Ukraine War’s Supply Chain Impact

Ukraine War’s Supply Chain Impact

In February 2022, Russian forces invaded Ukraine. While this is a terrible humanitarian event, it also impacts the global economy. There are economic repercussions not only in Europe, but also across the globe, especially since the timing of the war was not ideal.

As economies recovered from the pandemic, the conflict between Russia and Ukraine exacerbated existing unsolved problems. The underlying global economic issue is the supply and demand imbalance inherited from the pandemic.

Based on calculations done before the war, global GDP was forecast to grow by 3.6% in 2023. The latest forecasts show 1.3% growth for the year. Similarly, pre-war, Atradius predicted that global trade would grow 4.5% in 2022 and 3.5% in 2023. However, the estimated figures are now 3% and 1.5% respectively.

Impact on Commerce

Russia and Ukraine are the countries most affected by this war. While these two countries don’t appear to be major players internationally—representing less than 2% of global GDP combined—much of what they do contribute to the global economy is important for commerce.

Russia is a main supplier of oil and gas to European nations, and that supply has dropped by 80% since the start of the war. This shortage forced European countries to scramble for energy alternatives in the United States and the Middle East, but at a much higher cost.

This shortage has caused high global energy prices, as well as record profits for oil and gas companies. It has also brought about major changes to the global energy trade, mainly U.S. crude oil and liquefied natural gas (LNG) exports to Europe.

U.S. oil and gas will continue to fill Europe’s energy supply gap in the short term, but this crisis will also expedite policies to speed up the transition away from fossil fuels. Expect to see more investment and momentum in cleaner LNG alongside efforts to reduce the greenhouse gas impact of trade.

Energy hikes also impact food production costs. Russia and Ukraine accounted for a good part of wheat, corn, barley, and fertilizer exports. In 2023, fertilizer shortages will be a significant constraint on global food supply.

Commodities were also affected over the past year. Russia is a major supplier of nickel, used in battery production, and Ukraine is a major supplier of neon, used in semiconductors.

When Russia first invaded Ukraine, we expected that the conflict would be complete by the end of 2022. One year later, we now expect the two countries to remain in protracted conflict, at least as long as Western military support continues. Combined with simmering tensions in Beijing, this could ensure global value chains will continue to shift, with U.S. producers opting for trade with neighbors and allies.

Taking on the Challenges

Rerouting supply chains is expensive. Identifying and vetting new suppliers can be complex and time-consuming. Companies are also dependent on transportation and logistics infrastructure, which may need to be upgraded, leading to delays and reduced product quality.

With inflation already weighing on margins, taking on these extra costs is a difficult choice but can contribute to a more sustainable long-term strategy.

Price volatility and economic uncertainty will continue throughout 2023. To help businesses find some extra cash flow, it would be a good idea to increase the efficiency of current resources and expand investment in lower carbon fuels and other clean energy technology—this could be a win-win for the sector in the interest of meeting energy needs and energy transition demands.