Russia–Ukraine War Could Bring Repercussions to Semiconductor Industry and Others

An employee works in the chip manufacturing process at a clean room of the Barcelona Institute for Microelectronics (IMB-CNM) in Bellaterra, near Barcelona, on March 3, 2022. Josep Lago/AFP via Getty Images

In light of Russia’s invasion of Ukraine, the semiconductor industry has joined the collective group of entities declaring they won’t do business with Russia. The PHLX Semiconductor Index (SOX) dipped after the announcement, although a look at recent reports makes it clear that Russia isn’t a huge player in the field.

The Semiconductor Industry Association reported that Russia accounts for less than 0.1 percent of global chip purchases. In 2021, the broader Russian information and communications technologies market totaled around $50.3 billion, a mere fragment of the $4.47 trillion global market, per data from the International Data Corporation.

For Ukraine’s part, one potential concern lies in neon, a gas that’s integral to the lasers used in the chip-making process. Among other countries, Ukraine plays a role in purifying neon, and sends it out to semiconductor producers. Neon accounts for a critical part of the production process, which consists of a plethora of components that are collectively used to make semiconductors.

Ingas and Cryoin, two Ukrainian companies that produce about 50 percent of the world’s semiconductor-grade neon, have halted their operations recently, according to Reuters.

For now, those that need neon may not encounter additional shortages and delays, according to Stacy Rasgon, managing director and senior analyst of U.S. semiconductors and semiconductor capital equipment at Bernstein Research.

“It’s likely that with stockpiles producers have, we’ll be OK for a while,” he told The Epoch Times, although he said if the conflict in Ukraine carries on for another six months or a year, the supply chain for neon could get tight.

The Imbalance of Supply and Demand

The semiconductor industry first crossed the $300 billion mark in 2010 and then hovered around that figure until 2017, when it surpassed $400 billion. It remained in that ballpark for the following years. Then, in 2021, it skyrocketed to $583.5 billion, largely due to an influx in demand.

In 2020, at the onset of COVID-19, disruptions led to upheaval in the semiconductor industry, and increased demand caused delays in filling orders. Automakers had to pause production as they waited for semiconductor shipments to arrive at their factory doors. Game consoles like Nintendo Switch, PlayStation 5, and Xbox Series X|S became hard to find. The same shortage story played out in other sectors dependent on semiconductors, including appliances, smartphones, and televisions.

For manufacturers and consumers alike, it will be a waiting game to see when demand and supply return closer to an equilibrium.

“Viewing the semiconductor industry as a pipeline of goods, the pipeline had been drained,” said Stavros Kalafatis, professor of electrical and computer engineering at Texas A&M University. “There will be a lag to fill in the pipeline before you have a productive and quick return on orders or increased offerings. We’re still in the process of filling that pipeline.”

Those steps take time, and while automakers are producing vehicles, the rate of production hasn’t reached pre-pandemic levels. Secondhand cars, an alternative for those looking for a new vehicle but are unable to find one, are still priced high.

While semiconductor delays bring concern to some investors, there are other impacts related to the Russia–Ukraine war that could be felt at a higher scale. In addition to being a leading oil and gas supplier, Russia is the largest exporter of wheat in the world and accounts for more than 18 percent of international wheat exports.

“The sanctions and ongoing conflict will make it exceptionally hard for U.S. and European Union investors and businesses to conduct transactions with those in Russia,” Schuyler “Rocky” Reidel, a Texas-based attorney and founder of the Reidel Law Firm, told The Epoch Times.

“They likely are already finding that they are not permitted to send or collect funds to or from Russia given the U.S. and European Union sanctions and the counter-restrictions Russia has placed on foreign-owned securities and payments to the U.S. and European Union parties.”

These difficulties impose various risks, including the potential impact that will come if Russian banks or businesses with loans from foreign investors or banks are unable to pay on that debt, making them contractually in default, according to Reidel. “They could risk losing access to international capital in the future or even insolvency proceedings on property or collateral located outside of Russia.”

If the conflict continues, Russian businesses may look to restructure their supply chains and capital markets to avoid the United States and Western Europe, Reidel said. The process, however, could take several years and would involve many complexities. “It is likely that Russian businesses and markets will now pivot to Asia and Latin America for trade and capital, as most of Asia and Latin America have chosen to remain neutral and not impose sanctions on Russia at this time.”

In the meantime, semiconductor companies and other industries are likely to pause interactions with Russia for an indefinite period as they watch to see what happens next. In addition to a withdrawal of investments and transactions, Reidel sees a very hesitant approach to investing or expanding in Russia in the future.

“This will be to the unfortunate detriment to U.S. businesses and investors in Russia, Russian businesses, and the Russian people,” he said.