The Geopolitics of The Russian-Ukraine War
From the humanitarian crisis to the soaring prices of critical raw materials, many short-term and mid-term disruptions have affected continents, major industries, and global supply chains. While economically stable countries have contingency plans, developing countries are the most affected by this ongoing war.
A World Bank report published recently highlights the economic shock waves to disrupt five different areas: logistics and supply chains, commodity markets, foreign direct investments, and sectors like tourism, energy, etc.
The Geo-Political Impact
The impact of the war between Russia and Ukraine has influenced the security architecture throughout the globe. Even with a well-prepared army and defenses, countries like Ukraine are unable to defend successfully without the support of NATO countries and the U.S.
Realizing this risk of a significant war, Finland and Sweden have become the first two countries to apply for NATO membership. This move will make it riskier for Russia to plan further aggression. Russia is slowly being contained on multiple fronts by many neighboring countries, weakening its geo-strategic position and limiting its geographical movement.
While many countries in the West have opposed Russia for the aggression and cut ties, several countries don’t want their relationship with Russia to weaken.
A prominent example is the African continent. 17 African states out of a total of 54 abstained from giving a vote in the U.N. general assembly against Russia. Likewise, China seems to support Russia on a diplomatic level and has even urged the U.S. to listen and resolve Russia’s demand for a security guarantee.
However, despite Russia facing severe sanctions from the United Nations, The Organization of Security and Cooperation In Europe, and The European Union, China has made little to no effort to help Russia tackle these imposed sanctions financially.
While China is pushing for a diplomatic solution, major Chinese conglomerates and companies in Russia are retreating from the market.
A Potential Food Crisis at Bay
Russian and Ukrainian wheat exports are around 25%, whereas corn exports are 14%. With war raging between the two, these exports have dropped, resulting in a price hike.
Countries like Congo rely heavily on wheat imports from the Black Sea region, which is greatly affected by the war.
Input Shortages
Sanctions imposed amid the war have disrupted transport channels between Russia and Ukraine, and the rest of the world. While Russia’s transport links with European ports are cut, most of Ukraine’s seaports are occupied or blockaded, rendering them useless and leaving Ukraine to carry out exports within a limited capacity.
The sea routes are already stalled, air freight is now rerouted to avoid flying over Russian airspace, and rail transit is already on the verge of halting entirely.
This global disruption of supply chains is causing input shortages, which trigger a price hike. For example, the two countries are vital suppliers of several raw materials, chemicals, and electronic inputs, but the effects of the conflict have already made doing business difficult.
While Ukraine plays a limited role when it comes to making foreign direct investments, Russia, on the other hand, has invested in Moldova, Armenia, and the Kyrgyz Republic.
In contrast, Germany, Norway, and Finland are also significant stakeholders in Russia’s energy sector.
Disruptions In Raw Materials
Following the imposed sanctions, the global trade of critical raw materials is affected severely. Oil, gas, agriculture-related products and prices of several other commodities have skyrocketed amid the war.
These raw materials are crucial for several industries, and their scarcity due to the sanctions makes procurement challenging at reasonable prices.
For example, if the price of Aluminum rises, aluminum window manufacturers or automobile makers would have to bump up their spot price to keep the production feasible. This decreases the end product sales, making it challenging to maintain an effective production line.
Let’s review the influence the conflict has on the global production, prices, and exports of different raw materials,
Metal Exports
After China and India, Russia is the third-largest producer and exporter of Aluminum.
The country produces and exports around 5.5% of Aluminum worldwide. Japan, Turkey, China, and Poland import Aluminum from Russia. The country also exports 15% of the world’s nickel, providing countries like Poland a majority (85%) of their import share.
Since the start of the Russia-Ukraine war in February 2022, the prices of Aluminum and Nickel have increased manifold.
The prices have crossed a 10-year high and saw an exponential price increase of 80%. Palladium is another raw material that Russia exports. Russia is the top producer of palladium, and most countries rely on Russia for their palladium imports.
The country is also a significant producer of vanadium oxides used as an additive. Austria, the Czech Republic, China, and India have a large import share of vanadium oxide from Russia. Price hikes in palladium and vanadium oxide are similar to Aluminum and Nickel. Each metal raw material has already seen a price increase of more than 50%.
Recently, the prices of some materials have decreased. Yet, raw materials like anthracite and metals used in the automobile industry are scarce, leaving a supply vacuum and increasing the costs exponentially.
Agriculture-Based Raw Materials
While Belarus accounts for 19.7% of the global potash exports, Russia exports 14.5% of potash to the world. Due to the crisis, this halting of collective exports of 43.2% has affected many countries.
Turkey imports 70% of its potash, the European Union imports 51.5% of potash from both countries, and China imports 40%.
Several other countries need to carry out potash imports from Russia and Belarus. These countries include Nigeria, Sri Lanka, Senegal, and Brazil. Several Ukrainian chemical and fertilizer facilities have closed amid the invasion.
Disruption of Energy Supplies
Besides Germany, Finland, and Norway being significant stakeholders in the Russian energy sector, 40% of Europe’s gas is supplied through Russia. The gas is imported via Poland, Belarus, Ukraine, Turkstream, and the Nordstream corridors. These routes connect Russia to neighboring Germany and Turkey.
