What happens when politics ensnares supply chains?

Amid Russia’s conflict on Ukraine, already stretched world supply chains went into meltdown over entry to commodities and the way suppliers mirror political alliances.

When gas big Shell launched a press release saying it was unable to finish its reliance on Russian oil, Ukrainian international minister Dmytro Kuleba tweeted on the firm: “Doesn’t Russian oil smell [like] Ukrainian blood for you?”, starkly summing up how commodities and supply chains shortly develop into weaponised in instances of conflict.

Shell’s subsequent U-turn and makes an attempt at an apology highlighted the stress procurement groups encounter when reshaping supply chains in response to geopolitical tensions. 

Not for the primary time for the reason that pandemic, supply chains have develop into politicised and multinational firms face powerful selections over whether or not to chop ties with Russian suppliers, a transfer publicly considered as selecting a facet. Because in the present day, in the identical approach customers count on companies to mirror their stance on ESG, additionally they demand that world supply chains mirror their politics. 

Politicising commodities

While many international locations provided supply assist to Ukraine, they prevented direct motion to forestall triggering a 3rd world conflict. However, when Brent crude oil hit $139 a barrel within the second week of the invasion, prompting the best oil costs for the reason that monetary disaster in 2008, its world influence was clear.

George Filis, assistant professor of worldwide economics on the University of Patras, Greece, instructed Supply Management: “Political instability in major economies tends to create significant uncertainty to the real economy, which translates into uncertainty in the energy markets in general, and oil markets in particular. Obviously, military conflicts tend to create the largest impact. However, we can see that other political events could also lead to turbulent times for oil prices.”

Indeed, oil markets are susceptible to being closely weaponised, as within the Seventies, when costs rocketed after OPEC international locations halted exports in response to US president Richard Nixon taking the US off of the gold customary. The subsequent oil worth shocks had been extensively blamed for inflicting the 1973-1975 recession.

Coming again to the current, earlier than Russia invaded Ukraine, Fatih Birol, head of the International Energy Agency (IEA), accused Russia of compounding Europe’s power disaster by withholding as much as a 3rd of its gasoline. Analysts estimated Europe’s gasoline costs might have been reduce by half if Russia had elevated its exports by 20%.

Meanwhile, Covid-related disruptions highlighted the interdependencies  of power selections and world meals provides. Energy shortages in Asia prompted China to restrict its fertiliser exports, driving up costs for farmers.

David Laborde, a senior analysis fellow on the International Food Policy Research Institute who’s co-leading the organisation’s response to Russia’s conflict in Ukraine, instructed SM: “There is a long history of countries using food supplies and food shortage in geopolitical conflict, and food has been used to shape geopolitical relations. Food supplies, and even famine, have been used for political reasons either across nations or within nations.”

As such, the conflict in Ukraine has highlighted the hazards of turning into reliant on a small variety of suppliers concentrated in a single area, particularly if they’re at excessive threat of geopolitical actions. For occasion, 40% of the European Union’s gasoline supply comes from Russia, whereas Lebanon imports 50% of its wheat from Ukraine, adopted by Libya at 43%, and Yemen at 22%. Almost half of the international locations that depend on Ukraine for wheat imports had been struggling “severe food insecurity” earlier than conflict broke out, in line with the Centre for Strategic and International Studies. 

The influence of ideologies on supply

However, it isn’t simply political battle that creates volatility for world supply chains, however political tendencies and ideologies. The rise of former US president Donald Trump and the UK’s choice to go away the EU represented a interval of renewed nationalism in western politics. Trump’s financial coverage enabled US companies to prioritise home manufacturing and supply chains by lowering imports and investments from different international locations.

Trump’s “America first” agenda got down to make the nation much less reliant on globalised supply chains, significantly Chinese items and labour, and promised to “bring back millions” of producing jobs to the US. In a post-pandemic world, this initiative might be thought of shrewd, however as Trump made worldwide commodities much less interesting to US companies by imposing excessive taxes, corresponding to a 25% tax on international metal and 15% on aluminium, China retaliated with its personal tariffs, embroiling the international locations in a commerce conflict, which continued below present president Joe Biden.

Remi Charpin, assistant professor within the division of logistics and operations administration at HEC Montreal, cautioned towards utilizing financial nationalism to “weaken” others economies. He mentioned: “I think it’s very important to differentiate between economic nationalism, which has the intention to improve the economic conditions in the home country, while national animosity is when you’re going to leverage those policies to punish or try to weaken a foreign country.”

As Charpin mentioned, politicising provides is usually a matter of life and demise, because the pandemic demonstrated with the race to safe vaccines and PPE. “European integration would suggest you’re going to have supply chains within Europe and countries sharing resources and exploiting each other’s advantages. But when the coronavirus hit we saw it was the opposite. There was not much unity.”

Modern warfare: a battle of provides

Ultimately, supply chains have develop into a type of non-military assault throughout political bargaining. Charpin mentioned: “For the most powerful countries, they’re not going to face each other on the military ground, so it has become more economic and financial. Cutting off countries’ supply and demand is like the most powerful sanction that we can impose.”

It’s extra necessary than ever that procurement groups think about geopolitical relationships when establishing and diversifying their supply chains and pursuing multi-tier visibility. “What you need to do is try to source from other countries, but from safe countries in terms of political alignment because of this national animosity,” mentioned Charpin. “For firms, they should be at least aware of this, and say, okay, if we know one country might be at odds at some point with our government, we have to be careful or have another way to source.”

Dr Ioannis Koliousis, affiliate professor of logistics and supply chain administration at Cranfield School of Management, mentioned it’s tough to plan for geopolitical tensions and whereas they’re one-off occasions, sadly “we have too many of them happening right now”.

However, there are elementary steps procurement managers can take to assist future proof their supply chains from geopolitical uncertainty. “You need to diversify your supply, but you need to be careful not to have a supply chain that is very extended, because you end up relying on different actors in between different stakeholders,” mentioned Koliousis.

Preparing to answer political battle inside supply chains requires stringent due diligence, for procurement groups to develop particular threat profiles of suppliers to focus on any threat related to that space, and to have the ability to set up a backup plan for these suppliers.

While it’s tough to search out optimism within the present scenario, he mentioned the circumstances supply alternative for change and to strengthen world supply chains. “Once things go back to some sort of normality, we can start with designing the landscape in general. Where are we going to get energy from? What sources of energy will you have? I think now we have to clearly and robustly start thinking about other energy sources like solar and wind, or even nuclear.”