The ripple effect of Russian-Ukrainian conflict on global supply chain dimensions [Article]

The Crimean occupation and the military activity in Eastern Ukraine are myopically perceived as the core basis of the Russian-Ukrainian conflict. However, the Russian invasion of Ukraine has rattled global supply chains that are still in disarray from the pandemic, adding to surging costs, prolonged deliveries, and other challenges for companies trying to move goods around the world.  

As the Russian Federation uses Eastern Ukraine and the Black Sea region as a testing ground for several militaryoperations, global supply chain dynamics is worthy of a discussion. The recent military build-up that attracted the attention of all NATO allies demonstrated the significance of the maritime domain for the Russian Federation due to increased activities in the Black Sea region. The aforementioned increased operations in the Black Sea region have a likelihood of affecting global distribution dimensions. For instance, the clash in Ukraine, a large country at the nexus of Europe and Asia, has prompted several airlines to cancel or reroute their flights thereby, raising concerns about further supply chain disruptions.The conflict is also setting off a scramble among global companies as they cut off trade with Russia to comply with the most far-reaching sanctions imposed on a major economic power.

These sanctions have caused delays and higher prices for beleaguered economies that rely on global supply distribution mechanisms as an add-in effect for economic development. While the economic implications of the war and sweeping sanctions on Russia are not yet clear, many industries and economies are bracing for a bad situation to get worse.

Global supply chains are already hurting and stressed because of the COVID-19 pandemic. The consequences would vary for specific industries and economies depending on the length of the invasion, but the impacts would be magnified because of an already-vulnerable supply chain.

Specifically, companies with complex global supply chains, like automakers, are already facing impasses in global supply chain dynamics. For instance, Volkswagen projected those shortages of parts would force it to slow production at its main factory in Wolfsburg and several other German plants, while BMW said it would curtail production at facilities in Germany, Austria, and Britain. From an agricultural perspective, if the conflict is prolonged, it could threaten the summer wheat harvest, which flows into bread, pasta, and packaged food for vast numbers of people, especially in Europe, Africa, and the Middle East. Food prices have already skyrocketed because of disruptions in the global supply chain, increasing the risk of social unrest in poorer countries. In reality, the war has resulted in making our commodities market dire.

What is the Russian-Ukrainian conflict good for? Undoubtedly and absolutely nothing. However, as the tension between these two countries continues to grow, it is important for beleaguered economies and companies to navigate the war-related impasse by employing risk mitigation strategies for their survival. Herein, the Centre for International Maritime Affairs, Ghana (CIMAG) outlines three approaches to reducing the impasse of the Russian-Ukrainian conflict to a more appreciable level.

1. Supply Chain Inputs Diversification: There are undoubted efficiencies associated with sourcing from a single supplier (sole-source supplier), such as economies of scale, cost savings based on volumes, and streamlining logistics. However, a sole-source supplier renders an economy’s supply chain more sensitive to interruption. To fairly assess the source of its supply chain, a manufacturer should look at the lower layers of its supply chain.

2. Lock in Transportation and Shipping Rates to the Extent Possible: Given the volatile fluctuations in oil pricing, which will have impacts on all forms of transportation, lock in transportation and shipping rates as soon as possible. Many companies are partnering with third-party logistics providers in order to defray some of the increasing volatility across labor, warehousing, transportation, and other logistics.

3. Reassessing Contract Rights: For customer and supplier relationships that could be impacted, it is once again time to get out those contracts to see: (a) whether the contracts contain a force majeure provision; (b) whether the force majeure provisions cover events such as war, embargoes, etc.; and (c) assess whether the force majeure clauses provide termination rights and what the associated notice requirements are. Finally, even if there is no force majeure provision in the applicable contract, the parties may have certain rights to suspend performance under the doctrine of commercial impracticability, depending upon the particular circumstances.

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The Author, Albert Derrick Fiatui, is the Executive Director at the Centre for International Maritime Affairs, Ghana. (CIMAG). He holds a Master’s degree in Port and Shipping (Maritime) Administration from the Regional Maritime University.

He also holds an LLB (Law) degree from Mountcrest University College, Ghana, a Bachelor’s Degree in Integrated Development Studies from the University for Development Studies. He is a Chartered Member (CMILT) at the Chartered Institute of Logistics and Transport.