Following orders from Russian President Vladimir Putin, Russian forces invaded Ukraine Feb. 24, 2022. Russian forces have faced stiff opposition from Ukraine’s military and wide economic and diplomatic sanctions from most global powers. Ukraine Ministry of Defense photo.
But beyond these short-term effects, I believe the war in Ukraine could drastically reshape global supply chains in a way the pandemic never did.
Immediate effects: Fuel and famine
Russia accounts for less than 2% of global gross domestic product, while Ukraine accounts for only 0.14%. As a result, they have little direct impact on global supply chains – except in a few very important areas.
Let’s start with the most obvious one: energy. Russia supplies 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 signaled it would stop importing Russian oil, the price of crude topped US$130 per barrel for the first time in 13 years, and consumers in some parts of the U.S. have seen average gasoline prices rise above $5 per gallon.
Less obviously, Russia and Ukraine account for nearly one-third of all global wheat exports. Several countries, including Kazakhstan and Tanzania, import more than 90% of their wheat from Russia. The war has the potential to disrupt the still-recovering global food supply chain and endanger the livelihoods of millions of people.
It is also worth noting that Russia is a dominant exporter of titanium and titanium forgings, which are popular in the aerospace industry because of their light weight. This war will further stress the aerospace supply chain.
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 from COVID-19.
The war has also had a devastating impact on global trade movements, with hundreds of tankers and bulk carriers stranded at ports as a result of sanctions imposed on Russian-connected ships. It has also resulted in severe travel and transport restrictions imposed on Russia and Belarus in an unprecedentedly rapid and broad manner that has been coordinated among multiple nations.
In addition, the disruption of the route from China to Europe and the U.S. could do severe damage to China’s “Belts and Roads” initiative. That’s the ambitious trillion-dollar project aimed at reshaping global trade and affirming the dominance of a China-centric global supply chain, especially in Europe and Asia. Because both Russia and Ukraine are critical links in the initiative, it will almost certainly need to scale back in size and scope.
A supply chain Iron Curtain
The New York Times columnist Thomas Friedman, a true believer in globalization, in 1996 famously theorized that no two countries that both have a McDonald’s would ever fight a war against each other. McDonald’s has about 850 restaurants in Russia and 100 in Ukraine, all of which have now been temporarily closed.
His point was that countries with economies and middle classes big enough to support a McDonald’s “don’t like to fight wars; they like to wait in line for burgers.” It was also based on the belief that rational economic calculations will always triumph over geopolitical conflicts – that is, leaders in such countries wouldn’t let their differences get in the way of trade and making money.
And the supply chains that companies erected in the decades since then have crisscrossed the globe, ignoring old enemy lines for the sake of efficiency and higher profits.
Friedman now concedes Russia’s action has shattered that theory. I agree, and in fact the world may now be on the cusp of a new type of supply chain Iron Curtain 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.
Russia’s war against Ukraine is still ongoing, and there’s no way to know for certain how long the sanctions will remain in place or whether companies that have chosen 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 again as a result of this war.
This story appeared first in The Conversation on March 11, 2022. The Conversation is a community of more than 135,400 academics and researchers from 4,192 institutions.
Coffee or Die is Black Rifle Coffee Company’s online lifestyle magazine. Launched in June 2018, the magazine covers a variety of topics that generally focus on the people, places, or things that are interesting, entertaining, or informative to America’s coffee drinkers — often going to dangerous or austere locations to report those stories.