29.06.23 Sanctions Review

Sanctions Counteroffensive: Even a partial restriction of the 'grey' import of microelectronics to Russia could shift the balance of power on the battlefield

The Russian military-industrial complex remains critically reliant on imports, and supplies of dual-use products, particularly chips and microchips, continue to reach defence enterprises at almost pre-war levels through Chinese dummy companies and false transit schemes. Experts believe that Russia is consuming ammunition and equipment so rapidly that even a partial closure of these supply channels would pose a significant problem for it. Against the backdrop of the Ukrainian army’s increasing technological capabilities, this would lead to a weakening of the technological capabilities of Russian forces. At this stage, it could have an important or even decisive impact on the course of military operations.

In their announcement of the introduction of the 11th package of sanctions, EU leaders noted that the objective of the sanctions policy today is not so much the imposition of new restrictions as the strengthening of control over compliance with those already in place. Components developed by American and European companies continue to be used in practically all types of modern Russian weapons. These are primarily chips, microchips, and transistors, but it is also difficult to replace more commonplace components such as voltage regulators, capacitors, and so on, according to a report by the Kyiv School of Economics and the Yermak-McFaul Group, an international association of experts providing recommendations for expanding and enhancing sanctions against Russia and Belarus. In their analysis of 58 units of Russian military equipment and munitions captured since the beginning of the war, researchers found 1,057 imported components. Over 70% were produced by American companies (with a lion's share belonging to Analog Devices, Texas Instruments, Microchip Technology, Intel, and AMD), while over 20% were European. Chips and microchips accounted for half of the components found.

Which imported components are used in Russian weaponry? A study of 58 units of Russian equipment and weapons

Customs data examined by researchers reveals that Russia ramped up its procurement of critically important components for the military-industrial complex even before the war. From January to September 2021, Russia imported an average of $2.2 billion worth of dual-use products per month. In October, purchases increased by 44%, followed by a 59% increase in November and a doubling in December. By January 2022, the volume of imports reached $2.9 billion, and remained at a similar level in February. In the early months of the war, sanctions caused a 50% drop in imports, but in the second half of the year, imports began to recover thanks to deliveries through Chinese dummy companies and false transit schemes (Re:Russia has explored these schemes in detail). As a result, while overall imports of Western products declined significantly in 2022, as Re:Russia has previously reported, they were able to maintain the import of critical components for the military-industrial complex at pre-war levels. In the fourth quarter of 2022, these deliveries were estimated at $2.8 billion per month, which represents a 25% increase on pre-war levels. It should be noted, however, that the same products became more expensive due to radically more complicated logistics, but on the other hand, the ruble was generally stronger in 2022 than it was in 2021.

The report's authors note that it would be incorrect to say that the sanctions are completely ineffective. Russia depletes ammunition and loses equipment at such a rapid rate that it requires more imported components than it is able to procure. As a result, the report states, the reserves accumulated before the war are being rapidly depleted. In some cases, lower-quality components are being used, quite literally resorting to extracting chips from refrigerators and washing machines, because the required components are not available in sufficient quantities.

The researchers demonstrate the scale of the problem, in particular through the example of missiles. Due to their scarcity, the intensity of shelling is being reduced. Cheaper but less effective Iranian drones are being used more frequently. Some missiles, of which the army has a larger stock, are used for purposes other than their intended use, and new missiles are sometimes sent directly to the front lines instead of being stored.

How many missiles does the Russian army have as of June 1, 2023?

However, the report’s authors conclude that the impact of sanctions could be more significant if additional measures are implemented.

First, coordination between members of the sanction coalition and third countries needs to be improved. A unified list of dual-use products should be established. Currently, according to the report's authors, there are discrepancies even at the level of the European Union. Customs authorities should either engage in regular information exchange directly or upload statistics to an independent database (such as Export Genius). Researchers and experts should also have access to this data.

Second, the report's authors suggest imposing additional sanctions on the Russian banks that facilitate imports. They also call for the active implementation of secondary sanctions against organisations in third countries, as set out in the 11th EU sanctions package.

Third, they propose that a share of the responsibility should fall on the major global manufacturers who possess sufficient resources to minimise the supply of their products to Russia but have not yet had the incentive to do so. Authorities should assist small and medium-sized companies that lack the necessary resources.

Thus, the sanction war, like the real war, has entered its protracted phase, and its success will depend on how effective and careful the Western coalition’s strategy to combat 'grey' supplies is. Drastic actions against businesses in the global South may lead to increased tension between them and the West and may strengthen pro-Russian sentiments. In the most extreme case, the world may come close to a scenario of geo-economic fragmentation. Peripheral Chinese firms are likely to remain less vulnerable to Western pressure, as it is unlikely that supplies through them will be completely cut off. However, with the increasing capabilities of the Ukrainian army, even a reduction in these supplies will weaken the technological readiness of Russian forces, which at this stage will have an important, and possibly critical, impact on the course of military operations.