‘Everything is gone’: Russian companies hit hard by tech sanctions

Russian companies have been plunged into a technology crisis by Western sanctions that have created severe bottlenecks in the supply of semiconductors, electrical equipment and the hardware needed to power the country’s data centers.

Most of the world’s biggest chipmakers, including Intel, Samsung, TSMC and Qualcomm, have completely halted business to Russia after the US, UK and Europe imposed controls on export on products using chips manufactured or designed in the United States or Europe.

This has created a shortage of the kind of larger, low-end chips that go into the production of cars, home appliances and military equipment. The supply of more advanced semiconductors, used in consumer electronics and high-end computer hardware, has also been sharply reduced.

And the country’s ability to import foreign technology and equipment containing these chips – including smartphones, networking equipment and data servers – has been significantly hampered.

“All supply routes from servers to computers to iPhones – everything – are gone,” said a Western chip executive.

The unprecedented wave of Western sanctions against President Vladimir Putin’s war in Ukraine is forcing Russia into what the central bank has called a painful “structural transformation” of its economy.

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

Export controls on “dual-use” technologies that may have civilian and military applications – such as microchips, semiconductors and servers – are likely to have some of the most severe and lasting effects on the Russian economy. The country’s largest telecommunications groups will be unable to access 5G equipment, while cloud computing products from technology leader Yandex and Sberbank, Russia’s largest bank, will struggle to expand their data center services.

Russia does not have a leading technology sector and consumes less than 1% of the world’s semiconductors. That means tech-specific sanctions had a much less immediate impact on the country than similar export controls on China, the global tech manufacturing giant, when they were introduced in 2019.

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

MCST said on Monday it was considering shifting its production to Russian factories owned by JSC Mikron, where it said it could create “worthy processors with sovereign Russian technology,” according to business news site RBC. But Sberbank said last year that the Elbrus chips, developed by MCST, failed tests “catastrophically”, showing that their memory, processing and bandwidth capacity were far below those developed by Intel.

In response, the Kremlin must be creative. Russia this month introduced an import program whereby companies are allowed to “side-import” hardware – including servers, cars, phones and semiconductors – from a long list businesses without the consent of the trademark or copyright owner.

Russia has always been able to rely on unauthorized “grey market” supply chains for the supply of certain technological and military equipment, buying Western products from dealers in Asia and Africa via brokers. But a global shortage of chips and crucial computer hardware means even those channels have dried up.

“Some companies organized supplies from Kazakhstan,” said Karen Kazaryan, director of the Internet Research Institute in Moscow. “Some second-tier Chinese companies are ready to supply. There is a reserve of components in Russian warehouses. . . but it’s not the volume they need, it’s not stable and prices have gone up at least twice.

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

Engineers work on a Mapper semiconductor lithography machine
A semiconductor lithography machine produced by Mapper, of which TSMC was a customer. Along with its rivals, the Taiwanese chipmaker has halted business with Russia © Mapper Lithography/Reuters

A leading chip executive said that “in terms of consumer electronics, phones, PCs and data centers, what you see in most cases is that manufacturers outside Russia do not supply products to Russia even if they contain a chip inherited from China”.

They added that despite Xi Jinping’s reluctance to condemn the war in Ukraine, several Chinese companies had decided to stop selling smartphones to Russia – even if these electronic devices were excluded from the sanctions in order not to directly punish the Russian consumers – because they were concerned about the impact on their brands.

A shortage of high-end chips has obviously rattled Russia’s nascent cloud computing market, which has grown in recent years thanks to laws requiring companies to store data on Russian soil.

According to analysts at marketing intelligence group IDC.

VK Cloud Solutions wrote to the Kremlin last month asking for urgent help in finding “tens of thousands of servers”, according to local media. Domestic companies are no longer able to source supplies from Western companies, and a shortage of advanced chips going into servers is preventing Russian computer makers from ramping up their own production.

In 2021, 158,000 of the most ubiquitous servers – known as X86 – were delivered to Russia, of which 27% were produced by Russian manufacturers, 39% by American and European suppliers, and the rest made in Asia , according to IDC. The data.

The sanctions have also forced mobile operators to drastically reduce their plans. With no ready national replacement for 5G hardware – advanced mobile internet technology made by Nokia, Ericsson and Huawei – carriers are likely to try to buy outdated 4G equipment on the secondary market from countries that have already upgraded to the next one. generation of technology, said Grigory Bakunov, a former top executive at Yandex.

He added that the government was likely to advise companies not to create competitors for Western tech leaders, such as Yandex’s fledgling taxi app or VK’s social network. “This is how you solve the question of what to do for the next five years without infrastructure,” Bakunov said. “You reduce the amount of equipment you use by gradually dropping out of competition.”

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