Less Miserables? Assessing the Russia-Ukraine Conflict Three Years On...

As the Russia-Ukraine conflict marks its third anniversary, the ultimate outcome is still far from clear. Some reports claim that life in Ukraine appears deceptively normal. “Everything functions, including mobile phone networks, internet, electricity, and public transport. If anything, people complain that life is a little too normal,” according to the Atlantic Council.  This statement, however, belies the seriousness of the situation in which Ukraine finds itself as the negative consequences of a prolonged conflict are piling up.  

In this blog, I’ll explore the evolving dynamic of the conflict and how the broader military and political circumstances might potentially result in a negative business impact. Of course this depends on your individual business risk exposure, but this conflict has this far demonstrated repercussions extending considerably beyond the Russia-Ukraine-Black Sea battlespace. Emboldened by the death of Alexei Navalny an election “victory” President Putin may very well intensify his war effort using both conventional and asymmetric means, and in the Russi-Ukraine theater of operations and beyond.  

The Economies 

Ukraine’s economy has proved remarkably resilient. After a sharp contraction in 2022, Ukraine will likely realize a robust 6% annual expansion in 2024 according to the Economist.  

On the other side, Russia appears relatively unaffected by economic sanctions, providing evidence that the Russian economy has adapted more quickly and effectively than many anticipated. As a larger and arguably more diversified one, Russia has greater staying power than Ukraine.   

The Politics  

Momentum on the battlefield sets the tone of politics—and here Russia clearly has the upper hand. While the US remains mired in political gridlock over funding for Ukraine, Europe has proved remarkably resolute with French President Emmanuel Macron going so far as to not rule out the deployment of ground troops in a statement in late February and again on March 14. 

As China and India continue to support the Russian economy and avoid taking political stances, the future of Ukraine seemingly hinges on the results of the US presidential elections and whether the US stays engaged or walks away, such are the radically different world views of the two candidates. 

The Military Operations 

In a war of attrition, artillery is the coin of the realm—and Ukraine’s supply of artillery is dangerously low. Ukraine fires one artillery shell for every six fired by Russia.  

And while the US-made mobile artillery systems proved to be highly effective for Ukraine in the early stages of the war (e.g. the HIMARS MLRS system and ATACMS projectiles), their missile stocks are now depleted, forcing Ukraine to test the limits of what company-level units employing unconventional, asymmetric tactics can achieve. 

Additionally, there are limits to the military capabilities that Europe can provide Ukraine as it lacks the sophisticated Intelligence Surveillance and Reconnaissance (ISR) assets that are essential for effective targeting.  

Without the ability to mount effective combined arms operations at scale, Ukrainian forces are slowly being ground to bits by Putin’s war machine.  

The Impact on European Structural Reforms  

Europe has traditionally had difficulty dealing with a political and a financial crisis at the same time—and this is no exception. While dealing with a major land war at its doorstep, Europe also finds itself in the middle of a “competitiveness crisis,” according to Isabel Schnabel at the European Central Bank (ECB).  

Nowhere is this more evident than in the region’s banking system. The conflict has deferred a critically important European banking consolidation, impacting several key competitiveness indices. For example, while mergers and acquisitions activity has been subdued elsewhere in the world, it was positively sclerotic in Europe in 2022, hitting a five-year low. “The US is currently seeing the widest gap between S&P 500 current earnings yield and MSCI Europe Index ever,” wrote John Authers in Bloomberg earlier this month.  

The situation has been further exacerbated by tragically bad decision-making. Germany’s imprudent strategy to develop an almost total dependency on Russian natural gas has required a costly retooling of supply chain and infrastructure, a process made more difficult by a badly planned and executed green energy transition.   

Furthermore, Europe is certainly not immune from “higher for longer.” Keeping the cost of capital stubbornly high disproportionately affects European firms which are more dependent on debt capital. In the UK, Brexit may have permanently damaged the UK’s once enviable deep, liquid capital markets. “We are currently in a doom loop, where valuations are low, liquidity is reducing, investors are seeing withdrawals and there is little desire to IPO,” Charles Hall, Peel Hunt’s head of research, wrote in a report. “If this continues, the UK could lose a crucial part of its financial ecosystem.” Unfortunately, that ship has sailed.  

