Overview

New export controls on semiconductors to Russia, in combination with sanctions impacting the Russian economy. Some estimates put the trade of semiconductors to Russia at $50 billion.[1] But these impressive number bely the fact that Russia buys end products with chips and integrated circuits and does not have a strong industrial base to produce cutting edge semiconductors themselves despite attempts by the Kremlin to build a domestic production capacity.[2]

Russia’s Global Trade Flows

CNS analyzed trade flows of semiconductors and electronics into Russia to measure the current international supply chains Russia is relying on to keep her economy running. Firstly, we analyzed COMTRADE data from the United Nations using the Harmonized System data countries report they are exporting to Russia. We used two four-digit HS (Harmonized System) codes to filter for only goods relevant to the semiconductor and microelectronics industries. This meant using codes 8541 and 8542, for semiconductors and electronic integrated circuits, respectively. The goods were measured in U.S. dollars from the 2017 to 2021 period.

What we found was two distinct trade flows. The larger of the two routes stretches towards the Atlantic, constituting primarily the Netherlands, Germany, and United States to a lesser extent. The Netherlands was the leading reporting of trade, with totals reaching $1.48 billion in goods. Germany and the United States came in second with $856 million and $366 million in goods, respectively from 2017 to 2021. The smaller, but still extremely significant of the two trade flows stretches towards the Pacific, constituting supply chains from China and Hong Kong. The dominance of trade from China and Hong Kong fluctuated based on year, but $973 million in goods were reported by Hong Kong over the four-year period with $746 million coming from the Chinese mainland.

It is important to note the breadth and variety of semiconductors and integrated circuits. The goods Russia imports run the gamut of sophistication levels and are not all the high-end semiconductors that are the focus of the U.S.-China technology arms race, but lower end electronics for all number of industrial applications.

Asian Supply Chains

Logically, given geography and geopolitical leanings, there is concern China itself may step in to provide a workaround for getting semiconductors into Russia. This would mean higher prices for Russian end users and increased risk for any Chinese supplier. Fearing this, U.S. Secretary of Commerce Gina Raimondo came out on March 8^th and threated to further cut-off China from American goods and software if Chinese companies served to undermine U.S. export restrictions and sanctions. U.S. officials have specifically threatened to punish the Shanghai-based and partially state-owned Semiconductor Manufacturing International Corporation (SMIC) for any trade with Russia.[3] SMIC is already on the US ‘entity list’ meaning that all US trade with the entity must be referred to the licensing agency.[4]

The impact of Taiwan joining the export controls could be extremely consequential for its success. Given TSMC’s outsized role in the high-end semiconductor industry, market cut-off alongside U.S. decoupling cuts off Russia’s basic electronic manufacturing base is virtually nonexistent much less a capacity to manufacture high-end chip manufacturing equipment akin to Dutch EUV innovators at ASML.[5] This is all despite government subsidies to push forward Russia’s chip manufacturing abilities.[6] This is due to several factors, including lack of development during the Soviet period, lack of qualified staff, lack of basic research, and theft by state officials.[7]

Nvidia, AMD and Intel have also pulled out of the Russian market, defacto locking Russia out of personal computers, laptops, and supercomputers.[8] AMD specifically referred to U.S. “sanctions” as the reason for the company’s pullout, without elaborating if export controls or financial restrictions were more to blame.[9] This is a direct blow to Russia’s participation in the machine learning race, as Sberbank’s Christofari supercomputer was created in collaboration with Nvidia.[10]

Impact on Global Semiconductor Markets

A secondary risk is that as a major commodity exporter, Russia’s invasion of Ukraine could impact the availability of raw materials needed to produce some semiconductors. The most relevant components to the Russia context being neon gas and pallidum.[11] Russia supplies half of the world’s neon gas, much of which is then further processed in Ukraine before entering global supply chains.[12] This supply chain provides 90% of the neon gas used by the U.S. semiconductor industry to produce chips.[13] Dutch semiconductor giant ASML reduced their reliance on neon gas in their processes after the Crimea annexation.[14] One business analyst told Fortune magazine, “Unless Ukraine becomes a long, drawn-out war, lasting over a month, there should be little impact on neon supplies”.[15]

