Chips on the Table: Lax Policies Fail to Zap Russia’s Technology Base

In the wake of Russia’s 2022 escalation of the Russo-Ukrainian War, the Russian economy has been barraged with a spate of restrictions including those targeting financial services, commodity trade, and industrial manufacturing.

While full corporate exits remain a tepid prospect to Western multinationals, concerted sanctions have sought to stymie the flow of critical goods, most notably silicon microchips, into the wartime economy. Despite initially sluggish action from Western governments, steadily ramping responses have made key inroads in limiting Russia’s access to such key technologies. Yet, such efforts remain wholly insufficient as parallel importing and rampant support from bad actors continue to prop up Russia’s faltering domestic supply of semiconductors.

Today, silicon microchips remain critical to the Russian war effort, particularly as recent skirmishes exhibiting increased reliance on drone warfare and missile barrages continue to demand steady chip inflows for materiel replacement. Since February 2022, a steady bevy of sanctions have been levied on Russia’s ability to procure chips, both directly via wholesale vendors and indirectly through bolstered manufacturing capabilities. Over the course of the war, constant adjustments have led to targeting strategies such as controlling exports at the source to financial penalties after the fact.

Based on recovery analysis of captured military equipment, the United States remains by far the largest source of military and dual-use components for Russian military components. Since the beginning of the full-scale war, the United States has relied on stringent financial punishments and export controls to restrict the flow of critical technologies towards the Russian war effort. In February 2022, the United States banned microchips produced with American intellectual property from being exported to Russia. This regulation affects nearly all microprocessor trade around the world, as American firms have deep and growing tendrils in semiconductor sourcing and design. More recently, the Department of the Treasury and the U.S. Commerce Department, along with other divisions of the federal government, have focused on individual entities for scrutiny. Several high profile instances include the sanctioning of Russia’s largest chip distributor responsible for 50% of internal chip supply as well as targeting high-profile individuals affiliated with Russia’s military industrial complex. Since then, continual monitoring has resulted in updated action to restrict hundreds of known entities from accessing controlled technologies.

While the American semiconductor industry is a behemoth in silicon sourcing and chip design, it remains a small cog in an opaquely complex supply chain involving dozens of companies in jurisdictions around the world. Companies in the Indo-Pacific Region are of particular interest due to the unique, expansive manufacturing capabilities of Japanese, South Korean, and Taiwanese conglomerates. The Taiwanese contract manufacturer TSMC (Taiwan Semiconductor Manufacturing Company) is a particularly central figure, holding 61% of global market share and the majority of contracts from Russian chipmakers. Early in the invasion, Taiwanese sanctions on Russia exerted restrictions at the source, holding exports from TSMC to Russia at minimal levels.

Aside from targeting Russia’s ability to procure ready-made chips, a collaborative international effort has sought to shrivel Russia’s domestic production capacity. Two of Russia’s most prominent chip manufacturers, Mikron and Angstrem, have faced heavy difficulties buying machinery, raw materials, and specialized chemicals and gasses for their operations. While both previously contracted with TSMC for production, new restrictions have forced them to self produce at significantly degraded speed and quality. In the past year, domestic producers have added 90 nm capabilities to their existing 350 nm production lines, but deliveries of 8,000 chips per month remain a far cry from estimated demand of 30,000 wafers per month. Russia’s aged manufacturing lines use years-old processes, producing past generations of chips primarily suitable for automotive and telecommunications. However, the newest and most powerful chips necessary for central computing and advanced guidance systems remain out of reach for the domestic industry and must be acquired from foreign sources.

In spite of concerted efforts to prevent Russia from obtaining and manufacturing advanced silicon chips, the rogue state remains at large with a sustainable supply for use in missiles, drones, vehicles, and other materiel. While Russia previously relied on three supply chains for computer chips (Western sourcing, foreign contract manufacturers, and internal manufacturing), international sanctions have forced a pivot to byzantine illicit trade flows and a debilitated domestic complex.

