Introduction.
In the dawn of 2022, the world was given a stark reminder by Russia on how dependent countries were with regards to Russian energy production, negotiation, and distribution and how this can negatively affect supply chains across the globe in various ways. As predicted, the invasion caused huge amounts of market turbulence, leading to levels of inflation and interest rates that have not been seen for decades.
Why is it affecting the energy market?
Looking at the issue simply, Putin’s Russia is a major player in the global energy market with regard to the export of oil, natural gas, and coal with only the United States ahead of the country. Europe & China rely heavily on importing goods from Russia, around 90% to be precise. Therefore having deals that can be easily brokered by all parties involved is vital to ensure cheap and reliable energy.
Expanding on the discussion around energy prices, the invasion has meant steep rises throughout the globe and this unfortunately has trickled down to the end consumer due to the wholesale price increasing drastically. The input value for electricity, fertilizer, plastics, and refineries are just a few that have left end users paying much higher prices.
Across the world, nations have clubbed together, mainly led by the US & Europe to impose major sanctions on Russia. These sanctions make it very hard to clear Russian energy transactions through Western banks. As a result of this, countries are trying their best to seek alternative energy sources with the aim of cutting ties with Russian suppliers altogether.
The U.S market is a stable relief, in comparison.
As a result of the massive increase in prices and supply chain disruptions, the US is starting to become a much more attractive environment due to its much more stable market. However this is very much considered a short-term solution, the major issue that needs ironing out is how the world reduces its dependence on Russian suppliers after the war is over.
The current US administration has brokered several deals that will in turn strengthen the energy ties between Europe and the US, providing natural gas to the EU in the form of LNG (Liquified Natural Gas). This will help its western firms separate themselves from Russian gas. In the first 6 months of 2022, the US supplied more natural gas to Europe than it did in all 12 months of 2021. Therefore showing the Russian government that the EU has much less dependence than perceived.
A move towards renewable energy sources .
If the last year has taught us anything, it’s that the importance of investing in green renewable energy is vital. Washington is investing billions of dollars into green renewables, in order to provide businesses with alternative energy solutions. The UN has even claimed, “the war may be a blessing for the fight against climate change”. With the huge price hikes for traditional energy sources, it gives countries and companies the opportunity to make the switch to renewable energy options such as solar, wind, and hydrothermal.
This switch obviously is much better for the environment but also could potentially provide firms with a longer-term, much more stable option as it negates the security risks that come with fossil fuel dependence.
Filling the gap.
Whatever the journey that is taken, it is still going to be incredibly challenging for countries to compensate for the withdrawal of Russian energy exports, this is primarily due to the fact that the gas was easily sourced and prices offered by Russian suppliers were very attractive and allowed the distribution to the masses, cheaply. We must remember that replacing the entire Russian gas distribution is going to be incredibly challenging and likely not feasible therefore alternative means must be achieved.
Food & agriculture is also being affected.
The effects of the Russian invasion go far beyond just the energy markets. With the increase in energy costs, this results in food sources increasing in price too as well as struggles in exports of certain produce due to the damage of infrastructure.
Both Russia & Ukraine have numerous key food items that originate from their countries. The countries are big players on the agricultural stage and the rest of the world relies heavily on their ability to produce and distribute ingredients such as wheat which is obviously an ingredient in a huge number of supermarket staples.
Where Vine comes in.
From an organizational point of view, seeing the first effects of global market turbulence is simple, but a thoughtful and measured approach is required to analyze how it could potentially evolve over the long run. It is vital that businesses put in place a set of strategies that give them the ability to manage every aspect of the risk process.
The complex nature of the supply chains, input costs, supply substitution, and revenue volatility create a complex narrative that must be understood by management, key staff, and stakeholders.
Here at Vine Advisors, we are experts in getting under the skin of your business. We aim to understand the risk associated with all different types of supply chains and will work very closely with you and your stakeholders to realize where gaps are and what can be done to prevent any future negatively impacting actions.
