on one side and the West on the other. Companies will no longer be able to separate business from geopolitics.

And those allies include China, which remains at the heart of most Western companies’ supply chains. Despite China’s ambiguous position on the invasion, the war is likely to serve as a catalyst to reduce this dependency, at least for critical products such as materials used in semiconductor manufacturing, medical supplies and electric batteries.

Additionally, the growing importance of shareholders and regulators on environmental, social and governance issues means that how a company performs in each category can affect its day-to-day operations and its cost of capital.

As far as Ukraine is concerned, the desire to be more socially responsible is one of the reasons why companies have complied too much with sanctions. It also encourages them to proactively avoid geopolitical risks, which may involve pulling out of an entire economy.

Russia’s war on Ukraine is still ongoing, and there’s no way to know for sure how long the sanctions will stay in place or if the companies that chose to leave Russia will return.

But I believe one thing is certain: global supply chains, like the rest of the world, will never be the same as a result of this war.

Tinglong Dai is Professor of Operations Management and Business Analytics, Carey Business School, Johns Hopkins University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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