‘It’s all gone’: Russian companies have been hit hard by technical sanctions

Russian companies are plunged into a technological crisis due to Western sanctions that have created severe bottlenecks in the supply of semiconductors, electrical equipment and devices needed to operate the country’s data centers.

Most of the world’s largest chip manufacturers, including Intel, Samsung, TSMC and QualcommRussia halted business entirely after the US, UK and Europe imposed export controls on products using chips made or designed in the US or Europe.

This has led to a shortage of the type of larger, smaller chips that go into the production of automobiles, household appliances, and military equipment. The supply of more advanced semiconductors, used in high-end consumer electronics and IT devices, has also been severely curtailed.

And the country’s ability to import foreign technology and equipment containing these chips — including smartphones, network equipment, and data servers — has faltered significantly.

“The whole supply routes from servers to PCs to iPhones — everything — are gone,” said one Western chip executive.

The unprecedented sweep of Western sanctions against President Vladimir Putin The war in Ukraine Russia is forcing through what the central bank said would be a painful “structural transformation” of its economy.

With the country unable to export much of its raw materials, import basic commodities or access global financial markets, economists expect Russia’s gross domestic product to shrink by as much as 15 percent this year.

Export controls on “dual-use” technology that could have both civilian and military applications — such as microchips, semiconductors and servers — are likely to have some of the most serious and lasting effects on the Russian economy. The country’s largest telecom groups will not have access to 5G equipment, while cloud computing products from technology leader Yandex and Sberbankthe largest bank in Russia, You will struggle to expand their data center services.

Bar chart of the total value of semiconductor imports in US dollars (million), 2020 showing that Russia imports most of its chips from China, the United States, Taiwan and Germany

Russia lacks an advanced technological sector and consumes less than 1 percent of the world’s semiconductors. This means technology-specific sanctions have had a much smaller direct impact on the country than similar export controls on China, the global tech giant, when they were introduced in 2019.

While Russia has many domestic chip companies, such as JSC Mikron, MCST and Baikal Electronics, previously Russian groups relied on importing large quantities of finished semiconductors from foreign manufacturers such as SMIC in China, Intel in the US and Infineon in Germany . MCST and Baikal have primarily relied on foundries in Taiwan and Europe to produce the chips they design.

MCST said Monday it is exploring shifting its production to Russian factories owned by JSC Mikron, as it said it could create “processors worthy of sovereign Russian technology,” according to business news site RBC. But Sberbank said last year that its Elbrus chips, developed by MCST, had “disastrously” failed tests, showing their memory capacity, processing and bandwidth far below those developed by Intel.

In response, the Kremlin has to get creative. Russia this month introduced an import scheme where companies are allowed to “parallel import” devices – including servers, cars, phones and semiconductors – from a long list of companies without the approval of the brand or copyright holder.

Historically, Russia has been able to rely on unauthorized “gray market” supply chains to provide some technological and military equipment, and to purchase Western products from sellers in Asia and Africa through intermediaries. But a global shortage of chips and critical IT hardware has dried up these channels.

“Some companies have organized supplies from Kazakhstan,” said Karen Kazarian, head of the Internet Research Institute in Moscow. Some second-tier Chinese companies are willing to supply. There is a reserve of components in Russian warehouses. . . But it’s not the size they need, it’s unstable, and prices have gone up at least twice.”

Russian officials have also explored moving production to foundries in China, but there is little evidence that Beijing is coming to the rescue.

Engineers working on Mapper lithography machine for semiconductors
A semiconductor lithography machine produced by Mapper, of which TSMC was one of its customers. Along with competitors, the Taiwanese chipmaker has stopped doing business with Russia © Mapper Lithography / Reuters

“In terms of consumer electronics, phones, computers and data centers, what you see in most cases is that manufacturers outside of Russia don’t deliver products to Russia even if it has an old chip from China,” said a senior chip executive.

They added that despite Xi Jinping’s reluctance to condemn the war in Ukraine, many Chinese companies decided to stop selling smartphones to Russia – even though these electronic devices were excluded from sanctions in an effort not to punish Russian consumers directly – because they were worried about that. influence on their brands.

The scarcity of advanced chips has rocked Russia’s nascent cloud computing market, which has grown in recent years thanks to laws requiring companies to store data on Russian soil.

Since the sanctions came into effect, Russia’s major cloud service groups – Yandex, VK Cloud Solutions and SberCloud – have seen a surge in demand for their services as most Russian companies are no longer willing to host their applications in data centers abroad, according to analysts at IDC Marketing Information Group.

VK Cloud Solutions wrote to the Kremlin last month asking for urgent help in finding “tens of thousands of servers,” according to local media reports. Domestic companies can no longer get them from Western companies, and the lack of advanced chips that go into servers prevents Russian IT manufacturers from increasing their production.

In 2021, 158,000 of the most widespread servers — known as X86 — were delivered to Russia, 27 percent of which were produced by Russian manufacturers, 39 percent by American and European vendors, and the rest made in Asia, according to IDC data.

The sanctions have also forced mobile operators to significantly scale back their plans. With no ready domestic alternative to 5G devices — advanced mobile internet technology made by Nokia, Ericsson and Huawei — operators will likely try to buy outdated 4G equipment in the secondary market from countries that have already transitioned to the next generation of technology, said Grigory Bakunov, CEO. Former Yandex.

He added that the government is likely to advise companies not to build competitors to Western technology leaders, such as the fledgling taxi app from Yandex or the social network VK. “This is how you solve the question of what to do in the next five years with no infrastructure,” Bakunov said. “You reduce the amount of equipment you use by steadily giving up the competition.”