Since the second half of the 2010s, the Russian government and private corporations within the country have paid a great deal of attention to digitalisation and technological development. On one hand, Russia wanted to increase its own digital sovereignty and become independent from foreign software and components. On the other hand, it sent clear messages about becoming a leader in digitalisation, which would allow it to start exporting its technologies abroad. Before the war with Ukraine, the country had made significant progress in this area, especially in its financial sector. Russia ranked as one of the top 10 countries in the world in terms of digitalisation in public administration and development of digital banking. It also made the top 5 in terms of overall digitalisation and the transition to cashless payments during the pandemic. Tinkoff and Expobank were preparing to move into foreign markets.
In recent years, the Russian financial sector, which had become one of the leaders in the implementation of advanced technological solutions, began to align more closely with the IT sector in terms of its goals. The relationship had become so symbiotic that the Bank of Russia moved to recognise banks as IT companies. In 2016, Sbertech (created by Sberbank to service its IT projects) became Russia’s largest IT employer, and more than eight thousand IT specialists were employed by the Bank of Russia in 2021.
In the wake of the invasion of Ukraine, the Russian financial sector’s high level of digitalisation has also become its greatest vulnerability. According to the ‘Review of Financial Stability’ report compiled by Russia’s Central Bank, among these issues are the ability of banks to continue providing their services, risks to their payment infrastructure and technological risks in the financial system’s operational ability.
This is the first time that the Central Bank has so clearly defined technology as a channel for the transmission of external risks. That is not to say that technological sanctions were a surprise for the Russian financial sector. For a long time, the authorities have designated banks as objects of critical infrastructure. Russia started to build its own autonomous Internet in 2014, no doubt as a contingency for being disconnected from the global network. This plan also included large financial organisations (such as banks, the stock exchange, payment systems). The goal was for the financial sector to be run on Russian software by 2021, but a lack of funding and the dismal state of domestic technologies meant that the plans were put on hold.
In January 2022, critically important Russian banks conducted stress tests, and reported the results of these back to First Deputy Prime Minister Andrey Belousov and Prime Minister Mikhail Mishustin. The tests included scenarios such as Russia being shut off from the SWIFT system, a complete technological embargo from Western countries, physical damage to critical infrastructure facilities, correspondent accounts of the largest Russian banks being blocked in the US and Europe, and licences for foreign software being revoked. These tests identified the main problems as follows: a lack of access to components such as servers and data storage systems, and a lack of access to cloud solutions and various licensed software. 85% of the Russian financial sector’s software is imported. In terms of hardware, Russia uses the SKD process to assemble computers from imported components, and as such it is nowhere near achieving sovereignty.
Following the invasion of Ukraine, Western countries and their allies stopped exporting high-tech equipment to Russia, including chips and microcircuits. Most large foreign tech companies left the Russian market. The financial sector suffered the most from the departure of Oracle (database management), Cisco (network hardware), IBM (servers, software), Intel and AMD (processors), SAP, Microsoft, Adobe (software), Diebold Nixdorf and NCR (ATMs). One in two Russian companies was left without technical support. Domestic alternatives were simply not available. To add to this, in October 2022 the government banned Russian banks from using foreign programmes, and this ban ignored the fact that a large quantity of software does not currently have any domestically-produced analogues.
‘We have achieved digital sovereignty because most foreign companies have left the market. So now we are alone’, Maksut Shadayev, Minister of Digital Development, was quoted as saying in 2022.
The current situation means that banks and non-financial organisations risk disruptions to their operations due to a lack of servers and software. Systems may become more vulnerable to cyberattacks, technical failures may increase in frequency due to a shortage of equipment and maintenance specialists, and broken equipment will have to be replaced with low quality or outdated parts.
Virtually all the work of a modern financial organisation, from customer services to internal activities, depends on the smooth operation of its software and hardware. Just a handful of large banks account for almost 80% of the financial sector in Russia, which runs the risk of operational disruptions if disconnected from technical support. This means that the sector is particularly vulnerable from a technological point of view.
