Updated 04 March 2022
Russia’s invasion of Ukraine has unleashed a wave of human suffering on the Ukrainian population, and looks set to trigger a level of divisiveness between East and West not seen since the Cold War. Fears of further geopolitical destabilization around the world are rising. The economic shockwaves are already being felt globally. Oil price has surged to over US$110 per barrel, while financial markets have fallen. Punitive economic, trade and financial sanctions and other measures (such as blocking Russian banks from the SWIFT system for cross-border payments) by Western governments will effectively isolate Russia from much of the global economy, but will have wider repercussions for trade. Supply chains, already weakened by the pandemic and shortages, will be further undermined by measures to segregate Russia, especially given the country’s global importance in many industries. Germany’s cancellation of the Nordstream 2 gas pipeline sends a message about the EU’s willingness to reduce dependency on Russian natural gas, but will push up energy prices across the continent.
The technology sector, and the channel, are set to be heavily impacted by the crisis, both inside and outside Russia and Ukraine. The collapse of the Russian currency, and hikes in interest rates by the Russian Central Bank (to 20% at time of publication), will immediately push up prices within Russia for technology products while limiting customer spending power. US and European sanctions on exports to Russia of a wide range of technology products including semiconductors, and certain software, compute and telecom products, will hit vendors supplying Russia and channel partners selling them. Extending the ban to smartphones is reportedly being considered by the US. Meanwhile, Russian-owned or affiliated vendors with international presence, such as Kaspersky, are likely to be hurt by association. Disruption caused by conflict will be felt across Eastern Europe, which will impact distributors and other channel players operating across the region, including ALSO, AB Group, Asbis, Elko and others.
Not all the effects will be negative: the technology industry may see an increase in spending as a result of the conflict, in areas including defense, and cybersecurity. High oil and gas prices (and recognition of the need to break Europe’s dependence on Russian energy) will give renewed momentum to the renewable energy industry. But a period of severe disruption and volatility lies ahead. Likely implications include:
- Western vendors will significantly reduce sales activity in Russia in the short-term: Many Western technology vendors – and those from countries not allied with Russia – have already taken steps to halt or scale down Russian sales activities in the wake of the invasion, or face growing pressure to do so. Accenture, Apple, Cisco, Dell, HP, HPE, Oracle, SAP and TSMC are among the technology players on a growing list of international companies (across all sectors) cutting ties with Russia. Those that don’t will find themselves increasingly out of synch with global sentiment. Russian shipments and revenues will drop substantially this quarter, and potentially beyond, in the face of steeper prices and rising interest rates, restrictions on imported technology products, supply chain disruption and constraints on the Russian banking sector. Technology investments by Russia’s public sector – still the largest driver of IT spend – and state-owned enterprises, will shrink significantly in the coming quarters. SMBs and consumer spending will also be hit hard.
- Russia will turn East to maintain access to technology: With sanctions on technology imports imposed by the West, Russia can be expected to turn more to China (which has stated its opposition to sanctions), particularly as the Russian government rushes to replace Western brands and maintain access to key technologies. The winners are likely to be Chinese vendors such as Huawei, that have themselves been the victim of Western trade embargoes. However, the situation is complex for others, like Lenovo, OPPO and Xiaomi, that already have significant Western operations, or ambitions to grow in Europe or the US. Given that China opposes Western sanctions, this creates a dilemma for these Chinese vendors – do they follow sanctions and halt shipments to Russia, but risk angering the Chinese government? Lenovo, which generates the majority of revenue outside China, has reportedly already ceased shipping to Russia, but has yet to make an official statement. Smartphone vendors Xiaomi and OPPO have yet to stop Russian shipments (at time of writing), but failure to do so could impact their ability to grow internationally in future. Even if China does seek to support Russia’s technology industry, it may find that import restrictions limit its ability to trade effectively. Meanwhile, the ban on semiconductor exports to Russia will reinforce China’s determination to strengthen its own semiconductor manufacturing autonomy.
