The February 22 decision by Russia to recognise separatist regions of Eastern Ukraine as independent was a dramatic escalation of a crisis that has been growing since 2014. A large-scale incursion into Ukrainian territory will result in unnecessary and unwanted bloodshed, and Russia’s violation of Ukrainian sovereignty has provoked international outrage.
Russia’s President Vladimir Putin has form in this arena, having annexed the Crimea region of Ukraine in 2014. Economic sanctions followed: on individuals with ties to the Kremlin and high-technology imports, as well as euro and dollar financing.
These economic sanctions took their toll – mostly in the pockets of the ordinary man, woman and business owner – but hardly made Russia an economic backwater. Putin developed an economy resistant to shocks but unable to grow rapidly during favourable conditions. This is reflected in its unremarkable but steady GDP growth over the past decade. Today, Russia’s central bank has an estimated USD600 billion in reserves, enough to weather the wave of further, stricter sanctions that are being introduced – at least in the short term.
However, the disruption will be felt internationally. Europe was set to import some USD1 trillion of energy supplies from Russia in 2022, almost double the value of 2021. Oil prices spiked on the threat of disrupted Russian supply, with crude trading well over USD100 per barrel on February 24. Russia is also a major exporter of a multitude metals and, in today’s market where supply is tight, any ripples in production could exacerbate already steep price rises. For Ukraine, whose name translates literally as ‘on the edge’, the situation could hardly be worse.
The scope of the attack is still unclear but it is understood to have included blocking access to the Sea of Azov. Maritime security company Dryad Global said that all commercial operations at Ukrainian sea ports have been suspended by order of the Ukrainian military; any vessel currently within Ukrainian ports should seek to leave immediately is deemed safe to do so, ensure they are broadcasting on AIS and clearly state their intentions across VHF. At this time, Dryad Global advises all commercial operators to avoid any transit or operation within the exclusive economic zone of Ukraine or Russia within the Black Sea.
Ukranian airspace has been closed to commercial traffic and other impacts are already noticeable in the global supply chain. VLSFO bunker prices are expected to rise above USD800 per ton. Listed container carriers have seen share prices slump by as much as 10 percent in the past five days, and some large international forwarders have seen their stock decline. Some merchant ships are expected to be hit with sanctions.
The introduction of further, stricter economic sanctions designed to damage the Russian economy will undoubtedly create more problems for logistics services providers and shippers, particularly when it comes to cross-border financial transactions; banning Russia from the SWIFT international payment system is supposedly under consideration. Import and export disruption will burden more costs upon logisticians already feeling the squeeze – huge traffic jams of trucks were already being reported on the borders of Belarus, Russia and Ukraine last week. For Russians, the situation will exacerbate interest rate and inflation issues that have seen, for instance, truck prices treble in just 10 years. Some operators, already feeling the squeeze prior to Russian military escalation, were on the ropes financially.
Of course, the situation is complicated. Russia supplies near 40 percent of European gas. Present information suggests that Russian energy infrastructure will not be targeted under proposed sanctions but, with further escalation, it’s fair to say that all cards will be on the table. Over the past 10 years, Russia has cultivated an eager customer for its resources in energy-hungry China but export volumes are small in comparison to what heads West. The potential re-routing of commodities – of which Russia is a key exporter of many – would drive prices higher for consumers and pose greater demands of the logistics supply chain.
At this stage, various scenarios could play out and we are worried by what has taken place, thus far, in Ukraine. For our friends and colleagues that have been affected, we hope for a safe resolution.