Enterprise

Four things to consider as the U.S. imposes chip sanctions on Russia

The U.S. announced chip sanctions against Russia Thursday in response to its invasion of Ukraine. Here’s what it means for the sector, which has already endured two years of supply problems.

Russia's Prime Minister Mikhail Mishustin visits the Semiconductor Device Plant.

Russia's Prime Minister Mikhail Mishustin (left, front) visits a chip facility.

Photo: Dmitry Astakhov\TASS via Getty Images

The White House said Thursday that it planned to choke off Russian access to a range of U.S. tech, including semiconductors, as part of the economic sanctions package proposed in response to the invasion of Ukraine.

“We’re going to impact their ability to compete in the 21st century economy,” President Joe Biden said Thursday at a White House press conference, explaining the sanctions.

We’ve seen a blueprint of how the U.S. might implement such sanctions with the Trump administration's efforts to thwart Huawei and other Chinese tech companies. But the U.S. had more to lose in dealing with China, and its aggressive batch of fresh economic punishments against Russia cover financial systems and the country’s access to tech.

So how will today’s announcement impact Russia? And how will the sanctions play out across a semiconductor sector still reeling from supply chain shocks? We’ve compiled answers to some of the most pressing questions surrounding this ban.

How would the chip sanctions work?

The U.S. Department of Commerce elected to follow a playbook similar to how it handled Huawei in 2019, and implemented a foreign direct product rule that bans shipping a range of U.S. tech products, or those made with U.S. equipment, software and blueprints, to Russia. Commerce said the EU, Japan, Australia, U.K., Canada and New Zealand are expected to implement similar restrictions.

The sanctions have the potential to severely damage Russia’s ability to get its hands on the most advanced chips made around the world. Even though the U.S. doesn’t fabricate as many chips as it once did, American chip businesses have most of the world’s semiconductor design expertise and intellectual property. Choking off access to American tech cost Huawei billions in lost revenue, and forced it to turn to alternative chip suppliers that don’t have the tech needed to make the most advanced chips.

According to a Commerce Department fact sheet, there are a number of uses that are exempt from sanctions, such as telecom infrastructure and a “range of consumer items used by the Russian people” — referring to devices such as smartphones, among other things.

Will a chip ban be effective?

Despite the growing need for chips around the world, Russia isn’t a primary market for chipmakers.

The country accounted for less than 0.1% of global chip purchases, according to the Semiconductor Industry Association. “Russia is not a significant direct consumer of semiconductors,” SIA CEO John Neuffer said. Even the country’s overall spending on tech is relatively limited, according to research firm IDC, which estimates the market at roughly $50 billion, compared with a global market that measures about $4.5 trillion.

Even though Russia doesn’t buy large numbers of chips directly, the U.S. may have trouble implementing a severe form of sanctions, according to professor Bhaskar Chakravorti. Chakravorti told Protocol that a large number of businesses involved in various stages of chipmaking aren’t worried about being placed on a U.S. blacklist at the moment — demand for chips continues to outstrip supply, and the U.S. would be loath to worsen the problem. The issue is compounded by the fact that the administration has little visibility into the semiconductor supply chain, which makes it harder for officials to catch companies violating sanctions.

“I think many players are going to continue to do whatever they’re doing, and hope they aren’t going to be found out,” he said.

The most significant negative consequence for the U.S. could be increased cooperation between China and Russia. At the moment, Russia already purchases about 70% of its chips from China, a number that is only likely to increase if the sanctions are implemented.

“China is keen to move up the semiconductor food chain, so this is an opportunity for these two to get together,” Chakravorti said. “Putin goes to Xi and says, ‘Hey, I need chips, you know how to get chips for me — I can get you engineers, I can get you money, I can get you technology.’”

How would chip sanctions against Russia impact China?

The sanctions will push Russia further towards China as a trading partner for semiconductors. The problem is that for the short- to medium-term, China is struggling with foundry capacity and the ability to manufacture the most-advanced chips. And in the long term, Russia will not want to be so reliant on China for access to a foundational technology — right now, it just doesn’t have any viable alternatives.

SMIC is central to China’s ambitions to grow its capacity. The chipmaker — which is still subject to U.S. sanctions from the Trump era — has reserved $5 billion for capital expenditures this year. It has plans to open up a foundry in Shenzhen in the coming months, and is in the process of building another facility in Shanghai that would begin production in 2024. SMIC reportedly expects its 2022 expenditures to boost production capacity from 20,000 8-inch wafers to 150,000.

Aside from supply constraints, however, there’s the problem of access to advanced chips. SMIC isn’t yet able to produce the most-advanced chips that Samsung and TSMC are able to make.

U.S. sanctions have limited the ability of SMIC and other China-based chipmakers to purchase specialized extreme ultraviolet lithography equipment from the Dutch company ASML. Without that access, SMIC and others are having to make their own alternatives that could take several years to develop. The advanced chips are important for making more efficient chipsets that can be used in cloud computing, AI and graphics processing.

There are two important considerations for Russia. First, Russia and China have come closer together over recent years, but Russia ultimately wants to retain its sovereignty rather than rely so extensively on China.

The other problem has to do with the possibility of further U.S. sanctions against SMIC, which the Biden administration reportedly considered at the end last year. This could disrupt China’s ability to expand capacity to such an extent that it would be able to meet domestic demand while still exporting to key trade partners, like Russia.

Would the chip sanctions ease semiconductor supply constraints for everyone else?

For the chip industry — and the ongoing global shortage — the paramount concern appears to be the raw materials necessary for chip production. Earlier this month, the White House warned the chip industry about potential shortages of neon and palladium, which are made or refined in Russia and Ukraine.

The raw material gathering the most attention is neon, which is used in a part of chip fabrication called lithography, where a tool uses a narrow beam of light to draw features onto silicon wafers. The market for neon is tough to get information on, according to Bernstein chip analyst Stacy Rasgon, but it's relatively small, roughly several hundred million dollars, or about 600 million liters of material. According to a report from Techcet, Russia produces neon as a byproduct of steel manufacturing that is then refined by a specialized Ukrainian company.

Chip manufacturing uses about 75% of the world’s supply of neon, according to Rasgon’s research, and the last crisis in Ukraine prompted as much as a sevenfold increase in the price.

“We don't think the prospect for higher prices is really an issue (even at 10x neon costs are a tiny fraction of the industry's cost structure) though it may favor larger players over smaller ones in terms of getting supply,” Rasgon wrote. “But potentially putting a significant fraction of purification capacity at risk sounds somewhat ominous for an industry already struggling with shortages."

SIA downplayed the effect of any shortages, saying in a statement that the industry has a “diverse set of suppliers of key materials and gases” that the conflict between Russia and Ukraine won’t immediately disrupt. Evercore analyst C.J. Muse wrote in a research note that his checks revealed there will be enough neon in the chip industry for as long as the next year.

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