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Russia-Ukraine crisis and world supply chain

Dr. Muhammad Shahbaz

The writer is research fellow at University of Cambrdige, UK and Professor at Biejing Institue of Technlogy China.

After the dissolution of the Soviet Union (USSR) in 1991, Ukraine and Russia maintained close ties. In 1994, Ukraine agreed to accede to the Treaty on the Non-Proliferation of Nuclear Weapons as a non-nuclear-weapon state. Former Soviet nuclear weapons in Ukraine were removed from Russia and dismantled. In return, Russia, the United Kingdom (UK), and the United States (US) agreed to uphold the territorial integrity and political independence of Ukraine through the Budapest Memorandum on Security Assurances. Ukraine was a cornerstone of the Soviet Union, the archrival of the United States during the Cold War.

Behind only Russia, it was the second-most-populous and -powerful of the fifteen Soviet republics, home too much of the union’s agricultural production, defense industries, and military, including the Black Sea Fleet and some of the nuclear arsenal. Ukraine was so vital to the union that its decision to sever ties in 1991 proved to be a coup de grace for the ailing superpower. Ukraine became a battleground in 2014 when Russia annexed Crimea and began arming and abetting separatists in the Donbas region in the country’s southeast. Russia’s seizure of Crimea was the first time since World War II that a European state annexed the territory of another. More than fourteen thousand people died in the fighting in the Donbas between 2014 and 2021, the bloodiest conflict in Europe since the Balkan Wars of the 1990s.

Russia has deep cultural, economic, and political bonds with Ukraine, and in many ways Ukraine is central to Russia’s identity and vision for itself in the world. Russia invaded Ukraine on 24 February 2022, marking a steep escalation of the Russo-Ukrainian War which had begun in 2014. The invasion has caused Europe’s largest refugee crisis since World War II, with more than 6 million Ukrainians leaving the country and a quarter of the population displaced. Russia’s full-scale invasion of Ukraine in 2022 marked a dramatic escalation of the eight-year-old conflict and a historic turning point for European security.

With expanding Western aid, Ukraine has managed to frustrate many aspects of Russia’s attack, but many of its cities have been pulverized and one-quarter of its citizens are now refugees or have been displaced. It remains unclear if and how a diplomatic resolution could emerge. Ukraine’s place in the world, including its future alignment with institutions such as the European Union (EU) and North Atlantic Treaty Organization (NATO), hangs in the balance.

In its three decades of independence, Ukraine has sought to forge its own path as a sovereign state while looking to align more closely with Western institutions, including the EU and NATO. A more nationalist, Ukrainian-speaking population in western parts of the country generally supported greater integration with Europe, while a mostly Russian-speaking community in the east favored closer ties with Russia. Russian leaders, including Putin, have alleged that the United States and NATO repeatedly violated pledges they made in the early 1990s to not expand the alliance into the former Soviet bloc. The conflict is about the future of Ukraine. But Ukraine is also a larger stage for Russia to try to reassert its influence in Europe and the world, and for Putin to cement his legacy.

Ukraine was unique on all these fronts. Though it, too, had only existed as an independent state in modern times for a few short years, it had a powerful nationalist movement, a vibrant literary canon, and a strong memory of its independent place in the history of Europe before Peter the Great. It was very large the second-largest country in Europe after Russia. It was industrialized, being a major producer of coal, steel and helicopter engines, as well as grain and sunflower seeds. It had a highly educated populace. The economies of Russia and Ukraine were deeply intertwined. Ukrainian factories in Dnipropetrovsk were a vital part of the military industrial capacity of the USSR, and Russia’s largest export gas pipelines ran through Ukraine.

The war in Ukraine is putting global supply chains to the test again. Even before the conflict began, supply chain frictions had only improved marginally from the pandemic. The invasion of Ukraine by Russia and sanctions imposed on it for doing so and new pandemic-related shutdowns in China are the latest events to rock global supply chains. Combined with the China-U.S. trade war and other pandemic- and climate-related disruptions, it is certain to accelerate the movement by Western companies to reduce their dependency on China for components and finished goods and on Russia for transportation and raw materials and to lead to more localized, or regional, sourcing strategies.

If China decides to back Russia in the Ukraine conflict, it would only fuel that movement. In the 1990s, companies pursued strategies such as outsourcing, offshoring, and lean manufacturing to cut costs, retain market position, or gain competitive advantage. China emerged as a major manufacturing hub to serve global markets, including many Asian economies that were opening up.

Among the most pressing vulnerabilities is an overreliance in Europe on natural gas and crude oil from Russia, as well as dependence on both Russia and Ukraine for key agricultural commodities. Crude oil prices hit multi-decade highs on supply concerns and so did a broad range of commodities, with several of them hitting their all-time highs. According to the Food and Agriculture Organization of the United Nations, Russia and Ukraine account for more than 25% of the world’s trade in wheat and for more than 60% of global sunflower oil and 30% of global barley exports.

Russia is also a major global exporter of fertilizers, which means any supply shortages, or restricted access, could impact crop yields globally. Russia is a significant source of many of the 35 critical minerals that the US Department of the Interior (DOI) deems vital to the nation’s economic and national security interests, including 30% of the globe’s supply of platinum-group elements (including palladium), 13% of titanium, and 11% of nickel. Russia is also a major source of neon, used for etching circuits on silicon wafers.

Palladium, a critical component of catalytic converters for cars, has climbed as much as 80% in price since the conflict started. Moreover, as a result of the Ukraine conflict, LMC Automotive has cut its forecast of light vehicle sales in Europe by 2 million units a year over the next two years. “Some 45% to 54% of the world’s semiconductor-grade neon, critical for the lasers used to make chips, comes from two Ukrainian companies, Ingas and Cryoin. Russia exports over $6 billion of wheat annually and is a major producer of vast amounts of the essential raw ingredients for the fertilizer products that are used in produce grown around the world.

As Russia’s war against Ukraine escalates and sanctions by the U.S. and other countries intensify, so does their impact on supply chains around the world. The biggest hit to supply chains would come from any severe disruption to Russian energy exports, as several European countries are dependent on Russia for energy. “Russia’s invasion of Ukraine is an invasion of the global supply chain. Firm’s data shows that nearly 300,000 companies in the U.S. and Europe “have suppliers in Russia and Ukraine, putting their national economies at risk. That’s how interconnected the world is today”. The biggest shift in supply chains since the era of globalization began perpetual disruption is the new normal.

Now and in the future, continuous real-time monitoring of every tier of [the] supply chain will be the norm to help companies get ahead of the next crisis. Additionally, leaders will need to look at investing in new strategies for alternative sourcing which may include a blend of regional and global supply partners. “World trade will weaken more sharply than previously expected. Following the pandemic, continued supply chain troubles and higher inflation and shipping costs pose further downside risks to our trade outlook. Sanctions on several products previously exported to Russia, voluntary bans on exports and efforts to reduce oil and gas imports will all hit global trade this year”.

“We continue to expect some growth in world trade volume in 2022. The US economy and the Asian region ex-China have limited direct economic linkages to the area, speaking in favor of continued trade, although they are not immune to the indirect consequences of this conflict, such as a sharp drop in demand from Europe. Trade growth might hover just above the 0 per cent area if the war drags on. But whatever happens, trade flows will be significantly reshaped”.

Muhammad Shahbaz

School of Management and Economics,

Beijing Institute of Technology, Beijing, China.

Email: muhdshahbaz77@gmail.com

Rezwan Ullah

School of Management and Economics,

Beijing Institute of Technology, Beijing, China.

Email: rezwanullah1990@yahoo.com

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