The first McDonald’s store in Russia opened in 1990, just months after the fall of the Berlin Wall. It was a powerful symbol of the end of the Cold War and a great ideological healing.
Now all McDonald’s in Russia are closed, as nations and businesses reduce, suspend or sever ties in response to Ukraine’s invasion.
The scale of the economic sanctions imposed on Russia is unprecedented. It has been suggested that this conflict could be reorder the world, Russia choosing territorial hegemony over world trade. As Craig Fuller, general manager of supply chain information service Freightwaves, put it:
If the international ramifications of the Russian-Ukrainian conflict continue to expand, we face a real possibility of a bifurcation of the global economy, in which geopolitical alliances, energy and food flows, monetary systems and trade routes could divide into.
This is probably an exaggeration. Nevertheless, shockwaves are rippling through already strained supply chains. In this article, I’m going to focus on three things – energy, food, and trade routes.
Energy exports continue to sink
Fears over the disruption of Russia’s huge fossil fuel exports have led to a spike in global oil and gas prices. Tanker freight rates tripled as shipowners weigh the risk to be stuck with cargo they cannot unload.
So far, however, there has been no significant disruption to Russian exports. The United States and the United Kingdom (and Australia) are ban all Russian oil importsbut these are not significant markets (and the UK timetable for ending imports is end of 2022).
More important is what European Union countries are doing, given their heavy dependence on both Russian oil and gas. So far, the EU has imposed financial penalties on Russian energy producers while buying their product.
Getting away from Russian oil is not easy. Russia holds a 12% global share and global refineries are fine-tuned to work with specific types of oil found in specific regions. Whenever possible, scale back production to change the oil mix which goes in takes weeks and requires equipment changes. Cutting ties with Russian oil may not be a short-term option.
Replacing Russian gas is even more difficult. The European Union takes more than 40% of its gas imports from Russia. Pipelines like Nord Stream, connecting Russia to Germany, are unmatched. Shipping is limited. If tankers are oversized tin cans, LNG carriers are supercooled cryogenic tanks which keep the liquefied gas at minus 160℃ degrees (-260℉). There are few players in this game, the volume of gas transported in the world representing approximately 0.1% of that of oil.
In 2020, Russia and Ukraine accounted for 25.6% of world wheat exports (Russia 17.6%, Ukraine 8%), 23.9% of world barley exports (Russia 12.1%, Ukraine 11.8%) and 14% of world corn exports (Ukraine 13.2%, Russia 1.1%).
With rising energy prices also driving up food prices, the Food and Agriculture Organization of the United Nations has sounded the alarmfood safety in Africa and the Middle East.
Exports from Ukraine have practically ceased. No one knows for sure how badly his next harvest will be affected. Fertilizers, pesticides and fuel are scarce. Men are summoned to join the fight. Agricultural supplies are redirected to besieged towns and the army. The remaining trade routes to the west are threatened.
Russia has temporarily banned grain exports to its former neighbors of the Soviet Union. Along with these self-imposed restrictions, its Ministry of Industry and Commerce also “recommended” a halt to fertilizer exports.
Russia is the world’s largest producer ammonium nitrate, accounting for about a third of world exports. This will have implications for other major grain exporters like Brazil, which imports around 85% of its fertilizer, mostly from Russia.
The 27 countries of the European Union, the United States and Canada have closed their airspace to Russian planes. Russia in turn closed its airspace to 36 nations. This has implications for transport costs.
Circumnavigating Russia, the world’s largest country with 11% of its landmass, is not trivial if you’re flying from Asia to Europe. The cargo division of German flag carrier Lufthansa estimates that this will reduce its air cargo capacity by around 10%. FedEx added a war surcharge.
The war is also impacting the new “Silk Road” from China to Europe, the world’s longest freight rail line, on which the nation has spent 900 billion dollars.
Although China’s exports by rail are still small compared to maritime transport, they have been growing rapidly. Rail routes have helped ease pressure on Chinese ports during the pandemic. These pressures have increased again with the outbreaks of COVID and hard locks in port cities such as Tianjin, Shenzhen and Shanghai (the largest port in the world).
The main route from China to Europe passes through Russia and Belarus. There is an alternative route to Turkey via Azerbaijan, Georgia and Kazakhstan, but it is less established. China can also, of course, continue to use container ships. But a key geostrategic goal of its Belt and Road Initiative is to secure trade routes from the US Navy. This could dampen China’s enthusiasm for a protracted conflict between Russia and NATO countries.
The Russian invasion is a tragedy for the Ukrainian people, a challenge for European democracies and a headwind for economic recovery everywhere. A potentially long conflict may lie ahead. It is reshaping global supply chains, but for how long and to what extent remains to be seen.