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    Chip Makers, Once in High Demand, Confront Sudden Challenges

    Demand for semiconductors was off the charts last year. But a sharp slowdown coupled with new U.S. restrictions against China have created obstacles.A few months ago, makers of computer chips seemed on top of the world.Customers could not get enough of the small slices of silicon, which act as the brains of computers and are needed in just about every device with an on-off switch. Demand was so strong — and U.S. dependence on a foreign manufacturer so worrying — that Democrats and Republicans agreed in July on a $52 billion subsidy package that included grants to build new chip factories in America.U.S. chip makers such as Intel, Micron Technology, Texas Instruments and GlobalFoundries pledged huge expansions in domestic manufacturing, betting on a growing need for their products and the prospects of federal subsidies.But lately, supplies of some semiconductors are piling up, which could spell good news for consumers but not for industry executives. Their bold investment plans are running into a sudden and unexpected slowdown in consumer demand for electronic gadgets, new U.S. restrictions on sales to customers in China, rising inflation and the unusual prospect of a simultaneous shortage of some chips and glut of others.That has left chip makers, which had been looking ahead to immense demand and opportunity, suddenly grappling with immense challenges. Many of the companies now face complex questions about whether and when to boost production, amid uncertainty about how long the current sales slowdown may last.“Six months ago, I would have said we were in this hypergrowth phase,” Rene Haas, chief executive of Arm, the British company whose chip technology powers billions of smartphones, said of the broader industry. Now, he said, “we’re in a pause.”For many consumers, products that were scarce because of a chips shortage may start becoming more available, though not immediately. Automakers, which have struggled to make enough cars with the lack of chips and other components, said they were getting more but still face some problems. Prices of smartphones and computers could also fall as chip supplies grow and prices plummet for two types of memory chips they use.But for now, not everyone is able to get all the chips they need, and prices remain high for many kinds of semiconductors. “We are still way above prepandemic pricing,” said Frank Cavallaro, chief executive of A2 Global Electronics and Solutions, a chip distributor.Fears of a slump, which have clobbered semiconductor stocks this year, are evident in recent earnings announcements from chip makers. South Korea’s SK Hynix on Wednesday reported a 20 percent drop in revenue and said its business of memory chips “is facing an unprecedented deterioration in market conditions.” Intel provided more evidence of a downturn in its third-quarter results on Thursday, including a 20 percent drop in revenue and a $664 million charge to cover cost-cutting measures expected to include job cuts.The Biden administration delivered its own blow this month with sweeping restrictions aimed at hobbling China from using U.S. technology related to chips. The measures restrict sales of some advanced chips to Chinese customers and prevent U.S. companies from helping China develop some kinds of chips.That hurts semiconductor companies like Nvidia, which makes graphics chips used to run A.I. applications in China and elsewhere. The Silicon Valley company, already suffering from a sharp sales decline for video game applications, recently estimated that the U.S. restrictions would probably reduce revenues in its current quarter by about $400 million.The sanctions may bite even harder at companies that sell chip-making equipment, which relied heavily in recent years on sales to Chinese factories.Lam Research, which produces tools that etch silicon wafers to make chips, estimated that the China limitations would reduce its 2023 revenue by $2 billion to $2.5 billion. “We lost some very profitable customers in the China region, and that’s going to persist,” Doug Bettinger, Lam’s chief financial officer, said during an earnings call last week.Applied Materials, the biggest maker of chip manufacturing tools, also said sales would suffer because of the restrictions. On Wednesday, another maker of chip manufacturing tools, KLA, said its revenue next year was likely to shrink by $600 million to $900 million as it reduces equipment sales and services to some customers in China.Worries about foreign competition are nothing new in semiconductors, an industry known for boom-and-bust cycles. But it has rarely faced a player as potent as the Taiwan Semiconductor Manufacturing Company, whose factories on the island churn out chips designed by companies including Apple, Amazon, Nvidia and Qualcomm.China claims Taiwan as its own territory, creating a potential risk to chip supplies. That helped drive the recent bipartisan support for the U.S. chip legislation, which was heavily pushed by President Biden.President Biden trekked to Albany, Ohio, last month for the ground breaking of a $20 billion Intel manufacturing campus. Pete Marovich for The New York TimesHe trekked to Ohio last month for the ground breaking of a $20 billion Intel manufacturing campus. On Thursday, President Biden visited a site near Syracuse, N.Y., where Micron has vowed to spend as much as $100 billion over 20 years on a large complex to build memory chips, a project he called “one of the most significant investments in American history.”Those plants will be needed at some point, industry executives said. But they are now grappling with the sudden and sharp decline in chip demand. The problem is particularly acute in processors and memory chips, which perform calculations and store data in personal computers, tablets, smartphones and other devices.Those products were hot commodities as consumers worked from home during the coronavirus pandemic. But that boom has now cooled, with PC sales dropping 15 percent in the third quarter, according to estimates by International Data Corporation. The research firm also predicted that smartphone sales would fall 6.5 percent this year. Demand has been tempered by inflation as well as a lengthy Covid lockdown in China, analysts said.At the same time, inventories of chips piled up. Computer makers spooked by the shortage bought more components than they ended up needing, said Dan Hutcheson, a market researcher at the firm TechInsights. When customer demand dried up, they started slashing orders.“You see multiple issues converging,” said Syed Alam, who leads Accenture’s global high tech consulting practice, including semiconductors.Handel Jones, chief executive at International Business Strategies, predicts that total sales for the chip industry will still grow 9.5 percent this year. But he expects revenue to decline 3.4 percent to $584.5 billion next year. Last year, he had predicted steady yearly growth for the chip industry from 2022 until 2030.Warning signs included Intel’s second-quarter results, which it announced in July. The company posted a rare loss and a 22 percent drop in revenue, blaming its own missteps and customers who cut chip inventories.At Micron, the mood also changed quickly. In May, the company gave bullish presentations at an investor event in San Francisco about long-term demand for its memory chips. By the next month, it was warning of slowing demand and falling chip prices.In September, the company reported a 20 percent drop in fourth-quarter revenue. It also slashed planned spending on factories and equipment by nearly 50 percent in the current fiscal year.The swing in demand might seem to undercut Micron’s widely publicized expansion plans, which include the Syracuse complex and a new $15 billion factory in Boise. But chip manufacturers often juggle different time schedules. Since new factories take roughly three years to complete, waiting too long to build can leave them short-handed when sales rebound.