Russia buys 70% of its chips from China, but the U.S.’s blockade of American semiconductors will still hit Putin hard

February 25, 2022, 8:50 AM UTC

Late on Thursday, in response to Russian President Vladimir Putin’s invasion of Ukraine, U.S. President Joe Biden unveiled a second tranche of sanctions against Russia’s business interests that contained a dramatic broadside: a complete embargo on selling semiconductors to Russia.

“We’re going to impair their ability to compete in the 21st-century economy,” Biden said on Thursday, announcing sanctions that will cut Russia off from the computer chips that power cars, smartphones, and even missiles.

Under Biden’s new embargo, any chip developed with American technology is prohibited from sale to Russia. According to U.S. Assistant Secretary of Commerce for Industry and Security Thea Rozman Kendler, “Even most products made overseas using sensitive U.S. technology will be restricted for export to Russia.”

“Russia’s access to cutting-edge U.S. and partner country technology will halt. Its defense industrial base and military and intelligence services will not be able to acquire most Western-made products,” Kendler said.

Although the U.S. has only a relatively small base of semiconductor manufacturing, U.S. companies are leaders in the field of semiconductor design and chip patents. Many foreign manufacturers rely on U.S. intellectual property to design their own chips.

The White House hinted it would target Russia’s semiconductor supply in response to a Ukrainian invasion in the weeks prior to the Russian attack but has never deployed such a broad measure before.

The U.S. previously used the same law to block the sale of chips to Chinese telecom equipment manufacturer Huawei Technologies, which decimated the group’s smartphone business. Huawei has dropped from the world’s largest smartphone supplier to not even ranking in the top five.

“Some of the most powerful impacts of our actions will come over time as we squeeze Russia’s access to finance and technology for strategic sectors of its economy and degrade its industrial capacity for years to come,” Biden said.

While the embargo could be devastating for Russia, most global suppliers might hardly notice the cost of compliance. According to the CEO of the U.S. Semiconductor Industry Association (SIA), John Neuffer, “Russia is not a significant direct consumer of semiconductors.”

According to the SIA, Russia accounts for only 0.1% of global chip purchases. Research firm IDC estimates the Russian chip market is worth $50 billion in trade out of a $4.5 trillion global industry.

Russia purchases roughly 70% of its chip supplies from China, which will likely ignore Biden’s embargo. But China can produce only relatively low-end chipsets, which are good for automobiles and home appliances but won’t be smart enough to guide Russian missiles.

Russia and Ukraine are major suppliers of neon gas and palladium, which are both vital components in chip manufacturing. Some analysts fear Russia could leverage its position in the market to retaliate against the U.S. chip sanctions.

But many chipmakers began to diversify neon sourcing after Russia invaded Ukraine last time, in 2014, causing a 600% spike in neon pricing. Now the chipmakers are better prepared to switch suppliers.

“Unless Ukraine becomes a long, drawn-out war, lasting over a month, there should be little impact on neon supplies,” says Morningstar analyst Phelix Lee.

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