Merlin Linehan, Risk Manager at EBRD shares his insight on the impacts of geopolitical risk on supply chains

The impact of geopolitical risk on vendors and supply chain

Merlin Linehan, Risk Manager, EBRD

Below is an insight into what can be expected from Merlin’s session at Vendor & Third Party Risk Europe 2023.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

How has the Russia-Ukraine war had an impact on vendors and supply chains?

Supply chains were already under severe pressure thanks to the disruption caused by Covid-19. The Russian Federation’s invasion of Ukraine last year created an unprecedented crisis across already fragile links. Oil and gas prices soared as Western countries imposed sanctions and restricted supplies from Russia following the start of the war. Households suffering dramatically higher inflation took the majority of headlines, but the sharp rise in the cost of oil and gas has a knock-on effect across different industries, pushing up the price of many goods and services.

Russia is also the source of many raw materials. The fast-rising prices of various metals and minerals caused chaos in certain markets. Nickel, for example, is increasingly important for the global energy transition as it is used extensively in electric car batteries, as well as other industrial applications. Soon after the Russian invasion of Ukraine, the price of nickel spiked, rising by 250% in a day. This wreaked havoc in the market forcing the London Metal Exchange to stop trading in the metal.

Over time, supply chains have adapted, and energy prices have fallen as other suppliers pick up the slack. Vendors have borne the brunt of this disruption, forced to pay much higher costs and uncertainty. The sanctions applied to the Russian Federation, designed to punish the government in the aftermath of the invasion, now encompass nearly every aspect of Western economic interaction with the country.

Companies have spent time and resources ensuring they are aligned with sanctions. This can mean changing suppliers, financing arrangements, and avoiding conducting business with sanctioned entities. This process can be confusing – as vendors drop sanctioned entities and look for alternative providers, it can create further disruption and push prices even higher.

How is the energy crisis impacting supply chains? Are there any repercussions from the Russia-Ukraine war that are having an impact?

Energy supplies have been under stress across the world as countries struggled to adapt to soaring prices. This raised the specter of blackouts and power cuts in numerous countries as authorities struggled to keep the lights on in the face of rising prices. The energy crisis has pushed the cost of processing and manufacturing up; the cost of aluminum, copper, and steel has risen two or threefold.

This disruption has caused manufacturing costs to rise, hitting profits and inflation as companies try and push costs onto consumers. Higher prices are making companies and governments consider how to secure supply chains, to provide a steady supply of raw materials at a set price, protecting themselves from wild price fluctuations.

The energy crisis also underlined that many countries are heavily dependent on one or two sources (Russian oil and gas). Therefore, diversifying into renewable energy (for climate reasons) is imperative to avoid future energy shocks. Countries and companies that remain dependent on oil and gas will remain highly vulnerable to sudden shifts in price.

How can organizations be more prepared to monitor instabilities globally to mitigate supply chain risks?

Companies need to engage in horizon scanning and scenario planning to assess their risks, particularly their vulnerability to global flashpoints, the Persian Gulf, the Straits of Taiwan, and around the Korean peninsula. The impact of supply chain disruption may stay localized but in the case of conflict around Taiwan, thanks to its central role in the trade of semiconductors (and other manufactured goods), global supply chains will come under unprecedented pressure.

There is also a trend towards protectionism to protect supply chains. The (misnamed) Inflation Reduction Act in the US provides tax breaks to companies using raw materials for climate technology (electric batteries/solar panels etc.) that originate from US-friendly countries. This is an attempt to “friendshore” and ensure that critical imports are not in the hands of rivals. The EU and other countries are also looking at similar measures to protect their domestic industries from geopolitical risk.

Companies are waking up to the fact that supply chains are not as resilient as they assumed. Geopolitical risk is very real, and countries will not always act in their economic interests. Companies should be analyzing the potential weaknesses in their supply chains and consider backup plans.

The Russian invasion of Ukraine has destabilized supply chains, affecting supply chains worldwide. The good news is that these events have acted as a wake-up call for firms who should be preparing for the next shock to global supply chains. Governments, private companies, trading companies, and all stakeholders across supply chains should be seizing the opportunity to build more resilience into them.