Following the breakout of the Ukraine-Russia conflict, the U.S. has sought to take various diplomatic and economic measures to deter Russia from extending the war. Among these measures is the move to ban the supply of semiconductors to Russian firms. While this may seem prudent, Russia holds a few cards of its own too. Will counter-sanctions from Russia worsen the existing semiconductor shortage? Here’s a deep dive.
In early February, days before the Russian army crossed the Ukrainian border, the White House cautioned how counter-sanctions from Russia in the future could deeply hurtOpens a new window the semiconductor supply chain. The warning arrived days after research group TECHCET highlighted how U.S. technology companies were dependent on Russia for critical materials to make semiconductor chips, such as C4F6, Neon, and Palladium.
The advent of globalization has made the prospect of nations delinking from others completely a costly affair. Blanket sanctions imposed on Russia and putting a stop to all trade could hurt various sectors in the U.S., such as the energy, agriculture, pharmaceuticals and technology sectors. In 2021, the U.S. imported $29.6 billion worth of goods and services from Russia and exported goods worth $6.3 billion, up from $16.9 billion and $4.8 billion in the previous year. In January 2022, Russian exports to the U.S. were valued at nearly $2 billion.
On March 9, a banOpens a new window announced by President Biden on imports of Russian oil, Liquified Natural Gas and coal will have limited or no impact on both countries. Russia supplies just 3% of the U.S. crude oil imports, and oil and gas exports to the U.S. constitute just 1% of Russia’s overall export value for these products. Still, this led to a jump in crude oil prices as the country needs to hunt for alternative suppliers for as long as the crisis continues.Â
See More: Biden Takes Steps to Overcome the Global Semiconductor Chip Shortage
Will Russian Counter-Sanctions Impact the Semiconductor Industry?
Unlike Europe, the U.S. can afford to stop oil and gas imports from Russia as the latter is not a major supplier of these products yet. If Russia announces counter-sanctions, imports of wheat, corn and precious metal and stones could be hit hard. However, the most significant impact of Russian counter-sanctions on the U.S., if they materialize, could be on the technology sector, especially manufacturers of automotive, electronics, and IoT products.
According to TECHCET, Russia is a “crucial source of C4F6 which several U.S. suppliers buy and purify for use in advanced node logic device etching and advanced lithography processes for chip production. The U.S. market consumes about 8MT of C4F6 per year.†At the same time, Russia corners around 33% of the global demand for Palladium, a metal used in sensors and emerging memory (MRAM) and a crucial component of the automotive emission systems manufacturing process.
Lita Shon-Roy, the president and CEO of TECHCET, saidOpens a new window there is a strong possibility of Russia withholding the supply of critical materials to the U.S. “The conflict may impede exports from Ukraine, Neon supply would be immediately impacted. Moreover, C4F6 and Palladium exports that come directly from Russia could also be affected and used as leverage against trade sanctions. We hope it will not come to that, however, if the current situation escalates, U.S. chip makers may suffer material supply interruptions.â€
In a blogOpens a new window published by Russia’s Global Affairs, Oleg Izumrudov, the executive director of the RosSHD Consortium, said the practicality of cutting Russia off the microelectronics supply chain under present conditions is close to zero. “Threats to stop deliveries to Russia of AMD and Intel, as well as stopping the production of Russian Baikals and Elbrus at the Taiwanese TSMC plant look like an information attack. The reality of the implementation of these plans in the conditions prevailing in the modern microprocessor industry is close to zero,†he said.
Izumrudov said this is because Russia corners 80% of the global market for sapphire substrates used in optoelectronics and microelectronics to build up layers of various materials, such as silicon. Their utility is such that they are present in every chip in use worldwide. Russia also holds 100% of global deposits of rare earth elements used in special chip etching chemistry.Â
“The ban on finished products for Russia will result in a retaliatory ban on the supply of production components and will cause an acute shortage of processors for the whole world. By comparison, the end-2021 supply disruption situation will appear relatively light,†he warned.
In its latest reportOpens a new window on the state of the Electronic Gases market through 2026, TECHCET said the Russia-Ukraine conflict would likely affect several key gases used by the semiconductor industry, such as neon and helium. Ukraine, which is struggling to fend off Russian armed intrusions on several fronts, presently meets around 50% of the U.S. demand for high purity neon.Â
“TECHCET’s contacts in Ukraine indicate that rare gas purifiers in Ukraine have been temporarily shut down due to the conflict. So far there has only been an interruption of 5-6 days. However, if the fighting lingers on this could have a major impact on the chip industry that has been pushing hard to increase production,†the firm said.Â
Shon-Roy says the supply chain crisis affecting the semiconductor industry in 2021 will get further pinched in 2022, thanks to the conflict. For example, the supply of helium, used extensively by the semiconductor industry, was hit hard recently due to troubles faced by the US BLM and Russia’s Gazprom, the two prominent suppliers of the gas. The activation of new semiconductor manufacturing facilities in the U.S. could also intensify supply chain constraints for other critical gases, such as diborane, tungsten hexafluoride, nitrogen trifluoride, and CF-gasses.
