Updated Feb 2, 2022 - Technology

U.S. threatens Russia with a chip blockade

Illustration of a US flag made of semiconductor chips.

Illustration: Shoshana Gordon/Axios

Biden administration officials say they will cut Russia off from its vital supply of semiconductors if it invades Ukraine — a broad sanction without precedent.

Why it matters: Stemming the flow of microchips to Russia would be a blow to the country's economy, but the novel move could have long-term repercussions for U.S. companies.

How it works: As part of Biden's strategy to inflict economic pain on Russia, the administration is threatening to use government regulations to restrict not only chips made by U.S. companies, but chips made by foreign companies that rely on U.S. equipment, tools, software or designs.

  • Because of the ubiquitous presence of U.S. technology in the chip-making supply chain, the blow to Russia could be staggering.

"Semiconductors are the new weapon," Ed Mills, Washington policy analyst for Raymond James told Axios.

  • "If you can link arms and deny a country access to semiconductors, their ability to function as a modern economy is eliminated."

The big picture: The semiconductor threat is one that would pose long-term economic damage, not stop tanks in the field.

  • The Biden administration says planned financial sanctions would have an immediate impact, while the export controls, which limit products going into Russia, would make its economy more brittle over time.

Between the lines: It's not yet clear how broad the semiconductor sanction could be, but a person familiar with the White House's approach told Axios on Tuesday chip restrictions could be aimed at Russia nationwide or targeted more narrowly at specific industries.

  • A senior administration official told reporters last week the export controls focus on areas that Russian President Vladimir Putin has said are strategically important to the country, including artificial intelligence and quantum computing.
  • "If Russia wants to develop these sectors, it needs to import technologies and products that only we and our allies and partners produce," the official told reporters. "And so that would lead to an atrophying of Russia’s productive capacity over time."

Yes, but: The novel plan from the Biden administration has unnerved some industry officials, who fear it will lead to foreign companies accelerating plans to design out U.S. technology or seek alternatives from non-U.S. companies.

  • Robert Atkinson, president of think tank the Information Technology and Innovation Foundation, told Axios an Italian company that relies on U.S. chips for its machines is considering substituting out American chips.

What they're saying: "This is certainly a big stick that we can deploy to make Putin think twice," Atkinson said. "The problem with deploying the stick is the more you use it, the more it degrades."

  • "Even bringing it up sends a very clear message to a lot of countries and companies that they don’t want to be dependent on U.S. whims."

Flashback: The Trump administration made a similar move against Huawei in 2020 when it restricted the company's access to semiconductors that use U.S. technology and software.

  • "One of the concerns from industry has been this is really opening up Pandora's box, in a manner of speaking, of the use of extraterritorial controls as a policy means," an industry source told Axios of the threatened sanctions.
  • "That potentially signifies quite a broadening out of U.S. export control reach, and the willingness of the administration to view this as a policy option."

The intrigue: Whether China would comply with the U.S. regulations, and not sell chips made with U.S. tech, is an open question.

  • A spokesperson for the Chinese Embassy in the U.S. told the Washington Post the country is opposed to "so-called long-arm jurisdiction on other countries."
  • The Biden administration official said last week that if Putin turns to China and is denied the ability to import from the U.S. and its allies, "you are going to significantly degrade your productive capacity and your innovative potential."

What to watch: The U.S. could expand the export controls beyond semiconductors to other types of technologies.

  • The administration is actively considering similar measures targeted at strategic sectors like aerospace and maritime industries, the person familiar with White House thinking told Axios.
  • "If you just think whatever technology is produced abroad, if they're produced using U.S. technology or design and the product, whatever it is — semiconductor, engine, anything  — would be subject to U.S. export control regulation," the industry source told Axios.
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