US imposes sanctions as Russia invades Ukraine • The Register

The US government has imposed further sanctions on Russia after the Kremlin sent tanks into Ukraine’s breakaway regions today. Uncle Sam also left the door open to block chip exports to Russia.

Russia moved in ostensibly on a peace-keeping mission to protect Donetsk and Luhansk, two separatist territories in eastern Ukraine Russian President Vladimir Putin just yesterday formally recognized as independent states.

As Russia contemplates its next move, we have our next move prepared as well. Russia will pay an even steeper price if it continues its aggression, including additional sanctions

The tranche of sanctions this week cracks down on members of the Russian elite, and the banks VEB and Promsvyazbank; and cut Western financial funding to the Russian government, according to US President Joe Biden at a press conference on Tuesday afternoon.

Biden didn’t announce any specific technology export controls, but said “as Russia contemplates its next move, we have our next move prepared as well. Russia will pay an even steeper price if it continues its aggression, including additional sanctions.” The President earlier hinted at halting semiconductor shipments to choke Russia’s economic development – anything to curtail the roll out of 5G networks, artificial intelligence, and electrification of cars, for instance.

The EU earlier in the day agreed to impose targeted economic sanctions on specific entities and individuals; it didn’t pull the trigger on cutting off Russia’s access to the SWIFT banking system, which would disrupt financial transactions. Some of the sanctions placed by Europe and US are either an extension of, or similar to, those imposed on Russia in 2014 after the invasion of Crimea.

The sanctions imposed in 2014 weren’t completely effective as Russia had workarounds, Darshak Dholakia, a partner at law firm Dechert LLP, told The Register. Dholakia advises clients on international trade laws, including export controls.

“In 2014, sanctions primarily targeted things like raising financing for these state-owned banks and state gas companies. But like Chinese suppliers or Middle Eastern banks, there were other alternative sources of financing that weren’t subject to the same restrictions,” Dholakia said.

We note that a senior Russian diplomat said this month the Kremlin doesn’t really care about the sanctions placed on it, and we understand that President Putin will have planned ahead for the inevitable sanctions against his country should he invade Ukraine.

That said, America’s choke-hold on semiconductor technology, from design software and fabrication equipment to finished components, are a relatively new economic weapon with the potential to catch Russia off-guard. It could hurt Russian companies that include telecom and high-electronics firms.

“They were trying to find stuff that Putin hadn’t totally accounted for and wasn’t used to building resilience against in the same way that he was for the financial sanctions and in the energy sector, where clearly he’s had time to prepare,” Emily Kilcrease, senior fellow and director of the energy, economics and security program at CNAS, and former Deputy Assistant US Trade Representative, told The Register.

“So I think there was a little bit of this desire to have that element of surprise and newness to kind of increase the deterrent effect of the overall package,” she continued.

The US government has a number of trade weapons they can consider wielding against Moscow, though perhaps the most appealing is the FDPR – Foreign Direct Product Rule – which has been imposed on Huawei. The FDPR rule could be imposed on a sector-by-sector basis, against specific companies, or made countrywide.

That’ll restrict the export of chips that have any US origin – including software suites for chip design and manufacturing tools – to Russia. That nation’s heavy reliance on the United States for semiconductors makes it an effective choke point for Biden to weaponize.

Russia is behind the US on chip design and manufacturing, and doesn’t have significant tech companies like a Huawei that the US could target, which makes it hard to predict Biden’s plans.

“The open question is: what would the entities or individuals or companies or sectors be that would be subject to this prohibition? That’s the piece that we don’t know yet. We understand that it’ll be the defense industrial base. We don’t think it’ll be the entire Russian economy, at least not from the beginning,” Kilcrease said.

The open question is: what would the entities or individuals or companies or sectors be that would be subject to this prohibition? That’s the piece that we don’t know yet

Russia could acquire chips from secondary sources such as Malaysia and Vietnam, though any chip designed in the US could be subject to export controls. Russia’s Yadro is developing a native chip based on the RISC-V architecture as an alternative to x86 and Arm, but questions remain whether it’ll get access to US-linked manufacturing facilities, such as those operated by Intel, for production.

“For export controls, it’s harder just because of the degree to which US software technology is incorporated. It’s a lot harder to find a completely untainted source that wouldn’t be legally required to comply,” Dechert’s Dholakia said.

The US sanctions on Huawei were effective given it was targeted at one company, with some 70 Huawei-linked organizations placed on Uncle Sam’s Entity List, which restricts their trade with American businesses. But the global nature of the chip supply chain complicates matters, and though US corporations will fall in line with the White House’s wishes, ensuring compliance by international firms may prove harder for US authorities. In other words, Russia as a whole could well find ways around a semiconductor blockade put in place by President Biden.

“If the Department of Commerce doesn’t have that same jurisdiction to go in and demand to see shipping records – they might be located in countries that aren’t as cooperative with the US when it comes to these things,” Dholakia said.

Even if a supplier or vendor is willing to comply, they may not know if further down the supply chain there’s a company willing to bend the export-control rules, Dholakia said. Nonetheless, semiconductor export controls could “impose more difficulties and suppliers would ask a lot more questions and be reluctant when they don’t have the comfort that they need to proceed.”

The Middle Kingdom conundrum

The US will also need a level of cooperation from China, through which a lot of chips pass. China has made self-reliance of semiconductors a top priority as it has historically relied on US-origin chip technology, tools, and software.

The Chinese government may not willingly participate in America’s chip sanctions, though it also won’t actively participate in encouraging companies to violate US laws, CNAS’s Kilcrease said.

“There’s all these warm signals between Putin and Xi [Jinping], but when you actually come down to concrete actions that they would take, I don’t think that they’re going to be rushing to back-fill,” Kilcrease said.

If deeper sanctions do come, Russia may respond with asymmetric responses, such as cyberattacks or withhold supplies of critical semiconductor materials that include neon and palladium. Russia is also a source for a compound called Hexafluorocyclobutene, which is used in advanced manufacturing nodes, said research firm Techcet.

“We hope it will not come to that, however, if the current situation escalates, US chip makers may suffer material supply interruptions,” said Techcet CEO Lita Shon-Roy in a research note earlier this month.

Russia may not be immediately affected by any semiconductor sanctions as it’ll take time for chip suppliers to sort out the rules. There is a deep learning curve for companies, and compliance departments will be overtime.

“For a practical matter, non-US companies are going to struggle with understanding [export controls],” Dholakia said. “It’s also going to extend US export controls to a bunch of stuff that’s never been subject to US controls before. And people don’t like that. Especially other countries.”

Russia may take the opportunity to order as many chips as possible until countries and companies muddle through compliance issues, CNAS’s Kilcrease said.

“They can probably live on their current chips for a little while. This is something that over time will start to bite. You need to replace your technology, and then you can’t do that for the next five to 10 years – that starts to wear on the technology sector after a while,” Kilcrease said. ®