The FIFA 2018 World Cup in Russia: A Supply Chain Perspective

The FIFA 2018 World Cup in Russia: A Supply Chain Perspective

Background

For the first time in its history, the Russian Federation will host the 2018 FIFA World Cup, one of the largest sporting events in the world. More than 1 million fans from around the world are expected to attend the tournament which will be held from June 14 to July 15.

Preparations for the event began as early as 2010 in the 11 cities that were selected to host the 64 scheduled matches. These include important transportation hubs such as Moscow, Saint Petersburg, Kaliningrad, Sochi and Rostov-on-Don as well as the cities of Yekaterinburg, Kazan, Nizhny Novgorod, Samara, Saransk, and Volgograd.

To enhance the security of this large-scale event, Russian state authorities have begun to implement restrictive measures since May 25 which have the potential to disrupt logistics networks and supply chains across industries such as oil & gas, chemicals, steel and automotive. These restrictions are valid through July 25 and apply to the operation of production facilities handling dangerous goods and their transportation via rail, sea or air, including weapons, explosives, atomic, biohazardous, radioactive or toxic substances as well as pathogens of infectious diseases1.

The transportation of dangerous goods is, in particular, prohibited in the 11 host cities where tournament matches are to be held, although transit cargo may equally be affected by the restrictions on a case-by- case basis, especially during match days. Similar security measures were taken during the FIFA Confederations Cup in 2017, where state authorities worked to minimize the impact on business operations. However, the magnitude of the 2018 World Cup may cause more substantial disruption to logistics operations and industrial supply chains in June and July 2018,including supply shortages, delays and higher costs.

Challenges for Industrial Supply Chains

Petrochemical Industry

As part of the security measures, Russian state authorities have issued mandatory production halts for all industrial facilities producing or handling dangerous goods including weapons, atomic energy, radioactive material, chemical and biological substances or pathogens of infectious diseases, mainly to avert industrial accidents and to reduce the risk of large-scale terror attacks during the World Cup. According to Russian media sources, this measure affects plants located in areas around the 11 host cities, but could potentially cause the shutdown of plants up to 400 kilometers away from the nearest stadium. Factories may be able to avoid suspending their activities, if they can demonstrate that other measures have been taken to ensure work safety at their facilities. If companies are unable to halt their operations, they will reportedly be required to inform the Federal Security Service (FSB) of potential ecological and human impact in the case of a disaster. Since a specific list detailing which factories would qualify as dangerous facility has not yet been published, regional authorities were told to create a list of hazardous factories whose operations would need to wind down, likely creating a scenario in which each case will be handled individually. This has led some analysts to say that only businesses that lack political connections to lobby their case would be affected by the security measures. Some petrochemical companies, including Gazprom, have scheduled maintenance works for parts of the period during which the restrictions apply, while others may well be affected by limited raw material supplies. Liquefied Petroleum Gas (LPG) loadings, such as propane and butane, will reportedly be suspended at railway stations near the 11 host cities, which may create shortages of LPG supplies at processing plants including Nizhnekamskneftekhim, Russia’s largest producer of synthetic rubber and plastics, throughout the period of the World Cup.

Manufacturing Industries

Potential production stoppages or limitations at major petrochemical companies affected by the restrictions in Russia may also cause temporary supply shortages of critical materials for manufacturing industries. For instance, limited LPG supplies at Nizhnekamskneftekhim have the potential to impede its production output of synthetic rubber, which have various applications, such as vehicle tires. Similarly, Russian media sources indicated that the Red October plant in Volgograd, one of Russia’s largest steel mills which produces 40 percent of the country’s output of stainless steel, will entirely shut down operations during the World Cup in compliance with the governmental restrictions. Due to its dominant market position, a wide range of industries from automotive and aerospace to energy and oil & gas may face limited supplies of and higher costs for high-quality rolled metal, eventually causing lower production levels. Even though car assembly plants of major car manufacturers including Kia, Toyota and Hyundai have highly localized supply chains, they still rely on imports for at least 25 per cent of car components in Russia. A strict application of restrictions on dangerous goods handling may even result in shortages of car components such as batteries and paint materials, according to some industry sources. Other state-run corporations including the military technology firm Rostec, which also produces aviation equipment, stated that they would adjust production cycles due to the security restrictions.

Logistical Challenges

Besides production restrictions and potential supply shortages, manufacturing companies with a foothold in Russia will also face logistical challenges at ports, airports and border crossings which may delay critical import shipments, cause congestion and increase transportation costs.