“The long-term outlook for memory and storage is robust,” said Mark Murphy, Micron’s executive vice president and chief financial officer. The cuts in near-term capital spending, he added, are a needed response “to bring our supply in line with demand.”Intel’s situation is even more complex. The company has major factory expansions underway in Arizona, Oregon, New Mexico, Ireland and Israel, in addition to the new manufacturing campus in Ohio and one planned for Germany. Intel is also determined to start competing with T.S.M.C. in manufacturing for other companies, as well as making chips it designs.The Taiwan Semiconductor Manufacturing Company is a potent player in semiconductors, with factories that churn out chips designed by companies including Apple, Amazon and Qualcomm.An Rong Xu for The New York TimesIntel now plans to construct factory buildings while holding off on purchases of the costly machines inside them, which are a much bigger expense.Those purchases can be tailored to emerging demand for particular kinds of chips, said Keyvan Esfarjani, Intel’s executive vice president who oversees construction and operation of its factories. He said the long-term need to reduce U.S. and European dependence on chips made in Asia was too important to be halted by short-term business cycles.“This is beyond Intel,” Mr. Esfarjani said in an interview last month. “This is important for people, for communities, for the United States. It’s important for national security.” More

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    Biden Administration Clamps Down on China’s Access to Chip Technology

    The White House issued sweeping restrictions on selling semiconductors and chip-making equipment to China, an attempt to curb the country’s access to critical technologies.WASHINGTON — The Biden administration on Friday announced sweeping new limits on the sale of semiconductor technology to China, a step aimed at crippling Beijing’s access to critical technologies that are needed for everything from supercomputing to guiding weapons.The moves are the clearest sign yet that a dangerous standoff between the world’s two major superpowers is increasingly playing out in the technological sphere, with the United States trying to establish a stranglehold on advanced computing and semiconductor technology that is essential to China’s military and economic ambitions.The package of restrictions, which was released by the Commerce Department, is designed in large part to slow the progress of Chinese military programs, which use supercomputing to model nuclear blasts, guide hypersonic weapons and establish advanced networks for surveilling dissidents and minorities, among other activities.Alan Estevez, the under secretary of commerce for industry and security, said his bureau was working to prevent China’s military, intelligence and security services from acquiring sensitive technologies with military applications.“The threat environment is always changing, and we are updating our policies today to make sure we’re addressing the challenges posed by the P.R.C. while we continue our outreach and coordination with allies and partners,” he said, referring to the People’s Republic of China.Technology experts said the rules appeared to impose the broadest export controls issued in a decade. While similar to the Trump administration’s crackdown on the telecom giant Huawei, the new rules are far wider in scope, affecting dozens of Chinese firms. And unlike the Trump administration’s approach — which was viewed as aggressive but scattershot — the rules appear to establish a more comprehensive policy that will stop cutting-edge exports to a range of Chinese technology companies and cut off China’s nascent ability to produce advanced chips itself.“It is an aggressive approach by the U.S. government to start to really impair the capability of China to indigenously develop certain of these critical technologies,” said Emily Kilcrease, a senior fellow at Center for a New American Security, a think tank.Companies will no longer be allowed to supply advanced computing chips, chip-making equipment and other products to China unless they receive a special license. Most of those licenses will be denied, though certain shipments to facilities operated by U.S. companies or allied countries will be evaluated case by case, a senior administration official said in a briefing Thursday.It remains to be seen whether the Chinese government will take action in response. Samm Sacks, a senior fellow at Yale Law School who studies technology policy in China, said the new rules could push Beijing to impose restrictions on American companies or firms from other countries that comply with U.S. rules but still want to maintain operations in China.“The question is: Would this new package cross a red line to trigger a response that we haven’t seen before?” she said. “A lot of people are anticipating it will. I think we’ll have to wait and see.”More on the Relations Between Asia and the U.S.Taiwan: American officials are intensifying efforts to build a giant stockpile of weapons in Taiwan in case China blockades the island as a prelude to an attempted invasion, according to current and former officials.North Korea: Pyongyang fired an intermediate range ballistic missile over Japan for the first time since 2017, when Kim Jong-un seemed intent on escalating conflict with Washington. But the international landscape has changed considerably since then.A Broad Partnership: The United States and 14 Pacific Island nations signed an agreement at a summit in Washington, putting climate change, economic growth and stronger security ties at the center of an American push to counter Chinese influence.South Korea: President Yoon Suk Yeol has aligned his country more closely with the United States, but there are limits to how far he can go without angering China or provoking North Korea.The measures come at a particularly sensitive moment for Beijing. Chinese leaders will hold a major political meeting beginning Oct. 16, where leader Xi Jinping is expected to secure a third leadership term, becoming the country’s longest-ruling leader since Mao Zedong.Liu Pengyu, a spokesman for the Chinese Embassy in Washington, said the United States was trying “to use its technological prowess as an advantage to hobble and suppress the development of emerging markets and developing countries.”“The U.S. probably hopes that China and the rest of the developing world will forever stay at the lower end of the industrial chain,” he added.The Chinese government has invested heavily in building up its semiconductor industry, but it still lags behind the United States, Taiwan and South Korea in its ability to produce the most advanced chips. In other fields, like artificial intelligence, China is no longer significantly behind the United States, but those technologies mostly rely on advanced chips that are designed or fabricated by non-Chinese firms.Jack Dongarra, a computer scientist at the University of Tennessee, said some of China’s most advanced supercomputers depended on chips made by California-based Intel or Taiwan Semiconductor Manufacturing Company, which uses U.S. technology in its production process and so would be subject to the new rules.The restrictions limit U.S. exports of high-tech chips called graphic processing units, which are used to power artificial intelligence applications, and place broad limits on chips destined for supercomputers in China. The rules also bar U.S.