The conflict in Ukraine is likely to cause massive knock-on effects for the already severe inflationary consequences of COVID-19 and is poised to lay bare the fuller extent of the global structural supply chain vulnerabilities which underlie not only just-in-time manufacturing, but globalization itself.
It has the potential for upsets to international trade, commerce, and overall economic health which threaten the very global order established in the wake of WWII and the Cold War. An incoming and tremendous global impact simply isn’t an understatement.
“Over the last year-plus, there have been massive increases in freight [container prices]…we’ve come out of a relatively stable period of low oil prices, but [the conflict in Ukraine] is just going to hammer that,” notes supply chain expert Gary Newbury, CSCO On Call, RetailAID Inc. in an interview with Rethink.
“There’s going to be a mad scramble. That can only affect massively the existing price inflation that we are all starting to experience in ways that haven’t happened for 20 or 30 years.”
The world today is an interconnected world at the ‘end of history,’ a (neo)liberal world of advanced trade and cooperation, a world where global conflicts of the sort waged in the pre-Nuclear period were no longer intelligible propositions (what international relations experts refer to as Democratic Peace Theory).
It is precisely because of this that the military action in Ukraine we are now seeing was, even for many informed people, so unthinkable. The world we know today has never dealt with a problem like this and isn’t built to deal with it.
Soaring food, energy, and other commodity prices will fundamentally threaten global security
Understanding the modern supply chain impacts of globalization is particularly important when it comes to the ability of individual states to prepare for major global economic shocks and modern security threats, some of which might have once been weathered by more self-sufficient energy production and well-planned local supply chains.
“I won’t be surprised if [oil] hits $150,” notes Newbury. The consequences of an energy spike that significant—particularly given the pain energy costs are already inflicting (fuel oil alone is up 41%)—would be so great that they aren’t possible to fully predict.
Indeed, immediately following news of the invasion (as well as Germany’s halt to the Nord Stream 2 gas pipeline, which had the potential to deliver 55 billion cubic meters of gas per annum), oil topped $105/bbl for the first time since 2014, pummeling an oil market that already can’t take it.
“The first experience will be the perceptible rise in gas prices,” continues Newbury.
U.S. shale production will likely attempt to make up the difference, and efforts are being made to remove Trump-era diplomatic sanctions against Iran to release their supply. Yet, that likely won’t be enough, particularly if Russia responds to international pressure and sanctions by cutting pumps off, warns Newbury; “Saudi Arabia can’t just switch on a pump.”
“A Russian invasion of Ukraine has the potential to cause extensive and debilitating supply chain disruption across the globe,” further warns a new report from Interos, risking major commodity price hikes; “firm-level export controls and sanctions”; “cyber security collateral damage and supply chain turmoil”; and broader geopolitical instability which extends far beyond the conflict.
Another report by Sarah Hippold at Gartner anticipates “six supply chain issues” organizations will have to tackle: “key material shortages, material cost increases, production capacity impacts, demand volatility, logistics route, and capacity constraints, and cybersecurity breaches.”
“We expect severe shortages of hydrocarbon, critical minerals, metals, and energy. Prices for those items will likely spike, thanks to both the shortages and behaviors such as irrational buying and protectionism. This will, in turn, impact manufacturing operations up-and downstream as much as raw material mining.”
How organizations can respond to the crisis is already significantly compromised due to the long-standing, structural supply chain issues baked into globalized just-in-time manufacturing up to this moment of crisis, issues which disruptive events such as the Suez Canal fiasco or the climate-change driven disruption that cut the entire city of Vancouver off by road starkly illustrated.
“Is there any way to shield supply chains from future geopolitical conflict? The short answer is no, but it’s always a good idea to look at your organization’s risk appetite, posture, and risk management capabilities,” continues Hippold.
Closed eyes, predictable inflation, and an unpredictable future
Inflation, Newbury argues, isn’t some recent result of the supply chain (typical supply/demand dynamics that might allow governments to write off inflation as temporary), but the result of expansionary monetary policy in response to COVID-19: “Those [inflationary] pressures have continued.”
We recently wrote on inflation and noted its already rather extreme effects on the Consumer Price Index, a measure that accounts for the day-to-day price increases which Newbury argues constitutes a better measure of inflation (in contrast to ‘headline inflation’).
With global food prices at a staggering 33%, what are already record-setting post-war prices are likely to become remarkably worse (Ukraine is regarded as the “breadbasket of Europe”), particularly when considering Russia’s role as one of the largest exporters of fertilizer. According to a recent Financial Times report: “Russia and Ukraine together account for a third of the world’s wheat exports, a fifth of its corn trade and almost 80 percent of sunflower oil production.”
Furthermore, “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,” cautions the Interos report.
COVID-19 was (and continues to be) bad to put it mildly, but compared to Ukraine, it is currently the evil we know. “This is the new normal,” Newbury notes. The post-Cold War era’s globalized, quarterly-profit-oriented supply chains are going to struggle to respond to the Ukrainian conflict just as they did COVID-19.
Looking forward, governments, retailers, suppliers, and manufacturers would best coordinate themselves to examine those structural weaknesses which COVID-19 and now Ukraine so painfully expose, seeking to not only better prepare for disruptions, but to strongly consider doing so via strong, localized supply chains, advanced production planning (away from “just-in-time” to “just-in-case”), and greater energy independence.
The businesses and citizens of nations a few thousand miles away must now recognize that Ukraine could trigger an era of further instability, hardship, and strife that is much worse than any of the terrors of the last two years as the curtain dramatically closes on the post-Cold War period.