Geopolitical Supply Chain Security and Impacts

AI-generated painting of the interconnectedness of a Global Supply Chain

Geopolitical Supply Chain Impacts

Certain events may affect the global populace in different ways, but more significant events may be out of the control of individuals. Events, such as war and other international conflicts, can affect the supply and cost of goods, making them unaffordable for specific groups. The war between Ukraine and Russia is a modern example of how this conflict has disrupted the global supply chain's security and the products needed to sustain a moderate living. Exploring this conflict and its impact on the supply chain will help us understand how to mitigate these risks in the future.

What Is The Disruption?

In 2022, when Russia invaded the neighboring country, Ukraine, a cascade of problems resulted. The foremost is the disruption of global supply chains for various products. Due to previous global incidents, such as the pandemic and price instabilities, as well as increasingly extreme weather events, the invasion exacerbated an already strained global market (Berman, 2022). These disruptions resulted in production disruptions for the international wheat market, palladium supply, natural gas, and numerous other commodities.

Other disruptions occurred to the supply routes themselves. The European Union (EU) has suspended all flights from Russia and will not permit them to enter EU airspace. This includes air travel and air freight. For flights originating outside the EU, the travel time has increased, which will lead to higher costs (Noatum Logistics News, 2022). Ocean freight has been redirected to other ports, while rail freight moving through that area has been transferred to ocean freight. Russian Naval forces have further disrupted ocean freight. These disruptions have come in the form of ocean lane closures, ocean freight ship attacks with rockets and missiles, and shipping crews being trapped at ports (Tan, 2022). Road freight operations have ceased unless they are defense or aid-related in Ukraine (Noatum Logistics News, 2022). Road freight into Russia continues, but most carriers have ceased operations due to the difficulties of navigating road checkpoints and other challenges.

Industry and Endpoint Impacts

The above-noted disruptions have impacted various industries in many ways. The car manufacturing sector, which had previously been experiencing a semiconductor shortage, has had to shut down operations in several countries due to a palladium shortage. Palladium is heavily utilized in the manufacture of automotive semiconductors (Berman, 2022). The supply of nitrogen fertilizer has been affected by agriculture, as Russia was a major producer of this product. The natural gas supply for the EU has been affected, as has the global wheat supply (Hamilton, 2023). While there are other sources of these products, the increased production may cause strain and lead to higher consumer costs for various goods.

While the global wheat supply is directly affected, nitrogen fertilizer may impact the global agricultural industry. This will drive up the cost of food for those who are economically struggling. The cost of transportation, fuel, and vehicles, which are being impacted by shortened supply and sanctions against Russia, will create a more significant economic disparity for people in various countries. This may also prompt these industries to explore alternative sources of these materials, which could lead to further mining and drilling efforts. This could lead to increased employment opportunities, but it may also pose a greater risk of environmental impact.

Long-term Implications

As certain countries may not be able to afford the increased costs, the more protracted this conflict will lead to food shortages. This may create distress in African nations struggling with their food supply (Hamilton, 2023). Environmental impacts from the continued use of heavy metals in various types of munitions on both sides may result in increased toxicity in water supplies. This may lead to populations having new and expanding forms of cancer and other diseases. Other materials have been globally restricted for defense building. Nickel and titanium shortages may lead to reduced battery production rates for electric vehicles and commercial aircraft airframes. Locating alternative sourcing for these various products may lead to further localized production development in the U.S. and other countries.

Cybersecurity Risks and Threats

While there have been physical threats to supply chains, the escalating violence in the Ukraine-Russia conflict introduced the cyber war between Ukraine and Russia and supporting countries. These impacts are not only on military targets but also on businesses that support both sides of the conflict. The Cybersecurity and Infrastructure Security Agency (CISA) has issued a warning to firms, stating that there is a significant risk of the conflict escalating to U.S.-based networks (Kolbe et al., 2022). The European Central Bank has also warned EU financial organizations of potential market disruptions due to sanctions imposed on Russia.

