The far-reaching export controls the United States and others imposed in response to Russia’s further invasion of Ukraine were meant to have long-term erosive effects, but their impact on Russia has already been tangible. This is particularly true in the semiconductor sector. Moscow’s attempts to kick-start homegrown production of semiconductors and electronic components, which started in 2021, have unsurprisingly produced meager results, and the Western technology required to launch an indigenous chip sector is now further out of reach. China will thus play a crucial role in the future of Russia’s tech sector, but a complicated one. While China’s geopolitical sympathies lie with Russia, active support would likely run afoul of the allied export controls and put China’s own chip ambitions at risk.
In the first wave of sanctions after Feb. 24, the United States and more than 30 other countries introduced sweeping export controls on strategic technology items to Russia, including semiconductors, information-security and telecommunications systems, electronics, and computers. While Western nations already heavily restricted the export of military or dual-use technology to Russia, the new measures broke fresh ground in the use of export controls as a sanctioning instrument. Before the invasion, export controls were primarily used as an arms-control instrument. Russia is a participant in the multilateral Wassenaar Arrangement, a voluntary, consensus-based agreement among 42 members that was established in 1996 to set export controls on dual-use technology as part of a broader post-Cold War order. Now, export controls have been used to degrade the ability of a single country to project military power, marking a generational change in the use of this instrument.
The coordination amongst allies amplified the impact of the export control measures. The participating economies agreed to deny technology exports to Russia of any dual-use item listed on their respective controls lists, including both advanced technologies and lower-level items that had previously not been controlled but that nonetheless may be important for Russia’s ability to sustain its military power. South Korea and Japan, leaders in the semiconductor value chain and other advanced technologies, joined the measures along with over thirty other nations. The world’s largest contract chipmaker and dominant producer of cutting-edge chips, Taiwan Semiconductor Manufacturing Company (TSMC), announced that it will adhere to the measures though the Taiwanese government has not formally adopted similar export controls.
In reality, the company has little choice but to comply with the U.S. export controls, which are extended extraterritorial through the foreign direct product rule. The foreign direct product rule means that the U.S. export controls apply not just to chips produced in the United States but also to chips made in any foreign location if the foreign producer is using U.S. equipment, tools, or software. Since the United States currently enjoys dominance in chipmaking equipment and software, this rule creates an effective global chokepoint for nearly all chips produced anywhere in the world. If a manufacturer like TSMC ships products to Russia in violation of the U.S. foreign direct product rule, it would risk enforcement actions that could jeopardize its own supply of U.S. chip equipment and software. So too would manufacturers in China, which needless to say is not participating in the export controls. This weaponization of the chip supply chain curtails Russia’s access to high-end chips, which will have repercussions across the country’s digital economy and military capabilities.
Chips are the most prominent but not the only sector in which the foreign direct product rule is applied. This novel rule applies to all listed dual-use technology, targeting the country’s defense, aerospace, and maritime sectors more broadly. For dozens of specially designated Russian military entities, the rules are expanded even further, to such an extent that even pencils made in the United States or in a foreign location using U.S. equipment, tools, or software cannot be legally exported to Russia. However, the United States made an important nod to allied cooperation by exempting from the foreign direct product rule those countries that had implemented substantially similar controls. The strength of the allied approach means that the United States will be joined by other countries in enforcing the export controls rather than seeking to enforce its own laws on an extraterritorial basis.
A Poor Record on Import Substitution
Russia’s aerospace and automotive industries have been hit the hardest. The finalization of the country’s flagship airline project, the long-haul civilian aircraft MC-21, will be delayed. National carmaker Avtovaz has faced an ongoing crisis in the supply of electronic components. The Moscow subway’s “Troika” cards may no longer be operational, as restrictions have halted the delivery of chips from the Dutch company NXP. Even Uralvagonzavod, Russia’s armored vehicle manufacturer, has halted tank production, as it has run out of foreign parts. The Russian military is reportedly forced to use computer chips from dishwashers and refrigerators in some military equipment. The quicker-than-expected impact indicates that the industries did not anticipate such broad use of export controls as a sanctions tool and did not foresee a need to stockpile imported items ahead of time.
