Ukraine war initial effects may be localised but longer term might be structural

Supply Chain Risk

The attempted annexation of Ukraine has exploded into a war of some significance. Its effects threaten to spread across much of Europe and it will likely have an impact on the economy of both the continent and much of the world. However, with the exception of hydro-carbons, Russia is surprisingly peripheral to the global trading system and so the impact of the invasion on logistics and supply chain management is less dramatic than it could be.

Certainly, air transport is being disrupted although not catastrophically. By Monday, Britain had banned Russian aircraft from its airspace with Russia reciprocating. The EU has followed this policy and other nations also seem to be. Airlines are now taking southerly routes for flights between Europe and East Asia, which will add to journey-times and thus remove some capacity from the airfreight market, although in the context of the present distressed state of airlines the development will only add to the volatility in the sector. Russian based airfreight providers are reportedly suspending all services to Europe.

Sea freight is being affected with disruption to operations in the region. Maersk has suspended bookings to Russian ports and some other lines seem to be following, although so far it is the Ukrainian ports that have seen most cancellations.

The increasingly busy China-Europe rail and road services are also likely to be badly hit. The rail services generally pass through Kazakhstan and Southern Russia, avoiding Ukraine. However, forwarders are now warning customers that the viability of these services are questionable in the short-term. Logistics service provider Geodis stated that it “recommends not to book rail shipments between Asia and Europe at the current state of events. Our GEODIS Teams will be supporting customers to identify alternative transport solutions.” However, the freight forwarder DB Schenker reports that road freight in and out of Belarus and Russia are still operational although “all lead time commitments are suspended”. Routes based through Turkey and the Southern Caucuses are likely to be the beneficiaries to disruption.  

The wider context suggests that trade with Russia will collapse. Even in areas such as oil and gas activity is likely to fall, although it is hard to see oil consignments being reduced too much. Certainly, sectors such as automotive logistics around St Petersburg or Moscow are very vulnerable, with the possibility of a threat to their long-term viability. Other areas such as agri-bulk are likely to be more robust. What is likely to emerge is a series of emergency logistics arrangements, probably with China but also Turkey, playing an important role. However, the expulsion of Russia from much of the Western banking system will make any commercial relations arduous.

The short-term issue of logistics disruptions will probably be focussed on Russia, the Ukraine and some other neighbouring states. However, there is a strong possibility that this crisis will mark a change that goes beyond just sanctions. What the invasion of Ukraine may trigger is the reassessment of the structure of the global trading system based on political criterion. If so, this will have a particular impact in East Asia.

Source: Transport Intelligence, 1st March 2022

Author: Thomas Cullen