The entire world is watching the Russian invasion in Ukraine. Sadly, the humanitarian toll will likely be the most devastating result for the region. We want to focus upon the global effects of this conflict on the worldwide supply chain, inflation and Geo politics in order to be better prepared for what's ahead.
Supply Chain Effects
In terms of transportation, the impacts won’t just be on fuel prices. The national average for a gallon of on-highway diesel crossed the $4 mark this month for the first time in almost 8 years. Certainly, these increases will be included in freight rates moving forward. The invasion will create major new constraints on Asian ocean and air exports with spot container pricing. 336,500 TEUs were transported from China to the EU by rail in the first six months of 2021, that is 44% more than 2020 and 99% more than in 2019. Those shipments need to go by Ocean or the more expensive Air mode if ship berths can’t be found.
While the impacts of disruption of trade between US and Europe and Russian and Ukraine are miniscule in comparison to the disruption of trade with China that occurred because of the pandemic, the impacts are not insignificant.
An estimated 2,100 U.S.-based firms and 1,200 European firms have at least one direct (tier-1) supplier in Russia. More than 450 firms in the U.S. and 200 in Europe have tier-1 suppliers in Ukraine. Software and IT services account for 13% of supplier relationships between U.S. and Russian/Ukrainian companies.
Food inflation is a risk from a supply chain disruption. Ukraine is on track to being the world’s third-largest exporter of corn, and Russia is the world’s top wheat exporter. Ukraine is also a top exporter of barley and rye.
The conflict could squeeze metal markets. Russia controls roughly 10% of global copper reserves and is also a significant producer of nickel and platinum. Nickel has been trading at an 11-year high, and further price increases for aluminum are likely with any disruption in supply caused by the conflict.
Inflation Concerns
Political unrest in an oil rich region is the last thing our economy needs presently. Brent crude is rising above $105 a barrel for the first time since 2014, after Russia's attack on Ukraine exacerbated concerns about disruptions to global energy supply. "Russia is the third-largest oil producer and second-largest oil exporter. Given low inventories and dwindling spare capacity, the oil market cannot afford large supply disruptions," said UBS analyst Giovanni Staunovo in a Reuters article. Global oil supplies remain tight as demand recovers from pandemic lows. “Supply concerns may also spur oil stockpiling activity, which supports prices.” “What we’re observing is essentially an energy price shock and a financial markets shock that comes on the back of this already concerning inflation environment, an environment in which global supply chains are already stressed and in which there is already some degree of uncertainty as to the outlook,” said Gregory Daco, chief economist at EY-Parthenon. “It’s not just a shock in isolation, it’s a shock in that context.” There will surely be ripple affects felt throughout several markets.
Russian markets took a hit after Western countries stepped up sanctions in retaliation for Russia's invasion of Ukraine, the biggest assault on a European state since World War Two. In response, President Vladimir Putin ordered his military command to put nuclear-armed forces on high alert on Sunday.
Russia's central bank announced a slew of measures on Sunday to support domestic markets as it scrambled to manage the fallout of the sanctions that will block some banks from the SWIFT international payments system. The stock market has been closed all week.
The Rouble is taking a massive hit in currency markets. The Russian central bank raised its key interest rate to 20% in an emergency move to support the rouble and address inflation risks. Western sanctions are likely to make this invasion of Ukraine a very costly maneuver for Russia.
Strained Relations With Russia
The Russian central bank raised its key interest rate to 20% in an emergency move to support the Rouble and address inflation risks. The financial sanctions seem to be having a serious effect on the Russian currency system. Protests in Russia have a strong following given the strict punishments to those who question the Kremlin. Dwindling support at home, an arguably underpowered invasion, and the fighting spirit of a massive under dog are all generating tremendous worldwide support for Ukraine. In the world stage of chess games Russia may have, initially, underestimated its opponent and now must make some aggressive moves to balance the game at this point. This is the scary scenario. No one is sure what Putin will do when backed up. He is supported by a few countries with similar political ideologies as Russia. But mostly it seems, the entire world has expressed their support for Ukraine.
Please let us know if there is anything we can do for your organization in these challenging times. Let there be peace.
Stay Safe Everyone.
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Author
Michael Gaughan
Technology Officer
Land Link Traffic Systems
Land-Link, a well respected professional organization, has been providing its clients with effective transportation and logistics solutions since 1978.
