Ukraine Conflict Brings Supply-Chain Woes

Crises, natural or manmade, often put a strain on supply chains, and the current turmoil in Ukraine is a reminder that globalization creates risks as well as opportunities.

Natural gas that heats much of Europe, auto parts going to Germany, Poland, and the Czech Republic, grain for Europe and the Middle East, and ammunition for American hunters all travel through Ukraine or are exported from its farms and factories.

Since revolutionaries in Ukraine’s capital Kiev ousted Viktor Yanukovych in February, trade with Ukraine and Russia has been under constant threat. Falling currencies, blocked supplies, uncertainty over new borders and customs, and tax fluctuations are all impacting production and distribution across Russia and Ukraine, and with the U.S. threatening increased sanctions, the situation is likely to be exacerbated.  

On the metals front, for instance, several key U.S. manufacturers’ supply chains could feel the crunch. Boeing buys nearly a third of its titanium for its planes (translating into an $18 million total spend) from Russia, mostly from VSMPO-Avisma, the largest titanium producer in the world.

So far, sanctions have been limited to financial restrictions on a few Russian leaders, but for supply-chain managers it’s a balancing act between staying put and looking at alternate suppliers and supply routes.

“Assessing risks is complex because politics sets the agenda,” says Rosemary Coates, president of Blue Silk Consulting, a Silicon Valley firm. “If you have a factory in Ukraine, you may have to shift production, and that could have a significant impact on the place that you leave.”

Coates, who advises Nike Inc. among other clients, says that companies are increasingly sensitive about the impact of their actions on local economies. “We have to be aware that by closing a plant we’re causing a lot of misery for people. We have to ask, ‘what will be the impact on the people and the politics?’”

Coates says that production in both Ukraine and Russia can be challenging, with widespread corruption and petty crime. But she says that Ukraine in particular is well-integrated into eastern European supply chains, particularly with Poland, Slovakia, the Czech Republic, and Germany. Russia is Ukraine’s biggest trading partner. Ukraine exports cars, planes, and other goods to Russia, and it is dependent on Russian supplies of oil and gas.

Ukraine is one of the most industrialized regions of the former Soviet Union, making myriad components and finished goods. It exports commodities including steel, sunflower oil, grain, and honey, but the crisis has left customers, suppliers and investors nervous. Industrial production in Ukraine decreased 6 percent in April of 2014 over the same month in the previous year, according to National Bank of Ukraine.

The automotive industry is one of the hardest hit, with the international community considering Crimea as occupied territory; one large carmaker says that U.S. and EU authorities have “unofficially” warned carmakers to avoid doing business in the Crimea peninsula.

There’s even confusion around how to label goods leaving the region. Stickers saying “Made in Ukraine” or “Made in Russia” are affixed to manufactured goods or printed on textiles to tell consumers where a product originated from. Even though Russia says it has annexed Crimea and a vote there approved the takeover, the U.S. still requires that any goods from Crimea be labelled “Made in Ukraine,” says Coates.

“This is a very significant point being made by the U.S. government,” Coates says. “Goods coming from the Crimea cannot be labeled ‘Made in Russia’ because the U.S. government does not recognize the Russian government there.”

While the recent spike in violence in the eastern regions of Ukraine has disrupted automotive businesses on the ground, with bands of criminals in Donetsk and Lugansk Oblasts robbing and looting at will, wildly fluctuating import tax on autos is impacting both Ukraine and Russia on yet another level.

Early in the year, the Ukrainian government announced it would cut in half and then eliminate special duties on imported cars. The plans, strongly opposed by Ukraine automakers, were a response to protesters who wanted cheaper cars. But after president Yanukovych fled the country, the parliament reversed course and raised duties including imposing new excise taxes.

Foreign manufacturers who located in Ukraine to get access to the Russian market are concerned that Russia may raise tariffs on Ukraine cars to the same 25 percent rate imposed on other imports. That would effectively close the Russian market to Ukraine manufacturers.

In more obscure supply-chain news, the unrest in Ukraine was apparently to blame for a shortage of ammunition at a Florida firearms show in March. Phil White, editor of TheFirearmBlog says that shipments of ammunition from Russia and Ukraine for Wolf Performance Ammunition, a California-based importer of Russian bullets, was recently interrupted.

Wolf is a sponsor of the show and the sole supplier of ammunition at the show. The company was told a ship traveling from a Russian port had been scheduled to pick up a shipment from a Ukraine ammunition factory at a port in Crimea, but the supplies hadn’t arrived.

Even if Russia and Ukraine avoid outright warfare or further occupations of territory, the area is likely to be a continuing source of worry to companies with operations or suppliers in the region.


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