The Russian invasion of Ukraine will most likely exacerbate global supply chain issues, and shippers, already operating in crisis mode, should expect further supply chain disruption. Not only have logistics operations been halted in the war-affected areas, but the ripple effects will also be felt by the world at large. The invasion will create major constraints for Asian exports across all modes of transport, causing freight rates to skyrocket.
Five Major Risks to Global Supply Chains
While the initial impact on global shipping has been relatively small, the geopolitical tensions are likely to add economic uncertainty and send fuel costs and inflation higher still. The biggest risks we see for global supply chains include:
- Export controls and sanctions
- Key material shortages
- Commodity price increases
- Logistics disruptions and capacity constraints
- Cyber warfare
Export Controls and Sanctions
The U.S., Canada, European Union, Japan, South Korea, and New Zealand have imposed a broad range of restrictions on exports to Russia, aimed at restricting access to cutting-edge technology and software by Russia’s miliary, intelligence, and defense industrial base. Under the new regulations, exports, reexports, and (in country) transfers of all duel-use goods subject to the EAR are banned, including semiconductors, computers, telecommunications equipment and cell phones, information security equipment, lasers, sensors, aircraft and aircraft parts, spare parts and equipment that support Russia’s oil and gas refining operations, and marine equipment. The only exceptions to the ban are food and medicine designated as EAR99 and items classified as ECCN 5A992.c or 5D992.c, as long as they are not for Russian government or state-owned enterprise end-users. The rules also add new license requirements, license review policies, and the application of Entity List footnote 3. For the complete list of U.S. sanctions, click here.
Aircraft manufacturers Boeing, Airbus, and G.E. have announced they are suspending maintenance, parts, and technical support services for Russian airlines. Boeing and Airbus production lines are also likely to be affected by sanctions, as most of the titanium used for engine applications, such as rotors, compressor blades, hydraulic system components, and nacelles, comes from Russia. However, many manufacturers have stockpiled titanium due to the lack of demand for aircraft and the fractured relations with Russia.
The U.S. and European Union have also extended the export bans to include Belarus, due to the country’s support of Russia’s invasion of Ukraine. The UK is also preparing to extend their sanctions to Belarus, but details have not yet been released.
Additional measures are likely in the coming days.
The UK has also imposed an asset freeze on major Russian Banks, stopping major Russian companies from raising finance in UK’s capital markets, and preventing Moscow from raising sovereign debt in London. Individual sanctions will also be imposed on 120 individuals and entities, including defense companies, banks, member of Putin’s closest circle, and the political elite. More details will be released in the coming days. The U.S., EU, Australia, and Japan are also preparing new sanctions targeting the financial assets of Russian firms and individuals and are expected to be announced in the coming days.
In addition, the U.S., Canada, and Europe have banned Russian banks from using SWIFT, the global messaging system used for enabling bank transactions. While Belarus has not been excluded from the SWIFT system, EU officials have warned that measures will be forthcoming.
Restricted Airspace and Waters
The U.S., EU, UK, and Canada have prohibited Russian aircraft from entering their airspace. The order prohibits all passenger, charter, and cargo flights on “all aircraft owned, certified, operated, registered, chartered, leased, or controlled by, for, or for the benefit of, a person who is a citizen of Russia.” In addition, the UK and many European countries have also banned Russian vessels from their waters.
In return, Russia has banned EU and UK carriers from using its airspace. While Russia has not yet prohibited American and Canadian aircraft from entering its airspace, an announcement is expected this week.
Key Material Shortages
Even if a full-scale war with Russia is avoided, the conflict in the Ukraine and economic sanctions aimed at Russia and Belarus will create volatility in the already fragile supply chain. Ukraine is not a only a major source of food production – corn and wheat – for the European market, but it is also a significant producer of iron ore, steel, ammonia, uranium, and titanium, while Russia is one of the largest suppliers of fossil fuels, precious gems, gold, copper, nickel, aluminum, iron, steel, platinum, lithium, rare earth minerals, and fertilizer.