Conclusion

Since Peter the Great traveled the European shipyards 300 years ago, opening the so-called window to Europe, Russia has relied on Western technology transfers for modernization. The world is more globalized now, but Russia continues to rely on technology transfers for development. Russia attempted import substitution of electronics after the 2014 annexation of Crimea, but many of these attempts were marred by corruption and failure.[16] The semiconductor export controls stand to leave Russia weaker, poorer, and more isolated in a way the country has not seen since the Soviet Union.

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[1] https://fortune.com/2022/02/25/biden-ban-chip-semiconductors-exports-russia-ukraine/

[2] https://www.kommersant.ru/doc/5029560?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD and https://www.kommersant.ru/doc/4955528?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[3] https://www.nytimes.com/2022/03/08/technology/chinese-companies-russia-semiconductors.html

[4] https://www.federalregister.gov/documents/2020/12/22/2020-28031/addition-of-entities-to-the-entity-list-revision-of-entry-on-the-entity-list-and-removal-of-entities#:~:text=This%20rule%20adds%20SMIC%20and,)%20Co.%2C%20Ltd.%3B

[5] https://fortune.com/2021/10/19/asml-chips-euv-silicon-valley-biden/

[6] https://www.kommersant.ru/doc/4978092?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[7] https://novayagazeta.ru/articles/2018/02/26/75605-synki-otechestva and

[8] https://www.pcworld.com/article/619357/amd-officially-halts-chip-sales-to-russia.html

[9] ibid

[10] https://www.sberbank.com/news-and-media/press-releases/article?newsID=be3c0f17-e57a-49f7-bf64-900e6e81cb3f&blockID=7&regionID=77&lang=en&type=NEWS

[11] https://www.wsj.com/articles/chip-makers-stockpiled-key-materials-ahead-of-russian-invasion-of-ukraine-11647167582

[12] https://www.smh.com.au/business/markets/semiconductor-squeeze-likely-as-sanctions-on-russia-melt-supply-20220311-p5a3to.html

[13] https://www.smh.com.au/business/markets/semiconductor-squeeze-likely-as-sanctions-on-russia-melt-supply-20220311-p5a3to.html

[14] https://www.aljazeera.com/economy/2022/3/3/amid-ukraine-fallout-crisis-hardened-chipmakers-race-to-adapt

[15] https://fortune.com/2022/02/25/biden-ban-chip-semiconductors-exports-russia-ukraine/

[16] https://novayagazeta.ru/articles/2018/02/26/75605-synki-otechestva

Eric Woods, March 22 2022

Overview

Russia’s civil aviation sector is already in a deep crisis due to the growing package of export control and sanctions leveled against the country. The sanctions and export controls are affecting the country’s civil air fleet on multiple levels and exacerbating decades of neglect in key sectors of the country’s industrial base. The U.S. and EU sanctions, in particular, have led companies to freeze technical support, spare parts, supply of aircraft, leasing of aircraft, and maintenance to Russia. Around 700 of Russia approximately 900 aircraft designed for civil aviation will be affected in one way or another.[1]

Russia’s civil air fleet is overwhelmingly reliant on Western manufactured engines. Previous rounds of sanctions have stimulated Russia’s domestic development of composite materials and avionics, but full commercial engines will be a difficult transition in conditions of near autarky.[2] Aviation data acquired by the Wall Street Journal shows that of commercial aircraft serving of in storage in Russia, there are 370 Boeing aircraft and 345 Airbus.[3] The third most-popular planes are produced by Sukhoi, but these airframes are reliant on joint Russian-Western partnerships. According to the analysis of the Wall Street Journal, only 17% of Russia’s domestic air fleet is domestically produced.

