WEI CHENLU/FOR CHINA DAILY
Compared to the biggest economies in the world, Russia's GDP of $1.7 trillion is small and Ukraine's GDP of $156 billion is tiny. But the Russia-Ukraine crisis has the potential to create major supply chain disruptions worldwide.
How can a conflict between two relatively small economies create a global supply chain tsunami?
The intertwined economies of the supply chain and geopolitical narratives are the root causes.
With the conflict escalating, Western countries have imposed various sanctions against Russia, including blocking seven major Russian banks from the international financial messaging system SWIFT, freezing the $630 billion foreign assets of Russia's central bank, launching a transatlantic taskforce to identify and freeze the assets of sanctioned individuals and companies, and banning all Russian flights from their airspace.
Also, many Western multinationals, such as McDonald's, Coca-Cola and Zara, have suspended their operations in Russia.
In responding to the sanctions, Russia has upped the ante. After US President Joe Biden announced a ban on imports of Russian oil to the US, Russian President Vladimir Putin responded that Russia will ban exports of certain commodities and raw materials.
The ongoing conflict in Ukraine, the sanctions from various Western countries and the response of Russia will disrupt the global supply chain flows of many products beyond basic materials.
First, Russia and Ukraine account for 29 percent of the world's wheat market and 17 percent of the world's corn market. The ongoing crisis will disrupt wheat production and exports. It will cause shortages and push up the prices of wheat- and corn-based food products such as bread, pasta, and cereals in the Middle East and North African countries, which import wheat mostly from Russia and Ukraine.
Worse, as the world's largest exporter of fertilizers, Russia has banned exports of fertilizers and other essential materials such as potash and phosphate for fertilizer production, which will create worldwide fertilizer shortages. When the worldwide supply of fertilizer decreases, the yield for various crops will drop significantly. Consequently, a global food crisis will ensue, especially for the developing and low-income countries.
As a potential substitute for wheat, India may be able to export more rice in the short-term.
Second, Europe gets almost 40 percent of its gas from Russia, and Finland, Hungary and Poland are heavily reliant on supplies of oil and gas from Russia. The price of gas in Europe is 10 times what it was at the start of 2021. This may explain why the European Union is unsure about blocking Russian oil and gas.
As a stopgap solution, Europe is trying to source liquefied natural gas from other countries such as the United States and Qatar, but it will take time to increase LNG production. In the long term, many countries need to develop renewable energy locally to reduce inter-dependency and to reduce carbon emissions.
Third, Ukraine supplies more than 90 percent of the US' semiconductor-grade neon, a gas integral to the lasers used in the chipmaking process. Also, Russia supplies 35 percent of the US's palladium, a rare metal that is used to create semiconductors. The supply of both will be disrupted and it is challenging to find alternative suppliers. Some companies are developing ways to recycle neon and other materials as a stopgap solution.
This disruption will prolong the ongoing worldwide semiconductor shortage, as Intel, Taiwan Semiconductor Manufacturing Co and Global Foundries work to expand their production in the US. In the meantime, semiconductor shortages are hurting the sales of home appliance manufacturers such as Whirlpool and car manufacturers such as Tesla, hindering the economic recovery for many countries.
These material supply disruptions will prolong the shortages of many products, creating a perfect storm for escalating inflation.
The casualties triggered by the conflict are heartbreaking for the world to see. But the escalated global food crisis will be a hidden danger caused by the conflict and these sanctions.
Our world is interconnected. A disruption in one region can have a butterfly's wings effect for the entire world. To ensure stable supply chain operations, many firms are diversifying their supply base and reshoring some of their operations back to their home countries.
There is no winner in war. Only peace can ensure global supply chain stability. The dialogues and diplomacy must continue.
The author is a distinguished professor at the Anderson School of Management at the University of California, Los Angeles. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.
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