-based companies that make the equipment used to manufacture advanced logic and memory chips from selling that machinery to China without a license.Perhaps most significant, the Biden administration also imposed broad international restrictions that will prohibit companies anywhere in the world from selling chips used in artificial intelligence and supercomputing in China if they are made with U.S. technology, software or machinery. The restrictions used what is known as the foreign direct product rule, which was last deployed by former President Donald J. Trump to cripple Huawei.Another foreign direct product rule bans a broader range of products made outside the United States with American technology from being sent to 28 Chinese companies that have been placed on an “entity list” over national security concerns.Those companies include Beijing Sensetime Technology Development, a unit of a major Chinese artificial intelligence company, SenseTime. Also included are Dahua Technology, Higon, iFLYTEK, Megvii Technology, Sugon, Tianjian Phytium Information Technology, Sunway Microelectronics and Yitu Technologies, as well as a variety of labs and research institutions linked to universities and the Chinese government.In a briefing with reporters, senior administration officials said the measures would be limited to the most advanced chips and not have a broad commercial impact on private Chinese businesses. But they conceded that the limits could become more restrictive over time, given that technology will begin to outpace the advanced technological standards spelled out in the rules.Industry executives say many Chinese industries that rely on artificial intelligence and advanced algorithms power those abilities with American graphic processing units, which will now be restricted. Those include companies working with technologies like autonomous driving and gene sequencing, as well as the artificial intelligence company SenseTime and ByteDance, the Chinese internet company that owns TikTok.New limits on sales of chip-making equipment are also expected to clamp down on the operations of China’s homegrown chip makers, including Semiconductor Manufacturing International, Yangtze Memory Technologies and ChangXin Memory Technologies.The actual impact of the restrictions will hinge on how the policy is carried out. For most of the measures, the Commerce Department has the discretion to grant companies special licenses to continue selling the restricted products to China, though it said most would be denied.Some Republican lawmakers and China hawks have criticized the department for being too willing to issue such licenses, allowing U.S. companies to continue selling sensitive technology to China even when national security may be at stake.“If you want to stop it, you can just stop it,” said Derek Scissors, a senior fellow at the American Enterprise Institute. “When you create a licensing requirement, you are announcing to the world: We don’t want to stop it. We are just pretending.”With its vast ecosystem of factories, China continues to be a huge and lucrative market for U.S. chip exports. The tiny technologies are crucial to the smartphones, laptops, coffee makers, cars and other goods that Chinese factories pump out for domestic consumption and export to the world.Many American companies have long argued that their sales to China are an important source of revenue that allows them to reinvest in research and development and retain a competitive edge.But doing business with China has become much more fraught in the last few years, as the tensions between the United States and China have morphed into a cold war competition. The Chinese government has sought to blur the line between its defense sector and private industry, drawing on Chinese firms that specialize in fields including artificial intelligence, big data, aerospace technologies and quantum computing to fuel the country’s military modernization.Chinese military drills aimed at intimidating Taiwan, and China’s alignment with Moscow after the Russian invasion of Ukraine, have strengthened the case for technology regulation.Still, industry executives and some analysts argue that cutting China off from foreign chips will accelerate Beijing’s push to develop them itself and cause U.S. companies to lose out to foreign competitors, unless other countries also impose similar restrictions.The Semiconductor Industry Association said Friday that it was assessing the impact of the export controls on the industry and working with companies to ensure compliance.“We understand the goal of ensuring national security and urge the U.S. government to implement the rules in a targeted way — and in collaboration with international partners — to help level the playing field and mitigate unintended harm to U.S. innovation,” it said in a statement.In remarks last month, the Biden administration signaled that it would get tougher on technology regulation. Jake Sullivan, the national security adviser, said the U.S. government’s previous approach, of trying to stay a few generations ahead of competitors, was no longer sufficient.“Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible,” he said.Kevin Wolf, a partner at Akin Gump who led export control efforts during the Obama administration, said the move was “a fundamental shift in the use of export controls” to address broader national security objectives. Since the Cold War, most countries had used export controls more narrowly, focusing on regulating specific items that were necessary to produce or deploy weapons.Mr. Wolf said the new measures were likely to be highly effective in the short and medium term. “How effective they will be over the long term will be a function of whether allies ultimately agree to impose similar controls,” he added.Edward Wong More

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    How a Looming Oil Ban Could Devastate a Small Italian City

    Like thousands of Sicilians who live near Priolo Gargallo, part of an industrial petrochemical hub on this island’s southeastern coast, Davide Mauro has tied his livelihood to the giant Russian-owned Lukoil refinery — a landscape of towering chimney stacks, steel cranes and flat-topped gas tanks that rise above the Ionian Sea’s brilliant turquoise waters.Ever since the European Union agreed to ban most imports of crude oil from Russia because of its invasion of Ukraine, the future of this refinery — the largest in Italy — has been thrown into doubt. The deadline for the embargo is less than three months away, but workers still have no idea whether they will have jobs once it goes into effect on Dec. 5.