Import Substitution

The natural instinct for Russian leaders, and Putin in particular, is to involve Russia’s expansive military industrial base in the creation of domestic products. Russia has a number of research centers with wind tunnels that test hypersonic flight and cutting-edge aircraft. In fact, civil aviation engines under development such as the PD-8 and PD-14 are being developed under the auspices of state arms manufacturer Rostech.[4] Despite these competitive advantages in research and design of cutting-edge aerospace technology, Russia’s debt-laden and unwieldy defense enterprises are not able to produce globally competitive products despite years of government efforts.[5]

Compounding problems is Russia’s lack of a robust domestic electronics industry. Modern airplanes are reliant on a great deal of integrated circuits and advanced electronics. Despite robust attempts to build a domestic manufacturing capacity, Russian chipmakers were already struggling to meet orders for domestic import substituted chips before February 24^th.[6] Deliveries of the Irkut-produced MC-21 domestic airliner, a self-declared replacement for these foreign aircraft set was set for mass production in 2022, but may be delayed due to chip shortages.[7]

Safety and Maintenace

Russia’s Air Ministry is extending the licenses of aircraft creating fears that the ministry is simply lowering safety standards for flights.[8] There are early indications that this approach may already be putting passengers in danger. The semi-independent Russian business daily Kommersant, carried reports that there have been at least two incidents of autopilot failures on Airbus 320 flights made by the Russian carrier Ural Airline.[9] Some in Russia hope older Airbus 320s and 747s using the older CFM56 engines will be easier to maintain via secondary markets. A professor at Moscow’s Higher School of Economics told the newspaper, “We are in a situation where there are no good options. Either don’t fly at all or take risks”.[10]

Russia has domestic maintenance crews in place, but without the proper parts, tools and materials it will be difficult to maintain the fleet over the long haul. Some companies have looked to the UAE and Turkey for more advanced repairs that cannot be done in Russia, but fear of secondary sanctions has thwarted this according to managers at Russian airline companies.[11] Aeroflot in particular has pointed to the UAE and China as potential destinations for critical repair and maintenance.[12] Creative attempts to avoid the sanctions and export control regime, such as putting dozens of Russian aircraft into foreign registries, has so far, been prevented by the Kremlin.[13]

Chinese investment and intervention to prop up or save Russia’s economy from collapse remains the million-dollar question. With access to vast capital reserves and technology, China is theoretically poised to step into the gap left by Western providers if there is the political will to do so in Beijing. Fears of secondary sanctions have put a damper on investment so far. Officials from Russia’s air ministry told Interfax that attempts to procure replacement parts so far have been rebuffed.[14] Absent political will from top leadership in Beijing, there is little reason for profit-oriented companies to invest their money in a market with a business environment as toxic as Russia’s.[15]

Conclusion It may take years for Russia to bring its domestic Boeing and Airbus equivalents into serial production enough to make up for the losses.[16] Officials are speeding up the certification process of domestically produced engines.[17] But the problem remains that in relying on global supply chains for domestic civil aviation has put Russia in a place, where an entire sector of the economy is now at a breaking point. Without the involvement of foreign companies in the market, and without the ability to procure spare parts, Russia’s civil aviation sphere faces nothing short of catastrophe.

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[1] https://www.kommersant.ru/doc/5239501

[2] https://www.kommersant.ru/doc/5236969

[3] https://www.wsj.com/articles/russia-cant-fly-without-the-westbut-may-eventually-propel-china-11646738302

[4] https://rostec.ru/news/rostekh-izgotovil-uzly-dlya-demonstratora-dvigatelya-dlya-ssj-new/ and https://rostec.ru/news/odk-i-gazprom-dogovorilis-o-sotrudnichestve-pri-sozdanii-dvigateley-na-baze-pd-14/

[5] https://ridl.io/en/the-inner-workings-of-russia-s-military-industrial-behemoth/

[6] https://www.kommersant.ru/doc/5009185?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[7] https://www.kommersant.ru/doc/5236969 and https://trends.rbc.ru/trends/industry/622b2d7b9a7947dd4d90bc07

