‘It’s all 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 nation’s data centers.

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

This has created a deficit in the kind of larger, lower-end chips that are used in the production of cars, home appliances and military equipment. Supplies of more advanced semiconductors, used in consumer electronics and next-generation computer hardware, have also been sharply reduced.

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

“All supply routes for servers, computers and iPhones, everything, are gone,” said a Western chip executive.

The unprecedented scope of Western sanctions over President Vladimir Putin’s war in Ukraine is forcing Russia into 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 critical goods or access global financial markets, economists expect Russia’s gross domestic product to contract by as much as 15 percent this year.

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

Russia lacks an advanced technology sector and consumes less than 1 percent of the world’s semiconductors. This has meant that tech-specific sanctions have had a much less immediate impact on the country than similar export controls did 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, the Russian groups previously relied on importing significant 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 for the production of the chips they design.

MCST said on Monday it was exploring 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, had failed “catastrophically” in tests, showing that their memory, processing and bandwidth capacity fell far short of those developed by Intel.

In response, the Kremlin has to get creative. Russia this month introduced an import scheme whereby companies can “parallel import” hardware, including servers, cars, phones and semiconductors, from a long list of companies without the consent of the trademark or copyright holder. Author.

Historically, Russia has been able to rely on unauthorized “grey market” supply chains for the supply of some technological and military equipment, buying Western products from resellers in Asia and Africa through middlemen. But a global shortage of crucial IT hardware and chips has meant that even these channels have dried up.

“Some companies have arranged 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 explored moving production to smelters in China, but there is little evidence that Beijing is coming to the rescue.

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

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

They added that despite Chinese President Xi Jinping’s reluctance to condemn the war in Ukraine, several Chinese companies had decided to stop selling smartphones to Russia, even though these electronic devices were not subject to sanctions in an effort for not directly punishing Russian consumers, because they were concerned about the impact on their brands.

The shortage of high-end chips has palpably shaken Russia’s fledgling 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 leading cloud services groups (Yandex, VK Cloud Solutions and SberCloud) have seen an increase in demand for their services because most Russian companies are no longer willing to host its applications in data centers abroad, according to analysts at marketing intelligence group IDC.

VK Cloud Solutions wrote to the Kremlin last month asking for urgent help finding “tens of thousands of servers”, according to local media reports. Domestic companies can no longer source them from Western companies, and a shortage of the advanced chips found in servers prevents Russian IT manufacturers from ramping up production on their own.

In 2021, 158,000 of the most ubiquitous servers, known as X86s, were delivered to Russia, 27% of which were produced by Russian manufacturers, 39% by US and European vendors, and the rest made in Asia, according to IDC . data.

The sanctions have also forced mobile operators to drastically scale back their plans. Without a ready national replacement for 5G hardware (advanced mobile internet technology made by Nokia, Ericsson and Huawei), operators will likely try to buy outdated 4G equipment on the secondary market from countries that have already moved on to the next generation of technology, he said. . Grigory Bakunov, former senior executive of Yandex.

He added that the government is 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 problem of what to do for the next five years without infrastructure,” Bakunov said. “You reduce the amount of equipment you use by constantly giving up the competition.”

This article has been modified to correct a graphic that contained an error about Russian semi-conductor imports.

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