US threatens to use new export controls to harm Russia’s strategic industries if Moscow invades Ukraine
The Biden administration threatens to use new export controls to harm strategic Russian industries, from artificial intelligence and quantum computing to civilian aerospace, if Moscow invades Ukraine, officials say administration.
The administration could also decide to apply the control more broadly in a way that potentially deprives Russian citizens of certain smartphones, tablets and video game consoles, officials said.
Such moves would stretch the reach of US sanctions beyond financial targets to deploying a weapon used only once before – to nearly cripple Chinese tech giant Huawei.
The weapon, known as the foreign direct proceeds rule, helped Huawei suffer its first-ever annual revenue drop, a stunning 30% drop last year, analysts said.
The appeal of using the foreign direct proceeds rule stems from the fact that virtually everything electronic these days includes semiconductors, the tiny components on which all modern technology depends, from smartphones to jets to quantum computers – and that there is hardly a semiconductor on the planet that is not made with American tools or designed with American software. And the administration could try to force companies from other countries to stop exporting such goods to Russia through this rule.
“This is a slow throttle from the US government,” technology analyst Dan Wang of Gavekal Dragonomics, a research firm in Shanghai, said of Huawei. The rule reduced the company’s supply of necessary microchips, which were manufactured outside the United States but with American software or tools.
Now officials in Washington say they are working with European and Asian allies to craft a version of the rule that would seek to stop the flow of crucial components to industries for which Russian President Vladimir Putin has big ambitions, such as civil aviation, the navy and high technology. .
“The power of these export controls is that we can degrade and atrophy the ability of these sectors to become a key source of growth for the Russian economy,” said a senior Biden administration official, who like others in this report spoke on condition of anonymity to discuss internal deliberations.
But the effort could face headwinds from U.S. and European business interests who fear the use of export controls could lead to Russian retaliation in other areas — and ultimately push foreign companies to seek to engineer American technology from their products. Indeed, extending the rule beyond a single company like Huawei to an entire country or entire sectors of a country is unprecedented.
“It’s like a magic power – you can only use it so many times before it starts to decay,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a think tank. “Other countries will say, ‘Oh man, the United States has total control over us. We better find alternatives.
Russia is vulnerable because it does not produce consumer electronics or chips in large quantities, analysts say. In particular, it does not manufacture the high-end semiconductors needed for edge computing, an area dominated by Taiwan, South Korea, the United States, Europe and Japan.
Cutting the country’s chip imports “would invariably hit the high-tech ambitions of Russian leaders, whether in artificial intelligence or quantum computing,” said Will Hunt, an analyst at the Center for Security and Emerging Technologies at Georgetown University.
The administration has yet to decide whether to restrict export controls to strategic sectors or extend them to everyday devices, officials said. Either way, said Paul Triolo, head of technology policy for the Eurasia Group, “it would amount to weaponizing the US semiconductor supply chain against an entire country.”
The combination of financial sanctions and export controls would inflict immediate and long-term suffering. The impact of financial sanctions, which could apply to Russia’s largest banks as well as civil aerospace, maritime or emerging technology companies, would likely be felt first, experts say. Banking sanctions in particular would likely drive up Russian inflation and trigger a ruble devaluation, they say. Export controls, on the other hand, are getting stronger over time, as the cumulative effect of companies cutting off sales to Russia begins to hurt industrial production.
“If the goal is to impose severe and crushing costs on the Russian economy, the combination of sanctions against major Russian banks and export controls would go a long way towards that, absolutely,” said Kevin Wolf, a former senior Commerce Department official who once headed the agency that enforces export controls.
If the restrictions are applied on a large scale, they could also push up prices for consumer electronics, analysts say.
The administration says it could also hit Russia with an export ban similar to those on Iran, Cuba, Syria and North Korea. Such a ban, experts say, would likely apply to basic electronics, aircraft parts, telecommunications items and software. But the United States exports relatively little in this area to Russia, so the measure would have limited effect unless other countries impose their own similar bans.
Germany, which is Russia’s biggest trading partner in Western Europe and heavily dependent on Russian energy, is in close talks with the United States over sanctions, an embassy official said. Germany, declining to comment further.
According to Kostas Tigkos, an electronics expert at Kostas Tigkos, an electronics expert at Janes Group, a UK-based defense intelligence provider.
If the United States banned TSMC from supplying these chips to Russia, as it successfully prevented TSMC from supplying Huawei, it would have a “devastating effect”, Tigkos said.
In a statement, TSMC said it “complies with all applicable laws and regulations” and has implemented “a rigorous export control system … to ensure compliance with export control restrictions.”
Analysts say Western multinationals would likely comply with export controls. All US chipmakers include clauses in their contracts requiring customers to follow US export rules. The U.S. also has a mighty cudgel to enforce compliance: it could place all fraudulent companies on the Commerce Department’s Entity List, a sort of blacklist that effectively blocks U.S. companies from selling their technology to them. .
Russian government officials played down the potential impact.
Russian defense and technology industry conglomerate Rostec said in a statement that while some foreign components are used in civilian products, Russia has started manufacturing many components itself. “The potential imposition of additional sanctions will primarily affect the interests of US companies working for export,” Rostec said. “But we succeeded and we will succeed again, but not immediately, but very quickly – we have proven that more than once.”
China could also supply an exhaust valve to Russia, analysts say.
The country is a major electronics supplier to Russia. In 2020, it accounted for some 70% of Russian imports of computers and smartphones, according to the Peterson Institute for International Economics. According to market research firm International Data Corporation, three of the top five smartphone brands in Russia are Chinese.
Liu Pengyu, spokesperson for the Chinese Embassy in Washington, hinted that Beijing would not look kindly on US extraterritorial control. “China is always opposed to unilateral sanctions by any country and the so-called long-arm jurisdiction over other countries based on national law,” he said in a statement.
Chinese manufacturers could choose to continue selling in Russia even if they use American technology in their products, and it would be difficult, for example, to monitor Chinese smartphone sales in Russia, said IDC analyst Simon Baker.
Experts, however, said there are ways to control non-compliance. The Commerce Department often receives advice from companies about competitors breaking the rules. Its investigators scan the shipment data. They also obtain intelligence shared by other US agencies.
If Chinese companies end up supplying Russia in violation of the rule, that would leave Washington with a major diplomatic dilemma: Should they be punished, even if they make ordinary – not military – goods?
After the Trump administration applied the foreign direct proceeds rule to Huawei in August 2020, the company’s smartphone sales plummeted. Earlier in the year, it was the world leader in such sales. Today, it fell to 10th place, according to IDC.
The most important goal now is deterrence, officials and analysts said, and that means threatening the toughest sanctions — such as separating Russia’s biggest banks from the U.S. financial system, said assistant researcher Edward Fishman. at the Center for a New American Security. Export controls wouldn’t have such an immediate effect, said Fishman, a former State Department official in the Obama administration.
But, he says, they are a good decision.
“The United States has no interest in helping Russia’s technological and industrial capacity,” he said, “as long as Putin uses it to intimidate his neighbors and attack democracy.”
Isabelle Khurshudyan and Mary Ilyushina of The Washington Post in Moscow contributed to this report.
US President Joe Biden, left, and Russian President Vladimir Putin. (Christian Petersen, Getty Images/TNS)