- Cyber-attacks by both sides will massively scale up: The Ukrainian conflict is the starkest illustration yet of the role of cyber-warfare in modern day conflicts. Russia appeared to precede the invasion with a massive, co-ordinated set of cyber-attacks on Ukraine’s infrastructure, financial and governmental systems. Attacks by the Russian government have also ramped up against other Western targets, in retaliation to sanctions and in an attempt to destabilize government institutions and businesses. Russia and its allies may seek to target critical infrastructure, such as power grids, water supplies and transport networks, to sow disruption and chaos, and as an alternative to risky military action. At the same time, attacks against Russia have also increased, both by nation states in the West and independent activists. The role of the cybersecurity industry has never been more important, to counter threats, and provide protection to governments, critical infrastructure and businesses. The EU has assembled a team of cyber-experts to try and counter Russian attacks on Ukraine, for example. The cybersecurity industry is set to be one of the beneficiaries of the crisis, with technologies like managed detection and incident response in high demand.
- Russia’ consumer and B2B channels face a devastating impact: Russia’s systems integrator and reseller channels, heavily dependent on public sector and large enterprise spending, are set for a collapse in sales over the next few quarters. Technology prices, already rising sharply in the face of supply shortages, are set to spike with the Rouble’s collapse. Meanwhile, payment systems have been hit hard by sanctions on major Russian banks, while high interest rates will limit borrowing and credit. These will severely limit liquidity in the channel. That’s particularly true in the consumer sector. For Russia’s already embattled retail sector, still impacted by the pandemic, this is yet another devastating blow. The currency devaluation has wiped out savings for many Russian consumers, while retail prices have already rocketed. High numbers now face the loss of access to mobile payment systems including Apple Pay and Google Pay as a result of banking sanctions. This spells disaster for many Russian retailers. Distribution will be equally affected: Russian’s biggest distributor, Merlion, sees a high proportion of sales to independent retailers, and through its own retail chains. Apple is its largest vendor, and a significant share of revenue is generated from brands including HP and Dell Technologies.
- Crypto-payments will rise in Russia: Bitcoin’s valuation has already risen as Russian consumers and businesses turn to crypto-currencies to replace hard cash. This could be a short-term trend, however, as US and European regulators turn their attention to crypto-payments. Meanwhile, the shutdown of mobile payment systems means Chinese payment solutions, Alipay and Wechat, are likely already eying this opportunity, assuming regulators let them.
- The world’s supply chain crisis will worsen: Just as hopes rise that global semiconductor shortages are starting to ease, the crisis in Ukraine threatens yet another set-back. Ukraine is the world’s largest supplier of neon gas, key to semiconductor manufacture. That’s in addition to rising oil prices and the effect of sanctions arising directly from the crisis. This is likely to drive even higher levels of price inflation for technology products across the globe. Disruption to vendor supply via Russia’s Trans-Siberian railway, which has become a cost-effective alternative to air freight from Asia, is already contributing to significant shipment delays for the European channel. Yet with many parts of the IT industry worldwide still struggling with product shortages, one potential immediate benefit of the effective shutdown of the Russian IT market – one of the world’s largest – could be the reallocation of IT products destined for Russia to other markets across EMEA, helping local channel partners to clear sales backlogs.
The crisis creates huge social and economic uncertainty, and commercial disruption. But it has also united much of the world in an unprecedented wave of both solidarity and revulsion. While sanctions and other measures will have wide-reaching economic repercussions, there is a clear consensus that these are a price worth paying to resist aggressive expansionism. In the longer-term, even if Putin doesn’t survive, the conflict has likely set back for good Russia’s attempts to attract the world’s leading technology firms. Vendors and investors will look with extreme caution on Russian investments in future. On a final note, the global pandemic, followed by an escalating European conflict, have highlighted the difficulty of business planning in the face of intense unpredictability. Now, as the most horrific of scenarios – nuclear conflict – becomes a possible (albeit hopefully unlikely) prospect, business leaders must be prepared to consider previously unthinkable eventualities.
*Given the rapidly-moving nature of this topic, facts cited in this report may have changed following publication.