Russia’s economy has an Achilles’ heel: semiconductors. They are needed for almost everything today, but Russian companies can hardly produce them without American technology. Export bans could hit Russia harder than all the sanctions imposed so far.
Western goods and technologies will soon no longer be able to reach Russia. Here the port of Long Beach, California.
The White House is preparing a measure that is likely to significantly restrict Western technology exports to Russia. If Putin invades Ukraine, “we will cut him off from access to Western technology,” Wally Adeyemo, US Deputy Treasury Secretary, told CNBC on Wednesday. A few hours later, Valdis Dombrovskis, the European Union’s Trade Commissioner, addressed the public. He said the EU is ready to impose a second package of sanctions against Russia, including export bans.
Since Putin pushed the escalation further with the attack on eastern Ukraine, western technology companies could soon be subject to an export ban. However, neither Brussels nor Washington have so far provided any information on which fields of technology should be affected. In the past few weeks, however, information from the White House has repeatedly leaked out to the public. the The New York Times reported based on government circles of restrictions on trade in future-oriented technologies such as artificial intelligence or quantum computers, but also of possible export restrictions on industrial products for shipping and aircraft construction.
Loud Information from the Washington Post However, consumer electronics goods are now also eligible for export bans: smartphones, tablets, game consoles. Although these devices are often manufactured outside the United States, the law on which the Biden government’s action would be based could also restrict exports from other countries if American technology is used in the production of the goods.
The USA has a legal basis for such export restrictions with the Foreign Direct Product Rule. The law has already been used to cut off Chinese telecoms provider Huawei from American innovations. In August 2020, American companies were banned from using their technology to work with Huawei – not only on US territory, but worldwide. Since then, Huawei sales have plummeted by about 30 percent.
Achilles heel of semiconductors
Depending on how they are structured, export bans could hit the Russian economy hard. In early February, the Peterson Institute for International Economics wrote that it was the most potentially damaging measure of those previously discussed in connection with the Ukraine crisis analysis.
The institute continues to write that when western governments are considering export restrictions, they should be keeping an eye on the semiconductor market in particular. Semiconductors are found in the form of computer chips and microprocessors in almost all technical devices, from cars to microwave ovens. Since Russian companies hardly ever produce semiconductors using their own production technology, they are dependent on imports of production machines. This makes them vulnerable, especially since many machines are from Western companies.
China, which has so far been reluctant to comment on Russia’s military intervention in Ukraine, could supply Russia with semiconductors, but despite an ambitious government program for semiconductor factories, Chinese companies have not yet been able to match the technological lead of the competition from Taiwan, South Korea, Japan and the USA catch up.
China threatens countermeasures
Nevertheless, Chinese companies are likely to rebel against any American official measures, especially since the export restrictions would harm them directly. A spokeswoman for the Chinese embassy in Washington told American media in January that China opposes unilateral sanctions and “so-called long-arm legislation,” in which one country extends its rights to other countries.
Such statements should not leave the Biden government cold. Finally warned The Peterson Institute for International Economics in the summer before that China could at best apply a law as a countermeasure that condemns companies for working with governments of other countries. So this could put companies in a dilemma: follow Washington’s direction, anger Beijing – and vice versa.
Since Taiwan, South Korea, Japan, the EU states and the USA, however, the states with the largest semiconductor production facilities fundamentally support export controls towards Russia, sanctions could also be introduced by the United States without the extraterritorial legislation.
The EU has more to lose
During the negotiations on which technology sectors should be affected by a possible export ban to Russia, the western countries will also analyze the companies on their territory. The EU has more to lose than the US. European companies exported goods and services worth about 79 billion euros (82 billion Swiss francs) to Russia in 2021, more than ten times more than American companies.
Export bans, if they are actually imposed, are likely to hurt the EU considerably more than the USA. The political leadership is not lacking in determination. EU Trade Commissioner Dombrovskis: “We have to accept economic costs if necessary.”