Therefore, we expect to see severe shortages of critical and rare earth minerals, metals, oil, natural gas, and fertilizer, which will have a severe impact on key industries such as energy, manufacturing, agriculture, and high tech electronics, creating supply bottlenecks and production shortfalls.
In an effort to reduce America’s dependency on foreign markets for raw materials, the Biden administration has announced “major investments” to expand the domestic supply of critical minerals, including rare earths, lithium, and cobalt. A White House fact sheet said these critical minerals “provide the building blocks for many modern technologies,” ranging from computers to household appliances and clean energy technologies like batteries, electric vehicles, and solar panels, and “are essential to our national security and economic prosperity.” Yet, the Administration has done nothing to reduce our reliance on foreign markets for fossil fuels. The U.S. continues to import oil from Russia, Saudi Arabia, and Canada and is looking to boost crude oil imports from Venezuela. Meanwhile, cartel members at last week’s OPEC meeting, including Russia, opted not to increase oil supply, only marginally over time.
Commodity Price Increases
The shortages of raw materials will lead to price spikes for a wide range of goods and will likely lead to scarcity of a lot of different commodities. As Russia provides over a third of the EU’s natural gas, threats to this supply would force up prices at a time when businesses and consumers are already facing higher energy bills and paying more at the pumps. Pressures on the natural gas and oil supplies will likely spike volatility in other energy markets, with some experts estimating that oil prices could spiral to $150 a barrel. Food inflation is another risk, especially if the supply of fertilizer, which has already been widely unavailable, continues to dry up, as fertilizer is needed to produce the world’s supply of food. The continued skyrocketing inflation, which has already surpassed levels not seen since the 70’s, will also weaken consumer demand.
Logistics Disruptions and Capacity Constraints
The invasion of Ukraine is already hurting global supply chains. Transshipment hubs worldwide, already struggling with congestion and delays due to COVID-19, are becoming increasingly congested. Transport routes across Russia, Ukraine, and surrounding countries have been scrapped, and cargoes already enroute have had to be diverted, creating more cargo delays. Soaring fuel costs have pushed up freight rates across all modes of transport, and some carriers and insurers have imposed “war risk surcharges.”
In the near-term shippers should begin to evaluate contingency measures for sourcing, transportation, and logistics operations to fill resource gaps in their supply chains. Shippers are also advised to check with their insurers, as coverage may be withdrawn or premiums may be increased.
Trade and container movements have ceased near Ukraine, with ships, crew, and cargo stuck at ports which that are closed or under attack. There have been missile attacks on vessels in the area. One seafarer has been killed and many others have been injured. Parts of the Black Sea and the Sea of Azov are now too dangerous to sail or have been rendered completely impassable. ONE, Hapag Lloyd, Maersk, MSC, and CMA CGM have suspended bookings to and from Russia and Ukraine until further notice. All lines will continue to provide food, medical and humanitarian supplies to the country. UPS, FedEx, and DHL have also suspended service to Russia and Ukraine.
While on the surface it may not seem like a cease of operations on the Black Sea and the Sea of Azov would impact global trade, the war in Ukraine is likely to disrupt vital shipping routes across the world.
With most shipping lines suspending service to Russia and unable to call on Ukraine, European boxes already enroute to the two countries have been discharged at terminals enroute, increasing congestion at transhipment hubs. For shipments still going to Russia, European customs authorities have increased inspections to identify restricted items, slowing operations. The conflict has also caused many vessels to reroute. In addition, Russia- and Ukraine-bound cargoes that hadn’t sailed have been left sitting on the docks. The result is increased congestion at affected ports, which have already been struggling with historically high congestion due to the COVID pandemic, and vessel delays.
The congestion has led to soaring export dwell times, up 25% across Europe and 43% at transhipment hub, creating further disruption and delays on the Europe –Americas and Europe – Asia tradelanes. The shipping disruptions in the region are likely to spillover to Chinese and Asian ports and other key transportation nodes, which will then impact the Asia – Americas and Asia – Europe tradelanes. And the market is about to get even busier, as rail and road shippers from China to Europe are likely to switch to ocean to avoid the unpredictability of land routes.
