ON FEBRUARY 24TH President Joe Biden announced a suite of sanctions against Russia in response to its invasion of Ukraine. The focus was on the country’s biggest banks, cutting them off from the dollar and limiting their ability to raise money abroad. But the announcement also contained a new kind of sanction, one that attempts to choke Russia’s supply of technological components. Mr Biden reckoned these measures would cut off “more than half of Russia’s high-tech imports”.
The American government has done something like this before to Huawei, a Chinese telecoms manufacturer, which it suspected of spying. Donald Trump’s administration spent years honing its export rules in an attempt to stop the firm gaining access to cutting-edge technology. When it finally got the rules right in 2020, Huawei was instantly blocked from buying vital microprocessors from any company in the world that used American technology to produce them. The firm’s revenues plunged by 30% the next year.
But export controls have never before been used to punish an entire country. The results are hard to predict. The American government’s stated goal is to “cut off Russia’s access to vital technological inputs, atrophy key sectors of its industrial base, and undercut its strategic ambitions to exert influence on the world stage”. Even if they fall short of that goal, Mr Biden’s measures will be felt by the Russian state. Russia’s companies and citizens are certain to be hit, too.
The new controls mean the American government is in effect claiming jurisdiction over any person or company in the world that uses American technology to make products for sale in Russia. It forces anyone who wishes to sell a vast array of technologies, including semiconductors, encryption software, lasers and sensors, to request a licence—which is denied by default. The control is enforced through the threat of further sanctions against any company, person or country which sells to Russia in contravention of the rules. The dominance of American technology, which is used to make products all over the world, means that a huge array of products will be caught in the net.
The new rules went into effect as soon as they were published by the Bureau of Industry and Security, the arm of the Department of Commerce which manages America’s export-control regulations. Company lawyers around the world are now poring over them, attempting a first-pass analysis of their clients’ compliance, or lack of it. For some, the task of assessing their entire supply chain for the use of any American technology will be too onerous, and they will simply stop supplying components to Russia as a precaution. This cautionary halt will be the first impact of these sanctions.
Most of the sanctions’ intended impacts will only become clear over time, however. Their focus is on businesses operating in specific sectors—defence, aerospace and shipbuilding—not on individual consumers. Software updates for Google and Apple smartphones can continue without licences, for instance, thanks to an explicit exemption for consumer-software updates. Russians did not wake up on February 25th to error messages and failed updates on their phones.
Instead, the sanctions will probably bite lightly at first. Only later will they clench their jaws. The reason is structural. American export-control law regards software which carries out encryption to be “controlled”. That makes it subject to the new rules. This means that Russian defence, aerospace or maritime-construction companies that rely on software produced using American technology will lose access to it.
The impact on hardware will be felt afterwards, as the components of Russian systems fail and need replacing. Telecom networks are a patchwork of hardware and software supplied by firms from all over the world, many of which will be reliant on American tools for production. Where those networks are operating in the service of the armed forces or aviation, they will face constraints.
American tools are unavoidable in the production of chips. All of the biggest producers, including Intel in America, TSMC in Taiwan and Samsung in South Korea, will have to stop sending them to Russia. That will have little immediate effect on end users, whose laptops and phones are all made abroad; it may have a more immediate effect on Russian data centres. These are great arrays of computers, whose data-processing underpins digital services, banks and government systems. As with telecoms gear, individual machines break down (and often). They therefore need a regular supply of hardware to keep going. The new rules will cut that supply, and so Russia’s computing infrastructure will start decaying.
Unlike the Trump administration when it went after Huawei, the Biden administration has consulted allies and affected companies ahead of time. This makes the net tighter. In a statement made after the announcement, the Semiconductor Industry Association, an American lobby group, voiced its support for the measures, noting that Russia’s market is too small for its members to be very upset. They were far more worried when America applied the rules to Huawei, a large customer for many firms.
Russia has seen this day coming, and attempted to prepare itself by promoting domestic technology over the foreign sort. Some substitution has been successful in areas such as social media and payments. But in the industries targeted by America’s tech sanctions it has not got far. America says its controls on the flow of technology to Russia will be “severe and sustained”. Mr Biden hinted that there were more to come, if needed. America has built a new kind of wall around Russian technology, one that is abstract and legal, but no less formidable for that. ■
Our recent coverage of the Ukraine crisis can be found here
Source: Business - economist.com
