Impact of Russia's Invasion of Ukraine on Indonesia's Supply Chain

After being hit by the pandemic, the Suez Canal blockage, global supply chains are now facing unexpected challenges due to armed conflict at the European border between Russia and Ukraine.

Russia's invasion of Ukraine has the potential to cause dangerous and devastating supply chain disruptions worldwide, according to research.

Russia and Ukraine are "keys" to the global supply chain.

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A report by Interos warns that the conflict between the two countries could endanger thousands of companies around the world.

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This report emerged after Russia deployed 100,000 troops near the Ukraine border, as a form of protest against NATO expansion throughout Eastern Europe since the 1990s and the fall of the Soviet Union.

Supply chain teams must review the company's dependence on suppliers from Russia and Ukraine. This is needed to assess risk and ensure smooth production operations.

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Impact of Russia-Ukraine Conflict on Global Supply Chain

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1. Gas Prices

Geopolitical tensions between Russia and Ukraine pose a risk to global gas price inflation.

Russia supplies a significant portion of the EU's natural gas, and any threat to this supply could cause gas prices to skyrocket.

The Interos report states that pressure on natural gas supply can trigger volatility in other energy markets. 

Russia's invasion of Ukraine could cause oil prices to surge to $150 per barrel, which would reduce global GDP growth by nearly 1% and cause inflation to double. 

It is further explained that even if oil rises $100 per barrel, this would cause input costs and consumer prices to spike.

2. Food Prices

The Russia-Ukraine conflict could also result in rising food prices. 

Why?

Ukraine is designated as the world's third-largest corn exporter according to the International Grains Council. 

Russia is the world's leading wheat exporter. Ukraine is also a major exporter of barley and rye.

According to the Interos report, current food prices will only be worsened by other price increases, especially if Russia seizes Ukraine's core agricultural regions.

There are 14 countries that depend on Ukraine for more than 10% of their wheat imports, one of which is Indonesia. 

3. Cyber-Attacks

The Interos report also highlights previous Russian cyber-attacks in Ukraine, and warns that the conflict could result in cyber-attacks on the supply chain.

It is stated that Russia attacked Ukraine's electrical grid in 2015 and 2016, as a result hundreds of thousands of Ukrainians lost access to electricity. 

These attacks not only impacted Ukraine, but damage to the country's infrastructure could also trigger significant disruptions to the global supply chain.

In 2017, Maersk, Merck, and FedEx lost a total of $7.3 billion after a cyber-attack on Ukrainian tax reporting software that spread around the world in a matter of hours. 

The attack disrupted port operations, caused factories to close, and hindered government agencies.

The research states that the US Cybersecurity and Infrastructure Security Agency (CISA) is urging companies to prepare for potential Russian cyber-attacks.

What Problems Will Supply Chain Leaders Face?

There are at least six supply chain problems that companies will face if this situation continues between Russia and Ukraine:

• Shortage of key raw materials
• Rising material costs
• Production capacity impact
• Demand volatility
• Logistics routes and capacity constraints
• Cybersecurity breaches
  

It is estimated that there will be severe shortages of hydrocarbons, critical minerals, metals, and energy. 

Prices for these goods will likely surge due to scarcity and irrational buying. 

This will impact manufacturing operations upstream and downstream as well as raw material mining.

Influence of Russia-Ukraine War on Indonesian Commodities

Teuku Faizasyah, as spokesman for Indonesia's Ministry of Foreign Affairs, stated that Indonesia has good bilateral relations with Russia and Ukraine, ranging from trade to investment. 

However, even before the conflict between the two countries occurred, Indonesia was already facing challenges in its trade supply chain from and to foreign countries due to Covid-19.

According to data from Indonesia's Central Statistics Agency (BPS), the value of Indonesia's exports to Russia in January 2022 was US$176.5 million, an increase of 58.69% (month-on-month) compared to December 2021. 

And compared to January 2021, Indonesia's exports to Russia increased by 60.29%.

The commodities exported by Indonesia to Russia in January 2022 are:

• animal and vegetable fats and oils 
• footwear 
• rubber and rubber goods, and 
• other goods.
  

Meanwhile, Indonesia's exports to Ukraine in January 2022 only reached US$5.4 million or decreased by 83.78% compared to the export value in December 2021.

The commodity imported by Indonesia from Europe, particularly Ukraine, is wheat.

This must be monitored because material prices can spike due to war and also commodity booms.

How to Address Supply Chain Disruptions

Executives must be careful about the potential impact of the Russia-Ukraine military conflict. 

Leaders need to ensure appropriate contingency plans for their most critical supply chains and riskiest suppliers in the region.

Risk mitigation strategies include:

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1. Evaluate & Identify Current Risks.

Critically review your business and identify areas with risk exposure. Identify and evaluate potential supply chain disruption scenarios.

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2. Prioritize Based on Probability and Impact.

Prioritize potential risks that are likely to actually occur.

Then estimate the financial impact of each event. Develop mitigation plans, starting with the most likely and highest-impact risk scenarios.

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3. Ensure Supplier Quality.

Suppliers can influence company reputation.

In addition to ensuring supplier product quality, pay attention to how they treat employees, source materials, and interact with other partners. Conduct financial testing to ensure long-term supplier viability.

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4. Diversify Suppliers.

Do not rely on a single source for materials or products.

It is best to source from low-cost suppliers around the world, but if goods cannot be delivered on time, the supply chain becomes vulnerable. Build reliable secondary suppliers in various regions to minimize this risk.

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5. Watch for Supplier Risk.

Be aware of risks that suppliers may face, including regulatory compliance, country risk, economic and political conditions, or anything that could affect their ability to meet your needs.

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6. Involve Partners in Risk Planning.

Work with suppliers, transportation operators, data management centers, and customers to ensure they have disaster recovery and continuity plans aligned with yours.

Involving them in risk management planning reinforces their importance as partners and enhances their role in risk mitigation.

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7. Purchase Cargo Insurance.

Insurance is important in many aspects of life, as it is in your supply chain.

Find a cargo insurance provider that can protect shipments in transit as well as goods stored in a warehouse from loss or damage anywhere in the world, regardless of the operator or mode of transportation.

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8. Be Transparent with Partners.

Share information, such as increased sales projections, and include partners in product design changes.

This helps suppliers have the right products available when needed. Similarly, if sales projections decline, inform your partners as well.

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9. Review Risks Regularly.

Review risk scenarios regularly and identify changes in your supply chain. Preparation is the best way to protect your company from supply chain disruptions.

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With proper analysis, planning, and execution, it is possible to reduce significant risks, ensure operational resilience, and prevent supply chain disruptions.

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Read: Impact of Russia-Ukraine War on Sea Shipping

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The Role of Shipping Partners in Supply Chain Crisis

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