The Russian-Ukraine war can potentially impact global supply systems that are already strained by the pandemic. The worst effect will be on the ongoing chip shortage, according to a report, because the warring nations brutally control supplies of crucial raw materials used to manufacture semiconductors.
Russia controls up to 44% of global palladium supplies, while Ukraine provides a significant 70% of global neon supplies, the two essential raw materials that make chips.
According to a Moody’s Analytics research released on Friday, the global chip shortage, which began with the pandemic, would increase if the military war continues.
Palladium and neon are two resources for making semiconductor chips, used in almost every other industry, including automobiles, mobile phones, and consumer electronics.
Even if excess supply outside of Russia comes online, the Russian invasion of Ukraine will increase oil and natural gas prices globally, affecting every oil-importing country, according to the report.
According to the agency, Russia controls 12% of global crude oil production, 17% of natural gas, 5.2% of coal, 4.3% of copper, 6.1% each of aluminium and nickel, 15% of zinc, 9.5% gold, 5.4% silver, 14% platinum, 44% palladium, and 11% of wheat.
On the other hand, Ukraine supplies up to 70% of global neon demand.
During the 2014-15 Russia-Ukraine conflict, neon costs increased by multiple times, illustrating how severe this can be for the semiconductor industry.
Since the 2015 shortage, the chip-making companies have been stockpiling resources. Due to the increased demand during the pandemic, the chip shortage will worsen if a deal is not reached soon, the report warns, affecting almost all industries, including automakers, electrical device manufacturers, phone makers, and many more that are increasingly reliant on processors to make their goods work.
According to the report, the most negative impact will be felt on the energy front in Europe, which was already experiencing an energy crisis before the Russia-Ukraine war began last week because they rely largely on Russian oil and natural gas supplies.
Since the pandemic, the global supply chains have been unstable, and the military war between Russia and Ukraine would only exacerbate the situation for businesses in many industries, particularly those that rely significantly on energy resources.
Rising crude prices will significantly impact inflation, which will be passed on to energy-intensive goods and services, affecting the entire world.
Though the United States does not rely on Russia or Ukraine for energy directly, it has significant indirect energy exposure due to goods and services imported from Europe and Asia created using Russian energy.
On the other hand, India and China have greater direct exposure to Russian energy, but given the global sanctions imposed on Russian exports, nations that continue to do business with Russia will have superior bargaining power and will be less likely to see price increases as a result.
Transportation is another industry that will be harmed by the war, as it consumes the most energy of all major industries.
Even before the war, the pandemic went up transportation costs by more than 300% in 2021, as border and port closures led cargo to become delayed in various ports around the world, and global shipping shifted its focus to the most profitable East and West routes.
Even though shipping costs have decreased from their highs at the end of last year, they remain high and will remain so due to the scarcity of new containers.
What is certain is that this conflict will exacerbate the increasingly inflationary environment in which most countries find themselves, leading to central bank tightening, higher interest rates, and slower growth, negatively impacting businesses and consumers who have no direct ties to the situation through higher prices and interest rates, concludes to the report.