According to the United Nations Conference on Trade and Development, there has been a significant disruption in global trade since Ukraine’s invasion, especially with issues within the Black Sea Region. As a result, fuel prices increased, port operations were halted, infrastructure was destroyed, insurance costs increased, and trade restrictions were imposed.
Such disruptions and uncertainties led to a rise in demand for alternative trade routes for Ukrainian goods and goods leaving Ukraine to other parts of the world. With over 36 countries importing half of their wheat from the Russian Federation and Ukraine, the invasion saw a 3.7% decrease in global grain exports.
Notably, Ukraine’s invasion led to a global increase in food prices since goods must travel longer distances with the disruptions in shipping within the Black Sea Region, as shipping to and from Ukraine is 90% dependent on sea transport.
How the Ukraine war has impacted the shipping industry
One year after Putin invaded Ukraine, shipping a container through transoceanic trade routes increased seven times, with the cost of shipping bulk commodities rising even more.
The rising conflicts between Russia and Ukraine saw the closure of Ukraine’s major ports, such as Odesa, trapping Russian and Ukrainian crews in the uncertainty of whether to leave their vessels at the ports or return home.
Due to suspected sanction breaches, Russian vessels were also banned from entering the EU and UK ports, leading to detainment.
How the Ukraine war impacted Global trade
Besides the denial of access to critical maritime services to the Russian fleet, maintenance companies, engine manufacturers, insurers, and classification companies also withdrew their services to Russian-owned and flagged vessels.
Shipping outside the conflict zone was also challenged as the EU and US sanctions caused a critical compliance disruption to shipping and insurance companies. As a result, many western regions opted out of trading with Russia, which posed a legal challenge to their established contractual agreements with insurers.
Although Ukrainian traders were hardest hit due to the sanctions and service withdrawal, global trade continues to face the consequences of the disruption in 2023. It could impact imports in the following ways:
Increased inflation
The rise in commodity prices in the three commodity categories-agriculture, energy, and metals led to international supply chain and market disruptions.
On the other hand, the suppliers were also challenged as their supply quantities declined. And how could they explain the transport, insurance, and compliance disruptions to the consumers?
Importing from Russia and Ukraine hasn’t been easy with the high demand and low supply, rerouting expenses, increased fuel prices, air transport restrictions, and the insecurities within the main ports.
International transport disruption
Ukraine invasion took place in early 2022, a year after the advent of Covid-19. Most regions in the world were hardest hit at the time, and businesses that had not established their online presence were already facing the consequences of the pandemic with low ROI, most of them closed and freight rates at the peak.
The situation was exacerbated in February 2022 when Russia invaded Ukraine, and fuel prices increased, leading to increased inflation and freight rates.
The air and land transport routes through Russia and Ukraine were also disrupted due to increased safety concerns and sanctions. The maritime sector was already disrupted, leaving a few to zero options for diverting shipments to those routes, and rerouting was expensive.
In addition, there were few routes left through the Black Sea trade routes, and even countries with no trade restrictions struggled with importing from Russia and Ukraine since shipping is cheaper and more efficient through the seaports.
Generally, there were increased transport expenses which led to increased inflation rates globally since over 36 countries rely on imports from Russia and Ukraine, especially for oil and grains.
Emerging economy’s food security threat
Emerging economies such as the Middle East and Africa still face food security threats as they rely heavily on oil and grain from Russia and Ukraine. With over 50% of sunflower meals, seeds, and oils, and over 30% of wheat coming from Russia and Ukraine, there are limited options to replace these trade regions.
For instance, almost all the wheat in Sudan, Egypt, and Ghana is imported from Russia and Ukraine. With the disruptions in transport and inflation rates, how are such economies striking a balance between supply and demand? It only implies low supply and, if any, imports at highly competitive prices.
In addition, the Food and Agriculture Organization of the United Nations Report estimated 20-30% of Ukraine regions used for maize, sunflower, and winter cereals remain unyielding or unharvested through 2023, limiting their supply.
The supply disruptions only place developed and developing countries in the same space for food supply competition, posing a food security threat to developing countries.
Also, with low yields, even without considering the transportation expenses, the supply will still be limited with high demand, which means the prices remain at their peak.
Similarly, consider a situation where Indonesia bans exports to sustain its citizens and avoid increased inflation due to high demand and low supply. The problem is even worse in countries relying on imports because it translates to no supply at all, even with the increased inflation.
With over 50% reduction in wheat exports from Russia and Ukraine’s incapacity to supply wheat, there is a projected 34% increase in global wheat prices through 2023, as the demand increases with low supply.
Exporter’s challenge
Russia occupies the Crimea Region of Ukraine, limiting all imports, exports, and transfers of all items subject to export restrictions. Hence, unless it’s food or medicine you need a license to export regulated items to the region.
The safety regulations have become even more strict since the invasion of Ukraine, and since licenses are subject to denial, it can be challenging to export to Ukraine.
Multilateral Export Control Regime
Since Ukraine is subject to the multilateral regime, you need authorization for all imports and exports from the State Service of Export Control. The multilateral regime to which Ukraine belongs comprises:
- Australia Group
- Nuclear Suppliers Group
- Missile Technology Control Regime
- Wassenaar Arrangement
Coping with Ukraine invasion effects on imports in 2023
The European Council held meetings through 2022 to curb the looming danger of increasing inflation rates, food insecurity, and global supply chain disruption. Their response concerning the effect on the worldwide market lays a basis for recovery, as seen in the following:
Global food insecurity and increasing inflation rates
The council held Russia responsible for the rising global food insecurity and condemned their unjustified Ukraine invasion, which revealed Russia’s negligence in its agricultural role in the economic sector. The council urged Russians to:
- Stop blocking Ukrainian Black Sea Ports such as Odesa as the main shipping points for imports and exports.
- Allow food exports through port Odesa
- Stop attacking Ukraine’s transport infrastructure
EU council also urged the council member states to drive action through:
- Supporting the UN Global Crisis Response Group to coordinate the global group in achieving effective multilateralism.
- Remaining resilient while encouraging sustainable food production and transformation.
- Supporting global trade by helping Ukraine to realize alternative routes during uncertain times.
- Promoting solidarity through emergency relief and affordability support.
International transport disruption
- The EU council encouraged the development of alternative transport means for exports and imports as a backup for the existing Ukrainian routes in times of crisis.
- EU council also signed an agreement to temporarily loosen specific road freight operations between Ukraine, the EU, and Moldova.
- The council also suggested creating an emergency policy plan to drive transport solidarity and resilience in uncertain times.
Exporter’s Challenge
While the EU council action plan is vested in making peace to improve food security and curb the transportation challenge, exporting to Ukraine remains challenging due to compliance with the States Service of Export Control in Ukraine.
Hence you need an established Importer of Record (IOR) to help you with the following:
- Compliance with the States Service of Export Control
- Establishing your company’s presence overseas through legal entity representation
- A faster and cheaper way of obtaining licenses for your equipment
- Data center installation and commissioning expertise and
- Establishing forward stocking locations and warehouse infrastructure.
Conclusion
The effects of the Ukraine invasion, especially on the agricultural sector, can still be felt. Inflation rates are still increasing, and the demand for energy and food supplies is still high with low supply.
However, with time (maybe sooner than expected), the situation will likely culminate in decreased inflation rates, cheaper transport, the lifting of blockades within the main ports, the liberation of airspace restrictions and border crossing, and a state of peace between Russia and Ukraine.
While the EU council and the UN Global Crisis Response Group invest their efforts in restoring food security and promoting peace between Russia and Ukraine, your sole responsibility is to ensure compliance with existing policies for a successful importation.
