The chip shortage crippled parts of the world economy. A Russian invasion of Ukraine would make it even worse

February 14, 2022, 12:42 PM UTC

Just when it appeared that the global supply shortage of semiconductors might soon begin to ease, the prospect of a Russian invasion of Ukraine is casting another ominous cloud over the sector.

If Russia does invade Ukraine, as seems increasingly possible, the global shortage in semiconductors will likely be extended well into next year.

That’s because it turns out that the two potential combatants are major exporters of two little-known but key raw materials in the creation of computer chips.

Ukraine is a leading exporter of highly purified neon gas, which is necessary for the lasers that are used to etch circuit designs into silicon wafers to create chips. Russia, meanwhile, is the world’s leading producer of palladium, which is essential for many memory and sensor chips. The country also produces several other key raw materials for computer chips, including the rare–earth metal scandium.

Reuters reported Friday that in recent weeks the White House has contacted leading semiconductor and technology companies to warn them of possible supply-chain disruptions in the event of a Russian invasion of Ukraine and to urge them to seek alternative suppliers.

Among the biggest concerns are supplies of several industrial gases used in semiconductor lithography, the process of etching silicon wafers to turn them into computer chips. These include a gas known as C4F6, which is used in many of the most advanced chipmaking processes, as well as neon and helium.

Many of these gases are produced as a byproduct of Russian steel production, but then refined by specialized Ukrainian firms for use by semiconductor manufacturers. Owing to the cross-border nature of this trade, any war between Russian and Ukraine will almost certainly disrupt supplies.

The last time Russia invaded Ukraine, in 2014, the price of neon shot up 600%, almost overnight, causing havoc in the semiconductor industry. Since then, chipmakers have tried to diversify the countries from which they purchase the gas. But Ukraine remains a key supplier.

As for palladium, Russia produces more than 45% of the global supply. The price of the metal has already run up substantially, as traders anticipate potential supply disruptions if Russia invades Ukraine and the rest of the world imposes severe economic sanctions on Russia in response. It is currently trading at $2,400 per ounce, having climbed 52% since mid-December.

Supply disruptions from a Russia-Ukraine war and any subsequent sanctions are, experts say, unlikely to stop global chip production. But the disruptions might pinch capacity, especially for some smaller manufacturers. And they will likely cause a jump in semiconductor prices, at a time when chips have already become more expensive owing to exceptionally high demand and previous COVID-19-related supply-chain disruptions.

Chaos in the computer chip industry is just one potential global economic effect of a Russian invasion of Ukraine. The two countries together account for 29% of the world’s wheat production, with much of that shipped to countries in the Middle East and North Africa. War could disrupt deliveries, leading to potential shortages of the food in those places. The price of wheat has also already risen to some of the highest levels seen in a decade in anticipation of a potential conflict.

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