[8]https://www.kommersant.ru/doc/5249920

[9]https://www.kommersant.ru/doc/5249920

[10] ibid

[11] https://www.kommersant.ru/doc/5239501

[12] https://www.kommersant.ru/doc/5236969

[13] https://thebell.io/neizbezhnyj-defolt-valyutnyj-kontrol-natsionalizatsiya-inostrannogo-biznesa-i-ostanovka-mezhdunarodnyh-rejsov

[14] Китай отказал России в поставках авиазапчастей (interfax.ru)

[15] https://thebell.io/rossiyu-mozhet-zhdat-defolt-chto-eto-znachit-i-v-chem-raznitsa-s-1998-godom

[16] https://www.kommersant.ru/doc/5260739

[17] https://www.kommersant.ru/doc/5250027

Minh Ly, March 18 2022

A One-Sided Drug Trade

            Although the economic sanctions wielded by the West against Russia do not target its pharmaceutical industry or medical supply chain, the resulting ripple effects may adversely impact both. Since the early 2000s, Russia has had a keen interest in developing its biotech industry. This included both the agricultural and the pharmaceutical sector. While the agricultural sector was relatively successful and Russia rose to become the world’s largest provider of wheat, the pharmaceutical sector did not achieve the same level of growth. Russia relies heavily on the international market, mainly from its European trade partners, to cover the quantity and diversity of medical drugs its citizens consume. In 2019, Russia was importing 70% of the drugs the nation was consuming.[1] Russia’s pharmaceutical industry struggles to domestically produce an adequate amount of medical drugs and is therefore reliant upon imports.

            One of the reasons for Russia’s lack of medicine manufacturing capacity is its dependence on the international supply chain for pharmaceutical precursors, namely active pharmaceutical ingredients (API). The relationship between Russia’s imports and exports of APIs can be seen in Graph 1 below.

Although the value of imported and exported APIs have a similar trend from 2007 to 2021, the number of imports average to more than three times as much as exports. Russia imported 85% of its API consumption in 2019, which corroborates with the deduced information that Russia is heavily reliant on the international market to sustain its pharmaceutical sector and domestic medical drugs manufacturing. However, the total value of imports fluctuates within the recorded period in Graph 1, with increased imports in 2012 and 2018 while decreasing in 2015 and 2021. The fluctuation may reflect the mixed success of the national plans to improve the biotech and pharmaceutical industry. Russia’s Pharma 2020, one such national plan, promised to pump $4 billion into developing the industry[2] and explains the increase in Russia’s API demands from 2010 to 2013. The import regression from 2013 until 2018 is a visible sign of Pharma 2020 losing steam after its inception. The decrease after 2018 could be the effect of Russia’s Pharma 2030, an updated national plan. Although international movement and trade were hampered by the coronavirus in 2020, the foundation laid by Pharma 2020 should not be ignored. Major objectives of the Pharma 2020 plan included “localization and import substitution”[3] and Pharma 2030 leveraged these developments to improve Russia’s pharmaceutical sector. Despite these improvements, Russia still could not close the gap between its API imports and exports. Russia’s medical drugs trade data, shown in Graph 2, corroborate the mixed result of its national plans.

The difference between Russia’s imports and exports for medical drugs is immediately noticeable in Graph 2. The statistic that 70% of drugs consumed in Russia were exported in 2019 is visible here and would seem to be the case for 2011 and 2013 as well. The peaks and valleys of this graph correlate to Graph 1, indicating that medical drug supplies share similar effects from Pharma 2020 and Pharma 2030 as the pharmaceutical sector’s API imports. However, there is less fluctuation of imports for medical drugs, showing a higher level of consistency for Russia’s dependence on the international market to sustain its supplies. The Russian invasion of Ukraine and resulting sanctions have indirectly reduced the supply of medical drugs such as insulin in Russia[4], emphasizing their dependency on imports.

