Sanctions Game: The US has managed to create problems for the import of microelectronics into Russia, but even more importantly, to limit the development of its domestic production

The sanctions fight between Russia and the US is increasingly resembling a game of chess, where each side takes turns to make their move: Russia in circumventing sanctions, and the US in blocking the circumvention routes. The new US sanction strategy, which threatens secondary sanctions against banks conducting transactions with prohibited goods, is yielding results. Chinese banks are stopping accepting payments from Russian companies for shipments of microelectronics. Shipments have not ceased altogether, but their volumes have drastically decreased, and alternative methods have not yet been found. Russian purchases of chips in the first two years of the war remained at or even above pre-war levels in monetary terms, but in physical terms were noticeably lower, as prices for Russia substantially increased. Some problems with microchips were observed, but they did not have a significant impact on the Russian economy and military production. Russian authorities are working on a programme to replace imports of microchips by expanding their domestic production. Although technologically Russian microelectronics companies lag behind global leaders by 10-15 years, the lion's share of demand — including in the military-industrial complex — is for basic-level microchips, which Russia has the technology to produce. American experts believe that the main goal of sanctions policy in the future should be to prevent the expansion of Russian microchip production. Completely blocking the smuggling of advanced chips, of which there are few, is unlikely to succeed, but they do not play the main role in maintaining economic and military potential.

According to Kommersant, Chinese banks stopped accepting Russian payments for finished products in December 2023 and for components in early April. Market participants interviewed by Kommersant claim that payments are not going through even if the goods are not subject to restrictions. Banks fear secondary sanctions. In December 2023, US President Joe Biden gave the US Treasury Department's Office of Foreign Assets Control (OFAC) the right to impose restrictions for direct or indirect assistance to Russian military production. This includes punishment for banks through which payments are made. They become the key link in the new sanction strategy. In such a scheme, the government's agreement to join the US sanctions becomes insignificant.Moreover, unlike manufacturers, who are deeply interested in sales, for banks, the ratio of premiums to risks in the case of a suspicious transaction appears completely different, which ensures their high level of compliance to the sanctions requirements. At the same time, however, according to Bloomberg, OFAC began investigating about 600 distributors who could supply products of American companies to Russia. 

In the first two years of the war, despite the sanctions, Russia continued to procure not only ready-made microchips and other semiconductor devices, which are used, in particular, in the production of weapons, but also equipment, components and raw materials for their production at its own enterprises. China provides more than 80% of the supplies. However, the volume of purchases appears to have been lower than desired all along, according to an American Enterprise Institute (AEI) report by Chris Miller, a historian of the Russian economy and author of 'The Chip War'. 

According to Bloomberg, in 2023 Russia imported high-tech products from leading American (Intel, AMD, Analog Devices, etc.) and European (Infineon Technologies, STMicroelectronics and NXP Semiconductors) companies worth more than $1 billion. In addition, Russia purchased less advanced devices from other Western companies, as well as Chinese, Taiwanese, Korean and Israeli companies for about the same amount. Thus, in monetary terms, shipment volumes have remained almost unchanged compared to the pre-war period: in 2021, Russia imported $1.8 billion worth of semiconductor products. However, the costs of parallel imports are high. According to Miller's calculations, Russia is overpaying for chips by more than 80% compared to the legal market. Data from the Russian customs service and the American Center for Advanced Defence Studies (C4ADS), which he studied, indicates that, in 2022, Russia paid an average of $1400 for 1kg of chips (the average weight of a batch was 2.5 kg), in 2023 it paid $2700. Thus, the physical volume of supplies has significantly decreased. Moreover, Russia may not receive all types of chips in the necessary quantities — dozens or even hundreds of different microchips and other electronic components are needed to produce a single unit of military equipment.

There is no direct data indicating that Russian defence industry enterprises are suffering from a chip shortage. Numerous media reports, however, point to a shortage of chips in civilian industry. Such reports were particularly numerous in 2022 (→ Re:Russia: The Partial Mobilisation of Fridges). Production of biometric foreign passports was temporarily halted. To issue new bank cards, Sber was pulling chips from old cards. In 2023, there were fewer such reports, but the problems persisted. For example, due to a shortage of chips needed to produce Russian base stations, the government allowed Rostelecom to postpone the provision of Internet access to socially important facilities from 2024 to 2026. According to Miller, it is highly unlikely that defence industry enterprises do not face similar problems. 

Alongside the procurement of finished products, Russia imports equipment, raw materials, and components for its own microelectronics industry. Miller's research suggests that shipment volumes remain stable. China is the main supplier, which is unsurprising given its virtual monopoly in this market. New equipment is purchased in roughly equal shares from Chinese and Western sources. In some cases, this is done legally. For instance, Miller found that the Enkor plant, one of Russia's largest producers of silicon wafers and photovoltaic cells, officially purchased tens of millions of dollars worth of equipment from Korea's Jusung Engineering and American-Chinese company Linton Technologies in 2023 — a few months before the US imposed sanctions against it. Sanctioned companies continue to buy equipment on the secondary market, but in smaller volumes. After examining the purchases of 43 sanctioned companies, Miller found that purchases fell by more than 40% in the two months following the imposition of sanctions. 

The Ministry of Industry and Trade believes that Russian manufacturers are 10-15 years behind the world leaders in development. In reality, the lag may be more severe. The Ministry expects that, in 2026, the mass production of microprocessors with topological standards of 65 nm will be mastered (so far, just one manufacturer — Mikron — has reached this level), in 2027 they will reach 28 nm, and in 2030 — 14 nm. In 2035, it is envisaged that foreign microelectronics will be completely abandoned in the development and operation of military equipment, as well as in the production of products for critical infrastructure, including telecommunications companies and banks. 

Currently, in Russia, products are mainly produced according to the 130nm topological norms, and even then, in insufficient quantities. Russian industry cannot even cope with the production of the required number of chips for bank and SIM cards. According to the government's plans, the production of the former should be fully localised by 2025, and the latter by 2026. The 130 nm threshold was passed in the West in the early 2000s. The technology was used in the production of Intel Pentium III microprocessors. Leading manufacturers now widely use 5nm and 3nm technological processes, although they already have more advanced technologies. Before the war, Russian manufacturers — such as the Moscow SPARC Technology Center (MCST), NPC ‘Elvis’, and Baikal Electronics — placed production of relatively modern (28nm) chips in Taiwan, but due to sanctions, cooperation was halted. The media has reported that Baikal Electronics tried to organise their assembly in Russia, but the defect rate turned out to be too high. 

At the same time, 'Yakov and Partners' (formerly the Russian office of McKinsey) notes in its research on the Russian microelectronics market that the most in-demand chips in the industry remain basic-level microchips (90 nm and above), which Russian companies can produce with the availability of imported equipment, components and raw materials. Demand for them is estimated at 30,000 wafers per month. For comparison, advanced-level microchips (less than 45nm) are required in quantities of less than a thousand per month. The authors of the study suggest that, in the next five years, the total demand for chips in Russia may double and exceed 60,000 wafers per month, and in 2030-2035 may surpass the 100,000-150,000 mark. 

Strengthening sanctions pressure on the production of chips in the future may focus on two tasks, Miller believes: preventing the supply of high-tech products that Russia is unable to produce itself, and limiting the development of its own industry. Miller suggests focusing specifically on the second task. The most advanced chips will somehow find their way into the country — considering that they can literally be carried in suitcases. At the same time, the main role in maintaining economic and military potential belongs not to them, but to simple and mass-produced products. Russia needs imported components and equipment for the production of these.