The effect of tech sanctions on the Russian economy

  • Responses by global technology conglomerates and Big Tech corporations towards the Ukrainian invasion highlight the important role of tech companies in a State’s economy
This is the first time that specific embargoes have been put in place against the import and export of high-tech components targeting a country, in this case, Russia. (Shutterstock) PREMIUM
This is the first time that specific embargoes have been put in place against the import and export of high-tech components targeting a country, in this case, Russia. (Shutterstock)
Updated on Mar 16, 2022 08:10 PM IST
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During the course of the ongoing Russia-Ukraine crisis, the West (mainly the United States and its NATO allies) have been looking at deterrence mechanisms to curtail Russia's continuous military offensives. The current actions taken against Russia have mainly been in the form of targeting the Russian economy through sanctions and embargoes specifically targeting sectors that Russia relies on for export revenues. The recent announcement by President Joe Biden on banning Russian oil, gas, and energy imports to the US is just one of the decisions that are hitting the core of the economy. But, the US, has also specifically introduced high-tech sanctions mainly depriving Russia the access to critical technologies (like semiconductors, quantum, artificial intelligence, and big data) and their applications. 

This is the first time that specific embargoes have been put in place against the import and export of high-tech components targeting a country, in this case, Russia. As per the statement released by the Bureau of Industry and Security (BIS), the Department of Commerce, Government of the United States of America, “The US has imposed secondary and primary sanctions on Russia on imports of computers, chips, etc. The new controls mean the American government is in effect claiming jurisdiction over any person or company in the world that uses American technology to make products for sale in Russia. It forces anyone who wishes to sell a vast array of technologies, including semiconductors, encryption software, lasers, and sensors, to request a licence —which is denied by default. The control is enforced through the threat of further sanctions against any company, person, or country which sells to Russia in contravention of the rules. The dominance of American technology, which is used to make products all over the world, means that a huge array of products will be caught in the net.”

It also mentions that “Only case-by-case exemptions may be given to 'safety of flight, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and to support limited operations of partner country companies in Russia.” This would mean that in the short term, many States and their domestic companies would stop supplying specific technologies to Russia in order to comply with the sanctions that have been issued. 

The sanctions by the US effectively prevent Russia from importing a range of products, from chips to telecommunications equipment. But what is noteworthy is that the sanctions prevent Russian imports of both American products as well as products manufactured in other countries that use proprietary technology of any American firm or company to manufacture the products under the sanctioned list. This would mean that any firm, located in any country around the world, cannot export certain products even if they have been manufactured on that country’s soil utilising any sort of American technology during the process of design and manufacturing. The sanctions also have the caveat that the export of dual-use devices is also prohibited. 

Another major aspect of these technology sanctions has been the varied responses by major technology companies themselves. While some companies have to fall in line with the government’s sanctions due to the usage of American IP, some tech giants have taken unilateral decisions to cut off ties with Russia and stop all business from the country. Each company announcing their withdrawal from Russia has put out statements condemning Russia’s actions towards Ukraine and citing this as the primary reason for halting their operations in the country. While unilateral decision-making by tech companies is not new, this large-scale shunning of Russia by major tech companies around the world should sound alarm bells to the Russian federation. It is important to understand how these decisions might spell trouble for the overall growth and development of the state’s economy.

Domestic consumerism takes a hit 

While the official technology sanctions mentioned that the supply of consumer goods to Russia and Belarus would not be disrupted, the actions taken by tech companies themselves have the capability to reduce the access to tech products for the average Russian consumer. Major electronic smartphone manufacturers like Apple and Samsung have paused product sales in the country. They have also cancelled all existing and future shipments of finished products (like mobile phones) to Russia itself. Other electronic goods manufacturers like Dell and HP, both leaders in laptops and personal computers production, have also halted operations and suspended the sale of all their products in Russia. This can hamper access to basic electronic goods like mobile phones and laptops for the domestic consumer.

It is also not just the individual consumer who will be affected. Companies that supply electronic goods on a large-scale basis to businesses and governments have also joined in the embargoes. Telecommunications equipment dealers like Nokia, Ericsson and Cisco have all decided to stop all business in the country with no equipment being sold in the near future. On the semiconductor front, major companies like Intel and AMD have decided to stop the supply of chips. Taiwanese giant, TSMC has also joined the sanctions train and suspended all chip supply and manufacturing contracts to Russia. The country, without much domestic design and manufacturing capability, has relied on imports from these firms and Chinese semiconductor firms as sources of their chips. This would mean that Russian sectors like the automobile and consumer electronics industry will suffer from a high shortage of semiconductor chips. 

Web-based services and online sectors 

Apart from the hardware front, the technology services and software industry has also taken a massive hit with sanctions. Microsoft has prevented access to Skype, GitHub and cloud-based services, Azure. Netflix has stopped all streaming services in the country. Social media services like Twitter, TikTok and Snapchat have also agreed to prevent any Russian IPs from accessing their sites. Ad-hosting platforms like Google and YouTube have also prevented any monetisation through different ads from the country. Another critical company, Cloudfare, has vowed not to provide any protection for all Russian web resources. Website hosting sites like GoDaddy are now shutting down Russian websites and preventing any new ones with the .ru extension from going live. This could affect domestic businesses majorly with many relying on web-based services and social media for their marketing campaigns. 

Finally, entire technology sectors contributing to the economy are now shutting down due to the sanctions. All major gaming companies in the world have collectively stopped all sales of their games in the country. E-sports, which is touted to be a major gamechanger in the virtual economy, has been removed from Russia with all e-sport companies preventing Russian citizens from taking part in these competitions. Cloud and data-centres, which remain integral for data storage and a major source of revenue, are cut off with companies like SAP, Amazon Web Services and Oracle all suspending operations. Digital payments would also likely be wiped off from the Russian economy with global merchants like Visa and Mastercard blocking all card-holders in Russia. Apple Pay and Google Pay have also been restricted in use thereby preventing any digital payments from contributing to the economy. 

It is clear that just the United States government sanctions on technology have triggered a chain reaction with each major technology company looking to impose its own restrictions on Russia. Major economic repercussions must be expected due to these actions taken by companies. Revenues through import duties for technology goods and services would be cut off. There would also be a significant dip in access to technology goods in the market thereby decreasing domestic consumption. Domestic businesses would bear the brunt of the sanctions with no access to social media sites and other critical software. 

This is a clear indication to any potential aggressor in the future on the leverage that technology companies and their subsequent sanctions hold in the current Information Age. With the ability to cripple one’s economy, technology sanctions can be used as a primary deterrence mechanism for any aggressive posturing by a state in the future.

Arjun Gargeyas is a researcher with the High Tech Geopolitics programme at the Takshashila Institution

The views expressed are personal

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Sunday, July 03, 2022