Report: Where does Russia get its Microchips?
Authors: Michaël Grauwde and Nazarii Cherviak.
Editors: Emma Urbanova
With the imposition of heightened sanctions on the technology sector of the Russian Federation, the Kremlin finds itself facing significant obstacles in its quest to procure microchips for the purpose of advancing its conquest of Ukraine. These microchips serve as indispensable components across a wide range of military assets, ranging from Tanks and Attack Helicopters to targeting systems, playing a crucial role in ensuring their accurate and reliable functioning of these assets.
Given the gravity of the situation, it becomes imperative to delve into the investigation of how and from where Russia obtains its much-needed microchips. Amidst the sanctions-induced limitations, the Kremlin has been forced to explore alternative avenues and sources to meet its requirements.
The Tech Imports to Russia
The most notable change in Russian tech imports brought on by Russia's invasion has been the diminished share in tech coming from Europe.
Sources: Macrobond, UN Comtrade, BOFIT
Where does Russia get its chips?
There are 3 main ways how Russia will get its microchips:
Domestic Production
Regular Imports
Unorthodox methods, such as getting chips from consumer products and appliances.
Each point shall be investigated individually.
Domestic Production
Domestic production of chips in Russia is limited, with Mikron and Angstrem being the only major companies in the industry. Both have faced significant setbacks due to a military focus on chip production, and Russia's inability to match the success of Western commercial entities in this sector. While the first company barely developed chips 20-30 years behind in capability, the second one went bankrupt. The military focus in chip production has meant failure for Russia compared to the success of Western commercial entities, dating back to Soviet times.
Regular Imports
Western Countries/Allies
Imports from Western countries are now subject to export restrictions and supply from countries like Taiwan, USA, Germany, and Japan has dried up dramatically. Germany especially was a significant exporter of chips to Russia before the full-scale invasion.
However, the river is not completely dry. Between April and October 2022, an Estonian company Elmec OÜ exported to Russia USD 17 million worth of electronic components including chips. The company's GM said most of those goods were part of contracts signed before the war.
China
Sources: General Administration of Customs, Comtrade
The supply of chips from Western countries and allies has diminished significantly due to export restrictions. Imports from China have become the primary source, with over 70% of Russia's semiconductors coming from China and demand increases. However, there are still some problems with China being the main microchip supplier due to several factors:
China is facing its own chip shortage thanks to Zero-Covid and supply chain issues.
Russians report 40% failure rates and slower speed on Chinese chips (pre-invasion 2%) - speculations that the Chinese dump defective product in Russia.
Russia is also buying from unofficial Chinese chip markets as major businesses have left Russia.
Unorthodox Methods
The many ways of sanctions bypass:
According to Trap Aggressor (18), from 2014 on, Russia has found 31 unique ways to avoid sanctions and restrictions: abusing weak points in sanctions policy, hiding data on companies, implementing legislative changes, fulfilling contracts that were signed before sanctions were enforced, using offshore companies, etc.
Some of these ways might include:
Front companies
Third party suppliers
Transshipments
Consumer tech exceptions
Front Companies
One of the ways in which Russia is receiving its microchips is through different front companies. These are fully operational companies that serve to conceal and obscure the true activities of other actors. They are different from shell companies, which are usually dormant companies with little activity. It is important to note that most of these companies are based in Hong Kong and Turkey.
Pixel Devices Ltd
One case that has drawn attention is that of "Pixel Devices Ltd,"(1) a company that was founded in 2017 by a Russian citizen with a Hong Kong passport.
Pixel Devices is owned by a Singaporean company called Asia Global Neolink Pte Ltd, which is, in turn, owned by a Seychelles-based company called White Wings Ltd. These are essentially front companies packaged in shell companies, which makes it difficult to trace the true ownership and the ultimate beneficiaries of the sales.
Since April 2022, Pixel Devices has exported over USD 200 million worth of electronics to Russia, most of which are likely to be microchips used in military equipment. The company's primary customer is a St. Petersburg-based Russian company called "OOO KompLiga." In fact, OOO KompLiga almost exclusively buys from Pixel Devices.
The key assumption is that Pixel Devices is likely to be sourcing microchips from countries other than Russia, such as China or South Korea, and then exporting them to Russia. It is also possible that Pixel Devices is producing the microchips itself, although this seems less likely given the company's relatively recent founding.