“So, now I know how things are going in the war. How do I assess the risk to my business?” 

Given that military, macroeconomic, and political backdrop, the question that you should be asking yourself is “What does this have to do with my business?” 

Well, as Trotsky famously said, “You may not be interested in war, but war is interested in you.” And while the circumstances of the current conflict may be unfortunate, for an executive, pretending that the negative business consequences or business risks do not exist (or if they do exist that they will not affect my firm) is an abrogation of management responsibility. But where do you start? 

Many risks are hidden in firms’ supply and sourcing chains. Indeed, it’s axiomatic that you can outsource the service but not the risk. In this instance, better questions lead to better insights and better outcomes. The following is a useful framework from which to derive risk insights: 

What are the most significant risks to my firm or business unit? With a view on my business and operating model, extended supply and sourcing chain (including geographic risk exposure), and regulatory responsibilities, “Where is my risk?” comprising all relevant elements. What is the probability and the consequence value of a risk crystallization event? Do I have controls in place to prevent an event or mitigate its impact?  

Are the risks increasing or decreasing? What is the risk trend and how am I determining it? Am I using third-party continuous monitoring, and incorporating SLA data? Open source-based continuous monitoring and supplier delivery against contractual SLAs are excellent leading indicators, particularly given the one-to-three-year latency in most questionnaire-based assessments. Maintain Business Continuity: Guidance from Supply Wisdom enables companies to adjust their policies and risk management strategies dynamically, preserving operational resilience amid growing tensions and economic fluctuations. 

Are the risks within our risk appetite? Navigate financial and operational challenges. Ask yourself, “Have I identified the third-parties that underpin critical business functions or services? Have I set risk appetite for the most critical risk metrics or key controls?”  

Are there credible remediation plans in place to reduce risks that are outside of our risk appetite? Support Cybersecurity and Compliance. Again, ask yourself “Have I identified risks to third parties underpinning critical business processes or services? Have I put in place compensating controls to reduce the risk of a disruptive event until my remediation plan can be executed?” In my experience, it’s the first question the regulators ask when presented with a Management Action Plan.  

Do we have tools and MI in place to monitor the risks effectively? Third-Party Risk Management (TPRM) appears to be the last holdout against the sensible application of automation. TPRM leaders often default to onerous, expensive, time-consuming manual processes. It’s no wonder business units see this function as the “Business Prevention Unit.” But there is a better way. By utilizing real-time data and predictive analysis, organizations can identify potential disruptions and plan strategically for various outcomes. Moreover, I have seen outsourcing approvals process cut by more than 75%, and with less risk and cost, and before a business opportunity is lost, not after.  

What emerging risks could cause problems in the future? Business leaders, like generals, have a tendency to “fight the last war.” Business leaders need to be more inquisitive. The application of technology tools that provide better data at less cost and in real-time allows time for other activities that add value like scenario analysis, talking to thought leaders in your given industry, or simply quiet reading and reflection.  

Conclusion: The Path Forward is Continuous Monitoring  

The ongoing Ukraine-Russia provides a useful microcosm for discussing the cascading risk impacts on businesses. It is far from an abstract concept or academic exercise. A Head of Third-Party Risk Management or a household-name global universal bank with whom I spoke recently credited the information sources in his third-party “Air Traffic Control” function for informing strategic business decisions at the CEO level during the early days of the conflict. As the situation evolves, its impact on Ukraine, Russia, and the wider Europe and Central Asia region underscores the vital need for advanced risk intelligence and strategic advice. China is closely watching the developments in continental Europe. The outcome will influence their next move in the South China Sea. As former CIA Director George Tenet once said, "In an age of information overload, good intelligence becomes not just valuable, but indispensable." Trotsky would almost certainly agree.  

To learn more about Supply Wisdom's comprehensive continuous monitoring for third-parties and locations, book a time with one of our specialists here.