Ocean Freight

While the enhanced safety measures are unlikely to cause significant disruption to seaborne shipments, shipping companies have already made some operational adjustments for the period of May 25 to July 25. In particular on match days, transportation of cargo by sea and river will be restricted in areas within the immediate vicinity of stadiums. According to advisories by major container lines, the handling of dangerous goods destined for export, import and transit will be restricted at the Black Sea ports of Sochi and Rostov-on-Don.

However, Russia’s most important deep-sea port, the Port of Saint Petersburg, has been exempted from the restrictions on dangerous goods, except for biohazardous, radioactive or toxic substances as well as pathogens of infectious diseases. Similarly, most bookings for dangerous goods are allowed at the Baltic Sea Port of Kaliningrad, except for explosives, biohazardous, radioactive or toxic substances as well as pathogens of infectious diseases. As no matches will be played in the Port of Ust Luga, all restrictions have been lifted for this port. Due to its proximity to the Port of Saint Petersburg, it will likely serve as an alternative port of entry for onward shipments to major industrial or commercial areas.

It is likely that the partial or full restrictions will result in congestion and delays for both dangerous goods and other shipments throughout the period of May 25 to July 25 due to heightened customs and security checks. Additional storage and demurrage costs may apply throughout the entire period in case a shipment is not cleared by Russian Customs. Urgent shipments of dangerous goods may thus be redirected to seaports that remain unaffected by the enhanced safety measures.

Road and rail freight

The import, export and transit of dangerous goods via road and rail will also be restricted in host cities of the World Cup. During the FIFA Confederations Cup in 2017, state authorities suspended rail freight movements of dangerous goods to and from major ports including Saint Petersburg. Even if similar measures have not been explicitly announced, it is likely that these may apply in particular on match days. Furthermore, as authorities attempt to limit the risk of large-scale attacks involving dangerous goods, hundreds of additional security checkpoints and road blockages will create logistical challenges and lead to significant delays for shipments bound for consignees near host cities. Cross-border movements with Belarus or Kazakhstan may face longer customs checks or delayed departures from inland transportation hubs due to congested terminals and adjusted schedules, in particular for freight trains using the Europe-China rail corridor. Customers should therefore localize the customer ́s address in the file to determine whether a shipment may be affected by security measures and plan accordingly.

Air freight

The transport via air of all dangerous goods will likewise be prohibited in the lead up to and during the World Cup 2018, in particular during match days in host cities. Industry sources reported that short-lived medical isotopes, dry ice as well as ion-lithium and lithium metal batteries as part of larger equipment are exempted from these restrictions. Customers should liaise with local authorities to determine whether air freight shipments are likely to be held in customs or face delays due to increased customs and security checks.

Increased air traffic carrying visitors and in particular well-known personalities attending the opening and closing ceremonies in June and July may cause flight disruptions. Delays and ad-hoc cancellations of commercial flights (both passenger and cargo) may occur unannounced as airliners have no influence on decisions taken by the Russian authorities. Airspace restrictions, valid from July 1 to 17, and established by the Unified Air Traffic Management System of the Russian Federation (EU ATM)2, may also reduce available departure and arrival slots, in particular for cargo flights, causing further bottlenecks. Additional cargo checks and longer customs clearance procedures at large air freight hubs such as Moscow may delay time-sensitive air shipments, offsetting higher costs for this mode of transportation. Alternatively, customers should consider using second-tier airports in the vicinity and arrange for on-carriage via road to avoid congestion and blocked cargo.

Please refer to the Unified Air Traffic Management System of the Russian Federation (EU ATM) for further details on air space restrictions.

Recommendations

  • To avoid unnecessary disruption and financial penalties, customers are advised to comply with official regulations and seek clarification if these seem unclear.
  • Customers should locate their most critical suppliers and contact the Federal Security Service’s (FSB) inter-agency operational offices to confirm whether the production restrictions apply to them or if exemptions may be granted.
  • It is recommended to explore alternative routes via second-tier ports, airports and border crossings to reduce the risk of congestion and customs delays.
  • Customers are advised to contact carriers or local agents to determine whether shipments are likely to be held in customs or face delays due to increased customs and security checks before planning shipments of dangerous goods to or from Russia in June and July 2018.
  • Russian authorities may grant special permissions to companies seeking to import dangerous goods for their production. Customers should consider liaising with local officials if such a situation applies. Such decisions will be taken by the Interdepartmental Field Headquarters – a special body being established for the FIFA World Cup 2018 by the Federal Security Service of Russia.
  • To mitigate shortages of raw materials or components, customers may consider building up buffer stocks throughout the period of May 25 to July 25 or activate contingency plans with regards to alternative suppliers for materials or components where possible.

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