The war in Ukraine is the latest in a series of worldwide disruptions, but it is not just a short-term shock. Almost one year in, few doubt that it will have long-lasting consequences for the world and for business. But what will those consequences be? Enormous uncertainty remains about the course of the war and the ultimate geopolitical and economic impact on business and industry. Yet decision-makers cannot afford to ignore the risks and opportunities the war has created.
Predictions and decisions must be supported by analysis that identifies the remaining uncertainties. Scenario analysis is a useful tool; McKinsey developed nine scenarios shortly after the invasion. As with most such analyses, two key dimensions (or axes) of uncertainty define the scenarios: the duration/scale of disruption, and the strength of political/consumer/business response. Most of the disruptions identified are robust across all scenarios, though their durations and magnitudes vary.
For most companies, the key trends are:
increased supply-chain resilience
a race for critical materials
growing concerns about energy and food security
increased defense spending and cyber-attacks
intense pressure to take a moral stand
greater volatility in the economy and financial system.
Russia’s and Ukraine’s main exports are fuels (Russia only), metals and agricultural products. The war has combined with earlier shocks to increase the focus on supply-chain resilience, with 80% of supply-chain leaders in McKinsey’s survey reporting that they have implemented dual sourcing. There was a scramble to replace Russian and Ukrainian exports, and their prices spiked. But there is a danger of overreacting to events, and demand matters as well as supply. By mid-July, prices had dropped back to pre-war levels with the important exception of natural gas in Europe, which had an enormous temporary spike in August as well as fears for 2024 (because of difficulty replenishing current reserves) with severe political and business consequences. Security and political concerns will influence government policies on energy, food and metals for years to come.
The expansion of NATO to include Finland and Sweden, deliveries of military equipment and weapons to Ukraine, and concern over Russian aggression have combined to drive increases in defense spending by more than 15 Western nations. Most of the increase is likely to go for equipment, split between short- and long-term needs. There are also increased concerns about cyber warfare, though little public evidence of its effects.
The war has caused many Western companies to withdraw from Russia. Any concern over lost markets or assets was outweighed by fears about stakeholder reactions in Europe and North America. The war continues the trend of companies being judged for their actions on political issues.
The war has increased inflation and inflation expectations around the world. This helped trigger significant interest-rate hikes by the Fed, increasing the likelihood of a recession in 2023. The war is one of several factors that increase risks in the financial sector. Subsequent events like the British bond meltdown have supported this prediction.
For business leaders, the war in Ukraine demonstrates the value of scenario analysis and wargaming. Identifying the key scenarios and corresponding assumptions provides insights into emerging trends and risks. Any company with a global footprint would benefit strongly from elaborating scenarios and wargaming how competitors and key stakeholders will respond. In the process, “no-regret” moves, “real options”, and appropriate contingency plans can be identified, with corresponding improvements in decisions and strategic robustness.
Sources
White O et al, “War in Ukraine: Twelve disruptions changing the world”, McKinsey (mckinsey.com), 2022.
World’s Top Exports (worldstopexports.com).