New threats have been observed through this growing conflict. The increased use of malware and ransomware, which has affected energy production facilities, has been employed to disrupt Ukrainian power grids (Cerf, 2024). These threats and attacks against the physical infrastructure have a broader impact than the military targets intended to affect. These cyberattacks have recently been paired with kinetic or physical attacks, resulting in a strain on resources intended to mitigate these risks. These risks and threats may also be introduced to supply chain channels through ransomware. This may shut down any systems that are directly connected and those connected through partners.

Mitigations

Keeping updated antivirus/anti-malware and system patching is crucial as a mitigating factor on the information technology (IT) and operational technology (OT) networks. Additionally, segmenting these networks from one another with cyber and physical safeguards is crucial to ensuring minimal impact from one network to another. This can be achieved by utilizing virtual LANs (VLANs) on the switches and creating distinct network zones through firewalls. Monitoring for any anomalous activity on critical systems is also imperative to ensure that a rapid incident response can be initiated, minimizing the impact.

High-Level Business Impact Analysis

Variable costs are typically an inherent part of doing business. When conducting business during a significant conflict that disrupts supply chain security, an impact analysis must be performed. This includes understanding the short- and long-term effects of operations and security on an organization. A determination has to be made regarding the cost of shipping and whether that cost is passed on to the consumer. Since air freight shipping costs have increased significantly and ocean freight is slow, yet raises significant security concerns, the impact on profits may be substantial (Tan, 2022).

Energy production has been shifted, and costs increased due to sanctions on Russian imported crude oil and coal. This has driven energy costs up by between 120% and 150%, and for businesses, that includes increased production costs and additional transportation costs for ground transportation (Zinchenko, 2024). Ocean freight has significantly impacted grain exports from Ukraine, but agreements have been made to mitigate this impact. Due to this impact, Poland and Ukraine have also reached agreements on rail freight. This may reduce costs over time. As this is a highly fluid situation, varying cost increases and risks will drive up costs for the business, and therefore, the consumer. This may also introduce new opportunities for companies to engage in previously unidentified markets.

Conclusion

The Ukraine-Russia conflict has introduced a global supply chain disruption that has changed the geopolitical relationships between several nations. This has had a significant impact on various industries and consumers. This may also have long-term implications for multiple populations and geographic areas. A new level of cybersecurity risks and threats has been introduced at an escalating rate. Businesses not directly involved in the conflicted nations may need to take extra cautious measures regarding their cyber assets. While this conflict may introduce risks and threats, it may also introduce benefits and the building of new geopolitical relationships. While national conflicts can result in horrible carnage, there may also be positive opportunities that blossom out of the fog of war.

References

Berman, J. (2022, March 18). Industry Stakeholders Highlight Logistics and Supply Chain Impacts of Russia-Ukraine Conflict. SupplyChain247. https://www.supplychain247.com/article/industry_stakeholders_highlight_logistics_supply_chain_russia_ukraine

Cerf, E. (2024, May 17). Ukraine blackouts caused by malware attacks warn against evolving cybersecurity threats to the physical world. UC Santa Cruz. https://news.ucsc.edu/2024/05/ukraine-cybersecurity.html

Hamilton, E. (2023, February 21). The global supply chain consequences of the Russia-Ukraine war. University of Florida News. https://news.ufl.edu/2023/02/russia-ukraine-global-supply-chain/

Kolbe, P. R., Robson-Morrow, M., & Zabierek, L. (2022, February 24). The Cybersecurity Risks of an Escalating Russia-Ukraine Conflict. Harvard Business Review. https://hbr.org/2022/02/the-cybersecurity-risks-of-an-escalating-russia-ukraine-conflict

Noatum Logistics News. (2022, September 23). Russia-Ukraine war: Impact on global logistics. Noatum Logistics. https://www.noatumlogistics.com/russia-ukraine-war-impact-on-global-logistics/

Tan, W. (2022, March 11). How the Russia-Ukraine war is worsening shipping snarls and pushing up freight rates. CNBC. https://www.cnbc.com/2022/03/11/russia-ukraine-war-impact-on-shipping-ports-air-freight.html

Zinchenko, S. (2024, July 11). How the Russia-Ukraine war has impacted on logistics routes and supply chains. GMK Center. https://gmk.center/en/posts/how-the-russia-ukraine-war-has-impacted-on-logistics-routes-and-supply-chains/