America threatens novel export control to deprive Russia of key tech components that would damage AI and aerospace industries if Putin invades Ukraine
The Biden Administration may also opt to apply the control more widely, potentially restricting Russia’s access to semiconductors, and therefore Russian citizens of smartphones, games consoles and tablets, government officials said.
Such export controls that expand US sanctions beyond financial targets have only been deployed once before – to nearly bring down Chinese tech giant Huawei.
The measure, known as the foreign direct product rule, contributed to Huawei experiencing its first-even annual revenue drop that fell almost 30 percent last year.
Huawei’s supply of essential microchips was strangled. While they are made outside the US, they require US software or tools.
The US and the EU already have sanctions on Russia’s energy, financial and defence sectors, with tensions between Moscow and Western powers raising the prospect of new economic sanctions being imposed if Russia attacks neighbouring Ukraine.
The White House is also floating the idea of curbs on Russia’s biggest banks and has previously mooted measures targeting Moscow’s ability to convert roubles into dollars and other currencies.
Washington could also target the state-backed Russian Direct Investment Fund.
Similar restrictions on technology were deployed during the Cold War, when the United States and other Western nations maintained severe technology sanctions on the Soviet Union, keeping it technologically backward and crimping growth.
The United States has threatened to impose a novel export control to deprive Russia of key tech components that would damage AI and aerospace industries if Russia were to invade Ukraine. The Biden Administration may also opt to apply the control more widely, potentially restricting Russia’s access to semiconductors. Pictured: Biden speaking on Friday
Now, the White House has told the U.S. chip industry to be prepared for new restrictions on exports to Russia if Moscow attacks Ukraine, sources said, potentially blocking the country’s access to global electronics supplies.
Russian industries – such as civil aviation, maritime and high technology – could all be impacted, and are areas which Putin has big ambitions for.
‘The power of these export controls is we can degrade and atrophy the capacity of these sectors to become a key source of growth for the Russian economy,’ a senior source in the Biden administration told The Washington Post.
Will Hunt, an analyst with Georgetown University’s Center for Security and Emerging Technology, told the newspaper cutting off Russia’s chip imports ‘would invariably hit the Russian leadership’s high-tech ambitions, whether in artificial intelligence or quantum computing.’
However, introducing these controls could face resistance from US and European businesses that fear using them could lead to Russian retaliation in other sectors.
There is also concern that foreign companies could work to design their own technologies and thus reduce their dependence on American technology.
The fear stems from the fact that imposition of such controls on an entire industry is unprecedented, with the move only being used against a single company – Huawei.
‘It’s like a magic power — you can only use it so many times before it starts to degrade,’ Robert D. Atkinson, president of Think Tank Information Technology and Innovation Foundation told The Washington Post. ‘Other countries will say, ‘Oh, man, the U.S. has total control over us. We’d better find alternatives.’
Nevertheless, a combination of financial and technological restrictions on Russia would be damaging both immediately and in the long-term.
The US and the EU already have sanctions on Russia’s energy, financial and defence sectors, with tensions between Moscow and Western powers raising the prospect of new economic sanctions being imposed if Russia attacks neighbouring Ukraine. Pictured: Putin on Jan. 12
Financial restrictions on Russia’s largest banks and to its key industries would likely be felt first, experts have said, driving up Russian inflation and devaluing the ruble.
Export controls would have a more long-term, cumulative effect, driving up the price on consumer electronics and hitting the pockets of Russian citizens.
Use of the foreign direct product rule could also damage Russia’s military.
The Kremlin’s forces rely on a specific type of chip called Elbrus. It is designed in Russia but is manufactured in Taiwan at a chip factory called TSMC.
The United States barred TSMC from supplying chips to Huawei. Doing the same for the Russian military would be ‘devastating,’ electronics expert Kostas Tigkos at UK-based Janes Group told The Post.
Kremlin officials downplayed the potential impact of such controls, with Russian state-owned defense and tech industry conglomerate Rostec saying the country had begun to make components on its own.
China could also provide a route for Russia to ease the impact of any sanctions, with the country supplying Russia with 70 percent of its computer and smartphone imports in 2020.
The United States barred TSMC (headquarters pictured in Taiwan) from supplying chips to Huawei. Doing the same for the Russian military would be ‘devastating,’ electronics expert Kostas Tigkos at UK-based Janes Group told The Washington Post
The White House has told the U.S. chip industry to be prepared for new restrictions on exports to Russia if Moscow attacks Ukraine, sources said, potentially blocking the country’s access to global electronics supplies. Pictured: People look at a semiconductor on display in China
Meanwhile, President Joe Biden could deploy up to 50,000 US troops as well as aircraft and warships to eastern Europe to counter a Russian military build-up that has sparked fears Vladimir Putin is about to invade Ukraine.
The plan would see between 1,000 and 5,000 soldiers sent to NATO nations such as Lithuania, Estonia and Latvia, which border Russian territory.
Troop numbers could then be increased up to 50,000 if the security situation deteriorates, backed up by fresh deployments of ships and aircraft.
Pentagon officials presented the plan to Biden during a summit at Camp David over the weekend, convened to discuss military options to deter an attack by Russia after the threat of sanctions largely fell on deaf ears.
The plan would not involve American troops deployed directly to Ukraine, with Biden thought to be loathe to enter another conflict following his disastrous withdrawal of US troops from Afghanistan last year, the New York Times reports.
