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ASCM Insights

Russian Sanctions and the Global Supply Chain

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Increased fuel prices, ongoing supply shortages and millions of dollars in lost sales are just a few of the negative byproducts created by recent sanctions. They are affecting virtually every corner of the planet, with the supply chain world taking a drastic beating as organizations attempt to navigate diminishing supply and perilous logistical challenges. What does this mean for the present and future of supply chain, and what are the greatest challenges that organizations are facing at this time?

Here, ASCM's Matt Talbert interviews the CEO of Mercantile Logistics and International Trade Inc., Kim Daniels, and the founding executive director of Randall R. Kendrick Global Supply Chain Institute at the University of Southern California, Nick Vyas, Ph.D., to learn more.

TALBERT: Let’s begin by speaking very generally. What are the most basic effects that these sanctions are having on supply chains?

DANIELS: When it comes to any kind of supply chain problem, it doesn't like change. Supply chains don't like change, and when you sanction, when you add a tariff, whatever it is that you do, the supply chain will feel it. In the case of Russia, what we're running into is potential issues with containers being able to stop at safe ports, if they're actually safe when they end up in Russia.

You also have to be careful of potential fallout from the countries. If you are depending on an import from a sanctioned country and you start bringing in goods, you are looking at potentially losing your complete supply. If you're an exporter, you're losing sales — and this can be hundreds of millions of dollars’ worth of sales that it costs the country.

TALBERT: What are your thoughts regarding the impacts and projected outcomes directly tied to the sanctions?

VYAS: I think the sanctions are very ineffective ways to handle this. All it does is throw more uncertainties. I think the byproduct of that is what we're dealing with. This conflict suddenly heightens the awareness of our understanding of supply chain; network design; and questioning: Have we done the right things? And what are the structural deficiencies of the last four decades that we need to re-ramp and readjust and repivot?

The onslaught of the COVID-19 pandemic shook the global supply chain and left it gasping for air, but the Russia-Ukraine conflict is the straw that broke the camel's back. Some of the supply chains are very, very fragile at this point.

TALBERT: Some consumers — other than inflation or the high gas prices — maybe haven't yet felt all of the effects. Would you say that that's the case at this stage and there's more to come down the pipeline that could have an impact on not just supply chain professionals, but also the end customer?

VYAS: This is going to be long drawn out, and the consequences — or what I would say unintended consequences — could be severe. Because you think about: Our vault runs on the energy. Russia and Ukraine are close to 20% of the supply of the world energy. EU is dependent on the energy sources. Many of the African continent and other countries are dependent on this. If you disrupt that, think about the inflation, what we are seeing now and protracted war and sanctions continue. It sucks out the wind from the global economy. There's already World Bank projecting a 1% reduction of GDP globally of this Russia-Ukraine conflict. Can we take another 1% if it draws out another 6, 12 months? That would be disastrous from what we have already faced over the last two years.

DANIELS: Implementing tariffs and sanctions is much easier than suspending them. Sanctioning China, for example, hasn't proven to hurt China's economy, and many don't realize that, while the U.S. may not conduct certain business with China, their replacement supplier network isn't necessarily bound by the same rules. This means that, while the U.S. may feel the negative impact of a lost relationship, it doesn't always result in actual change.

Sanctions are not something to be entered into lightly. While I understand that the government was punishing and using punitive ways to punish another country that was acting poorly, it still punishes everybody else that is involved in the supply chain, which comes down to that individual consumer.

TALBERT: We've heard of companies pulling out of Russia. There's more that happens when a company pulls out of a country, particularly one with that much economic force. What other impacts are we going to see to supply chains as a result of, say, companies leaving?

DANIELS: When you abide by U.S. sanctions, you may be violating the laws of the country being punished. That can create some serious legal discord for the people who you work with in those countries. If you have a manufacturing plant or a Starbucks in Russia, and now you have to close it all down, you could be violating Russian law simply by doing what the U.S. law is demanding that you do. There are definitely some issues and implications that you have to be worried about with that.

VYAS: We know, to date, about 700 institutions — the companies, multinationals — have curtailed their operations out of Russia. For the large Fortune 500 companies, this is an entry in their journal about writing up the losses, McDonald's being the biggest, as an example. You can shut down the operations, leave all your assets, walk away, book that as your loss, capital loss, and move on with it.

My recommendation here really is that, yes, companies are forced to do this because they have an obligation to follow the sanctions that have been imposed by the U.S. and the European Union. But, hopefully, the cool heads prevail thinking about the long-term implications … so that we can minimize the impact both the short term and the long term.

DANIELS: You can grab a bat from any store and just start pummeling away, and that seems to be what [recent administrations] have been doing with sanctions and with tariffs. What they don't understand is that this isn't just, let's go and get them with this one tool. There's got to be a lot of other diplomatic tools that can be used that don't affect your micro-economies."

TALBERT: We talked a little bit about the short-term impacts, and we've seen some of them. And we talked about the short-term impacts that might happen from supply chain managers and consumers in the near term. Take a look at the long-term impact.

VYAS: We have become very one-country-sourcing dependent. China became the world's manufacturing hub. Some of the commodities we later find out in 2020 during the COVID disruption, they're close to 90%, 95% some SKUs, were coming out of this one country. All of a sudden, we realized that at the cost of only focusing on total cost of goods sold and the profit margins, we give up the resilience, agility, sustainability.

What I call the long-term implication of the triple bottom line mindset that we let go on, the corporate greed of just the profit over the last 35 years, and we need to start to think about: How do we design our supply chain, our sourcing strategies, our manufacturing strategies and have some regional nodes? What I am proposing, decouple supply chain, is the regional shorter supply chain that delivers reasonably priced goods and services, but also strikes the balance of resilience and sustainability.

We have the capacity, we have the technology, we have great minds. How do we now create a new design of our supply chain network that is shorter, agile, sustainable, so we can actually manage the next 40 years and beyond for the future generations and leave the legacy much different than what we are today going to show?

DANIELS: I think we do focus too much on one country, and we could make that a more holistic type of environment, where we say, "Hey, this country's good at this, this country's good at this, this country's good at this," and get them all to work together to find a better solution so we're not putting all of our eggs in one basket. … When something happens with that one location — whether it's a sanction against Russia or it's tariffs against China or whatever — you are sourcing from one location, you are going to get hurt.

I think another long-term effect and impact to all of the supply chain and everyone involved is trust. … I think that how you manage and mitigate some of the risks that you're dealing with in the supply chain is really going to dictate how successful you can be in the future. If you can continue to maintain trust, whether it's with your suppliers or your buyers or with your personnel and all in between, such as your forwarders and your ocean carriers, if you cannot maintain that trust, the whole thing's going to collapse.

Some parts of this discussion have been eliminated or altered for clarity and summarization. For the full LinkedIn Live discussion, click https://bit.ly/3Pst0gw

About the Author

Elizabeth Rennie Editor-in-Chief, SCM Now magazine, ASCM

Elizabeth Rennie is Editor-in-Chief at ASCM. She may be contacted at editorial@ascm.org.

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