Consequences of Sanctions

Russia’s dependency on the international market for its pharmaceutical precursors and medical drug supplies puts the nation in a precarious position when these sources are compromised. Russia’s invasion of Ukraine has engendered waves of strict economic sanctions against key Russian sectors and leaders by the West. The United States and many European countries have already rolled out sanctions against Russia on key technologies and banks, crippling its ability to conduct business. Aside from items listed on international export control regimes, however, these sanctions do not target the pharmaceutical sector directly and exceptions for medical supplies are in place.[5] This has not stopped Russian medical supplies from being affected. The ripple effects from these sanctions could have detrimental consequences on Russia’s entire economy, including its pharmaceutical sector and medical supplies. Already, pharmaceutical companies are struggling to import important ingredients.[6]

One such peripheral consequence is the devaluing of the Russian ruble, which will reduce Russia’s buying power for medical drugs and the pharmaceutical precursors for domestic drug production. Additionally, sanctions on Russian banks will cause disruptions and complications for payment transactions for Russian pharmaceutical importers and their trade partners. Major airlines and shipping companies have also suspended operations in Russia, severally limiting supply routes. These difficulties, along with moral and reputational pressure, may discourage establishing and continuing trading relationships with Russian entities. These discouragements may ultimately impact Russia’s ability to continue the high volume of medicine and API imports to meet the demands of its populace, who consumed 6,173 million packages in 2019.[7] A multitude of companies not named by sanctions are already withdrawing from the Russian market for a combination of these reasons.[8] Panic buying and hoarding of imported medical drugs induced by worries over sanctions has also reduced supply and artificially inflated demands.[9] India, one of the top ten sources for Russia’s medical drugs, is paying close attention to the Russian invasion of Ukraine and is considering how the ripple effects will influence its pharmaceutical exports to Russia and Ukraine.[10] Compounding the peripheral consequences listed is the sources of medical drugs that Russia traditionally imports from, which is shown in Graph 3.

            The countries in Graph 3 are the top 14 sources for Russian import of medical drugs. The European Union, which a vast majority of the countries on Graph 3 are a part of, is discouraging Russian aggression through sanctions. Sanctions implemented by these countries, although not directly targeting Russia’s medical drugs supply chain, could impede exports of medicines to Russia[11], whose medical supplies such as insulin, are running low. Top sources for Russian API imports, shown in Graph 4, also share a similar dynamic as medical drug imports, although with more leeway for Russia’s pharmaceutical sector. China is the largest provider of API for Russia, which is the source for most of its API imports. Other major exporters of API to Russia include several EU countries as well as the US and Ukraine, who are all implementing sanctions against Russia. Impediments of APIs imports from these countries would not have as significant of an impact as medical drugs due to China’s central role as Russia’s primary API provider. However, as Russia lacks the capacity to domestically manufacture a sufficient amount of medicine, it would need to seek alternative sources to maintain the medical supply that is indirectly affected by sanctions. Turning to China to aid in this endeavor would be one of the few options that Russia has remaining.

China is in an excellent position and has the capacity for the surge of drug and API demand, likely to result from Russia’s predicament. One of the staple characteristics of China’s biotech industry is its contract development and manufacturing organizations, which include the production and provision of medical drugs and active pharmaceutical ingredients. As Graph 4 and Graph 5 show, Russia is already one of the top ten importers of China’s API supplies. Aside from Korea, China’s API trade flow is one-sided, with more exports than imports. China’s pharmaceutical infrastructure would welcome this surge of demand from Russia because it is an opportunity to enhance China’s influence over Russia as well as strengthen China’s pharmaceutical sector. Imports from China is likely to increase due to the potential impact on Russia’s ability to acquire medical drugs from European partners, where it traditionally obtains these goods. Russia might either directly import medicines or lean on its domestic pharmaceutical sector to manufacture them, which requires increasing API imports from China. Ultimately, this could increase China’s leverage over Russia and alter the relationship between these two world powers.

