The effects of Russia’s invasion into Ukraine on the supply chains

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The effects of Russia’s invasion into Ukraine on the supply chains

“We are rightly worried about what comes from there, and what will happen to our exporters who are doing well, especially those in the farm sector. We are assessing the situation as it is going to have an impact on the essentials like edible oils and fertilizers, among others.” The above quotes from our Minister of Finance Nirmala Sitharaman indicate the implications of the recent Ukraine-Russia tussle for the Indian business sector. When one reads between the lines, one will understand and have more clarity. Dr. Vijay D. Joshi, Assistant Professor, Dr. Ambedkar Institute of Management Studies & Research, Nagpur & Madhulika Vijay Joshi, Associate Supply Chain, Accenture Solution Pvt Ltd explain…

A supply chain is nothing but an ecosystem that binds together the producers and their suppliers. It is defined as “A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer”. Any unexpected events cause disruptions in the supply chain and the current one is no exception to this fact.

Know Russia and Ukraine from the trade perspective of India

Russia is one of India's largest trading partners and ranked 25th. India has exported goods worth US$2.5 billion and imported goods worth US$6.9 billion from Russia in the first nine months of 2022. The import includes crude oil, coal, and diamonds, whereas exports include mobile phones, tea, and medicines. India's exports to Ukraine totaled about the US$372 million from April to December, mainly for pharmaceuticals and mobile phones, but most of the imports of crude sunflower oil seeds and urea are worth US$2 billion. This article is an attempt to explain how Russia's invasion of Ukraine has affected and what exporters are concerned about (related supply chain issues).

There are diverse ways this conflict could impact global supply chains. Following are some of the generic-level effects:

  • A rise in prices of energy products such as crude oil, and natural gas
  • Additional worries about the transportation costs
  • A rise in electricity costs
  • Chances of food inflation
  • Increase in the prices of some industrial/essential metals
  • Uncertainty looming over semiconductor supply

According to Bloomberg data as of Feb. 28, 2022, 9 pm., a price rise is observed in some of the commodities during the last five days. This is as shown in the table below…

With the above-said effects, the following sectors (and their supply chains) will be affected:

Energy (oil and natural gas): Russia is considered a major source of natural gas and oil, hence, there will be irregularities in the supply side for some time. This will increase the prices of petroleum products, for example, the crude oil prices are at US$100 per barrel and will have its effects on different sectors. For India, there are fears of inflation going up, as according to the RBI (Reserve Bank of India) estimates, a 10% change in crude oil prices impacts retail inflation by 30 basis points.

Food (wheat, sunflower oil, and corn): Ukraine and Russia are some of the few large exporters of wheat. In present circumstances, there is an opportunity for Indian wheat exporters to tap the global markets. This is at the time when the prices are increased. In the case of sunflower oil, around 90% of the sunflower oil in the world is exported by Russia (20%) and Ukraine (70%). In the case of edible oils, India must push and accelerate its ‘Make in India’ campaign in this area. This can be achieved by giving an impetus to the local manufacturing of oilseeds. Indian wheat exporters can take advantage of the present situation and explore business opportunities.

Transportation Costs: With the shipments stuck at various ports, exports will have to bear the delays, and additional costs till the shipment reach the destination. It is the rising freight rates that are adding to the worries of the exporters besides the safety of their consignment (or the goods). Now, the exporters are concerned about the growing freight rates. As reported by Drewery World Container Index, Bloomberg said that there is a rise in the freight rates. For instance, the spot rate for a 40-feet container from Shanghai to Los Angeles has increased to US$11,050. This is 3.3% high as compared to the last week, and 125% more as compared to last year.

Metals: Some of the industrial use metals (e.g., nickel, copper, and iron) will cost more as their supplies from these two countries will be impacted. These are mainly used in consumer durables (such as refrigerators and air-conditioners). Also, these metals are used in the export and manufacture of other essential raw materials like neon, palladium, and platinum. Their supply patterns will be affected.

Semiconductors (or microchips): Semiconductors, that power everything electronic on earth and in space, have a complex ecosystem of chip manufacturing. Chip manufacturing is not an easy process but a difficult and complex process. The global semiconductor industry is not dominated by any single nation. It is interwoven, interdependent, and driven by the existing ecosystem yet. It was expected that the semiconductor shortage will end by mid-2022. Due to the present development, the situation has become worse. Considering this Palladium is essential for memory and sensor chips. Russia being a major producer of palladium will impact the semiconductor industry. It also produces several other key raw materials for computer chips, such as the rare–earth metal, scandium. In this context, Ukraine is seen as one of the major producers and exporters of Neon gas. Neon gas is a highly purified gas. It is used in the semiconductor industry for the most important process - etching circuit designs into silicon wafers to create chips. All these factors will affect and influence the supply patterns of the semiconductor industry.

We would like to conclude with the powerful words of Jane Kinninmont, Director, European Leadership Network, “There will be a global fallout – accelerating existing trends of de-globalization and protectionism. This is because the countries are concerned about the supply chains everything from food to energy to the rare earths. A cyber dimension is likely (to feature soon).”

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About the Author

Dr. Vijay D. Joshi’s outstanding academic career consists of his Ph. D. Management control system in corporate, which is awarded by RTM Nagpur University in 2013. A Gold medalist in International Business (PGDIT) from Bhavan's College of Management Mumbai, he has obtained his MBA (Marketing) from Yashwantrao Chavan Open University, and M. Phil (Sociology) from Madurai Kamraj University. Dr. Joshi has more than 20 years of corporate experience in senior managerial positions. He has been associated with the academic field for over past 12 years and contributed to more than 40 national and international research papers presented several papers in national and international conferences.

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