“The company never says anything official,” said Mr. Mauro, a shift operator who has worked for 20 years at a plant that supplies the oil refinery with power. There has been talk of the Italian government’s possibly nationalizing the facility or guaranteeing new lines of credit. Most recently, there has been talk of an interested American buyer. But Mr. Mauro said: “It’s all rumors. Nothing’s clear.”The uncertainty hanging over the Lukoil refinery is a potent example of how the hard-won unified opposition to Russia’s invasion of Ukraine is rippling, sometimes in unintended ways, through Europe, straining local economies and fanning political tensions.Davide Mauro, a shift worker at the ISAB Lukoil refinery, at his home in Siracusa. He fears losing his job after Europe’s embargo on Russian oil goes into effect.Gianni Cipriano for The New York TimesSoaring fuel and food prices have eroded living standards. European leaders have already warned that rationing, factory closures and blackouts may be coming this winter. But in places like the Siracusa province of Sicily, the economic sanctions against Russia — previously Europe’s largest supplier of energy — carry a particular sting.Areas bearing a disproportionate share of the economic burden can be found all over the continent: in Schwedt, Germany, where an oil refinery also depends on Russian crude; in Arques, France, where an energy-hungry glass factory can’t afford to keep the furnaces running; and in Tertre, Belgium, where high natural gas prices have compelled the fertilizer company Yara to shutter its operation.If the Lukoil site in Priolo closes, Mr. Mauro said, he will probably have to leave this place, where he was born. The unemployment rate in Sicily is nearly 19 percent — one of the highest in the European Union. Finding a well-paying job like the one Mr. Mauro has with Lukoil would be next to impossible.“It’s a nightmare,” he said. “My entire life is here.”Lukoil, the largest private corporation in Russia, was not singled out by sanctions by any country when the Ukraine war started in February. Still, many banks and other financial institutions decided to avoid doing business with Russian companies after the European Union imposed sanctions. And so Lukoil lost lines of credit, which it had used to finance purchases of crude from suppliers outside Russia.Before the war, the Priolo refinery, known as ISAB after its former owner, got roughly 40 to 50 percent of its oil from Russia. Now with those other sources off limits, its only alternative was to get all of its crude from Lukoil.Oil tankers at the ISAB Lukoil oil terminal. Before the war in Ukraine, the Priolo refinery got roughly 40 to 50 percent of its oil from Russia.Gianni Cipriano for The New York TimesA Lukoil gas station in Priolo. Although Lukoil is not under sanctions, lenders have stopped providing financing after the European Union imposed sanctions on Moscow for its invasion of Ukraine.Gianni Cipriano for The New York TimesBut when the European Union’s oil embargo kicks in, no Russian oil will be allowed in. Without a financial rescue plan that would allow it to buy non-Russian oil, the plant faces closure and job cuts.“The impact on the community will be devastating,” Giuseppe Gianni, the mayor of Priolo, said from his office, lighting a small cigar. Above his desk hung a gold crucifix and an enormous painting of a Madonna and Child under a fig tree. Outside the window is a small pastel-colored playground with a view of the refinery as a backdrop.Mr. Gianni acknowledged that the petrochemical complex had been linked to toxic air, water pollution and cancer, which he said needed to be resolved, but he maintained that closing the refinery would blight the area’s economy.The refinery, which processes more than a fifth of Italy’s crude oil in addition to exports to other countries, employs about 1,000 workers directly. Two thousand more are contractors working on maintenance and mechanical projects. Another 7,500 in the area — from truck drivers to seamen — would be affected by the widespread layoffs.Several other energy and petrochemical companies including Sasol, Sonatrach and Versalis are in the area, and representatives have said that because the plants produce and buy products from one another and share contractors and supply chains, their economic futures are linked.Giuseppe Gianni, the mayor of Priolo, said closing the Priolo refinery would blight the local economy.Gianni Cipriano for The New York TimesWorkers for ISAB taking a bus home after their shift in Priolo.Gianni Cipriano for The New York Times“The effect would be destabilizing for the whole industrial area,” said Carmelo Rapisarda, the head of the industrial sector of the C.G.I.L. trade union in Siracusa, adding that the 35-kilometer industrial hub accounts for half the province’s economy.The looming oil embargo has forced the region to suddenly confront a long-simmering crisis. The European Union’s decision to transition away from fossil fuels to renewable energy sources means that the life span of the ISAB refinery and two others on Sicily’s coast is limited.“The situation was already critical regardless of the war,” Mr. Rapisarda said.Last year, Confindustria Siracusa, the area’s industrial association, proposed a $3 billion conversion plan to develop new clean facilities that could reduce carbon emissions and produce hydrogen. But both the Italian government and the European Union have been reluctant to spend money to help the oil industry transition.Aside from the economic fallout on the region, the refinery is important to Italy’s energy security, said Simone Tagliapietra, a senior fellow at Bruegel, a research group in Brussels. “They cannot let the refinery close down” right away, he said. It is needed “to ensure the provision of oil products, mainly to southern Italy” during the transition.The political situation is complicating the search for a quick solution. Mario Draghi’s national unity government fell in July, and he is in a caretaker role until elections on Sunday. Giorgia Meloni, the hard-right leader of Brothers of Italy, is leading in the polls.Once a vocal admirer of President Vladimir V. Putin of Russia, Ms. Meloni has recently said she supports following the European Union sanctions and sending weapons to Ukraine.Whoever wins the election will inherit the fallout from the oil embargo. But in the meantime, the situation is becoming urgent. To meet the Dec. 5 deadline of ending seaborne imports, the plant would have to start preparing for a shutdown in November and halt deliveries. Various figures, including the outgoing ecological minister, have mentioned the possibility of nationalizing the refinery. In Germany, the government last week took control of three refineries owned by the Russian oil company Rosneft.But Claudio Geraci, vice president of Confindustria Siracusa, dismissed the idea of nationalization as absurd. Mr. Geraci, who is deputy general manager for human resources and external relations at ISAB in Sicily, emphasized that he was speaking solely in his capacity as vice president of the industrial association. “As ISAB’s manager, there is no comment,” he said. In response to queries, press representatives at Lukoil’s headquarters in Moscow declined to comment.Carmelo Rapisarda, a C.G.I.L. union representative, said closing the refinery “would be destabilizing for the whole industrial area.”Gianni Cipriano for The New York TimesA Lukoil gas station near the ISAB Lukoil refinery in Priolo.Gianni Cipriano for The New York TimesMr. Geraci said “the only possibility” was for the government to guarantee a line of credit so that the company could buy crude from non-Russian sources. But he added that “from Confindustria’s point of view, the situation is difficult,” because the Italian government does not want to be seen as helping a Russian company.Local political leaders said there had been interest from potential outside investors. According to union officials, representatives from Crossbridge Energy Partners, a New