Analysis: How a conflict between Russia and Ukraine might impact the tech sector

This week has seen ominous warnings about a Russian incursion into Ukraine intensify, as fears of war in Europe grow across the continent.

US President Joe Biden warned that a Russian invasion to some level could be imminent, while analysts and politicians across the globe questioned what impact this could have on Ukraine and economies across Europe.

Should Vladimir Putin take action, Western leaders have promised to heavily sanction the Russian leader, as well as people and businesses connected to him.

All of this is happening as the world tries to recover from a global pandemic that is still raging in many places – one that has caused chaos to supply lines and manufacturing, most notably in the tech sector.

For businesses who operate on a global scale, the imposition of sanctions could make dealing with Russian business partners more difficult.

One proposal is to exclude Russia from global financial messaging service Swift, which is used by many thousands of financial institutions in more than 200 countries. This would be a “potent weapon”, British Prime Minister Boris Johnson claims, as it would limit what Russian banks could do overseas. However, this would also impact partners who work with Russian financial institutions.

Another potential financial sanction could come from targeting sovereign debt. In April 2021, Biden barred U.S. investors from buying new Russian rouble bonds over the accusations of election meddling. Going further could deprives Russia of financing sources that could contribute to economic growth and development.

But it is in the tech sector that perhaps the most likely sanctions are expected. One key tool the West could leverage is the export of goods and components into Russia, stopping companies from selling their commodities in the country.

With the pandemic causing a major worldwide shortage in microprocessors, this is seen as a particularly important option when it comes to sanctions. Limiting sales of electrical goods would have a direct impact on Russian consumers and businesses, but it could also impact other vital industries, such as telecommunications and the military.

Of course, Russia could retaliate, and it is again in tech where this could be felt most. Russia 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. Should the West impose sanctions, Russia could do the same, restricting the amount of raw materials it provides to chipmakers, compounding the pandemic shortages.

Russia also provides a number of gases used in the process of turning silicon wafers into microchips (known as semiconductor lithography). The gases – including helium and neon – are produced as part of Russian steel production, before they are shipped across the border to Ukraine to be refined for microchips.

Should war break out, this kind of cross-border cooperation will come under significant pressure, putting the entire ecosystem at risk of delays and shortages, and this is before any potential sanctions are even applied.

There is evidence of how disruptive this could be. In 2014, Russia annexed the Ukrainian region of Crimea, causing the cost of neon to rise by more than 600% overnight.

The potential is so significant, politicians are briefing the industry to be prepared for disruption. In a phone call on Friday, White House National Security Council officials Peter Harrell and Tarun Chhabra told executives from the Semiconductor Industry Association, a chip lobbying group, to be ready for unprecedented actions against Russia if it invades Ukraine, according to Reuters.

There is also fears around how Russia might retaliate. Ukraine has already this week experienced its largest recorded DDoS attack in history, though officials there have not revealed if they believe Russia is the source of the attack.

The UK Financial Conduct Authority (FCA), has warned banks to strengthen and test their defences against retaliatory attacks if an invasion leads to sanctions on Russia. The NSC also issued a stark warning to businesses, saying they need to up defences in preparation for an attack.

It is understood to be highly likely that Russia will retaliate to any sanctions imposed by the West if it invades Ukraine. “The short answer is absolutely it can and will retaliate, there is no doubt about it. Our actions will not go unpunished,” James Nixey, director of the Russia and Eurasia programme at Chatham House, told British paper i.

This could include sanctions on gas, of which Russia is the biggest supplier for Western Europe, or other energy supplies. Russia supplies around half of the EU’s gas, which makes up a third of its overall energy supply, meaning any cut off could lead to a rise in energy prices that are already on the up due to high inflation.

Jonathan Brearley, chief executive of energy regulator Ofgem, told UK MPs: “We expect that if Russia invades Ukraine, and let’s say there was a sanctions regime that meant Russia limited gas to Europe, that would drive price rises and yes that would ultimately feed through to customers.”

While it remains uncertain what will happen in Ukraine, with the story changing daily, it is clear that a conflict would have a potentially disastrous effect on the global economy and notably on the tech sector.