War in Ukraine is the final warning to rethink global supply chains
The Financial Times reported earlier this week on how the war in Ukraine has caused a spike in commodity prices. It has limited imports of important raw materials, from grains and gas to palladium and neon, affecting multiple sectors’ production, including major UK food producers. Commodities have been weaponised by both sides to serve political ends, amplifying the issues of relying on global value chains.
After the annexation of Crimea in 2014, business leaders were hesitant to adjust their operations to geopolitical developments. Total’s CEO at the time, Christophe de Margerie, said “we are involved in the business; we are not involved in politics.”, reflecting the attitude at the time. The Russian invasion of Ukraine, however, has shown that geopolitical risk in Europe can no longer be ignored and business leaders must reconsider globalised production networks.
Russia is the world’s largest exporter of wheat, the third-largest producer of oil, and provides 50% of neon exports, 17% of natural gas, and 40% of palladium. 30% of oil and 40% of gas imports to the EU come from Russia. The global dependency structure allows states to weaponise commodities. Frank Fannon, the former assistant US secretary of state for energy resources, says “Commodities have been weaponised for a long, long time . . . it's always a question of when does a state pull the trigger”.
It is only a matter of time before the Kremlin does. Dmitry Medvedev, the former Russian President and Prime Minister tweeted: “Welcome to the brave new world where Europeans will soon be paying €2,000 per 1,000 cubic meters of gas!”.
The COVID-19 pandemic foreshadowed the dangers of relying on production from external actors. In 2020, UNCTAD reported how COVID-19 shook the global trade landscape, causing grave declines in international trade and risking a greater economic downturn than 2008.
While pandemics are difficult to predict, China’s rise, now controlling 80% of global exports of rare materials, has forewarned Western producers of the weaponisation of commodities.
Businesses have reacted to the Ukrainian crisis by stockpiling commodities – but this is a short-term solution to a structural problem. China’s influence, COVID-19, and now Ukraine, have provided enough warnings and business leaders must adapt to this new reality by rethinking global value chains.
Producers should make their supply chains resilient to geopolitical risks by regionalising production. Indeed, there must be a balance between risk and opportunity. ‘’Strongly regionalised value chains may prevent firms and economies from efficiently allocating their scarce resources, from increasing their productivity or realizing higher potentials from specialization’’ says Adnan Seric at the UNIDO. Yet the hinders of importing commodities from Russia demonstrates how low costs have been prioritised over resilience.
Some commodities, however, depend on geographical advantages, and it can be difficult to relocate production. In such cases, an effort must be made to invent new resources and enable self-sufficient extractions. Some actors have already realised the need to rethink global value chains and have localised production in response. The American, Japanese, British and Australian industries are reacting to Beijing’s control over rare earths by investing and localising their own minings. Other sectors must follow in this direction.
The signs are crystal clear – now is the time to invest in resilient and regionalised supply chains.