York-based company that converts traditional energy infrastructure, had recently visited the plant. Crossbridge said it had no comment.Any meaningful and sustainable conversion plan would need significant public investment, said Lucrezia Reichlin, the founder and president of the Ortygia Foundation, a nonprofit devoted to promoting development in southern Italy and located about five miles south of Priolo.Given the region’s important industrial tradition, such an approach makes sense, Ms. Reichlin said. But with the political uncertainty, she added, “I doubt that we’ll have a government that is ambitious enough to look at this situation with a long-term view toward the energy transition.”Ms. Reichlin, who is also an economics professor at the London Business School, said the Italian government was likely to fall back on a familiar and expensive stopgap measure: public assistance for employees who lose their jobs.For now, it seems that workers like Mr. Mauro, politicians like Mayor Gianni and industrial leaders like Mr. Geraci are operating on a wing and a prayer, inveighing against the inaction, while hoping for a last-minute miracle.“It’s like the bank that is too big to fail,” Mr. Mauro said of the refinery and his hope for a bailout. But the precise solution is still murky. “It’s a typical Italian situation,” he added. “I’m sure we will know what happens only at the last moment.”The Bar La Conchiglia, a cafe frequented by refinery workers in Priolo.Gianni Cipriano for The New York Times More

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    EU Leaders Say Putin’s Gas Power Is Weakening

    In Germany and elsewhere, leaders are growing more confident that months of work to stockpile and line up alternate energy sources may help them blunt Russia’s weaponization of exports.BERLIN — Not long after Russian forces invaded Ukraine, another mobilization began. European energy ministers and diplomats started jetting across the world and inking energy deals — racing to prepare for a rough winter should Russia choose to cut off its cheap gas in retaliation for Western sanctions.Since then, President Vladimir V. Putin of Russia has fiddled with the gas tap to Europe repeatedly. Through Gazprom, the Kremlin-controlled gas monopoly, Russia has vastly reduced supplies or suspended them for days at a time — until last week, when it announced that it would indefinitely halt flows through the Nord Stream 1 pipeline that supplies Germany, and through it, much of Europe.Yet when the blow finally came, it provoked more ridicule than outrage among European leaders, who say that by now they would expect nothing less from Mr. Putin and that they have accepted that the era of cheap Russian gas is over, unimaginable as that might have seemed just months ago.In some corners, even as Europe’s leaders scramble to blunt the blow from lower gas supplies and higher prices, there is a growing sense that perhaps Russia’s weaponizing of gas exports is a strategy of diminishing returns — and that Mr. Putin may have overplayed his hand.“It would have been surprising the other way around,” Robert Habeck, Germany’s economy minister, said this week of Russia’s announcement that Nord Stream 1 would remain shut. “The only thing from Russia that is reliable is the lies.”Even the markets seemed to take the latest disruption in stride. After rising 5 percent on the heels of Gazprom’s announcement, prices are now lower than they were at the start of last week.That does not mean that European nations are not feeling the pain, or have skirted the risk that the energy crunch could sow social unrest, fracturing their unity against the Kremlin this winter. But a lot of the damage has already been done, with gas prices several times above anything that would be considered normal and pressure mounting on consumers and businesses.The question remains, then, of just how successful the hard pivot from Russian energy actually is — whether Europe has lined up enough new sources, whether its stockpiles can get it through the winter, whether conservation efforts can make a difference and whether governments can help shield consumers from rising prices.“The only thing from Russia that is reliable is the lies,” said Robert Habeck, right, Germany’s economy minister, with Chancellor Olaf Schulz, center, and Christian Lindner, the finance minister.Tobias Schwarz/Agence France-Presse — Getty ImagesRussian officials are watching and waiting for what they believe is the inevitable collapse of European resolve as the economic pain bites.“I think that the coming winter will show how real their belief is in the possibility of refusing Russian gas,” the Russian energy minister, Nikolai Shulginov, said in an interview with the Russian state-run news agency Tass. “This will be a completely new life for the Europeans. I think that, most likely, they will not be able to refuse.”Russian state news outlets are full of reports of protests in Europe. Italians, Russian state media reported, are being told to boil their pasta for just two minutes before turning off the heat, while Germans are forgoing showers.The message: Sooner or later, the Europeans’ unity against Russia will crumble under the weight of high gas prices, while Russia’s standing has been elevated.“We have not lost anything and will not lose anything,” Mr. Putin said on Wednesday.But increasingly, Europe’s leaders are signaling that, having spent months preparing for this moment, they are ready for the showdown.“Now our work is paying off!” the European Commission president, Ursula von der Leyen, said on Wednesday in Brussels. “At the beginning of the war, Russia’s pipeline gas was 40 percent of all imported gas. Today it is now down to only 9 percent of our gas imports.”That is because European leaders — especially those from Italy and Germany, which rely most on Russian energy — have crisscrossed the globe. From Algeria to Qatar, Senegal, Congo and Canada, they have been negotiating deals to replace Russian supplies.Gazprom’s Orenburg gas processing plant in Russia. Steep energy prices netted the company $41.75 billion profit in the first half of the year — $10 billion of which went to the Kremlin.Alexander Manzyuk/ReutersGermany has also leaned heavily on Norway and the Netherlands, which agreed to extend the life of its biggest gas field to combat the energy crisis.As a result, Germany’s dependency on cheap Russian gas — once more than half its overall gas imports — decreased to less than 10 percent in August.In Italy, consumption from Moscow has dropped to 23 percent from 40 percent.Chancellor Olaf Scholz of Germany and other European leaders are defiantly claiming the end of an era.For decades, dating to the days of the Soviet Union, Moscow had insisted to Germany and others that it was a reliable energy partner, no matter the political context. But now, European leaders say, Mr. Putin has shattered that understanding.“Something that held true throughout the Cold War no longer applies,” Mr. Scholz said last weekend. “Russia is no longer a reliable energy supplier. That is part of the new reality.”That new reality, perhaps, should not have come as such a shock. Mr. Putin’s gas brinkmanship dates to 2004, when Gazprom cut deliveries to Belarus, in a battle for control of a transit pipeline into Western Europe.In 2009, as Ukraine sought NATO membership under a pro-Western president, Mr. Putin ordered a sharp reduction in gas flows through the country; after Ukraine elected a pro-Russian president a year later, the Kremlin rewarded him with a 30 percent cut in natural gas prices.And even before Russia invaded Ukraine, it reduced exports in the summer of 2021, and did not refill Gazprom-owned storage sites in Europe.A compressor station near the German-Polish border for Russian gas through the Yamal-Europe pipeline.Filip Singer/EPA, via ShutterstockSergey Vakulenko, an analyst in Bonn, Germany, who worked for years in Russia’s energy industry, said that over the last two decades Russian officials had seen the geopolitical power that the United States derived from its influence over the global financial system, and sought to harness Russia’s status as a major energy exporter in a similar way.