Cisco, the main producer of network equipment, was one of the first companies to leave the Russian market. Chinese Huawei is closing its corporate division as it does not want to risk being hit with secondary sanctions. The current state of equipment and operational systems allows for a certain margin of safety, but the inability to purchase new products in the future (not taking into account parallel imports) means that banks will be forced to abandon the development of new products and to reallocate resources towards critical services.
Another risk to the Russian financial sector, which would not have been as critical if it were not for the war, is the high level of outsourcing of services such as data storage, backup and cloud services. For example, according to the Central Bank’s December review, 45 Russian banks buy a remote banking cloud service from just a single provider. Most small-to-medium companies in the financial sector do not have enough funds to maintain their own development teams, especially in the area of information security. Acquiring extra services from a contractor is common practice, but in conditions of external risk, a high level outsourcing can lead to dire consequences.
A refusal by the largest microchip manufacturers — TSMC, Intel, Nvidia — to supply products to Russia for the Russian financial sector will lead to regression and loss of the country’s leading position in this field. Despite the presence of several domestic enterprises for the production of processors, the possibility to create a full-fledged and autonomous Russian production cycle of IT equipment is highly unlikely, given the necessary scale of this enterprise.
In the modern world, microchips of various sizes are present in absolutely all technological products. Simply put, they differ in size (topology) and scope: the largest ones, with a topology of 90 or more nanometers, are mainly used for equipment; those with a topology of less than 45 nm — in electronics (both desktop and portable) and supercomputers, as well as in equipment for servers and networks, data storage systems and memory cards. Most chips are delivered to Russia as part of assembled equipment, including electronics, machine tools and consumer goods. At the same time, Russia also has its own production of large chips (90 nm), although current capacity does not cover even one third of the total demand, according to experts from Yakov and Partners, the former Russian branch of McKinsey and Co.
Despite multi-billion rouble loans and state support, it has turned out to be impossible to set up a full-fledged manufacturing process for microchips of the necessary topology for the industry. In addition, Yakov and partners note, Russia does not have its own equipment for the production of silicon wafers and the subsequent process of drawing patterns on them (this is necessary to make a chip). In order to expand their production, another half a trillion roubles a year will be required.
While there still remain some opportunities for importing chips from abroad, these sources are unstable. According to Russian customs, from April to November, the country imported $2.6 billion worth of electronic components. Of this amount, at least $777 million was spent on goods from Western manufacturers, calculations made by Reuters and the Royal United Defense Research Institute (RUSI) show. Deliveries were also made through little-known Turkish and Hong Kong companies. In addition, Russia has increased thousandfold its imports of consumer electronics from neighbouring countries. If Western countries begin to actively apply secondary sanctions against not only intermediary firms, but also countries, then this flow will most likely decrease. This is especially the case as a portion of the consumer electronics microcircuits will most likely end up in rockets.
For the first time in history, technological sanctions have been used extensively against a country with a high level of digitalisation. These restrictions have already forced Russian companies to reconsider their plans for development and to rebuild their relationships with service providers. For consumers, these effects are starting to become visible, but are still mild in nature. The products of sanctioned banks were removed from app stores (they have since returned under new names, but with the constant threat of blocking and deletion). People have begun to pay by cash more frequently while on holiday, and the Central Bank has been forced to offer a currency exchange service based on the fast payment system, as an increasing number of countries block the Mir payment system.
The absence of foreign equipment and software will ultimately negate Russia’s previous technological advances. As a result, instead of generating innovative solutions and expanding internationally (including to the markets of neighbouring countries in the EAEU) the Russian financial sector will be forced to pause their development. Financial institutions will focus on supporting their current operations instead of investing in new technology. Given the current speed of technological development, a pause of three to five years will significantly reduce the country’s potential within this sphere. Sanctions will also cause Russia to fall an insurmountable distance behind in the technology race.