Geopolitical shifts and global supply chain risks

Globalisation has hit a few hurdles over the last few decades, but radical change kicked in when the global pandemic struck in 2019. Following the pandemic, globalisation took a further blow when Russia invaded Ukraine, starting a radical realignment of alliances.

From the 1960s onwards, international connections were forged to offer goods and services on a global stage. By the 1980s, globalisation was in full swing, making the most of the stability in many countries. The 1980s also marked the start of the 'Extended Enterprise' view of organisations, where nearly every organisation started to recognise its dependency on a few critical suppliers to operate.

Global supply chain complexities

With the 'Extended Enterprise' view of organisations, the term 'Integrator' became popular for organisations that did not manufacture sub-components but oversaw an assembly operation. In the service sector, there was a parallel approach, where a large organisation with a global range brought together a range of smaller sub-services to provide an international service operation.

A variation on the integrator model in the service sector is the franchise model, where the parent organisation manages the brand, but the delivery of the services to the end customer is through a network of secondary organisations that sign up to a rigidly enforced operating model.

So, we entered the new century with long, complex and well-established supply chains, each with a high social dependency on the reliability of these supply chains to provide for our modern needs.

Whether we buy a car from an automaker, a kiwi fruit from a supermarket, or make a call on our new Apple iPhone, we are utterly dependent on these long and complex supply chains.

Restructuring the world’s supply chains

According to the International Energy Authority (IEA), Russia is the world's third largest exporter of combined oil products at 11 billion barrels per day, 60% of which goes to OECD European countries. As Russia’s carbon related exports total around $160Bn, it was a natural target for recent sanctions to obstruct funds for Russia's war, and a potential weak spot for nations dependent on the supply from Russia.

Energy prices shot up, and Europe started to wean itself off Russian oil by seeking other sources. In response, Russia sought to maintain its export levels, increasing its supply to China and India. We can see that energy prices may be falling as a new global distribution model based on different trading relationships becomes established. Still, prices may fall slowly and may never reach past levels again.

The logistics industry learnt a lot from the Covid-19 pandemic, which has helped with the consequences of global political and trade reorganisation. Still, there is only so much that can be done, and supply chain failure remains a significant risk.

What areas may change as a direct consequence?

• Energy security - given the global dependency on fossil fuels and the ongoing reorganisation of the energy supply industry.
• Food security - given the large amount of grain and vegetable oil produced in Ukraine and Russia.
• Defence spending - as Ukraine's allies provide assistance.

Geopolitical tensions and supply chains

The war against Ukraine is also a destabilising political event in other ways too, as it has widened the envelope for other countries to test post-Covid boundaries.

China is at odds with other countries in the South China Sea regarding sovereign territory and territorial waters. The issue with Taiwan has taken on a new significance, and the move by the US to publically support Taiwan has not gone down so well with China. Other than rising tensions with China, relations with North Korea have also worsened.

The potential of the Russia Ukraine conflict on food security mentioned above should not be underestimated.

Many of the products we need for our modern lifestyle originate from China, Taiwan and South Korean factories. Certain semiconductors are only really available in volume from South Korea. So any outbreak of hostilities in the region will very likely disrupt supply chains for many months, and even products assembled in the US and Europe will be badly affected.

A campaign of cyber attacks

Aside from the consequences for physical goods and oil supplies, all organisations should consider the implications of the current tensions between Russia and the West for cyber risk.

Russia may not be the superpower it once was, and its economy accounts for just 3.4% of global GDP. But developing a substantial and sophisticated cyber warfare capability does not require the same level of funds as a full-on physical (kinetic) war. Consequently, the war on Ukraine has included cyber attacks on the country's infrastructure and communication ability.

According to the UK's National Cyber Security Centre (part of the UK's GCHQ security infrastructure), Russia prefers disinformation and degrades a population's confidence in its country's leadership. This is why attacks on Ukraine have included a substantial increase of 'wiper’ attacks on government servers, aimed at causing disarray, and attacks on the press to prevent the dissemination of accurate information.

Due to the West's opposition to Russia, there has also been an increase in attacks on Western interests. Still, the activity level has been kept below that necessary to solicit a 'kinetic' response. That said, the most prolific type of cyber attack for organisations, from Russian or other sources outside Ukraine, remains ransomware, not wiper attacks.

Risk and resilience - key takeaways

As always, we would encourage organisations to look at the actions they need to take to manage risks, reducing the consequence of adverse outcomes while maximising opportunities. And to consider how effective their resilience measures will be in the event of fast-moving situations or effects that cannot be mitigated to acceptable levels by the organisation. In providing example sources of risk, this section is neither exhaustive nor an in-depth analysis. The intention is to give examples of the kind of fresh thinking organisations may need to apply to assess the organisation's external context.

• Global events are altering country alliances. Attitudes in some countries may change, service levels may vary, and stricter or even new rules may replace old customs. Any organisation with a footprint extending to countries that may have altered alliances should consider whether the new political alignment changes its organisation's risk profile.
• Organisations may need to take steps to protect their supply chain. For many, this will start with actions to understand the depth and breadth of their supply chains. Issues to consider may include security of supply, lead time variability, product quality and single source issues.
• The cost of doing business has increased, but other risks may have also increased. For example, international maritime law exposes anyone with cargo on any ship to additional cost risks when shipping goods to another country. These maritime risks surfaced recently when the 'Ever Given' container ship became stuck in the Suez Canal in March 2021 and the organisations with cargo on board found they were exposed to third party claims for issues the ship caused for Egypt. This was over and above the risks they faced because their goods were significantly delayed. Organisations may consider increased shipping risks related to conflict and trade tensions justify a review of their shipping insurance policies to make sure all risks, including risks from international maritime law, are covered.
• Energy prices have increased. While many are beginning to forecast a drop in costs, organisations may need to consider if they will ever return to past levels. On the other hand, not all countries are losing due to rising energy prices, and some locations may see a substantial benefit which feeds through to their economy.
• Consideration of what may come next. One trap people often fall into is underestimating how dynamic situations may be. There is a tendency to think of 'now' as a steady state. These are turbulent times, not a perpetual state of dark, so organisations may need to re-evaluate the timeframes covered by their scenarios and consider what may arise post-war and if global tensions change.

Adapting to geopolitical change

In closing, where organisations have been able to rely on the stability of globalisation in the past, this is no longer a justifiable assumption and organisations of all sizes need to consider how global political events may pass down changes to the organisation's external environment.

While nobody expects organisations to solve global issues, there is a reasonable expectation that adjustments to their risk and resilience response can go a long way to protect an organisation from the worst effects.

If you would like to discuss any of this topic in more detail, please contact your usual Barnett Waddingham consultant. You can also get in touch by emailing RAA.group@barnett-waddingham.co.uk.

Stay up to date with the latest independent commentary and exclusive insights, tailored to your preference.

Sources 

• Russia Oil and Gas exports
• Russian economy
• Supply chain lessons
• World economic data
• Insurance and maritime law
• Winners and losers in energy market change