“There was a great desire, as a superpower, to have something similar,” he said. “There was the feeling that oil and gas was the answer.”Yet Russia’s cuts in gas exports to Europe since its invasion of Ukraine are of a different order of magnitude. “This is now just blackmail,” said Mikhail Krutikhin, a Russian energy analyst. “We haven’t seen it on this scale before.”In going so far, Mr. Putin has also invited greater risks. An internal Russian government economic forecast described this week by Bloomberg News estimated that a full cutoff of gas to Europe would cost as much as $6.6 billion in lost tax revenues.But with Gazprom netting a record profit of $41.75 billion in the first half of the year — $10 billion of which it passed on to the Kremlin — that is a cost Mr. Putin has calculated to be acceptable.For Russia, oil is the biggest revenue source, and Mr. Putin may be keen to use gas as a political weapon while he can, said Thomas O’Donnell, an energy expert at the Hertie School, a public policy school in Berlin.“This is where he’s got his biggest leverage to cause the most trouble in the European Union,” Mr. O’Donnell said. He added, “It’s a lever that he knows he’s going to lose in a year — or even maybe after this winter.”And a lot may depend on the severity of the winter. Even if liquid natural gas imports to Europe from other sources continue at their record high rate, a study released this week by the research institute Bruegel estimated that a complete stop to Russian supplies would require all of Europe to cut its consumption by 15 percent.European nations that used to rely on Russian gas imports for big chunks of their domestic energy production have been racing to fill gas storage facilities. Germany’s are now at 86 percent capacity, Italy’s at almost 84 percent.In Germany, large industry players have so far managed to drop their consumption by around 20 percent. A similar amount would have to be shaved off household usage, according to German energy and economy ministry models, should Russian gas remain shut off. If households don’t cut back, Germany’s gas regulator has repeatedly warned, the option could be rationing.Lights switched off in apartments in Frankfurt. German energy officials have repeatedly warned that households must conserve energy or face rationing.Michael Probst/Associated PressEurope is aiming to have enough liquid natural gas solutions in place by next year. Germany recently signed a deal for a fifth floating L.N.G. terminal, while terminals in Belgium, France and the Netherlands are fully booked.The key to surviving this winter in the face of a Nord Stream shutdown will be how well European states work together.So far, only Hungary has signed a deal for additional supplies with Gazprom.France and Germany, in contrast, agreed this week that Paris would send any excess gas to Germany, where it is badly needed, and in return Berlin promised to send its extra electricity.The tricky issue will be what happens should more critical German industry have to cut back, and voters begin to insist supplies not be diverted to neighbors — like the Czech Republic, where 70,000 people already came out in protest of soaring prices. It is a challenge many European leaders may face this winter, warned Annalena Baerbock, Germany’s foreign minister.“That will be the central question that will really put us to the test in the coming months,” Ms. Baerbock said, at a meeting of German ambassadors in Berlin this week. “Will we be able to secure our energy supply for all people in Europe together in solidarity, or not?”Gaia Pianigiani More

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    Trade Between Russia and Britain Falls to Lowest Level on Record

    For the first time since records began, Britain had a month in which it imported no fuel from Russia, as trade between the two countries plummeted following Russia’s invasion of Ukraine, according to British government statistics released on Wednesday.In addition to a sharp decline in imports of Russian fuel in June, imports of other Russian goods also fell that month to the lowest level since Britain’s Office for National Statistics began recording the data in 1997. Imports decreased to 33 million pounds ($39 million), or 97 percent less than the average monthly imports in the year to February, the month when Russia invaded Ukraine.The figures show the extent to which the British government’s economic sanctions against Russia, which came into force in March, are having an effect. Self-sanctioning, where companies voluntarily seek alternatives to Russian goods, was also likely a factor in the steep decline in trade, according to the Office for National Statistics.Exports of most commodities to Russia from Britain also dropped significantly, led by a decline in exports of machinery and transport equipment. The exception was medicine and pharmaceutical products, which increased by 62 percent from the prewar average. These products are exempt from sanctions.Under sanctions, British companies have until the end of the year to end imports of Russian oil and coal and have been encouraged to find alternative sources until then. To make up for the decreased volumes of refined oil from Russia, British companies in recent months have increased imports from Saudi Arabia, the Netherlands, Belgium and Kuwait.Before Russia’s invasion of Ukraine, Britain imported nearly a quarter of its refined oil from Russia, 6 percent of its crude oil imports and 5 percent of its gas imports. (Britain gets about half of its total crude oil imports from Norway.)The European Union has also reduced its purchases of Russian gas ahead of a ban on the vast majority of the bloc’s imports of Russian oil, which will come into force at the end of the year. The European Union also agreed to curb natural gas consumption from Russia. In the final week of June, total E.U. gas imports from Russia were down 65 percent from a year earlier, according to a report by the European Central Bank.Russia is feeling the effect of sanctions. Its economy contracted sharply in the second quarter, declining 4 percent from a year earlier. Sanctions on Russia have led many American and European companies to exit the country and have cut off Russia from about half of its $600 billion reserves of foreign currency and gold.One boost for Russia’s economy has been higher oil prices, which have helped it make up for revenue that would have come from buyers in Europe. India, China and Turkey have stepped up their purchases of Russian crude, providing temporary relief, but once the European Union oil ban comes into full effect, Russia will need to find buyers for roughly 2.3 million barrels of crude and oil products a day, about 20 percent of its average output in 2022, according to the International Energy Agency. More

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    Estonia Never Needed to Import Gas by Ship. Until It Did.