Russia’s push for self-sufficiency began in 2014, but import substitution for high-tech items produced meager results. The country continues to be highly reliant on foreign technology. According to the United Nations Comtrade database, in 2020 Russia imported around $400 million worth of semiconductor devices and roughly $1.25 billion worth of electronic integrated circuits. As a result, diversification of suppliers became the key strategy. In 2018, China, Taiwan, and Malaysia became crucial suppliers of electronic components previously procured from NATO states (Germany, Italy, and France). The three Asian countries were also Russia’s leading suppliers of integrated circuits, diodes, transistors, resistors, and capacitors.
Moscow’s attempts to kickstart homegrown production and manufacturing of semiconductors and electronic components came belatedly. In January 2020, the government approved a “Development Strategy for the Electronics Industry” through 2030. It aimed to create a competitive industry based on the development of scientific, technical, and human resources; optimization and technical upgrading of production facilities; and the creation and development of new industrial technologies. The strategy aimed to increase the share of Russian-made electronic products on the domestic market (in terms of revenues) to 59 percent.
In October 2021, Russia’s Ministry of Industry and Trade announced that it will spend 1.2 billion roubles to build up the domestic semiconductors industry, with the launch scheduled for 2026. The scale of Russian state support paled in comparison with what other countries are investing in the industry: Since 2021, the American semiconductor industry has announced nearly $80 billion in new investments through 2025, and Congress is poised to pass $52 billion in incentives to support domestic manufacturing of chips in the United States. The Russian strategy acknowledged that the development of the industry was closely linked to the growth of the Russian economy and its potential to attract foreign investment and technologies.
Unsurprisingly, the late start on import substitution efforts, modest state support, and lack of qualified specialists did not add up to any meaningful results. Baikal Electronics and the Moscow Center for SPARC Technologies (MCST) are the only two Russian manufacturers of domestic processors, which are meant to become viable alternatives to two American companies, Intel and AMD. However, Baikal and MCST rely heavily on Western architecture, imported components, and foreign manufacturers. Both have been placed on the U.S. Department of Commerce’s Entity List, barring them from receiving any U.S. technology. Due to technical limitations and the complexity of the process, the production of Russian processors was until recently outsourced to Taiwan. Russian analogs also lag in performance — they are too energy-intensive and are only capable of performing easy tasks. Russia’s largest bank Sberbank tested MCST’s Elbrus-based servers but ruled them out due to their technical inadequacy.
The country’s leading chipmaker, the Mikron Group, is similarly dependent on foreign components and manufacturers. To illustrate the level of Russia’s technological backwardness in this area: Mikron has mastered the local production of semiconductors with 180-nanometer circuitries and 90-nanometer circuitries, but not for mass production, while Taiwan’s TSMC is embarking on the production of semiconductors of 2 nanometers. Nevertheless, the Mikron Group sells products such as power management chips, radio frequency identification chips, and bank card microcontrollers. Since the global pandemic, Mikron has been experiencing difficulties with the supply of materials. The latest sanctions aggravated the situation, as the company lost access to foreign equipment.
In March 2022, the European Union included the Russian manufacturers on the E.U. sanctions list, prohibiting European companies from exporting any listed dual-use item or providing any related technical or financial assistance to Baikal Electronics and MCST. The United Kingdom followed up with similar restrictions, by adding Mikron, Baikal Electronics, and MCST to its own list. The U.K. ban will effectively halt the production of new processors, as the Russian manufacturers relied on the architecture from the British-based chip designer Arm for production licenses. In addition to these entity-specific listings, the export controls applied on a national basis by all participating economies will have a further impact on the Russian tech sector’s ability to procure chips and other critical components. For example, in April, the E.U. sanctions were expanded to target exports important for strategic sectors, such as advanced semiconductors and sensitive machinery, to degrade Russia’s technological base and industrial capacity.
The only Russian attempt to launch a factory capable of producing semiconductors failed: Angstrem-T, which specialized in semiconductors and chips, went bankrupt after being targeted by the U.S. Department of Commerce in 2018.
