Russia-Ukraine crisis replaces Covid as top risk to global supply chains, Moody’s says

Covid-19 drove global supply chains to the breaking point, causing shortages and sending prices skyrocketing. Just as the pandemic has calmed down, Russia’s invasion of Ukraine threatens to further scramble those fragile supply chains.

Russia is a major producer of commodities, everything from oil and natural gas to palladium and wheat. Ukraine is also a major exporter of wheat as well as neon. The crisis is casting doubt on the availability of a sizable chunk of those vital supplies.

“The greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine military conflict and the geopolitical and economic uncertainties it has created,” Moody’s Analytics economist Tim Uy wrote in a report Thursday.

The Tirgan Martirosyan oil tanker seen off the Tsemes Bay promenade in the Black Sea port city of Novorossiysk, 100km southwest of Krasnodar, Russia on March 12, 2021.

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Moody’s warned that the Russia-Ukraine crisis will “only exacerbate the situation for companies in many industries,” especially those reliant on energy resources.

Europe, in particular, will feel the most pain from the energy price spike, because it is dependent on Russia for natural gas. Oil prices have surged worldwide, driving up prices for gasoline and raising the cost outlook for airlines and other industries, such as plastics, that rely on petroleum.

The Russia-Ukraine conflict also could pile further pressure on the worldwide computer chip shortage, which began during Covid and has been at the heart of the spike in new and used car prices.

Moody’s pointed out that Russia supplies 40% of the world’s palladium, a key resource used in the production of semiconductors. Moreover, Moody’s said Ukraine produces 70% of the world’s neon, a gas used in making computer chips.

“We can expect the global chip shortage to worsen should the military conflict persist,” Uy wrote.

Neon prices skyrocketed during the 2014-2015 conflict in Crimea. Even though chipmakers have stockpiled resources, Uy said that inventories can last for only so long.

“If a deal is not brokered in the coming months, expect the chip shortage to get worse,” Uy said, adding that this will pose significant risks to automakers, electronics companies, phone makers and other industries.

Uncertainty ahead

The combination of high energy prices and more pressure on computer chip supplies will complicate the inflation picture. Consumer prices soared in January at the fastest pace in nearly 40 years. Although many economists anticipated inflation would cool off significantly later this year, that outlook is now in doubt.

A customer refuels a vehicle at a Chevron gas station in Los Angeles, California, on Feb. 28, 2022.

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“The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Federal Reserve Chairman Jerome Powell told Congress on Wednesday.

Beyond computer chips, Moody’s pointed out that the Russia-Ukraine crisis has the potential to raise the costs of transportation, the most energy-intense of all industries.

“While the world will be relieved to have seemingly overcome the Omicron variant,” Uy wrote, “a new challenge has emerged where the endgame is not clear.”