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Russian Conflict Compounds Supply Chain’s ‘Existing Chaos’

Russia’s attack on Ukraine forced ocean carriers to shutter some local operations and adjust shipping routes Thursday as logistics executives braced for the expected impacts to supply chains in an already challenged operating environment.

“What we’re hearing from customers is that this will be yet another disruption to add on top of the existing chaos,” Brian Glick, CEO of supply chain integration platform Inc., told Sourcing Journal. “We’re expecting further knock-on effects on top of the existing congestion and volatile rate environment that has plagued the industry for the last year. Even if you’re not directly sourcing from the impacted areas, this will have ripple effects across the supply chain.”

Ukraine’s top global exports, totaling $49.3 billion in 2020, included cereals, iron, steel, animal and vegetable fats, oils and waxes, according to a special report on the Russia-Ukraine situation from supply chain risk management firm Resilinc. Top 2020 imports, amounting to $53.9 billion, included mineral fuels and oils, machinery, vehicles and electrical machinery, the report said.

“U.S. officials have threatened to impose tariffs to damage certain Russian industries such as quantum computing, civilian aerospace and artificial intelligence,” Resilinc CEO Bindiya Vakil said. “Sanctions could widen and lead to the foreign direct product rule, which would ban trade for products using semiconductors, including certain tablets, smartphones and video game consoles. Most global semiconductors are produced from U.S. technology or tools, and the U.S. could impose other countries to ban imports as well.”

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Vakil pointed to China-based smartphone maker Huawei, which saw revenue fall 30 percent in 2021, after the foreign direct product rule was applied to the company.

Flexport supply chain economist Chris Rogers wrote in a research note released Tuesday the Ukraine conflict poses a number of risks to supply chains, including disruptions to the movement of commodities such as natural gas, increases in commodity pricing, disruptions to logistics networks and challenges to customs and billing processes in light of sanctions.

“A kinetic conflict in Ukraine could generate a wide range of challenges for global supply chains,” Rogers’ report said, with higher commodity prices only serving to “exacerbate ongoing, global supply chain inflation.”

Meanwhile, a Drewry special report issued Friday says the immediate impact of Russia’s invasion of Ukraine on the world economy and container shipping is fairly small so far, but that could change quickly.

Drewry echoed immediate consequences such as oil prices jumping to a seven-year high of $100 per barrel hours after the invasion, stock markets around the world slumping with Russian stocks falling particularly sharply, while the ruble crashed to a record low and commodity and energy prices surged. The fallout for international container shipping will likely take longer to materialize, the report suggested, “and the immediate operational threat is relatively low outside of the locality.”

Drewry’s report said it’s possible China might feel “emboldened to copy Putin’s playbook in Taiwan, something that would hit shipping very hard.”

“We can envision a scenario, which for the time being we will put as a very low probability, in which an inflation-racked economy leads to an unexpected contraction in container demand,” it added. “It is within the realms of possibility that a trade slowdown will be steep enough to release some of the pressure on the container supply chain, giving ports the necessary breathing space to break out of the congestion cycle. War would be far too high a price to pay for that cure.”

Rogers raised the possibility of increased insurance shipping costs in the conflict zone and cyberattacks with “logistics firms as collateral damage,” while Drewry also warned of “retaliatory” digital hacks that could affect shipping.

Port of Odessa
Ocean liners have stopped services to and from Ukraine following Russia’s invasion. Stringer/Sputnik via AP

The details behind a cyberattack that crippled Expeditors International‘s global systems Sunday remain murky. The Seattle logistics firm, which had 2021 revenue of $16.5 billion and services The Kooples and Herschel Supply Co., has not specified what remains down or when operations might fully resume. A call to the company on Thursday was not returned. Its latest update on Wednesday afternoon said it “continues to operate within our global business continuity plan.”

Carriers have had to rework routes in light of Russia’s invasion of Ukraine.

Ukraine and neighboring Moldova have closed their air space to civilian flights, while portions of the air space in Belarus and Russia bordering Ukraine have also been closed. Meanwhile, Russian troops took over Antonov International Airport, a cargo and testing facility located about 20 miles northwest of Kyiv.

“This extension [of the conflict zone] reflects the operational reality and takes account of the assessed risk posed by the threat of missile launches to and from Ukraine,” the European Union Aviation Safety Agency said in an update Thursday.

Ocean liners issued a flurry of updates in response.

A.P. Moller-Maersk, Hapag-Lloyd and CMA CGM Group all said Thursday local employees have been instructed to work from home.

Service by sea to and from Ukraine has also been suspended, with nearby ports now handling the re-routed cargo.

CMA CGM said cargo bound for Ukraine will now be delivered to the Port of Costanza in Romania, Port of Tripoli in Lebanon and Port of Piraeus in Greece.

Maersk said cargo on its way to Ukraine will be delivered to Port Said in Egypt and Port Korfez in Turkey.

“The current circumstances mean that Maersk has decided not to call any ports in Ukraine until further notice and will stop the acceptance of orders to and from Ukraine until further notice. Services in Russia, meanwhile, currently remain available but are potentially subject to change as things develop,” Maersk said.

Mediterranean Shipping Company S.A. said it stopped all new bookings to and from Ukraine, while services to and from Russia continue.

“Stacking areas at hubs in the region are already very full and we expect the impact of the Ukraine situation to present additional challenges on top of existing global supply chain disruptions,” MSC said.

Drewry added that “the outlook for container shipping is intrinsically tied to the global economy and it is a near certainty that Putin’s gambit will lead to more economic volatility, heaping even more inflation on to people all over the world still reeling from the pandemic.”

Additional reporting by Arthur Friedman.