Russia’s Quest for Self-Sufficiency Under Sanctions Pressure
For the Kremlin, the sweeping export controls have been a pretext to double down on the “securitization” of its economy. Acknowledging the impact of the measures, Vladimir Putin expressed the need for deep structural changes to the Russian economy. After February 2022, it became clear that the Russian industry for chips and semiconductors would have to be created from scratch, cutting out any dependency on foreign manufacturers.
The Russian government amended its strategy and expanded support measures for the industry by reducing taxes, increasing financing, and providing larger subsidies. The updated plan seeks to reverse-engineer foreign technology and transfer production to Russia and China, as well as make every component that it currently imports by 2024. The government also plans to increase the number of Russian design centers from 70 to 300 by 2030 and allocate 2.7 trillion roubles to develop the electronics industry. Mimicking Soviet-style planning, the new strategy suggests a rigid demand-and-supply mechanism for determining the price of electronic items.
The old strategy emphasized the localization of core technologies, with the transfer of intellectual property rights to Russian companies. For decades, the Russian government’s policy mainly focused on financing design centers rather than creating an independent electronics ecosystem that would include materials production, the manufacturing of equipment, and raising skilled industry professionals. The latest crippling sanctions put a definite end to those plans, but they have not seemed to thwart the Russian government’s ambitions. In May 2022, the MCST announced the construction of a new plant for the production of microchips using 28-nanometer technology. The plan originally envisaged sourcing necessary equipment from Dutch photolithography giant ASML. No details have yet been revealed regarding how the plant planned to resolve its dependency on European chipmakers and set up its own production from scratch.
After the latest round of sanctions, the Russian government included both Baikal Electronics and MCST on its list of “systemically important” companies. This status allows them to apply for preferential subsidies and guarantees from the state budget. However, increased funding is not the end of Russia’s problems. The government’s approach fails to offer a comprehensive solution, encompassing the development of materials, equipment, building factories, and creating final products. Cooperation with other countries is imperative, but it will be hard to secure given the broad support for Western export controls.
Complete Onshoring Is Impossible
The lack of a qualified workforce is another problem the Russian industry is facing. The majority of Russian companies acknowledged experiencing staff shortages prior to the invasion. However, the new wave of domestic repression following the war in Ukraine has accelerated the brain drain, and will only aggravate the situation further. In March, the government reported that 50,000 to 70,000 IT specialists left the country. Russian officials announced that the Russian economy will need about 1 million specialists.
Even if Russia successfully tackles all three problems — falling imports, brain drain, and insufficient funding — achieving self-sufficiency in such a complex domain as chips and semiconductors is a tall order. Deep structural changes require lavish financing, ample time to catch up with technological advancement, and a great deal of international cooperation to spur innovations. None of that is possible, as Russia has reached North Korean levels of isolation. Complete onshoring of the industry is impossible in an industry known for complex and globalized processes.
In fact, no country has complete control over its semiconductor supply, as these complex value chains cross borders multiple times as raw materials are transformed through chip design, manufacturing, packaging, and assembly into an end product. Taiwan’s TSMC is the largest producer of microchips, accounting for 50 percent of the global market; software for circuit design is produced in Germany and the United States; manufacturing equipment is dominated by the United States and the Netherlands, with one key component (advanced extreme ultraviolet photolithography machines) manufactured exclusively by Dutch ASML. The better positioned United States and European Union are coordinating their steps via the U.S.-E.U. Trade and Technology Council to build more resilient supply chains, and the United States is engaging with partners in the Indo-Pacific with similar objectives. Even China, with its lavish state subsidies and “national tech champions,” is struggling to climb the semiconductor value chain, let alone achieve self-sufficiency. The novel export controls will aggravate Russia’s technological laggardness and doom the country’s ambitions to develop emerging technologies.
Exact details on the stockpiles of critical components are unavailable, but as Russia is heading into a war of attrition, the restrictions will start to bite. An inspection of weaponry covered by Western export controls shows that Russian military equipment is highly reliant on foreign chips and semiconductors. The Iskander-M, the Kalibr, and the Kh-101 cruise missiles are reliant on a British-designed oscillator in the computer controlling. The 9M727 cruise missile uses U.S.-manufactured circuit boards. The components of Russia’s military tactical communication are sourced from the United States, the United Kingdom, Germany, the Netherlands, Israel, and Japan.