The fact that Pixel Devices is using front companies packaged in shell companies suggests that the company may be trying to hide its true ownership and the ultimate beneficiaries of its sales. This could indicate that Pixel Devices is involved in illicit activities, such as evading sanctions.
SMT-iLogic LLC
Russia is also obtaining microchips used in their war efforts in Ukraine through a Hong Kong-based company called SMT-iLogic LLC. The company has already been placed under sanctions [4] by the State Secretariat for Economic Affairs and mentioned in a report by Reuters [5].
SMT-iLogic has been sourcing its microchips from a range of Hong Kong companies, some of which have a history of evading sanctions and supplying military equipment to the Chinese government. These microchips are then exported to Russia through a single importer based in St. Petersburg with close ties to the Special Technology Centre. The importer, SMT-iLogic, shares an address with a drone manufacturer and has other business connections as well.
The owner of the importer, Anton Trofimov, is a Russian expatriate who graduated from a Chinese university and has diverse business interests in China, as well as a company in Toronto, Canada. Despite the sanctions and reports of their activities, business has been booming for SMT-iLogic this year. In the seven months since the Russian invasion of Ukraine in February, Asia-Pacific (the largest supplier to iLogic) has exported about $5.2 million worth of microchip parts, an increase in percentage from about $2.3 million in the same period in 2021.
Some of SMT-iLogic’s largest suppliers since the start of Russia’s invasion have been a range of Hong Kong, [8] companies, some with a history of evading sanctions and providing military equipment to the Chinese government. [2]
Фортап( Fortap)
The Russian importer Fortap (Фортап), based in St. Petersburg, has been circumventing sanctions imposed on Russia by importing millions worth of electronics, including U.S. computer parts. According to Russian customs records, the company, which was founded by a Russian businessman in April, has imported at least $138 million worth of electronics since its inception.
One of Fortap's biggest suppliers is a Turkish company, Bion Group Ltd Sti, which has expanded into wholesale electronics from its former textile trading business. This company has purchased electronics from Bion Group Ltd for over 138 million dollars [3].
The import of electronics from U.S. companies, such as Intel Corp, Advanced Micro Devices Inc (AMD), Texas Instruments Inc, and Analog Devices Inc, as well as the German company Infineon AG, are banned under the sanctions imposed on Russia. Despite this, these products have been imported into Russia via Fortap's operations.
The Russian importer's operations have raised concerns about the effectiveness of sanctions imposed on Russia and the need for stronger measures to be put in place to prevent their circumvention. Similarly, it is alarming that banned products continue to be supplied to Russia from Hong Kong, Turkey, and other places.
Transshipments
It is crucial to understand that Transshipment is a common technique used by countries to evade sanctions imposed by other nations. Russia is no exception, and it has been accused of using Transshipment to import computer chips and other goods that are under sanctions or export controls.
Transshipment is a process in which goods are shipped through an intermediary country, usually a neutral one, to hide the true destination of the goods. This allows the goods to bypass export controls and sanctions imposed by the destination country. In the case of computer chips, Russia has been accused of transshipping chips from China and other countries to hide the fact that they are ultimately intended for Russian companies that are under sanctions or export controls.
Such countries are Hong Kong, Turkey, Kyrgyzstan, Serbia, Armenia, and Azerbaijan.
Consumer Tech Exceptions
Russians are also harvesting chips from the different consumer tech which is being exported to Russia from various countries. The following are some of those chips which are needed by Russians:
LAN9221/LAN9221i: This chip is a low-power, small-footprint Ethernet controller commonly used in networking applications. It is often found in smart speakers, televisions, and other Internet-connected devices. Some examples of products that use the LAN9221/LAN9221i chip include the Google Nest Mini and the LG OLED65GXPUA television, as well as Microsoft Xbox One and Sony Bravia KD-49XE8004 (television).
Xilinx XC6VLX130T-3FFG1156C: This chip is a high-end field-programmable gate array (FPGA) commonly used in high-performance computing applications. It is often found in laptops, gaming consoles, and other high-end computing devices. Some examples of products that use the Xilinx XC6VLX130T-3FFG1156C chip include the Dell Precision 5820 Tower workstation, the Xbox One X gaming console, Dell Latitude E7440, and Sony PlayStation 3.
