Disruption in energy markets, supply chains amid Russia-Ukraine conflict
By Akshat Jain
A group of London Business School spokespeople,writing for Forbes, have recently identified the issues forming from the tumultuous situation in Ukraine with this stark reminder -Beyond soaring energy prices and the horrendous humanitarian crisis in Ukraine, the rest of world will suffer from the ripple effects of Russia’s war. Russia’s war is sending shockwaves through the global economy, reverberating across the intricately intertwined global supply chain. “The principal reason that Russia plays above its weight is that it is a major exporter of some of the world’s most important commodities.
If you’re looking for a simplistic way of assessing the situation, given it is one which is myriad in its complexity and scope, then look no further than Ukraine’s status as ‘the bread basket of the world’. Ukraine produces approximately twenty five percent of the world’s wheat crop, and its harvests have already been disrupted by a poor winter season before the war even began. Now that we are months into the conflict, there is mounting evidence that Ukrainian grain stocks are being seized in Russian controlled territories. Without even scratching the surface of the issue, the tactical advantage Russia holds with just these actions alone is vast, and that is before taking into consideration any other relevant factors such as fuel.
Much of the fuel Europe requires, specifically the gas in this case, is piped into the required countries from channels that originate across Russia and the Ukraine. US President Biden has startednowwith plans to reroute supplies to Europe as a response to the growing unrest. The rest is supplied ‘on demand’, delivered through global shipping channels, via Liquified Natural Gas. This instability of an essential supply has been a great blow to the integrity behind many European based NATO members’ responses to the crisis. This is a massive consideration, one that can be offset by the fact that some EU countries have had the forward thinking in years past to make sure they have large scale gas storage to cover societal operations in the event of a shortage. In the eventuality of a crisis, of any kind, most of the most prominent EU states have a gas reserve that could last, theoretically, over a month.
Russia has now started to cut supplies to what it considers to be opposing nations. The Netherlands is to be cut off, with Denmark allegedly next if they don’t pay in Roubles rather than their own currency. As the hot-war spreads further east throughout Ukraine, the trade war intensifies also. The UK finds itself at a huge disadvantage in this situation, with the available emergency gas reserves lower than anywhere else across Europe due to the UK’s insistence on hard-line austerity in the years since the economic collapse of 2008, despite the still prominent wealth the nation clearly held before the destruction wrought by the Covid19 pandemic, a prominent member of NATO has therefore left itself open to coercive oppositional strategies and a need to pander when strength is required on the global stage.Although there are talks to repurpose an offshore UK power station as a hydrogen processor, such generalised thinking towards the future doesn’t help the UK or its allies in the present.
Fuel and food, though essential to basic existence, aren’t the only issues thrown up by the disruption of the Ukrainian conflict.Russia and neighbouring Ukraine are also major producers and supplier of multiple types of semi-conductors, materials essential for all the global electronics industry. Recent years have seen a slow production of these essential materials for a variety of factors, including flooding in Taiwan, and the implications of these deficits are chilling when factored against the backdrop of war. The financial advisory companyDeloittereports that, 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 per cent of the globe’s supply of platinum-group elements (including palladium), 13 per cent of titanium, and 11 per cent 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 eighty percent 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 two million units a year over the next two years.
Global supply chains have already been damaged by the woes of recent years, most of all the Covid-19 Crisis;but the onslaught looks set to continue with the fallout from the war and economic sanctions that stem from therein. Russia holds many of the cards in the trade element of this conflict, even if Russia’s military prowess has been questioned by many during the conflict, with the National Institute of Economic and Social Research summing the situation thus, The war in Ukraine represents a challenge for the global economy with only a few winners – energy exporters – and many losers.
(The author is Akshat Jain, Research Scholar, Indian Institute of Technology (IIT) Delhi. He is a graduate from BITS Pilani and pursuing his research studies in the field of Psychology and Neuroscience).