What does the Ukraine crisis mean for supply chains?

Following on from our initial Ukraine - Russia Advisory, please find below an update on the latest developments, indicating the possible longer term impact on supply chains.

Freight movement

The ongoing crisis has seen trade with both Ukraine and Russia heavily sanctioned, with many of the world's biggest shipping lines announcing that they will not accept any new bookings to or from Russia except for humanitarian goods such as food and medical supplies - temporary suspensions have also been announced for air and rail movements. The reason for halting any new bookings is to help mitigate the risk of overwhelming congestion in European hubs. Explained in more detail, the reduction of services to essential goods and cutting off new bookings aim to avoid Europe's ocean hubs suffering major congestion due to an influx of vessels or containers descending on the ports with no onward destination, which would likely happen in the event of a complete immediate suspension.

The UK's stance has been to ban all Russian owned, affiliated, chartered or flagged vessels from its ports, although it has however stated that Russian-owned cargo will be free to move if it is aboard a non-Russian vessel. The rule further extends to vessels in ownership of other nations where the next or last destination is within the Russian Federation, except for those carrying humanitarian aid. The port bans have caused vessels to deviate from their course or anchor whilst awaiting further information.

Following this, the European Parliament is looking to enforce similar measures across the continent, with major European ports such as Hamburg and Rotterdam already beginning to refuse containers originating in or destined for Russia. This relates to all cargo, therefore containers being transhipped to or from Russia are unable to be moved - the sanctions relate to both loading and unloading of containers, meaning that any Russian cargo already on vessels will not be able to be unloaded and will remain on the vessel, and any cargo sat at the terminal will remain at port until further notice.

Around 830 Russian-affiliated vessels call at UK and EU ports each month, with the global list of vessels owned or operated by Russian entities topping over 6,400.

Closer to the epicentre of the crisis, ports across the Black Sea have been closed, forcing vessels to either reroute or return to origin.

Pressure has been put on cargo capacity for air freight, with flights being rerouted or cancelled. A mutual ban for flights between Western Russia and the rest of Europe has been imposed. Beyond the impact on direct flights, the restrictions in Russian and Ukrainian airspace have caused diversions in flights between Asia and Europe, with flight times between London and New Delhi increasing by 8% compared to the same route prior to the conflict (Flightradar24). The lengthening of flight times will in turn create a domino effect within the supply chain, with backlogs and storage challenges becoming key concerns.

Manufacture and Export

Automotive

The situation is having a big impact on production lines too, with automotive firms such as Volkswagen and BMW slowing production across their European manufacturing hubs due to a delay in crucial parts which would have originated in either Ukraine or Russia. The two countries are important sources of many metals used in the car building process, with parts such as catalytic converters being made of palladium and platinum which are just two of the metals heavily sourced in the region. Further to catalytic converters, the manufacture of semiconductors also uses palladium, in addition to xenon and neon.

Food

With 50 percent of the world’s sunflower seed oil as well as 16 percent of global corn exports and 12 percent of wheat exports produced by the Ukraine, and 50 percent of the cereal needs for North Africa and the Middle East met by Russia and Ukraine, concerns around the significant impact on agricultural supply chains have intensified.

Retail

Retailers, such as furniture giant Ikea are pausing exports and imports in and out of Russia and Belarus, including the sourcing of materials, due to supply chain issues and to protect their extended ecosystems, including staff members on the ground locally. The impact will be significant with the IKEA groups alone having more than 15,000 workers affected in the region.

Finance

More and more countries are considering or actioning the freezing of assets of Russia’s leading oligarchs. The Russian ruble crashed to less than 1¢ and the Russian GDP could decline by 5% this year.

Our thoughts remain with the communities affected.

We will of course keep you updated as to any further industry impact.