TEXAS INSTRUMENTS WIFI MODULE (WL18MODGB): This chip is a small, low-power WiFi module commonly used in Internet of Things (IoT) devices. It is often found in smart speakers, refrigerators, and other connected devices. Some examples of products that use the TEXAS INSTRUMENTS WIFI MODULE chip include the Amazon Echo Dot and the LG Smart InstaView refrigerator.
Gumstix GUM3703FEY: This chip is a small, low-power computer-on-module (COM) commonly used in embedded systems. It is often found in industrial control systems, robotics, and other specialized applications. Some examples of products that use the Gumstix GUM3703FEY chip include the ABB IRC5 robot controller and the Epos4 compact positioning controller.
SIM800C Cellular module: This chip is a low-cost, low-power cellular module commonly used in IoT devices. It is often found in smart home appliances, such as air purifiers and washing machines. Some examples of products that use the SIM800C Cellular module include the Xiaomi Mi Air Purifier and the Haier HWS80-14636 washing machine.
Why Does Russia Need Chips?
Microchips are one of the many crucial inventions of recent years. They have allowed modern innovations such as computers, smartphones, telephones, car and aircraft components to be developed. More commonly known as CPUs and GPUs, microchips are a driving force in the economy of day-to-day technologies. In late September 2022, reports began to surface from Russia, reporting on the lack of microchips in the Russian military arsenal. While Russia had fired many of their weapons in the early part of the war, the military was beginning to run low on their missile firepower and had come to rely on more Soviet-era munitions. Ukraine, on the other hand, being armed by Western countries, had no issues in receiving more modern military weapons to assist them, a Politico report stated.
A lack of these microchips was a major factor in the lack of modern military weapons that Russia was not receiving. As a result, microchips are an absolute necessity for the Russian government to continue its war against Ukraine. Microchips are used for a wide variety of munitions in the Russian military. For high-tech and precision-based weapons, Texas Instruments chips have been found in various drones used by the military such as Orlan-10 and KUB-BLA, Iskander missiles and KH-101 missiles. Texas Instruments components are found in most high-precision Russian munitions alongside many other companies’ technologies such as Analog or Xilinx. A report by Business Insider found that the situation in the Russian military is so bad that the military has begun using old weapons and non-military hardware to buffer the chip shortage.
In this section, we will look at how the Russian military is obtaining their microchips to continue to make use of their modern weapons in the war.
We will start by examining why Russia needs these weapons in the first place. Put quite plainly, Russia needs high-precision munitions because they have exhausted their existing stockpile. There was, as is evident now, an overestimation in the eyes of the wider military world of the strength and depth of the Russian military. This also extended to the weaponry in the military’s arsenal. Kyrylo Budanov, the Head of the Main Intelligence Directorate of the Ministry of Defense, remarked on the dire situation for the Russians in an interview with Pravda, 24th of October 2022. He mentioned that for Iskanders, there were about 13% left; for Kalibr-Pl, and Kalibr-NK types, there were 43%; and for KH-101 and KH-555 there were about 45% left. From a Russian perspective, these are particularly dangerous numbers, as to drop below a 30% level is already representative of using an emergency reserve of weaponry. While sanctions have a huge import in the restriction of certain technology reaching sanction-afflicted countries, sanctions themselves are not product-specific; rather, they are quite wide-ranging in nature – focusing on financial and economic embargoes and further regulations such as visa restrictions. Export restrictions, in addition to being more product-specific, often concern technologies of strategic importance. A Russian Iskander missile is composed of a variety of foreign-produced goods and with an influx of trade restrictions, it becomes increasingly difficult for the country to continue to produce these missiles on a scale necessary for warfare.
While there were already supply chain crunches due to the Covid-19 pandemic which led to shortages across many commercial products, this has extended to more military technologies. In a globalised economy, the necessities of the global supply chain require the cooperation of technologies from various companies around the world to contribute to the construction of one product. Sanctions by Western countries have focused on these supply chains of microchips with the aim of decreasing military capabilities. More recently, a Politico report expanded on the desperation of the Russian military to receive these technologies. The report found that most of the microchips the military required were microchips manufactured by U.S. firms such as Microchip, Texas Instruments, Intel, Holt, and others. Some were also required from the Japanese firm Renesas and Germany’s Infineon firm. The Russian war effort remains reliant on these technologies.