Ocean freight rates on most tradelanes have not yet been affected by the invasion but are expected to rise exponentially in the coming weeks. Global bunker prices rose sharply last week following the invasion – its highest level in more than a decade – and carriers are likely to announce significant emergency BAF surcharges in the coming weeks to recover their costs, especially on the spot market. In addition to the BAF, many industry experts anticipate that ocean rates are likely double due to the invasion, adding to the inflationary pressure on the global economy.
Overall, the shipping container shortage is likely to worsen, especially for reefer container, but the degree will vary by port and region.
It is also important to note that Russian and Ukrainian seafarers account for 14.5% of the seafaring workforce globally, and many Ukrainian seafarers have expressed a wish to end their contracts early to go home to join fight against Russia. This will lead to a shortage of seafarers, at a time when the industry is already facing a declining workforce after the crew change crisis during the first year of the pandemic caused many seafarers to leave the industry.
The air freight market is becoming increasing restricted and expensive due airspace restrictions. Russia’s ban on EU and UK flights over its airspace has created difficulties on the Asia – Europe tradelane. Some airlines have been forced to suspend flights to China, Korea, and Japan, while others have had to add detours to avoid Russian airspace, adding time and costs to flight operations. Some European airlines have had to carry extra fuel to avoid Russian airspace, lowering cargo payloads.
Once Russia bans American and Canadian flights from their airspace, there will also likely be disruptions on the China – North America lanes. In the meantime, flights from China to North America may be impacted, depending on the route.
As a result, air cargo is likely to see rate increases, as well as an immediate hike in fuel, war, and security surcharges. Insurance premiums are also likely to go up, while some flights won’t be covered at all, especially for flights going near the Black Sea. The European Safety Agency, EASA, has also warned that airspace within 100 nautical miles of the Belarus and Russian borders could also pose safety risks, increasing the likelihood of war and security surcharges as well as denial of insurance coverage or premium hikes.
As the delays and disruptions are likely worsen in the coming weeks, especially as some shippers are likely to switch to air to avoid landside and ocean disruptions, shippers are advised to book cargos well in advance of when your shipments are needed at their final destination. Sea-air services might help alleviate the problem or the risks.
Significant delays are predicted for the trucking market, especially on the China to Europe trades. The sustained high price of fuel over recent weeks has already started to affect the jobs truckers will take, and the rising fuel costs and uncertainty will lead truckers to become even more selective in the jobs they pick. The increased fuel costs are more likely to impact smaller trucking operations who do not have fuel surcharge agreements in their contracts with shippers, as most larger companies already include contract provisions to counter additional expenses linked to sudden fuel prices.
European road haulage is bracing for a growing shortage of Ukrainian truck drivers, many of whom have return home to their families or enlisted in the Ukrainian armed forces.
While the China – Europe rail freight services remain operational for now, rail services may not remain safe or continue to be an affordable alternative to ocean freight. Rail services will be severely impacted by the Ukraine conflict, as the bulk of traffic from China passes through Russia and Belarus.
Shippers using this route should be aware of the risks to their shipments, including cargo damage in war-impacted areas, which could spread from Ukraine to neighboring countries, increased insurance premiums or declined coverage , and payment issues due to Russia’s removal from SWIFT. In addition, Russia may slow down or stop rail freight in retaliation for the sanctions imposed by the EU and UK.
Maersk has temporarily suspended its intercontinental rail services to and from Russia, and other carriers offering inland transport as part of their packages are likely to follow suit.
Many experts have expressed concern that the geopolitical tensions with Russia could lead to cyber warfare directed at North America and Europe. There is a very real risk that critical infrastructure may be targets, and carriers, ports/airports, and logistics service providers are a part of the critical infrastructure. Other sectors that are likely targets include energy, finance, and banking. The widespread use of the cloud has made the risks even greater. And even if only one large cloud player is shut down, it could impact the ability of thousands of companies to effectively manage their supply chains. Just look at the Expeditors cyber-attack that took place in February, and the company is still struggling to get back their operations weeks later. If there are more attacks like this, it could have a devastating effect on supply chains.