Throughout 2022, reports suggest the supplies to Europe are decreased by two thirds, violating the 5-year gas supply transit period that was formerly agreed upon.
Russia has already banned gas exports to Europe and halted the Nord Stream II pipeline. Gas is a primary raw material used in the petrochemical and fertilizer industries.
These surging prices have further increased the production costs of chemicals used in the fertilizer and livestock industry. Unfortunately, this instant and severe decrease in gas supply have forced these industries to limit their production.
Over the last few decades, Europe’s dependency on energy sources like oil, gas, and coal has increased exponentially. The oil exports of Russia are 5m bbl/day, out of which 2.5m bbl/day is exported to Europe.
Similarly, 30% of coal is imported by Europe from Russia. With sanctions imposed, the dependency of 25% of European oil imports from Russia might not be possible in the future.
Disruption of Ammonia Supplies
The war has already affected the global food production system. Both Russia and Ukraine are significant producers of ammonia and potassium, accounting for two-thirds of the worldwide production.
Soon after the conflict started, the prices of fertilizers and food-related staples had increased by well over 50%. Fertilizer production is directly linked to food production.
A recent U.N. analysis estimates around 40% of the harvest in Ukraine is at risk of being wasted. Global fertilizer shortages are further fueling the issue. The world’s largest ammonia-supplying pipeline, called The Togliatti-Azat pipeline, stretches between the Ukrainian Black Sea port of Yuzhny and Samara Oblast in Russia.
The exports were carried out through Yuzhny, which is now halted after the invasion. Ammonia is a key component used to make fertilizers, and significant stakeholders in the industry are looking for other options to keep everything afloat.
Now that we’ve covered the impact of the Russia-Ukraine war on raw materials, let’s explore how the war is affecting industries, economics, and government policies across the board.
Positive Changes In the Supply Chain
The COVID-19 pandemic had already set the air for supply chain managers to find novel ways and manage the supply chain effectively.
Before the war began, most supply chain managers reported expanding their inventory and sourcing raw materials from multiple sources. Russia accounts for 2% of the world’s exports, with high figures in critical commodities like energy sources (gas, oil, etc.) and base metals.
The continued sanctions and restrictions further push supply chain leaders to ensure they can procure raw materials from other suppliers instead of relying on one.
Evolving Global Tech Standards
Many countries have no issue opting for a vast shared information system like the internet. Yet, some countries like Russia, North Korea, and China don’t recognize these standards and have already restricted an array of content services and information.
This limiting of information creates a massive gap in the tech standards. The war between Russia and Ukraine further fuels this gap.
Russia is not on board the global high-tech value chain amid the war, and almost 80% of tech companies and firms have already retreated from the Russian market.
On a global scale, around 60% of tech companies have refused to provide their services to Russia following the sanctions. This divide between tech standards and services will mean an increase in the cost of services and lower global tech growth.
Besides facing a massive tech gap, the issue is further disrupted by continued cyberattacks on infrastructure. Experts link these cyberattacks to a tactic used in 5th generation warfare.
On the day the conflict started, internet services in Ukraine and Europe were disrupted, making it difficult to maintain communications. These cyberattacks can affect telecom networks, power systems, military communication channels, and related critical services.
Now companies and government organizations are staying vigilant as their exposure to cyber attacks, malware attacks, and ransomware attacks are increasing.
The Unpredictability of the Financial System
The influence on the financial system due to the war is limited. However, European banks have assets in Russia, which are around $75 billion.
While the direct effect of war on financial institutions is limited, ripple effects put the financial system at risk. These risks include expanded borrowing by aspiring markets, a recession after quick inflation, a failing payments system, and much more.
The U.S. treasury markets already recognize the most evident risk, recession after inflation. The treasury is flashing warnings, anticipating curve inverts that can come up 15 to 18 months after the inflation. Fortunately, most banks have already started working on how they can serve their customers and industries with these changing dynamics.
The corporate sector is also taking the toll of the war. Before the conflict, Russia housed 281 Fortune 500 companies, out of which 70% have pulled out after the imposed sanctions. These decisions by the corporate sector were decided upon and implemented within days.
The Bottom Line
The war has undoubtedly created disruptions on a global scale, exposing the vulnerabilities of the global critical raw material supply chain. The reasons behind these vulnerabilities include sourcing dependencies, export restrictions, market fluctuations, and lack of transparency.
Countries directly affected by these restrictions revamp their operations by accessing their raw material reserves, expanding production, and maintaining multiple sourcing channels.
Millions of refugees from Ukraine have fled abroad, whereas 30% of its population finds themselves displaced from their homes.
Higher prices of vital raw materials like oil and gas have already impacted the livelihood of the vulnerable. This spike has resulted in higher food prices, traveling, and accommodation costs.
While some experts fear this war will disrupt the global standards of growth and development, countries are re-accessing the geo-political risks, and parting from countries or regions is considered risky. These changes may not be done suddenly but will take time, resources, and planning to be implemented effectively.
Still, the risk of changing policies from big players can fragment the financial and trade system rather than strengthen global value chains or diffuse tensions arising from these policies.