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Implications of Russia’s invasion of Ukraine for its value

chains
Deborah Winkler, Lucie Wuester 11 May 2022

The trade disruptions resulting from Russia’s invasion of Ukraine have revealed the vulnerabilities of relying on a
limited range of suppliers for imports with few substitutes. This column shows that the impact of the war through
Russia’s participation in global value chains relates to its ‘upstream’ position. Countries in closer geographic
proximity to Russia face higher risks due to their greater direct trade links with Russia. But the countries that will Deborah Winkler
be affected most severely are those in global value chains reliant on products from Russia with fewer substitutes, Senior Consultant
such as rare metals.

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Editors' note: This column is part of the Vox
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The war in Ukraine is having far-reaching economic
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How the war in Ukraine may reshape Consultant, World Bank
notably through trade and finance links (Angris et al. globalisation
2022, Federle et al. 2022). Several researchers have Michele Ruta
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François Langot, Franck Malherbet, Riccardo the GDP? Evidence from
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Economic spillovers from the war in Ukraine:
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to trade disruptions and highlight the vulnerability of Jonathan Federle, André Meier, Gernot Müller, pandemic. The impact on
countries reliant on Russia as an exporter of Victor Sehn labour-force participation
commodity inputs. Guner
Russia's war against Ukraine might persistently
shift global supply chains In-utero effects of Ramadan
What is Russia’s role in global value Tobias Korn, Henry Stemmler fasting. Estimating the long-
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Russia’s role as a major supplier of commodities places it at the foundation of a wide array of global Events
production. Russia is especially important as an exporter of primary and intermediate goods and Warwick Pre-University
services used in other countries’ exports at an early stage of production. This is indicated by Summer School 2022
Russia’s position in global GVCs, which is marked by high forward GVC participation (or 5 - 15 July 2022 /
Warwick/Coventry / University
‘upstreamness’). The commodities that drive this upstream link into GVCs are energy (coke and of Warwick
petroleum), metals, and chemicals, as well as transport and certain business services (Figure 1, left
Economic Policy Lunch:
panel). By contrast, Russia is far less important as a ‘buyer’ in GVCs, relying less on imported Reconstructing the
inputs to produce its exports (backward GVC participation). Ukrainian economy
6 - 6 July 2022 / Online & On
ESMT Berlin campus,
Disruptions of Russia’s exports will feed into GVCs via major global production hubs for trade and Schlossplatz 1, 10178 Berlin /
will especially affect regional economies that are highly dependent on these supplies. While virtually ESMT Berlin and CEPR
all GVCs are affected by rising energy prices, GVCs that are especially reliant on metals and INDIA POLICY FORUM 2022 :
Call for Papers
fertilizer inputs from Russia for their export production include transport equipment, machinery, 11 - 13 July 2022 / / National
Council of Applied Economic
electronics, and agribusiness, as well as supporting services including transport and business Researach (NCAER)
services (Figure 2). The GVC production hubs of China (and to a lesser extent Japan and South
Harvard Kennedy School
Korea), Germany (and other Western European countries), and the US are among Russia’s largest Trade Policy for Today's
trade partners, both as importers of Russian commodity inputs and as exporters of GVC goods. World
8 - 19 August 2022 / Online /
However, the countries that are most dependent on exports from Russia, and thus particularly Harvard Kennedy School
vulnerable to such trade disruption, are neighbouring and regional economies (Figure 1, right Executive Education
panel). VSFX 2022
22 - 23 August 2022 / Palais
Figure 1 Russia’s forward and backward GVC participation and ten most dependent markets on Coburg, Vienna, Austria / WU
Vienna University of
imports from Russia Economics and Business
Research Institute for Capital
Markets (ISK)

CEPR Policy Research

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Source: Own computations. Data: OECD-WTO TiVA 2021 release (left panel) and UN Comtrade (right panel).
Demographics and the
Note: Forward GVC participation = Domestic value added embodied in third country exports (% of exports). Backward GVC
Secular Stagnation
participation = imported inputs in exports (% of exports). Mirror data for exports used. Bright blue bars = Eurasian Hypothesis in Europe
Economic Union countries. Favero, Galasso
QE and the Bank Lending
What are the GVC risk factors and channels? Channel in the United
Kingdom
Butt, Churm, McMahon,
As a major commodity exporter, disruptions of trade with Russia have a global impact through price Morotz, Schanz
hikes, notably of energy goods, which affect transportation costs and virtually all GVCs. Globally,
supply constraints and price hikes are being felt, notably for wheat, corn, and vegetable oils (which Subscribe
has led several countries to restrict their own exports of such goods), fertilizers, metals, and energy
commodities (Ruta et al. 2022). Logistics disruptions, inflated freight prices, and longer delays affect @VoxEU
trade and transit flows between Russia and Europe but also between East Asia and Europe (Arvis
RSS Feeds
et al. 2022).
Weekly Digest
Power relations also matter, with certain GVCs consisting of many competing suppliers globally
(e.g. apparel), while in others global suppliers have large market power (e.g. semiconductors). For
example, pig iron exports are dominated by three countries (Russia, Brazil, and Ukraine), together
accounting for over three-quarters of global exports. Hence, replacing pig iron imports from Russia
will be more difficult than products for which the global market is less concentrated.