According to Foreign Policy, due to the Russian war effort, the West expanded export controls that have not been seen since the end of the Cold War. These export controls included banning of the export, the reexport and the transfer of commodities, software, or different technology essential for Russian aerospace, defence, and maritime sectors. In addition, these controls were expanded to foreign-made products using U.S. software and technology. The U.S., similarly, put a full embargo on the export of any goods with U.S. origin to the Russian military and lastly, over 100 entities were added to the U.S. Department of Commerce’s Bureau of Industry and Security’s Entity List (e.g. Rostec, the Russian-owned defense company, headquartered in Moscow), which are subject to broad sanctions.
The Russian military is subject to this microchip scramble not only because they need microchips owing to their own arsenal’s depletion; but as they use Iranian-made drones, which also rely on U.S. based components. Not only are these companies on the U.S. sanctions list; likewise, they can be found on the EU’s sanction list. This prohibits European companies from exporting any dual use items or providing technical or financial assistance to chip manufacturers – Baikal Electronics and MCST (Moscow Center for SPARC Technologies). These companies are also on the banned list of the U.K.’s sanction list, in addition to Mikron Group, the country’s leading chip maker. The prohibition of dual use items is significant as this bans the export of goods which could be legally sold to a country for consumer or commercial use; and then resold from another country to another via a secondary market for military use. Finally, this is where Russia’s focus is currently redirected in their attempt to continue to get the chips necessary for their military. In export scenarios, it is difficult for both manufacturers and governments to trace the end-users of their products. Without dual use export controls, there are concerns about the restrictions of the export controls themselves. However, a complete export ban on commercial products is almost impossible to enforce.
“Microchips are necessary to build hyper-sonic missiles and other advanced weaponry”
How Does Russia Get Its Chips During The War?
As we have explained/clarified above, for the Russian military, there is a stark necessity to continue to receive chips to progress with their assault on Ukraine. Thus, as the stockpile has continued to dwindle, the goal of the Russian government has shifted to penetrating the supply chains to continue to receive their technology.
The way in which Russian weapons were made was investigated by The Royal United Services in 2022. They have found the systems of Russian missiles to contain at least 450 microelectronic components – which came from companies based in Europe, Asia, and the U.S. Most of these components were found to have come from U.S. companies. While Russia continues their war in Ukraine, there remains a requirement for them to gain access to these weapons while evading sanctions and export controls. Supply chains in this arena are notoriously weak and allow countries like Russia to penetrate those chains to gain access to fundamental technology and use it in military equipment. EuroNews found that the Orlan 10 UAV (otherwise known as the “Sea Eagle”), a relatively cheap and low-tech drone which has been directed to fire shells on Ukrainian positions daily, has used logistics from all around the globe in its construction. This confirms that the Special Technology Centre which produces the Orlan is manufacturing drones regardless of sanctions which have been imposed by the U.S. since 2017. As we’ve mentioned earlier, involved in the providing of this equipment is the company SMT iLogic by way of Asia Pacific. The company has sold chips worth $1.8 million made by Analog Devices, $641,000 from Texas Instruments and from Xillinx, $238,000. Many companies have stated that companies like SMT iLogic and Asia Pacific are not authorised distributors of their equipment.
A US-Russian citizen in Florida also owns a company that has sold technology to iLogic and other Russian companies between 2018 and 2021. While federal law banned these sales, the company, IK Tech, found a way around. Despite this man having been arrested in early 2022 and charged, he claimed to be one of many companies that are skirting sanctions to assist Russian-made military equipment. The export controls currently aimed at Russia are among the strongest so far from the countries participating in sanctioning Russia. As U.S. export controls are applied to chips produced in the U.S. but also any location abroad, if those producers are using U.S. equipment, then export controls also apply to them. It would make it difficult for any producers using U.S. equipment to export to Russia as it would put their own supply of U.S. equipment in jeopardy. These rules have forced the Russian military to occasionally use computer chips from dishwashers and from fridges to bolster their military equipment.