The Russian military is building up near Ukraine, with an estimated 100,000 troops, tanks, artillery and heavy equipment near the border.
Biden is due to make a call on military measures as soon as this week, the paper adds, even as high level talks between Washington and Moscow continue – with the US due to submit a written response to Russian security demands.
Amid warnings from the Pentagon that an invasion is ‘imminent’, families of US diplomats stationed in Ukraine were ordered to leave the country.
Non-essential embassy staff were also offered a route out of the country due to ‘increased threats of Russian military action’.
The UK has also started withdrawing diplomats and their families from Ukraine.
The European Union has also threatened ‘massive’ sanctions and U.S. Senate Democrats have unveiled a bill to impose sanctions on Kremlin officials, military leaders and banking institutions if Moscow engages in hostilities against Ukraine.
Russia, which has massed tens of thousands of troops near Ukraine’s borders but denies planning to invade the former Soviet republic, has been subject to sanctions since its 2014 annexation of Crimea from its neighbour.
Further punitive measures were added after a former Russian spy was poisoned in Britain in 2018 and following an investigation into alleged Russian meddling in the 2016 U.S. presidential election won by Donald Trump.
Russia has denied any role in the poisoning of ex-spy Yuri Skripal and his daughter, and denies trying to interfere in foreign elections.
An instructor trains members of Ukraine’s Territorial Defense Forces, volunteer military units of the Armed Forces, in a city park in Kyiv, Ukraine, Saturday, Jan. 22, 2022
According to former U.S. State Department economist Mark Stone, sanctions applied to individual firms often cause sector-wide pain, as they make investors worry that the curbs will be widened or that they will be unable to differentiate.
Sanctioning all transactions with Russian banks and freezing assets would be ‘more impactful and more targeted’ than a cut-off from the SWIFT global messaging system, said Brian O’Toole, a fellow at the Atlantic Council think tank.
Targeting Russia’s access to SWIFT, which is widely used in international financial transactions, would become useful really only following broad financial sanctions by the United States, Britain and the EU, O’Toole said.
Sanctioning individuals via asset freezes and travel bans is a commonly used tool and can sometimes resonate widely.
Britain imposed sanctions in April 2021 on 14 Russians under a law giving the government the power to penalise those it says are credibly involved in the most serious corruption abroad.
The bill unveiled by Senate Democrats foresees sweeping sanctions on top Russian officials including President Vladimir Putin.
Kremlin spokesman Dmitry Peskov said the idea of imposing sanctions on the Russian president would be tantamount to severing relations between Moscow and Washington.
One of the harshest measures would be to disconnect the Russian financial system from SWIFT.
SWIFT, used by more than 11,000 financial institutions in over 200 countries, is a Belgium-based cooperative governed by a 25-member board, including Eddie Astanin, chairman of Russia’s Central Counterparty Clearing Centre (NCC).
There is a precedent: In March 2012, SWIFT disconnected Iranian banks as international sanctions tightened against Tehran over its nuclear programme – a move that saw the country lose half its oil export revenues and 30% of foreign trade, according to think tank Carnegie Moscow Center.
Iran’s economy is smaller and not as linked-up internationally as the Russian economy, whose interconnectedness with the West has worked as a shield.
The United States and Germany would stand to lose the most, as their banks are the most frequent SWIFT users with Russian banks, according to Maria Shagina at the Carnegie Moscow Center.
Calls to cut Russia’s SWIFT access were mooted in 2014 when Moscow annexed Crimea, prompting Moscow to develop an alternative messaging system, SPFS.
The number of messages sent via SPFS reached around 2 million, or one-fifth of Russian internal traffic, in 2020, according to the central bank, which aims to increase this to 30% in 2023.
However, the SPFS system, which has size limits on messages and is operational only on weekdays, has had a hard time picking up foreign members, Shagina wrote in a 2021 paper.
The Atlantic Council’s O’Toole said cutting Russia off from SWIFT would cause immediate disruption but the impact would diminish over time.
‘Some payments would be delayed and there may be increased cost in making new ones, but broadly speaking there is unlikely to be a massive collapse of Russian trade so long as that trade remains legal/not sanctioned,’ O’Toole said.
In Europe, Chancellor Olaf Scholz has signalled that Germany would be ready to discuss suspending the Nord Stream 2 pipeline project – intended to bring gas under the Baltic Sea from Russia to Germany – if Moscow attacked Ukraine.
The pipeline has been built but has not yet secured regulatory approval. It has faced opposition from the United States and caused concern among some European politicians that it will increase Europe’s dependence on Russia for energy supplies.
Russia has said that both Europe and Russia will gain from Nord Stream 2 and that Germany should not ‘politicise’ the project.
Access to Russian bonds has become increasingly restricted and curbs could be tightened further, with a ban on secondary market participation floated as one option.
In April 2021, U.S. President Joe Biden banned U.S. investors buying new Russian rouble bonds – OFZs as they are known – over accusations of election meddling.
Sanctions imposed in 2015 made future Russian dollar debt ineligible for many investors and indexes such as JPMorgan’s EMBI Global.
Those measures have cut Russia’s external debt by 33% since early 2014 — from $733 billion to $489 billion in the third quarter of 2021. Lower debt improves a country’s balance sheet on the surface, but deprives it of financing sources that could contribute to economic growth and development.