In essence, while a country’s GVC risk depends largely on its direct trade links with Russia, GVCs
reliant on products that have fewer substitutes will be affected more severely. The substitutability of
inputs from Russia also depends on whether products are differentiated or homogeneous. Several
of Russia’s key export products (e.g. rare metals) are difficult to replace in the short run, suggesting
a severe impact on GVCs.

Which countries and value chains are most dependent?

Russia is a key exporter of several goods with few substitutes, including metals (with dependence
on direct trade links highest for countries in the Europe and Central Asia, or ECA, region) and
fertilizers (with high dependence of both regional and global markets), and also extends to services
supporting those exports. Regionally close countries are particularly dependent on Russia as a
trade partner. Examples of high regional dependence include imports of cereals and fertilizer from
Russia, metals (nickel and iron and steel), wood products, and mechanical goods and vehicles
(especially to the Eurasian Economic Union countries).

Figure 2 Russia as a seller, key sectors and products, and implications for GVCs and trade
partners

Source: Own compilation.

Note: Based on analysis in Winkler et al. (2022).

A critical exporter of (rare) metals, several countries, especially in ECA, imported above 90% of
certain iron and steel, aluminium, copper, nickel, and palladium goods from Russia. Over half of
Russia’s metal exports over the period 2018–20 were of iron and steel. For instance, Denmark and
Belgium depend on Russia for over 80% of their imports of semi-finished iron and non-alloy steel.
Exports of unwrought aluminium largely reach the Commonwealth of Independent States, with
shares above 90%. Both products are used in a range of manufacturing activities, including power,
construction, consumer electronics, and transportation/vehicles.

Russia’s exports of fertilizers are important in both global and regional markets. Kazakhstan is the
third largest buyer of Russia’s chemical exports and eight of the top ten most dependent markets on
Russian chemicals imports are ECA countries. Almost half of Russia’s chemical exports consist of
fertilizers. Belarus, Mongolia, and Moldova import over two-thirds of their fertilizers from Russia,
while for Honduras and the Central African Republic the share is over half.

What is the role for policy?

The trade disruptions resulting from Russia’s invasion of Ukraine have revealed the vulnerabilities of
firms and countries relying on concentrated suppliers for their imports. Russia’s upstream position
as an exporter of energy, metals, chemicals, as well as transport and business services, most
severely affects its regional neighbours as well as global trade partners with limited substitutes. New
survey results show that German industrial firms would find it difficult or not economically viable to
replace their inputs sourced from Russia, Ukraine, or Belarus in the short term.1 In the longer term,
firms and government policies should focus on strengthening supply chain resilience to idiosyncratic
shocks, for instance, by diversifying firms’ global supplier base or by becoming less dependent on
production processes using conventional energy sources.

Authors’ note: The views expressed in this column are those of the authors and they do not
necessarily represent the views of the World Bank Group.
References

Angris, N, S Djankov, P Goldberg and H Patrinos (2022), “The loss of human capital in Ukraine”,
VoxEU.org, 27 April.

Arvis, J F, C Rastogi and D Saslavsky (2022), “Effects on Global Logistics and Connectivity”, in M
Ruta (ed), The Impact of the War in Ukraine on Global Trade and Investment, The World Bank.

Chepeliev, M, Thomas Hertel and D van der Mensbrugghe (2022), “Cutting Russia’s fossil fuel
exports: Short-term pain for long-term gain”, VoxEU.org, 9 March.

Federle, J, A Meier, G Müller and V Sehn (2022), “Economic spillovers from the war in Ukraine: The
proximity penalty”, VoxEU.org, 18 April.

Langot, F, F Malherbet, R Norbiato and F Tripier (2022), “Strength in unity: The economic cost of
trade restrictions on Russia”, VoxEU.org, 22 April.

Ruta, M, N Rocha and A Espitia (2022), “Effects on Food Trade,” in M Ruta (ed), The Impact of the
War in Ukraine on Global Trade and Investment, The World Bank.

Winkler, D, L Wuester and D Knight (2022), “The effects of Russia’s global value chain
participation,” in M Ruta (ed), The Impact of the War in Ukraine on Global Trade and Investment,
The World Bank.

Endnotes
1 See https://www.ifo.de/en/node/69417

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Topics: International trade Politics and economics

Tags: Ukraine war, Russia, global value chains, spillovers, trade

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