Russia's Semiconductor Struggle Amidst International Sanctions

Since the outbreak of the Ukraine-Russia conflict in February 2022, the semiconductor industry has become a key battlefield in the geopolitical tug-of-war. Major economies, including the United States, the European Union (EU), Japan, Singapore, South Korea, and Taiwan, have imposed export controls on semiconductors destined for Russia, aiming to curb its military capabilities by restricting access to these crucial components. However, despite these stringent measures, Russia has found ways to obtain the necessary semiconductors, albeit at a significantly higher cost.

The Semiconductor Industry Association (SIA) released a statement soon after the conflict began, expressing commitment to complying with the new export control rules. According to the World Semiconductor Trade Statistics (WSTS), Russia accounts for less than 0.1% of global chip purchases, indicating that it is not a significant direct consumer of semiconductors on a global scale. However, the broader Russian information and communication technology (ICT) market totaled about 50.3billionin2021,afractionofthe4.47 trillion global market, yet significant enough to warrant attention from major semiconductor producers.

The impact of these sanctions has been multifaceted. Initially, Russia sourced its semiconductors through three primary channels: direct imports from Western companies such as AMD and Intel, purchases from major distributors like Ingram Micro, and manufacturing of Russian-designed chips in Taiwan, primarily by TSMC. Additionally, Russia produced smaller chips domestically, primarily for defense applications. Post-sanctions, these channels have been severely disrupted, forcing Russia to seek alternative routes to obtain the necessary semiconductors.

According to a recent report by the American Enterprise Institute, Russia has been able to obtain some chips through indirect channels, but the cost has nearly doubled. Furthermore, Russia has acquired some semiconductor equipment and materials, which, however, are insufficient to bolster its weak chip manufacturing capabilities. To circumvent the sanctions, Russia has adopted a strategy involving countries like Turkey and the United Arab Emirates as intermediaries. These countries receive the first shipment of semiconductors and then redirect them to Russia, obscuring the final destination and complicating the enforcement of export controls.

China has emerged as a significant supplier of semiconductors to Russia. The report states that about 89% of the semiconductors obtained by Russia since the conflict began have originated from China. This trade relationship has allowed Russia to access consumer-grade chips, some of which can also be used for military purposes. The shift in supply chains has led to a surge in the cost of semiconductors for Russia. In 2021, Russia paid approximately 1,411perkilogramofchips,butby2023,theaveragepricehadrisento2,730 per kilogram.

Despite these challenges, Russia has continued to import chips from the United States and Europe. According to confidential customs data cited by Bloomberg, Russia imported chips valued at over $1.7 billion from U.S. and European companies in the first nine months of 2023. These chips included those designed for client computers, those for use by Russian intelligence agencies, and dual-use chips that can be utilized in weapons. Notably, over half of these chips originated from U.S. and European tech giants, including AMD, Analog Devices, Intel, Infineon Technologies, Macom, Marvell, Microchip Semiconductor, NXP Semiconductors, STMicroElectronics, Realtek, and Texas Instruments.

Moreover, Russia has been making efforts to boost its domestic chip manufacturing capabilities. The report by the American Enterprise Institute reveals that Russia has obtained some chip manufacturing equipment from South Korea, Taiwan, and Israel. However, Russia's domestic chip manufacturing is outdated and can only cater to the defense industry. Manufacturers like Angstrem and Mikron rely heavily on outdated wafer fabrication equipment produced in the United States and Europe, hampering their ability to increase production despite the sanctions.

In response to Russia's efforts to obtain restricted chips and equipment, the Biden administration and its European allies are investigating distributors and subsidiaries that have sold these items to Russia. The U.S. is encouraging companies to be vigilant at every stage of the supply chain and is working with enterprises to analyze data from over 600 distributors that seem to be still selling restricted products to Russia, with the aim of removing these distributors from the supply chain.

The legal framework of the sanctions against Russia is stringent. On the day the conflict began, the U.S. announced restrictions on the export of military production technology, followed by the EU the next day, focusing on semiconductors. Major semiconductor-producing regions such as Japan, Singapore, South Korea, and Taiwan soon followed suit. Subsequently, the EU, Taiwan, the U.K., and the U.S. tightened the rules on technology transfers to Russia. Given that these regions produce a significant portion of the world's chips, these restrictions should theoretically have a high impact.

However, the reality is that completely cutting off Russia's access to semiconductors is impossible. With over a trillion chips produced annually worldwide, the small size of chips allows hundreds or even thousands to be transported in a single suitcase. Additionally, many semiconductors have both civilian and military applications, making trade diversion inevitable. Russia's security sector has honed its semiconductor smuggling skills since the Cold War, further complicating enforcement efforts.

Russia's chip manufacturing industry is far from being technologically advanced, but it does produce certain types of chips for the defense industry, such as communication and navigation chips for drones and missiles. Prior to the conflict, Russia's chip manufacturing ecosystem included key players like Angstrem, Mikron, and Integral (headquartered in Minsk, Belarus, which has been part of Russia's defense industrial base since the Soviet era). Most of the manufacturing equipment in these factories originated from the West. For instance, in 2007, Angstrem acquired a 130-nanometer (nm) production line from AMD, funded by the Russian state-owned bank VEB, which often supports transactions involving imports necessary for Russia's military or foreign policy. This 130-nm technology, invented around 2001, was outdated even at the time of purchase, although still suitable for manufacturing many types of military chips. Mikron, on the other hand, purchased manufacturing technology from STMicroelectronics, enabling it to produce 90-nm chips around 2011. Both of these Russian-based chip manufacturers faced financial difficulties before the war.

Russia's attempts to diversify its semiconductor supply chain and enhance domestic production have faced significant hurdles. The sanctions have severely restricted its access to necessary foreign equipment and materials, hindering progress in expanding chip manufacturing. Despite these challenges, Russia continues to seek ways to obtain the technology it needs for its military and artificial intelligence (AI) ambitions.

One notable initiative is Russia's plan to build up to 10 supercomputers by 2030, each equipped with thousands of NVIDIA H100 GPUs. The U.S. has long prohibited the sale of its most powerful GPUs, including the A100 and H100, to countries like Russia and China. These chips are crucial for advanced AI and supercomputing technologies. Despite the sanctions, Russia is determined to purchase between 100,000 and 150,000 NVIDIA H100 GPUs. The aim is to create supercomputers capable of performing about 450 teraflops (TFLOPS) of FP64 computations, an impressive achievement but still not on par with the world's most powerful supercomputers, which can achieve exaflop-scale performance.

Russia's attempt to procure H100 chips on the black market, where each chip can cost up to $20,000, poses a direct challenge to the U.S. and its allies. The high demand for these advanced GPUs has prompted businesses and governments to turn to unofficial sources, including imports from India, Taiwan, and Singapore, to circumvent U.S. restrictions.

In conclusion, the semiconductor sanctions imposed on Russia have disrupted its traditional supply chains and increased the cost of obtaining these crucial components. However, Russia has been able to find alternative routes to obtain some chips, albeit at a higher cost. The country's efforts to boost domestic chip manufacturing have faced significant challenges due to the sanctions, but it continues to seek ways to obtain the technology it needs for its military and AI ambitions. The ongoing tug-of-war over the control of the semiconductor supply chain underscores the importance of these components in the global geopolitical landscape.

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