US business resilience: limiting the impact of the Russia-Ukraine conflict
May 2022 | SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS
Financier Worldwide Magazine
May 2022 Issue
Make no mistake about it: the Russia-Ukraine war coupled with the persistent coronavirus (COVID-19) pandemic will continue to send shock waves through the US and global economy.
Forget the recent assertion by some executives, including Stephen Squeri, chief executive of American Express, that the war has little effect on business. American companies – and consumers – face tough times with continued high energy and food inflation, rising interest rates, supply chain bottlenecks, a talent shortage and possible stagflation that will curb consumer spending and hurt employment and profit gains. A recession cannot be ruled out.
As first-quarter earnings begin appearing, look for the commentary from companies about the outlook for the rest of 2022 and beyond. It is not likely to be rosy, even though the latest job numbers were promising. Bette Davis’s famous line comes to mind: “Fasten your seat belts. It is going to be a bumpy night.”
Indeed, a so-called global forces behaviour model employed by a researcher at the Universidad de San Carlos de Guatemala concludes that the Russian-Ukraine war can generate more vulnerability to the world economy than the COVID-19 pandemic. The methodology considered a production collapse, trade dispute, investment disruption, energy shortage or financial crisis.
But there are actions that US companies and their chief executives can take, if they have not already, to reduce the risk of acute damage from the war on their operations. They can involve key procurement, security and business management executives. Seven recommendations to consider are listed below.
Broken trust leading to declining global growth
The war on Ukraine is merely exacerbating the huge pandemic jolt. Even if the conflict abates soon, which is doubtful, the repercussions will continue for months, if not years. Ukrainian reconstruction will take years and will continue to affect valuable exports of oil, minerals, wheat and other crops, and IT talent from that country.
International trust with the Kremlin has been broken and will not return for a long time. Even lifting Russian sanctions will not restore confidence among previous investment and trade partners. President Putin’s highly irrational decision to launch a full-blown war with Ukraine has shattered the trust in Russia as a dependable business partner. Many investors and companies may elect to stay away from such a risky environment for years to come.
For 2022, it is almost certain that global growth will slow. Financial conditions will tighten further. Stock and commodity market turmoil will continue as the war dampens the appetite for risk. Global energy, automotive and food supplies will shrink. Digital and IT talent shortages will persist. Supply chain roadblocks will linger.
Already, global production of new cars and trucks is suffering as the war disrupts supply chains. Major automakers have cut output at European factories because of shortages of parts, including cable harnesses from Ukraine.
Impacts on commodity trading and business continuity
Oil and gas prices will stay sky-high as European countries continue to wean themselves off Russian energy and as alternative infrastructure solutions take time to develop. Gas pipelines for non-Russian gas must be built to connect Spain – which primarily gets its gas from Algeria – with the rest of Europe. Russia also lacks liquefied natural gas plants and pipelines besides those that run toward Europe. Consequently, it is unlikely that Russia can find alternative buyers for its gas soon and, as a result, the amount of easily accessible gas will shrink.
Food supplies will shrink while prices will rise further. The Ukrainian harvests of winter wheat, spring barley, corn, sunflowers and sugar beets are likely to be lost this year and that will impact the world food provisions. It will also trigger unpredictable ripple effects: political instability in countries such as Egypt, mass starvation and new refugee crises, among others.
International air travel will be another casualty of the Ukraine war. Fewer flights, higher air and fuel prices, and a declining economy and stock market will curtail travel for business and leisure.
Where the pandemic was once the major factor determining travel decision making, twice as many travellers in a recent survey cited concern about the war on Ukraine spreading beyond the country’s borders compared to fears related to COVID-19. Russia and Ukraine are the two largest countries on the continent, and for European business jet operators, air connections within the two nations comprised almost 10 percent of all flights, underscoring the significance of the conflict.
Even healthcare is affected, since Ukraine is a major centre of regional clinical trials of new drugs by Big Pharma players, including Merck, Pfizer, Biogen and AstraZeneca, among others. Disruption of these trials, which usually take years, is likely to lead to the loss of vital data as well as stifling the progress of several promising drugs.
Displacement of Ukrainian talent has widespread consequences
As for the war for talent, the loss of Ukrainian technology professionals is a major hit to the US and global economy at a time when the International Monetary Fund foresees a global tech shortage of 85 million people that will grow between now and 2030. In 2020, 200,000 developers were in Ukraine, according to estimates from software development outsourcing company Daxx, which said one-fifth of Fortune 500 companies had their remote development teams in the country before the war.
