‘Everything is gone’: Russian businesses 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 hardware needed to power the companies. national data center.

Most of the world’s largest chip manufacturers, including Intel, Samsung, TSMC and Qualcommstopped doing business in Russia altogether after the US, UK and Europe imposed export controls on products using chips manufactured or designed in the US or Europe.

This has created a shortage in the larger, lower-end chips used in the manufacture of cars, home appliances and military equipment. Supplies of more advanced semiconductors, used in advanced consumer electronics and IT hardware, have also been severely cut.

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

“The whole supply route from the server to the computer for the iPhone – everything – is gone,” said one Western chip executive.

Unprecedented Western sanctions against President Vladimir Putin War in Ukraine is forcing Russia into what the central bank says will be a painful “structural transformation” for its economy.

With the country unable to export many raw materials, import vital goods or access global financial markets, economists expect Russia’s gross domestic product to fall by as much as 15 percent in the coming year. 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 impact. the most serious and lasting for the Russian economy. The country’s largest telecommunications groups will not be able to access 5G equipment, while cloud computing products from technology leader Yandex and SberbankRussia’s largest bank, will struggle to expand their data center offerings.

Russia lacks a technologically advanced sector and consumes less than 1% of the world’s semiconductors. This means that technology-specific sanctions have much less immediate impact on the country than similar export controls on China, the manufacturing giant’s country. technology exports globally, as they are adopted in 2019.

While Russia has a number of domestic chip companies, namely Mikron Corporation, MCST and Baikal Electronics, Russian corporations have previously depended on importing significant amounts of finished semiconductors from foreign manufacturers such as SMIC in China, Intel in the US and Infineon in Germany. MCST and Baikal mainly rely on foundries in Taiwan and Europe to produce the chips they design.

MCST on Monday said it was looking to move production to Russian factories owned by Mikron Corporation, where it said it could make “processors worthy of its proprietary technology.” Russia,” according to business news site RBC. But last year, Sberbank said the Elbrus chips, developed by MCST, had “disastly” failed tests, showing that their memory, processing and bandwidth capacities were far behind those made by Intel. develop.

In response, the Kremlin must be creative. This month, Russia introduced an import scheme under which companies are allowed to “parallel import” of hardware – including servers, cars, phones and semiconductors – from a long list of suppliers. company without the consent of the trademark or copyright owner.

In the past, Russia could rely on unauthorized “gray market” supply chains to supply some military and technological equipment, purchasing Western products from dealers in Asia and Africa through international channels. broker. But the global scarcity of chips and critical IT hardware means even these channels are exhausted.

“Several companies have organized sourcing from Kazakhstan,” said Karen Kazaryan, head of the Internet Research Institute in Moscow. “Several second-tier Chinese companies are already offering. There is a stockpile of components in Russian warehouses. . . but it’s not the volume they need, it’s not stable and the price has increased at least twice. ”

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

Engineers working on the Mapper . semiconductor lithography machine
A semiconductor lithography machine manufactured by Mapper, of which TSMC is the customer. Along with rivals, the Taiwanese chipmaker has stopped doing business with Russia © Mapper Lithography / Reuters

“In terms of consumer electronics, phones, PCs and data centers, what you see in most cases is manufacturers from outside Russia that don’t supply,” said a top chip executive. supply products to Russia even if it contains chips inherited from China.”

They added that despite Xi’s reluctance to condemn the war in Ukraine, some Chinese companies have decided to stop selling smartphones to Russia – although these electronics have been sanctioned with efforts not to punish Russian consumers directly – because they are concerned about the effect on their brand.

Scarcity of high-end chips has shaken Russia’s nascent cloud computing market, which has grown in recent years thanks to legislation mandating companies to store data on Russian soil.

Since the sanctions went into effect, the main groups of Russian cloud services – Yandex, VK Cloud Solutions and SberCloud – have experienced an increase in demand for their services because most Russian companies are no longer willing to host their applications in overseas data centers, according to analysts at marketing intelligence group IDC.

Last month, VK Cloud Solutions wrote to the Kremlin asking for urgent help finding “tens of thousands of servers,” according to local media reports. Domestic companies can no longer source these sources from Western companies, and the shortage of advanced chips going into servers is preventing Russian IT manufacturers from ramping up their own production.

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

Sanctions have also forced mobile operators to drastically scale back their plans. With no ready domestic replacement for 5G hardware – advanced mobile internet technology produced by Nokia, Ericsson and Huawei – operators will likely try to buy outdated 4G equipment in the market. secondary from countries have moved on to the next generation of technology, said Grigory Bakunov, a former senior executive at Yandex.

He added that the government is likely to advise companies against building competitors to Western technology leaders, such as Yandex’s fledgling taxi app or VK’s social network. “This is how you solve the problem of what to do in the next five years without infrastructure,” Bakunov said. “You cut down on the amount of gear you use by steadily giving up competition.”

This article has been revised to correct an erroneous chart on Russian semiconductor imports

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