    In Paldiski, Estonia, abandoned Soviet-era bunkers, splattered with graffiti and overgrown with weeds, are a reminder of the centuries-long domination that Russia once exerted over the Baltic region.Now this port city in the northwestern corner of the country is hastily being turned into a bulwark against Russian efforts to politically pressure Europe. Ever since Moscow threatened to withhold natural gas as retribution for countries opposed to its invasion of Ukraine, workers in Paldiski have been constructing an offshore terminal for non-Russian gas at a round-the-clock pace.The project is one piece of Europe’s strategy to quickly wean itself off the Russian energy that is heating homes and powering factories across the continent.The Estonian terminal will serve as a floating dock for a gargantuan processing tanker that will receive deliveries of liquefied natural gas and convert it back into a vapor that can be piped through the existing network that serves the Baltics and Finland. With a scheduled finish date in November, Paldiski is on route to be the first new L.N.G. terminal completed in Europe since the war started.Shipping natural gas in a liquefied form has become Europe’s eureka solution to what the European Commission has labeled “energy blackmail” by President Vladimir V. Putin of Russia. Since the fighting began in late February, 18 new facilities or expansions of existing ones have been proposed in 11 European countries, including Germany, the Netherlands, Italy and Greece, according to Rystad Energy.The L.N.G. project in Paldiski is one of 18 proposed or under expansion in Europe since Russia attacked Ukraine.Marta Giaccone for The New York TimesGiant beams were installed with a floating crane.Marta Giaccone for The New York TimesEuropean leaders have been traveling to the Middle East and Africa — including to some countries previously held at arm’s length because of human rights abuses — to compete for the world’s limited L.N.G. supply or plead for the rapid development of additional sources. Until the war, China, South Korea and Japan were the biggest customers.“L.N.G. is really the only supply element that is able to step up for the coming years” during the transition to more climate-friendly renewable energy sources, said James Huckstepp, head of European gas analysis at S&P Global Commodity Insights.Although the United States and Qatar, the biggest producers of L.N.G., are ramping up operations, it will take at least a couple of years to significantly increase capacity. So businesses and households are bracing for high prices and painful shortages during the cold winter months. Governments have drawn up emergency plans to cut consumption and ration energy amid dark warnings of social unrest.Marti Haal, the founder and chairman of the Estonia energy group Alexela, shakes his head at the feverish race to construct liquefied natural gas terminals. He and his brother, Heiti, proposed building one more than a dozen years ago, arguing that it was dangerous for any country to be solely dependent on Russia for natural gas.“If you would talk with anyone in Estonia in 2009 and 2010, they would call me and my brother idiots for pursuing that,” Mr. Haal said. He was driving his limited-edition Bullitt Mustang, No. 694, in Steve McQueen green, to the site of the terminal in Paldiski that his company is now building. He slowed down to point out the border of a restricted zone that existed before the Soviet Army left in 1994. When Moscow was in control, Paldiski was emptied of its population, turned into a nuclear training center and surrounded by barbed wire.The facility was met with shrugs when it was first proposed over a decade ago. Now construction is on a frenzied pace.Marta Giaccone for The New York TimesAs he drove on, Mr. Haal recalled the debate over building an L.N.G. receiving station: “Everybody we talked to said, ‘Why do we need diversification?’” After all, gas had been reliably arriving through Russian pipelines since the 1950s.Today the brothers are looking more like visionaries. “If at the time, they would have listened to us, we wouldn’t have to run like crazy now to solve the problem,” Mr. Haal said.Mr. Haal, who spent that morning competing in a regatta, always had an entrepreneurial streak — even under Communism. In 1989, as the Soviet Union was dissolving, he and his brother started building and selling car trailers. Mr. Haal said he would drag one on board the ferry to Finland — the fare to bring it by car was too expensive — and deliver it to a buyer at the Helsinki port. He collected the cash and then returned to pay everyone’s salary.When they started selling gas, they named the company Alexela — a palindrome — so that they would have to erect only one sign that could be read by drivers in both directions.Their L.N.G. venture at one point looked like a failure. As it turns out, the millions of dollars and years of frustration meant that when Estonia and Finland agreed in April to share the cost of renting an L.N.G. processing vessel and build floating terminals, the preliminary research and development was already done.In the months leading up to Russia’s invasion, Mr. Haal said, soaring gas prices had already begun to change the economics of investing in an L.N.G. terminal. Now, his major concern is ensuring that the Estonian government completes the pipeline connection to the national gas network on time.Over the years, the question of building more L.N.G. facilities — in addition to the two dozen or so already in Europe — has been repeatedly debated in ports and capitals. Opponents argued that shipping the chilled, liquefied natural gas was much more expensive than the flow from Russia. The required new infrastructure of port terminals and pipes aroused local opposition. And there was resistance to investing so much money in a fossil fuel that climate agreements had eventually targeted for extinction.One of the countries saying no was Europe’s largest economy, Germany, which was getting 55 percent of its gas from Russia.“The general overview was that Europe had more L.N.G. capacity than it needs,” said Nina Howell, a partner at the law firm King and Spalding. After the invasion, projects that had not been considered commercially viable, “and probably wouldn’t have made it, then suddenly got government support.”The first layer of reinforced concrete structure.Marta Giaccone for The New York TimesConcrete line pressure pipes.Marta Giaccone for The New York TimesEstonia, which shares a 183-mile border with Russia, is actually the European country least dependent on its gas. Roughly three-quarters of Estonia’s energy supply comes from domestically produced oil shale, giving it more independence but putting it behind on climate goals.Still, like the other former Soviet republics Lithuania and Latvia, as well as former Communist bloc countries like Poland, Estonia was always more wary of Russia’s power plays.Two days before the war started, the Estonian prime minister chided “countries which don’t border Russia” for not thinking through the risks of depending on Russian energy.By contrast, Poland moved to quit itself of Russian natural gas and began work in 2013 on a pipeline that will deliver supplies from Norway. It is scheduled to be completed in October. Lithuania — which at one point had received 100 percent of its supply through a single pipeline from the Russian monopoly Gazprom — went ahead and completed its own small L.N.G. terminal in 2014, the year that Russia annexed Crimea.Liquefied natural gas terminals are not the only energy source that European countries once disdained and are now compelled to explore. In a hotly disputed decision, the European Parliament last month