Technology research and advisory firm IDC also expects the conflict to leave a deep impactOpens a new window on the information and communications technology (ICT) market in Russia and Ukraine, but its effects will also be felt across the global semiconductor supply chain and the energy sector. “Imports of tech materials from Russia and Ukraine will be affected, particularly in the semiconductor sector where supplies of neon gas, Palladium, and C4F6 used in chip manufacturing will be greatly reduced. The conflict is also expected to further disrupt global supply chains as cargo is rerouted around the two countries and costs increase,†the firm said.
“Given the fluid nature of the conflict, IDC recommends that companies identify weak links in their value chain ecosystem, develop agile supply chain strategies, and create action plans that enable them to anticipate and react to a range of disruptive market movements,†said Philip Carter, group vice president, Worldwide Thought Leadership Research, IDC.
Despite Russia’s ability to choke supplies of sapphire substrates and critical gases essential for the semiconductor industry, the Semiconductor Industry Association (SIA) in February sought to soothe the industry’s nerves regarding the impact of sanctions imposed on Russia. Stating that it would comply with the new export control rules announced in response to recent events in Ukraine, SIA said the impact of sanctions on Russia will be significant but will not impactOpens a new window the global semiconductor industry as a whole.
“Russia is not a significant direct consumer of semiconductors, accounting for less than 0.1% of global chip purchases, according to the World Semiconductor Trade Statistics (WSTS) organization. The broader Russian ICT market totaled only about $50.3 billion out of the $4.47 trillion global market, according to 2021 IDC data. In addition, the semiconductor industry has a diverse set of suppliers of key materials and gases, so we do not believe there are immediate supply disruption risks related to Russia and Ukraine,†it said.
See More: TSMC Ups 2022 Spending to $44B As Chip Shortage Crisis EnduresÂ
Factors Technologies Companies Should Keep in Mind
Considering the current reliance of the semiconductor industry on Russia for certain materials and gases, technology companies have to keep a few geopolitical and sectoral realities in mind for devising future strategies:Â Â
The China factor
U.S.-led technological sanctions could have a limited impact on Russia. China, a prominent global leader with the ability to manufacture older 55nm and 65nm process nodes and the widely-used 28nm node, has refused to join the U.S.’s call and continues to supply technology products to Russia. Before the sanctions were announced, Russia imported $248.57mn of the $439.84mn in components from China alone. The country’s reliance on China will further increase in 2022.
China’s Semiconductor Manufacturing International Corporation (SMIC) recently demonstrated its ability to manufacture the most advanced 7nm chips. Even though the company has not begun mass-producing 7nm notes yet, it may soon develop this capability. The fact that SMIC is itself sanctioned by the U.S. limits the chances of China joining hands with the U.S. against Russia, its largest geopolitical partner.
Recently, the U.S. commerce secretary issued a warning to Chinese technology companies, threatening to cut off their access to critical U.S. technology if they violated the ban on selling semiconductors to Russia. The threat could prove to be a double-edged sword. Any move to curtail China’s development of advanced chips could result in China threatening to invade Taiwan. U.S. technology companies rely heavily on Taiwan’s TSMC, the world’s largest manufacturer of advanced semiconductors, and a war could have significant ramifications for the technology industry.
Russia’s dominance in palladium and sapphire substrates market
While the West seeks to limit or entirely eradicate Russia’s access to advanced semiconductors, Russia could play its cards to leverage the dominance it enjoys in palladium and sapphire substrates markets. Technology companies should prepare for such a possibility and diversify their supply chains to reduce reliance on any single country for critical materials.Â
Logistical Challenges
The ongoing Russia-Ukraine conflict has impacted cargo movement in the conflict zone. Inland, sea, and air routes in the area have become extremely dangerous, forcing many logistics companies to stop the movement of goods in the Black Sea and the Sea of Azov. Combined with the global container shortage and rising oil prices, the hazardous routes could skyrocket insurance premiums, increasing logistics costs substantially. This could negatively impact U.S. technology companies’ manufacturing and assembling costs.
Russian and Ukrainian seafarers also form up to 15% of the global seafarer community, so their absence could further complicate the availability of cargo ships and crew, thereby increasing the time taken to deliver critical components and products to Europe and the U.S.
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