Ukraine: Key market forces

Based on in-depth interviews with sector experts and practitioners, our research highlights the business implications and specific challenges for the global economy, namely cyber, supply chain, food security, climate transition, ESG, energy security and public sentiment.

Cyber

In January 2022, multiple cyber-attacks against Ukraine’s government websites were recorded, with another wave disabling multiple government and bank services in the following month. From the outset of the conflict, there has been a global increase in cyber-attacks, but early indications of the number of attacks may rise as Russia continues to plan and execute cyberattacks. It takes time to plan and execute these attacks, which is why it’s possible that there is a delayed growth in frequency.

As a result, businesses should expect a need to increase their cyber resilience to minimise the peripheral impacts of state-sponsored attacks and opportunistic threat actors in the wake of the crisis. This will likely lead to businesses being more well-versed in financing their risk transfer solutions while improving their appetite for more comprehensive risk management

Supply chain

Supply chain constraints have been worsened by the war – with Russian oil, agricultural and metal exports constituting over $190bn in 2020, sanctions against Russia could have significant ramifications across the global energy and commodity supply markets.

Companies with international exposure or operations in Russia are also facing potential losses – they are now unable to access spare parts, insure their facilities and export their goods. Multinational corporates will assess fragilities in their global business, with decisions made on stopping, scaling-back or continuing operations in exposed regions.

Food security

Ukraine and Russia’s position as major exporters of wheat (combined output accounts for 30 percent of global supply) and sunflower oil (combined output at 55% of global supply) has led to severe disruptions to food supplies as a consequence of the crisis.

Many nations are targeting food independence -– as early as 2023. We may see farmers start to use new crop technologies that offer biologics that provide improved plant health and soil fertility benefits, leading to an increase in the yield of crops. However, as this will take time to have a real impact, to fill the short-term shortage, companies in regions such as Latin America are being encouraged to increase supply but will likely need to meet varying and demanding regulations from Western states.

Climate transition

Accelerated decarbonisation of energy and increased reliance on imported energy left Europe vulnerable to energy supply disruptions and economic shocks resulting from extraordinarily high energy prices. Almost 40% of natural gas consumed in the European Union originates in Russia making gas a particular vulnerability, especially for Germany and Italy which have a greater proportion of gas coming from Russia relative to their overall dependence on gas as an energy source.

With the entire value chain around LNG (and non-Russian natural gas) likely to experience accelerated demand, organisations will look to implement agile and lean technology advancements that can cut costs and improve extraction efficiency to increase margins while recalculating their budget for risk transfer solutions to account for inflationary pressures from supply shock.

Energy security

The desire for greater independence from fossil fuels is exacerbated by the war and will further accelerate decarbonisation initiatives. The EU has woken up to the dangers of over-reliance on energy provision from unreliable partners and is responding by accelerating its transition to renewables More than 90 percent of global emissions are now covered by Net Zero pledges which will support the renewable energy industry, suggesting this crisis could lead to an acceleration of geopolitical tailwinds for renewables. However, this cannot be achieved quickly, increasing the EU’s reliance on hydrocarbons for its energy needs, even re-opening coal fired power stations and burning more coal.

There will be winners and losers in the accelerated climate transition pathway. In the short term, construction and energy giants emerge as the clear winners from the inflated demand of renewable projects while the long-term downside of a disrupted transition has potential detrimental spill over effects to communities and biodiversity.

ESG

From an ESG perspective, company performance is still being measured in returns delivered over decades and not days. As such, the immediate actions necessary to mitigate losses from catastrophic events, including the war in Ukraine, should be distinguished from the steps that are necessary to preserve a company’s long-term value.

Organisations face heightened expectations from employees, customers, and shareholders to see how they will align with societal expectations especially with global financial institutions. Companies will have to reassess their partnerships and step up their due diligence checks on suppliers and third-party vendors to identify and remove potential ties with Russia to mitigate that risk.

Public sentiment

Global sentiment towards the conflict in Ukraine has largely been heavily pro-Ukrainian, with some countries traditionally considered part of the “Russian sphere” such as Slovakia and Hungary showing allegiance and support towards Ukraine. However, if the conflict continues into the future allegiances on both sides will be tested by politically and commercial imperatives.

Most corporations are proactively exiting Russia or terminating Russian partnerships, while a handful are remaining to either provide essential goods to Russian civilians or seeking healthy profit margins, potentially risking reputational damage. In the future, Russia will have to adapt to the ‘new normal’ by trading via smuggling rings in neighbouring countries and importing ‘knock-off’ goods from China and India.

Key market forces influencing the risk landscape