reclassified some gas and nuclear power as “green.” The Netherlands is re-examining fracking. And Germany is refiring coal plants and even rethinking its determined rejection of nuclear energy.In Paldiski, enormous wind turbines are along the coast of the Pakri peninsula. On this day, gusts were strong enough not only to spin the blades but also to halt work on the floating terminal. A giant tracked excavator was parked on the sand. At the end of a long skeletal pier, the tops of 200-foot-long steel pipes that had been slammed into the seabed poked up through the water like a skyline of rust-colored chimney stacks.Paldiski Bay, which is ice-free year-round and has direct access to the Baltic Sea, has always been an important commercial and strategic gateway. Generations before the Soviets parked their nuclear submarines there; the Russian czar Peter the Great built a military fortress and port there in the 18th century.Now, the bay is again playing a similar role — only this time not for Russia.Remains of a Soviet-era bunker. The region that will boost the energy security of the Baltics was used as a nuclear training site when Moscow was in charge.Marta Giaccone for The New York Times More

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    Companies Brace for Impact of New Forced Labor Law

    Billions of dollars could be at stake as a law banning imports of products from China goes into effect.WASHINGTON — A sweeping new law aimed at cracking down on Chinese forced labor could have significant — and unanticipated — ramifications for American companies and consumers.The law, which went into effect on Tuesday, bars products from entering the United States if they have any links to Xinjiang, the far-western region where the Chinese authorities have carried out an extensive crackdown on Uyghur Muslims and other ethnic minorities.That could affect a wide range of products, including those using any raw materials from Xinjiang or with a connection to the type of Chinese labor and poverty alleviation programs the U.S. government has deemed coercive — even if the finished product used just a tiny amount of material from Xinjiang somewhere along its journey.The law presumes that all of these goods are made with forced labor, and stops them at the U.S. border, until importers can produce evidence that their supply chains do not touch on Xinjiang, or involve slavery or coercive practices.Evan Smith, the chief executive at the supply chain technology company Altana AI, said his company calculated that roughly a million companies globally would be subject to enforcement action under the full letter of the law, out of about 10 million businesses worldwide that are buying, selling or manufacturing physical things.“This is not like a ‘picking needles out of a haystack’ problem,” he said. “This is touching a meaningful percentage of all of the world’s everyday goods.”The Biden administration has said it intends to fully enforce the law, which could lead the U.S. authorities to detain or turn away a significant number of imported products. Such a scenario is likely to cause headaches for companies and sow further supply chain disruptions. It could also fuel inflation, which is already running at a four-decade high, if companies are forced to seek out more expensive alternatives or consumers start to compete for scarce products.Understand the Supply Chain CrisisThe Origins of the Crisis: The pandemic created worldwide economic turmoil. We broke down how it happened.Explaining the Shortages: Why is this happening? When will it end? Here are some answers to your questions.Lessons From History: Henry Ford believed short-term interests must not squeeze out investment in a business’ resilience. His management philosophy yields powerful insights about the current crisis.A Key Factor in Inflation: In the U.S., inflation is hitting its highest level in decades. Supply chain issues play a big role.Failure to fully enforce the law is likely to prompt an outcry from Congress, which is in charge of oversight.“The public is not prepared for what’s going to happen,” said Alan Bersin, a former commissioner of U.S. Customs and Border Protection who is now the executive chairman at Altana AI. “The impact of this on the global economy, and on the U.S. economy, is measured in the many billions of dollars, not in the millions of dollars.”Ties between Xinjiang and a few industries, like apparel and solar, are already well recognized. The apparel industry has scrambled to find new suppliers, and solar firms have had to pause many U.S. projects while they investigated their supply chains. But trade experts say the connections between the region and global supply chains are far more expansive than just those industries.According to Kharon, a data and analytics firm, Xinjiang produces more than 40 percent of the world’s polysilicon, a quarter of the world’s tomato paste and a fifth of global cotton. It’s also responsible for 15 percent of the world’s hops and about a tenth of global walnuts, peppers and rayon. It has 9 percent of the world’s reserves of beryllium, and is home to China’s largest wind turbine manufacturer, which is responsible for 13 percent of global output.Direct exports to the United States from the Xinjiang region — where the Chinese authorities have detained more than a million ethnic minorities and sent many more into government-organized labor transfer programs — have fallen off drastically in the past few years. But a wide range of raw materials and components currently find their way into factories in China or in other countries, and then to the United States, trade experts say.In a statement on Tuesday, Gina Raimondo, the secretary of commerce, called the passage of the law “a clear message to China and the rest of the global community that the U.S. will take decisive actions against entities that participate in the abhorrent use of forced labor.”The Chinese government disputes the presence of forced labor in Xinjiang, saying that all employment is voluntary. And it has tried to blunt the impact of foreign pressure to stop abuses in Xinjiang by passing its own anti-sanctions law, which prohibits any company or individual from helping to enforce foreign measures that are seen as discriminating against China.Though the implications of the U.S. law remain to be seen, it could end up transforming global supply chains. Some companies, for example in apparel, have been quickly severing ties to Xinjiang. Apparel makers have been scrambling to develop other sources of organic cotton, including in South America, to replace those stocks.But other companies, namely large multinationals, have made the calculation that the China market is too valuable to leave, corporate executives and trade groups say. Some have begun walling off their Chinese and U.S. operations, continuing to use Xinjiang materials for the China market or maintain partnerships with entities that operate there.Uyghur workers at a factory in Xinjiang, China, in 2019. A wide range of raw materials and components from Xinjiang currently find their way into factories in China or in other countries, and then to the United States.Gilles Sabrié for The New York TimesIt’s a strategy that Richard Mojica, a lawyer at Miller & Chevalier Chartered, said “should suffice,” since the jurisdiction of U.S. customs extends just to imports, although Canada, the United Kingdom, Europe and Australia are considering their own measures. Instead of moving their operations out of China, some multinationals are investing in alternative sources of supply, and making new investments in mapping their supply chains.How the Supply Chain Crisis UnfoldedCard 1 of 9The pandemic sparked the problem. More