In line with pre-invasion trade flows, the broad majority of chips continue to be sourced from Western distributors. Western conglomerates including Intel, AMD, and Texas Instruments have disavowed shipments to Russia, pledging to adhere to international sanctions. However, Russia’s continued access to this category of advanced chips – coupled with the Sino-Russian trade spike – suggest that Chinese agents are critical in redirecting legitimate chip trade to Russia. According to the Silverado Policy Accelerator, vendors from China and Hong Kong accounted for upwards of 89% of all Russian chip imports in 2023, marking a 10% increase in semiconductor trade compared to pre-invasion levels. A corroborating analysis of customs data showed that year-over-year shipments of chip-related materials (Including ancillary materials for manufacturing) from China to Russia increased by over ten times from 2021 to 2022. Several prominent incidents in the United Arab Emirates and Greece have laid bare Russia’s dependency on trade obfuscation to procure critical inventory. Since February 2022, countries including Turkey, Kazakhstan, and Malaysia have seen more than fifty-fold increases in chip trade. These trade indicators suggest that such countries play important, yet comparatively smaller, roles in disguising illegitimate trade channels.

Since the first round of sanctions, foreign contract manufacturers such as TSMC and Samsung have completely stopped operations supplying Russia, forcing the renegade state to ramp up domestic production. At face value, Russia’s internal chip industry should be decimated by its inability to access modern lithography systems and raw materials to work with. In reality, Russia has maintained a sizable production effort, diverting legitimate trade of etching gasses and silicon bullion to supplement negligible internal production. However, the key pressure point on Russia’s chip industry is its urgent dearth of chip-making equipment. Significant leakage from Korea and Taiwan, routed through Chinese vendors, have allowed Russia to circumvent formal barriers to obtain these tools. Trade logs and production metrics indicate that Russian companies have not been able to access the newest chip-making tools, restricting them to older processes for less sophisticated chips. While international cooperation has kept next-generation machines and techniques out of Russia, bad actors have successfully obtained parts and tools to maintain their current operations. In the past two years, Russia unveiled its first domestic chipmaking tool while continuing to spirit away chip-making machines from around the world. These incidents indicate that Russia’s concerted effort to develop domestic industry has accelerated to address demand shortfalls, but failed to establish an advanced homegrown process.

If Russia is ostensibly meeting its production goals, then roughly 22,000 microchips per month are procured and imported despite outstanding sanctions. Therefore, it is clear that the crux of Russia’s chip supply – the West – is also the least easily controlled. Even as Western distributors decry rampant sanction evasion through China and other foreign intermediaries as unlawful and immoral, it remains increasingly difficult to thwart Russia’s constant attempts to obscure and restructure supply lines. As the full-scale invasion stretches into its third year, Russia’s dearth of semiconductor chips has become more readily apparent, though it remains unclear whether its shifting reliance on older technology will ameliorate this shortage. Instead, the international community must continue restricting the flow of chips into Russia through timely and active monitoring of product flows and stronger action on impropriety among Chinese entities.

Export controls have proven to be one of the most powerful tools that chip-making countries employ to control resource flows. However, it is critical that multilateral cooperation is promoted and instated to fully monitor the final destination of microchip shipments and their actual buyer. It is clear that sanctions and export controls have been an effective tool in curbing the Russian economy and limiting its access to computer chips. However, current practices are not effective enough in ensuring appropriate access to chips and chip-making materials, with countless third party traders concealing the true destination for chip shipments. Timely international cooperation is necessary to untangle complex supply chains and continually cease sanction evading efforts. This is particularly true for chip-making tools, which have avoided scrutiny even as they become targets for Russian procurement efforts. Taiwan, Korea, and other countries that build chip-manufacturing tools have officially outlawed shipments of such materials to Russia, but older generation tools are often overlooked as modern fabs seek to remove old inventory. Additional emphasis on this category of machining tools is critical to prevent Russia’s burgeoning technology build-up.

Furthermore, the international community must cease ignoring China’s instrumental role in propping up Russia’s diminishing chip supply. Additional investigations and stringent penalties must be instated to discourage Chinese firms and Chinese nationals from their outsized role in sanction evasion. Past sanctions regarding North Korea and Iran have been demonstrated to force compliance among Chinese business practices, indicating that similar measures may be effective in cutting the flow of chips from China to Russia. If this key choke point can be closed, international silicon fabs can safely ensure that their products are used for their intended purposes. Through renewed dual focus on export controls and global trade flows, the international community can truly ensure Russia’s trade isolation with respect to computer chips and silicon manufacturing tools.