Conclusion

            Russia’s invasion of Ukraine has resulted in dire consequences in the form of international condemnation and economic sanctions. These sanctions target key technological sectors and Russia’s banking system. They do not directly target the pharmaceutical or medical sectors. However, these sanctions will have ripple effects on all of Russia’s economy and will be detrimental to even non-targeted sectors and a variety of important supplies. The pharmaceutical industry and medical supplies could be amongst those indirectly impacted by the sanctions. Despite sanctions not applying to medicines, Russia could be restricted from a major reliable source of medical drugs, impeded by the peripheral effects of sanctions, which it heavily depended on securing from European trade partners. Russia would be forced to find alternative sources or rely more heavily on its pharmaceutical sector to provide the necessary medical supplies to its citizens. China may be an appealing resource and trade partner for Russia. However, the reliance on China could shift their relationship and cost Russia some of its political influence. As Russia becomes a pariah on the international stage, China could expand its influence in Russia and regions where Russia’s influence wanes. China’s increase in influence may pose a significant threat to the national interest of the United States, especially in the economic and geopolitical realm. The competition between the United States and China may become more pronounced as Russia becomes further isolated due to its invasion of Ukraine. The vacuum created by Russia’s isolation could usher in a new geopolitical and economic balance of power defined by a United States and Chinese rivalry.

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[1] https://investinrussia.com/data/files/sectors/russian-rharmaceutical-market-trends-2020.pdf

[2] https://www.nature.com/articles/nm0511-517.pdf?origin=ppub

[3] https://novamedica.com/media/smi/p/8691-the-pharma-2030-strategy-promoting-globalization

[4] https://www.themoscowtimes.com/2022/03/09/fears-in-russia-over-pharmaceutical-supplies-a76840

[5] https://www.bloomberg.com/news/articles/2022-03-14/pfizer-halts-trials-in-russia-but-will-continue-to-supply-drugs

[6] https://www.wsj.com/articles/western-drugmakers-are-still-providing-medicines-to-russia-11647081002

[7] https://investinrussia.com/data/files/sectors/russian-rharmaceutical-market-trends-2020.pdf

[8] https://www.nytimes.com/article/russia-invasion-companies.html

[9] https://novayagazeta.ru/articles/2022/03/10/boleznennye-sanktsii

[10] https://www.businesstoday.in/latest/corporate/story/russia-ukraine-war-can-impact-indias-pharma-sector-experts-warn-323814-2022-02-24

[11] https://www.reuters.com/business/healthcare-pharmaceuticals/drugmakers-device-companies-say-sanctions-may-hinder-medical-supplies-russia-2022-03-03/

Reproduced from nonproliferation.org

Context

CNS has been focused both on the question of emerging technology controls and on the question of export controls in an area of strategic competition. CNS has been undertaking detailed sectoral mapping in relation to several emerging technologies, including artificial intelligence, aerospace and avionics, high-performance computing, biotechnology, cybertechnology, telecommunications, and semiconductor technologies. CNS will soon be launching resources intended to help governments and the private sector to manage these technologies in this new security environment. CNS is also working to benchmark and develop good practices in relation to the cybersecurity of export-controlled information. This article is intended to provide a broader framing to the work CNS is undertaking concerning export controls in an era of strategic competition. CNS staff would be happy to brief officials from governments or the private sector on these topics.

Nonpro Note Introduction: Export Control and Emerging Technology Control in an Era of Strategic Competition

The nature of export controls is changing. In recent years, the export control landscape has been evolving as a result of strategic competition between the United States and China. However, Russia’s invasion of Ukraine on 24^th February 2022 had an instant catalyzing effect on the evolution of export controls. While in recent decades export controls have been relatively geopolitically neutral tools aimed at preventing Weapons of Mass Destruction proliferation and preventing WMD terrorism, the tools are evolving to become a central instrument through which the US and allies are seeking to stem the development of advanced military capabilities in an emergent China and a revisionist Russia. An important aspect of this relates to so-called emerging and foundational technologies.

The purpose of this article is to provide an overview of changes taking place in relation to export controls, particularly from a US perspective. The article focuses on the issue of emerging technology. However, in the context of the targeted export control measures adopted by multiple countries against Russia following its invasion of Ukraine, this article also examines the broader context of the evolution of controls. The article briefly examines the future of multilateral export controls and argues that the measures adopted against Russia may provide the foundation for a new form of export control coordination. The article identifies specific tools that states should adopt and also emphasizes emerging technologies that should be considered for control in the context of strategic competition.