Sanctions and rationing: the next shock for businesses

If you have a diesel car, fill it up now. Russell Hardy, chief executive of Vitol, the oil trader, says Europe is about to reap the whirlwind of its “systemic shortage” of fuel. About half of Europe’s diesel imports come from sanctions-hit Russia.

He didn’t say the word “rationing”, but he and others at last week’s Financial Times Global Commodities Summit acknowledged the possibility. As crude prices rise, Ben Luckock, co-head of oil trading at Trafigura, said he had already seen evidence of hoarding, the ugly sister of rationing.

Some European governments prepare citizens for sacrifices. If Russia retaliates to its enemies by shutting down the pipelines that supply the majority of Germany’s natural gas, larger energy shutdowns are likely. The priorities for next winter would be decided “politically”, according to the German Minister of Economy. Meanwhile, Ireland is resorting to ‘wartime tillage’ incentives to grow crops that could ease a potential food supply crisis.

Depending on what you read, these are the 1940s, when wartime rationing was in effect almost all over the world. Or it’s the 1970s, the era of the global oil shock and the UK’s three-day working week. Measures to tackle power shortages then included power cuts and a ban on television after 10:30 p.m. (Companies have protested that the television “concentrates the family in a dimly lit room,” saving, not wasting, energy.)

How could such scarcity affect the way businesses are run?

The pandemic provides an approximate model. The crisis has accelerated decisions that had been put on hold as managers digitized and simplified inefficient analog ways of working. Constrained by lockdown and travel restrictions, teams found new ways to repair or retool production lines remotely, and experimented with online alternatives to meetings and social events. Some underlings rose to the challenge in unexpected ways, while other supposed leaders crumbled.

Unforeseen shocks shake organizations from the board down. Suddenly, the strategy is obsolete or no longer fit for purpose: as evidenced by the sudden withdrawal of companies from Russia or the hasty establishment of strained supply chains. Decision-making structures are lacking. People crumble and cultures creak. Companies often find that they need to “unlearn existing business processes,” according to a new article in the journal Business & Information Systems Engineering.

A group of academics have looked at the impact of shocks on business process management. They identified a myriad of challenges for managers, especially during what they called the “shock phase” when processes are messy. But they also highlighted the opportunities. Organizations can adapt to the initial hit and subsequent aftershocks (e.g. successive waves of Covid infection). For those who get away with it, necessity can truly be the mother of invention as a “make and fix” approach takes hold.

For example, the international Red Cross and Red Crescent movement puts its governance structure into “crisis mode” when it needs to deliver relief. On the other hand, NASA struggled to adapt to the series of disasters that hit the American space agency at the end of the 20th century, despite the overhaul of its procedures.

Businesses will respond to energy rationing in particular by trying to secure their supply and improve their efficiency. In the medium term, they could accelerate the switch to renewables – although traders said last week they expected a rush to fossil fuel alternatives first.

Having simplified roles, duties and methods to adapt to the shock of war, organizations must carefully consider whether to incorporate these changes into the way they work. Learning from their own and others’ experience during a crisis has been shown to improve managers’ response to the next disaster.

Of course, what simply manifests as higher food and energy prices in the northern hemisphere will translate into famine in parts of the developing world. In the short term, wealthy European economies should be able to persuade businesses and individuals to help end the horrors endured by Ukrainians. It’s spring and turning down the heat isn’t a big ask for most. Two years of tough government anti-Covid measures may even have conditioned people to lower their expectations in the public interest (although anti-lockdown protests suggest the reverse is also possible).

However, shaking and aftershocks will continue to occur.

Sylvie Bermann, France’s former ambassador to Russia, warned the commodities summit that European citizens were ready for short-term suffering now, as the Russian invasion had caused “a lot of emotion. . . But in November it will be different, because [there’ll be] more storage and it will be cold and there will not be so much emotion.

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Twitter: @andrewtghill

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