Risk Management Implications of the Russian Invasion of Ukraine

Randy Sadler


August 11, 2022

Russia Ukraine War Risks

Russia’s invasion of the Ukraine has prompted a humanitarian crisis as millions of civilians flee the violence and thousands have been injured or killed. The invasion does not only have humanitarian implications, however—the impact has also been economic. As the war has unfolded and government sanctions escalate, the supply chain crisis has worsened. Combined with soaring inflation and energy market disruption, the business environment has grown more challenging with more than 750 firms in North American and Europe suspending operations in Russia altogether. New high-impact risks to business and industry continue to unfold from the conflict, revealing risk management tactics that should be considered to help protect companies from major disruptions. The following are some of the largest ways the invasion could impact business:

1. Supply Chain Disruption
Russia’s military action is creating chaos in global supply chains and markets for innumerable goods. The COVID pandemic already wreaked havoc on the world’s supply chain, and now violence in Europe is packing another detrimental punch.

Russia is a major exporter for more than energy, including food staples and strategic metals for luxury items. In all, more than 130 economies have at least one good or commodity import that is predominantly sourced from Russia, Ukraine and Belarus, according to a Bloomberg News analysis.

A recent Moody’s Analytics report characterized the Russia invasion as “the greatest risk facing global supply chains.” The report warned that the Russia-Ukraine crisis will “only exacerbate the situation for companies in many industries,” shifting away from the COVID pandemic. Moody’s pointed out that Russia supplies 40% of the world’s palladium, a key resource used in the production of semiconductors, and Ukraine produces 70% of the world's neon, a gas used in making computer chips. This impact on semiconductors could impact everything from the auto industry to the tech world.

2. Oil and Gas Under Pressure
Russia’s position as a major global producer of oil and gas—amid cascades of new sanctions being imposed daily from governments worldwide—has already cast waves of disruption on certain industrial sectors, with price spikes at gas pumps that have not been seen in years. Russia is the world’s  third-largest exporter of oil, and its second-largest exporter of natural gas. If sanctions continue, Russia may retaliate by cutting back fuel sales. Any interruption in the world’s fuel supply could be a black swan event with major financial implications.

3. Shortages and Rising PricesWheat, fertilizer, semiconductors and auto parts are currently experiencing some of the most dramatic shortages and rising prices, impacting a wide range of industries. According to an analysis by Goldman Sachs, the semiconductor shortage touches a 169 industries in some way. This wide-spread impact from the chip shortage could create a 1% hit to U.S. GDP as it is used in products like automobiles, smartphones, televisions, refrigerators, washing machines and LED bulbs.

Not even beer is immune. “Ukraine accounts for about 20% of beer’s usage of barley,” said Jim McGreevy, president and CEO of The Beer Institute. “It’s one of the top five global producers of barley, so brewers, particularly at a global level, will be watching the supply and price of barley.” Such a price hike could ultimately have an impact on restaurants and bars that were already reeling from the pandemic.

4. Loss of Key Suppliers
The dire impact to European nations cannot be overstated with many companies doing business with overseas clients feeling more than just an economic pinch. Many are losing key international suppliers, as a direct consequence of these recent events. The global uncertainty and market fluctuations, coupled with key supplier losses could disrupt businesses by creating conditions that are historically difficult to predict or insure against.

Risk Management Actions

The tragedies in Ukraine serve as a harsh reminder that military conflicts can unleash international economic strife—even in countries that are not directly involved or geographically close to Ukraine. There are actions businesses can take to address potential vulnerabilities and ensure they are protected:

  • Businesses should start by reviewing their business continuity plan and ensure they have a system for continuing the delivery of necessary products or services should a disruptive incident happen—ultimately ensuring ongoing operations.
  • Assessing the company’s insurance policies is also critical. It is important to know where the business is uninsured or underinsured. For example, is the business insured against loss of a key supplier?
  • Although it is late in the game to start now to mitigate risk associated with the war in the Ukraine, a captive insurance company can be beneficial in protecting against future crises. While traditional insurance policies may have gaps that can leave a business uncovered and vulnerable to losses, captive insurance policies can be customized and written to avoid exclusions. And since the premiums paid become profit after claims are paid, the wealth accumulation is beneficial in a time of crisis to weather the storm. Thus, it can serve as a solution to help businesses manage previously unforeseen risk factors spawned by international conflict.
Randy Sadler is a principal with CIC Services, LLC, where he consults directly with business owners, CEOs and CFOs in the formation of captive insurance programs.