Crippling export controls will force Russia to go through something of reverse industrialization. While in 2014 the government aimed to catch up with the technological advancement of developed countries, today the objective is simpler: to rely on less advanced technology. Russia is reportedly ready to deploy Soviet-era T-62 tanks, as it is running out of advanced equipment. For the military and civilian industries, reverse industrialization means relying on chips of domestic production that are 15 or 20 years behind the current standards or establishing new supply chains via third countries or smuggling. In both cases, it will lead to lower functionality, higher expenditure, and time costs. Without advanced and imported chips, Russia can’t restock precision munitions, and so the war in Ukraine will be increasingly shaped by low-quality, non-precision weapons.
Pivot to Asia (Again)
As Russian domestic production lags, doubling down on the pivot to Asia — namely, China — could alleviate a certain amount of pressure from export control restrictions. In 2021, nearly a third of Russia’s imported chips came from China. Malaysia, Taiwan, and Vietnam also had substantial shares — 14 percent, 12.6 percent, and 11 percent respectively, though the exports from Malaysia and Vietnam likely represent those countries’ roles in the final packaging stage of chip production, rather than an indigenous capacity to produce chips that could fulfill Russian needs. Within weeks of imposing the new export controls, the United States issued warnings to Beijing not to backfill technology in violation of the export controls, and to date, there has not been evidence of attempts to do so. But as the war of attrition continues, there are concerns that China may supply semiconductors and other high-tech components to Russia to mitigate the blow.
In the short term, China has limited potential to supplant Western high-end components. Reducing dependence on Western semiconductors has been a national priority for over a decade, with efforts intensifying with the launch of massive investment funds in the 2010s and the broader Made in China 2025 industrial policy focused on achieving global dominance in critical technology areas. However, achieving self-sufficiency has been fraught. Chinese tech giants such as SMIC, Xiaomi, and Lenovo continue relying on U.S. design, equipment, and technology. SMIC is lagging several generations behind its Taiwanese counterpart. The application of the U.S. foreign direct product rule against Huawei has hobbled the company’s growth.
Beijing could potentially supply chips of lower quality to Russia. However, satisfying Russia’s demand for high-end chips will be difficult, given the global shortage of electronics and China’s lack of capabilities at the cutting edge of the chip sector. Switching to the Chinese suppliers would require time and money for Russian users to adapt. Western and Asian components vary in their quality and design.
Another way for Russia to evade export control restrictions would be to relocate the production of Russian domestic processors from Taiwanese TSMC to Chinese SMIC, but it is unlikely that SMIC would be willing to violate U.S. sanctions or export controls outright. The Chinese semiconductor company continues using American chipmaking equipment, even after it was placed on the Entity List in 2020 and restricted from receiving items uniquely required for producing semiconductors at advanced technology nodes (10 nanometers and below, including extreme ultraviolet technology). SMIC will not want to invite further U.S. scrutiny. Purely based on geopolitical sympathies, China would probably be ready to exploit Russia’s isolation and capitalize on it, but violating U.S. sanctions is not in Beijing’s national interests as it would likely jeopardize its own access to the foreign technology on which it still uncomfortably relies. Supplying Russia with any technology that falls under the foreign direct product rule would jeopardize China’s own technological ambitions.
In the long term, Beijing’s intensified push for indigenization and technological independence has the potential to sufficiently decouple the country from Western technology. The “Made in China by 2025” policy aims to restructure economic and technological supply chains that serve China’s interests. The plan commits to immense subsidies and investment to move up the value chain in semiconductors, telecommunications, artificial intelligence, and quantum computing. By 2025, Beijing aims to onshore up to 70 percent of the semiconductor production. In the same vein, Chinese chip-makers are testing production lines without U.S. technology. Driven by a shared desire to circumvent the U.S. nexus, Sino-Russian high-tech cooperation could intensify.