Russia-Ukraine - What This Volatile Backdrop Means For Businesses

By Neil Debenham

The Covid 19 pandemic significantly affected businesses and induced numerous permanent companies closures worldwide but as society returns to normal, businesses now face a new volatile backdrop caused by Russia’s invasion of Ukraine.

Oil prices have recently surged to over $100 for the first time since 2014, indicating mass fear over a potentially catastrophic supply chain disruption. While Russia is not the primary provider of oil to the UK, many European countries rely on them. In turn, this creates pressure on UK natural gas supply. In both cases, it is uncertain to what extent these price hikes will be sustained. Energy price increases serve as a catalyst for a domino effect on the economy at large and mean businesses have to pay significantly higher overheads.

Rising energy prices in particular are a significant concern for SMEs as whilst large conglomerates can negotiate longer-term energy tariffs with a supplier, SMEs don’t have this privilege. Working on considerably tighter margins meaning the smallest hike in energy prices can significantly affect their business.

Another casualty of conflict is inflation, which in the UK is already at a 30 year all time high regardless of the Russian invasion. The conflict may cause even further inflationary pressure, causing the cost of living to soar, along with business costs. The result of such high levels of uncertainty will more likely make the public even more vigilant and cautious, resulting in a potential decrease in spending, lowering businesses economic growth.

Uncertainty is the buzzword surrounding the current worldwide economic situation, and for good reason. In many ways, a pandemic in tandem with a war is tantamount to the most significant possible hit on the economy. The ‘unknown’ plays a huge part in determining what the outlook is going forward. Uncertainty is rife on both macro and micro levels, from volatility across markets and soaring energy prices to squeezed household budgets and SMEs trying to stay afloat with soaring costs of business.

Aside from the economic uncertainty, many companies are now being forced to re-evaluate the areas they conduct business. Whilst SMEs may not be conducting activity in Russia or Ukraine directly and risk sanctions like larger corporations, their suppliers might be. This conflict is set to significantly affect supply issues. As mentioned, oil prices are at a record high, resulting in global shipping price increases, driving up manufacturing costs of products. It is knock on effects like this that will most directly affect UK SMEs.

This conflict may take many years to resolve and businesses need to be prepared to plan ahead to minimise its potential impact. One of the key ways businesses can do this is by diversifying their supply chain, becoming less reliant on a single region and therefore making their business model more robust.

As Europe imposes more sanctions on Russia in order to end the conflict, prices are likely to rise, supply chain issues will likely get worse and consumer confidence will fall. Businesses should be prepared for this and streamline their operations. With overhead costs increasing businesses need to work smart, revaluate non-essential business expenses and put a hold on expansion plans. In doing so they can best prepare themselves for future uncertainty against the ever-changing volatile backdrop for businesses.

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