Ukraine also graduates 130,000-plus engineering students a year, and the US depends on this supply of computer science and technical graduates. Any major loss of this talent bank can be disastrous if technology projects cannot finish on time and budget.
Supply chain disruptions that appeared to be dissipating somewhat as the pandemic waned are expected to continue and perhaps even worsen, adversely impacting a growing roster of producers. This is due to sanctions against Russia and its ally Belarus, and continued supply problems in Ukraine.
Russia and Ukraine are both substantial outsourcers of palladium and platinum used to make catalytic converters for vehicles, and the countries supply platinum, copper and nickel essential for ongoing battles among electric vehicle producers. Russian aluminium and steel go into a wide range of manufactured products, from smartphones to beverage cans, and Ukraine supplies about half of the world’s neon gas used in lasers that help make semiconductor chips. Belarus is a major producer of potash for fertilizer, and its role in the conflict will also have impacts on the global economy.
Mitigation steps for US business leaders
But smart chief executives can ensure that their businesses minimise the impact of the war and its aftermath by taking actions that reduce their risks. These are helpful especially for those companies with global operations. The most pressing priority is to prepare a plan for geopolitical disruption that considers several initiatives, as outlined below.
Consult with foreign policy experts. Chief executives are adept at managing their companies, creating new products and generating profits, but they often do not know much about foreign policy. A foreign policy consultant can help navigate the war on Ukraine as well as related geopolitical issues elsewhere that could harm or affect operations and business.
Determine the security of company sites and employees. A security firm or expert that understands global threats can help assess such security. Make sure to assess cyber security-related exposure to attacks and quickly strengthen defences.
Develop a supply chain risk plan. The plan should assess current supply routes and lay out alternative scenarios. While local suppliers can offer a strong advantage, be prepared to use substitute procurement sources should a crisis strike. Stay connected with strategic suppliers, examine their cultural mix and develop a plan to switch quickly to alternative suppliers when necessary. Diversify logistics, such as freight and warehousing, to be prepared with contingency plans when a sudden disruption occurs.
Check insurance coverage on assets and employees. Review and, if necessary, update business travel insurance and trade credit insurance. If any operations are abroad, consider cargo insurance and terrorism and political violence insurance.
Communicate with stakeholders. If any products or services require reiterating or changing company responsibilities, make sure to relay that information to consumers, customers, clients, shareholders and employees. For instance, Parag Agrawal, chief executive of Twitter, reiterated the social media company’s responsibility when a crisis strikes to enforce rules proactively, preserve access to Twitter, elevate credible and reliable information, protect the privacy and safety of people, and prevent efforts to manipulate public conversation.
By mid-March 2022, Twitter had removed over 75,000 accounts for violations and labelled or removed over 50,000 pieces of content. Many US companies with Russian operations explained why they were leaving Russia – or not – after it invaded Ukraine, and such communications should continue when warranted.
Prepare crisis communications plans if Russian ties exist. Many Western firms that may have sold technology to Russia used for malign purposes, such as military components and surveillance technology, should be prepared to address the issue should it arise, even if their intentions were good. The war will bring such business ties under closer scrutiny and almost certainly will trigger strong public criticism.
Gauge the company’s exposure should Russia, and others, default on debts. Russia might default in the next several months. Several emerging market countries could as well, since more of their population could face extreme poverty as commodity prices climb. Financial officers should check with their banks and other financial institutions to weigh the impact of any defaults and consider possible actions.
Black swans on the rise
The war on Ukraine is considered a black swan event. It was unexpected, is unprecedented to a degree, and carries an enormous impact. These black swans – natural disasters such as hurricanes, floods and wildfires, as well as epidemics and war – have historically happened every five years or so, but they are increasing in number.
Russia’s invasion of Ukraine is a rarer event. That is why its impact on US companies and consumers is still unknown but certainly will be extensive and expensive. And given that it has erupted as the COVID-19 pandemic endures and inflation has reappeared, it creates an uncertain period for businesses, consumers and the economy – both domestically and globally. Be prepared.
Harlan Loeb is executive vice president of Argyle Communications and Alexander Brakel is a visiting scholar at Wesleyan University. Mr Loeb can be contacted on +1 (312) 282 5632 or by email: hloeb@argylepr.com. Mr Brakel can be contacted on +1 (332) 250 6877 or by email: a.brakel@gmx.de.
© Financier Worldwide
BY
Harlan Loeb
Argyle Communications
Alexander Brakel
Wesleyan University
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