As the country remains reliant on equipment from NATO states and other Western allied nations, obtaining equipment from abroad remains difficult. Furthermore, the country has been unable to kickstart their own semiconductors industry fast enough to cope with the pressure of the invasion. While in the process of launching their own industry, two companies have emerged – Baikal Electronics and Moscow Centre for SPARC Technologies – however, both companies use Western equipment which makes their situation strenuous since the start of the war. The same can be said of the aforementioned Mikron group which has been experiencing difficulties getting supplies and has lost access to receiving foreign equipment. In addition to the U.S. banning U.S. made equipment from reaching Russia, the EU and the U.K. have also followed suit. The focus of Western nations to stifle the Russian military in this manner can dampen their success on the battlefield as well as moving forward.
However, Russia has decided to align with China in hopes of manufacturing their components along with the Chinese. While the goal for the country is to completely onshore the production, it seems more difficult than imagined. There is a lack of workforce, and the war has led to a brain drain in the country. As the process of creating the necessary microchips requires globalised supply chains, due to Russia’s isolation on the world stage, it has become exceedingly difficult for them to support themselves and become self-sufficient in this industry. As Russia’s weapons from Iskander-M, the Kh-101 and the Kalibr are all reliant on British-made components and parts of Russia’s tactical communication use components from other Western nations, there seems to be a real problem in the future for the government. The goal of the country is then once again to shift to China. However, the U.S. warning China not to help Russia avoid these sanctions must present a concern for the Russian military as semiconductors are also of vital importance to China. China themselves are focusing on becoming self-sufficient in the microchips industry. While the goal for this country is to have technological independence from the West, this is currently not the case and for Beijing, they would rather not strain these relations.
As the Russian military continues to struggle under the export controls that we’ve explored in this investigation, they examine how they can evade the controls. An investigation in the Netherlands from the NOS found that microchips from Dutch countries are still ending up in Russia. These chips have come to be found in weapons of the military. They mainly come from NXP (Eindhoven) and Nexperia (Nijmegen). Russian companies have been found to go through intermediaries that have ended up in the hands of the Russian military. In another investigation, journalists found that Chinese companies are specifically evading export controls to export chips to Russia. There has been no decline in exports visible from their investigation. These chips have been found in different drones and also in armored helicopters and cruise missiles.
The Dutch companies NXP and Nexperia state that they are powerless as to where their chips may end up through parallel trade once they are sold. Their investigation found that in November 2022, 2 million chips made it to Russia from various companies, 60,000 of which came from Dutch companies NXP and Nexperia. While there cannot be clarity as to how many chips are ending up in the Russian military and not simply in refrigerators or in washing machines, it is definite that there is a need for these weapons. Apart from small companies that ship chips to Russia via mail, there are also companies in Asia involved in reselling chips in Russia for high profit margins. One such company is Sinno Electronics which has so far escaped punitive measures from the EU, though a report from Reuters states that sanctions may soon be implemented. In the meantime, however, this becomes very difficult to tackle at the border and only one prosecution has been made by the Dutch Public Prosecution Service so far.
Conclusions
The invasion of Ukraine by Russia has resulted in a significant reduction in tech imports from Europe. Russia has been forced to turn to alternative sources to obtain microchips for its military equipment, including domestic production, regular imports from China, and unorthodox methods such as front companies and third-party suppliers. Domestic production of chips in Russia is limited, with only two major companies in the industry, both of which have faced setbacks due to a military focus on chip production. Imports from Western countries are now subject to export restrictions, and supply from countries like Taiwan, USA, Germany, and Japan has dried up dramatically. As a result, over 70% of Russia's semiconductors come from China. However, there are still some problems with China being the main supplier of microchips due to several factors, such as China facing its own chip shortage, Russians reporting 40% failure rates and slower speed on Chinese chips, and Russia buying from unofficial Chinese chip markets as major businesses have left Russia.
Russia has also found 31 unique ways to avoid sanctions and restrictions since 2014, using weak points in sanctions policy, hiding data on companies, legislative changes, fulfilling contracts signed before sanctions were enforced, using offshore companies, etc. One of these ways is through front companies, which are fully operational companies that serve to conceal and obscure the true activities of other actors. These front companies are mostly based in Hong Kong and Turkey. Two examples are Pixel Devices Ltd and SMT-iLogic LLC, which are Hong Kong-based companies involved in sourcing microchips from other countries and exporting them to Russia through third-party suppliers. Both companies have been placed under sanctions and have been mentioned in reports for their illicit activities, such as evading sanctions.
