From Conflict to Disruption is a Small Step!

From Conflict to Disruption is a Small Step!

The Russia-Ukraine conflict has precipitated a supply chain crisis that is leading the global economy to the verge of major dislocation

The world is teetering on the verge of another supply chain and economic dislocation, as the war drums beat louder each day over Russia’s threat to attack Ukraine. From semiconductors to wheat, energy, information technology to finance, everything will witness major disruptions as interlinked supply chains between the US, European and Russian companies will be snapped off the instant a conflict begins.

Global semiconductor industry sales totalled $556 billion in 2021, the highest-ever annual total and an increase of 26.2% compared to the 2020 total of $440.4 billion. The industry shipped a record 1.15 trillion semiconductor units in 2021, as chip companies ramped up production to address high demand amid the global shortage. A likely Russia-Ukraine conflict could disrupt this industry and in turn, once again dislocate global supply chains, and that’s only part of the story. Last year global automobile manufacturers lost around US$210 billion due to semiconductor shortages. On an average, supply chain disruption for each organization costs US$184 million in lost revenue in 2021.

Ukraine is a leading exporter of highly purified neon gas, which is necessary for the lasers that are used to etch circuit designs into silicon wafers to create chips. Russia, meanwhile, is the world’s leading producer of palladium, which is essential for many memory and sensor chips. The country also produces several other key raw materials for computer chips, including the rare–earth metal scandium.

Disrupting IT supply chains

A war would also throw Europe’s and US’ information technology industry in a disarray. Today thousands of US and European companies do business with suppliers in Russia and Ukraine, which could be at risk during a prolonged military conflict. Analysis of global relationship data on the Interos platform reveals key findings:

  • More than 1,100 U.S.-based firms and 1,300 European firms have at least one direct (tier-1) supplier in Russia.
  • More than 400 firms in both the U.S. and Europe have tier-1 suppliers in Ukraine.
  • Software and IT services account for around 12% of supplier relationships between US and Russian/Ukrainian companies, compared with 9% for trading and distribution services, and 6% for oil and gas. Steel and metal products are other common items purchased from the two countries.

Cyber security collateral damage

Entities linked to malicious cyber activity may also face further repercussions from the US and its partners. Ukraine is certainly no stranger to Russian cyber aggression. Russia has twice disrupted the Ukrainian electric grid, first in December 2015 leaving hundreds of thousands of Ukrainians in the cold, and then again the following year. But destructive attacks on the country’s infrastructure could also spark significant collateral damage in global supply chains.

In 2017, the NotPetya attack on Ukrainian tax reporting software spread across the world in a matter of hours, disrupting ports, shutting down manufacturing plants and hindering the work of government agencies. The Federal Reserve Bank of New York estimated that victims of the attack, which included companies such as Maersk, Merck and FedEx, lost a combined $7.3 billion.

This figure could pale in comparison to the global supply chain impact of a Russia-Ukraine military conflict, which would inevitably include a cyber element. Whether Russia would target its cyberwar playbook at US or EU targets in retaliation for any support to Ukraine remains hotly debated. But the Cybersecurity Infrastructure and Security Agency (CISA) has been urging U.S. organizations to prepare for potential Russian cyber-attacks, including data-wiping malware. illustrating how the private sector risks becoming collateral damage from geopolitical hostilities.

An energy crisis

In the short term, it is widely acknowledged that a Russia-Ukraine war, even a limited one, would spark a further massive rise in oil and gas prices, especially in Europe. Russia supplies about 30 per cent of Europe’s oil and 35 per cent of its natural gas, which would be cut off in the event of a conflict. Rabobank’s energy analysts believe that could push oil prices up from already-elevated levels of about $US90 a barrel to $US125, with gas prices following higher.

Geopolitical instability

Cyberwarfare would be unlikely to remain within Ukraine’s borders. Thus the destabilizing effect of a Russian invasion could have wider geopolitical ramifications. In Europe, a refugee crisis could emerge, with three to five million refugees seeking safety from the conflict. In Africa and Asia, rising food prices could fuel popular uprisings. Of the 14 countries that rely on Ukraine for more than 10% of their wheat imports, the majority already face food insecurity and political instability.

China is watching closely to see how the world responds if Russia invades Ukraine. The superpower has its own aspirations of seizing territory and extending its sphere of influence. Taiwan’s defence minister has remarked that tensions over Taiwan are the worst in 40 years. A Russian invasion could further embolden China to enlist military tactics against Taiwan. In addition to far-reaching geopolitical implications, this would have a significant impact on electronics and other global supply chains.

Export controls and sanctions

Commodity cost pressures could be exacerbated by targeted US and European export controls. The use of such controls to restrict certain companies or products from supply chains has soared over the last few years. While many have been aimed at Chinese companies, a growing number of Russian firms have been earmarked for export controls for “acting contrary to the national security or foreign policy interests of the United States”.

Prominent Russian companies already on a US restrictions list include Rosneft and subsidiaries and Gazprom. Extending export controls and sanctions to Gazprom’s subsidiaries, other energy producers, and key mining and steel market firms could further impact supply availability and input costs. Not surprisingly, U.S. companies and business groups are urging the government to be cautious in how it applies any new rules.

US. and EU export controls would also likely target the Russian financial sector – including state-owned banks – if an invasion takes place, and maybe a tactic for deterrence as well. U.S. officials have noted that any sanctions would be aimed at the Russian financial sector for “high impact, quick action response”.

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