Don’t Use Chips to Play Poker With Putin – Foreign Policy

As the poker game over Ukraine has the world on edge, U.S. President Joe Biden warned Russian President Vladimir Putin last week that the United States would act decisively and impose swift and severe costson Russia in the event of an invasion. What might these severe costs be? In late January, the Biden team hinted at one novel sanction: The United States would play poker with real chips, the kind that powers everything from smartphones to military drones and supersonic jets. According to an unnamed senior administration official speaking in a White House press call, cutting Russia off from any semiconductor chips made with U.S. inputs (which include chips made in Taiwan and elsewhere) would have massive consequences that were not considered in 2014the last time Russia invaded Ukraine.

This move pulls from Bidens predecessors playbook. In 2020, then-U.S. President Donald Trump used the Foreign Direct Product Rule to block Huawei, the Chinese telecommunications giant, from purchasing U.S. products as inputs, causing the companys revenues to fall by 31 percent in 2021 as a result. Might the same strategy work to keep an entire country in line? There are reasons to be doubtful, given the industrys hard realities and the complex geography of its supply chain.

Consider three questions. How much control does the United States have over the worlds chip supplies? How much pain would a chip blockade inflict on Russia and Putin? How credible is the threat?

As the poker game over Ukraine has the world on edge, U.S. President Joe Biden warned Russian President Vladimir Putin last week that the United States would act decisively and impose swift and severe costson Russia in the event of an invasion. What might these severe costs be? In late January, the Biden team hinted at one novel sanction: The United States would play poker with real chips, the kind that powers everything from smartphones to military drones and supersonic jets. According to an unnamed senior administration official speaking in a White House press call, cutting Russia off from any semiconductor chips made with U.S. inputs (which include chips made in Taiwan and elsewhere) would have massive consequences that were not considered in 2014the last time Russia invaded Ukraine.

This move pulls from Bidens predecessors playbook. In 2020, then-U.S. President Donald Trump used the Foreign Direct Product Rule to block Huawei, the Chinese telecommunications giant, from purchasing U.S. products as inputs, causing the companys revenues to fall by 31 percent in 2021 as a result. Might the same strategy work to keep an entire country in line? There are reasons to be doubtful, given the industrys hard realities and the complex geography of its supply chain.

Consider three questions. How much control does the United States have over the worlds chip supplies? How much pain would a chip blockade inflict on Russia and Putin? How credible is the threat?

U.S. dominance in semiconductors is not what it used to be. Back in the 1990s, the United States produced 37 percent of the worlds semiconductor chips, but that share is down to only 12 percent today. Chip-making has shifted to Asia: The Taiwan Semiconductor Manufacturing Company (TSMC) alone makes 92 percent of the worlds most sophisticated chips, up to 60 percent of the microcontrollers in cars, and the majority of chips that go into smartphones. But the United States still has a crucial presence. It dominates chip design, research, and development as well as key categories of intellectual property. In terms of value created, the United States contributes a disproportionate 39 percent of the total value of chips. On top of that, U.S. allies and partnersincluding not only Taiwan but also Britain, Germany, Japan, the Netherlands, and South Koreacollectively contribute 53 percent of value. The remaining 6 percent is created by China.

The United States outsized influence through its dominance of design and innovation is significant in an industry perpetually dependent on pushing the frontiers of processing. And Washington has extensive experience compelling non-U.S. companies using U.S. inputs to adhere to any sanctions. In principle, the stick the Biden administration plans to wield is a big one.

The other side of the threat is the importance of Russia accessing the chip supply chain. Russia is no tech superpower. According to Digital Planets Digital Intelligence Index, Russia ranks only 49th out of 90 countries in terms of countries digital evolution. For example, Russias smartphone penetration at 70.1 percent is well below that of advanced countries in North America, Europe, and East Asia. On the surface, this might suggest that a chip blockade would not do as much damage to Russia as to a highly tech-enabled economy.

Nevertheless, a deeper dive reveals some interesting facets of Russias digital economy and its priorities. One of the most important drivers of Russias digital economy is the government, particularly in the area of national security. Russia has invested in a military version of Silicon Valley with numerous priority fields,including artificial intelligence (AI), small spacecraft, robotics, pattern recognition, information security, energy sufficiency, nanotechnology, and bioengineering. Speaking of artificial intelligence in particular, Putin has said that whoever becomes the leader in this sphere will become the ruler of the worldand it is the Kremlin, not the Russian private sector, that has taken the lead in steering Russias AI endeavors. As part of the 2018 May decrees, Putin has followed up with a commitment to a national project focused on the digital economy and advanced technologies. Other technology upgrades include 5G telecommunications networks in the 10 largest Russian cities,scheduledto start working in 2024.

These efforts paint a more dynamic picture. When it comes to measures of digital momentumin other words, how quickly the economy is digitizingRussia ranks much higher: 10th out of 90 countries. Retaining access to the semiconductor supply chain and the cutting edge of chip technology is therefore key to maintaining this momentum and the governments technological goals. Russia cannot produce the chips and electronics it needs. In other words, a chips blockade could inflict serious damage to the countrys aspirations. If chips are suddenly in short supply, the Kremlin will likely prioritize government and military technologies over consumer needs.

Despite Russias dependence on continued access to chips, Bidens blockade threat has a few credibility issues. Consider five:

First, the semiconductor supply chain is notoriously complex. A single chips components might involve up to 1,200 process steps over a six- to eight-week production cycleand traveled more than25,000 miles. Moreover, chips are rarely sold directly to Russia but mostly integrated into the end products that use their processing power. The route of a chip might include designing in the United States, slicing of silicon ingots into wafers in Japan, and converting into fabrication wafers and cutting into die back in the United States. Further steps might include die assembly, packaging, and testing in Malaysia, shipping by container from Singapore, and integration into end products in China. Other chips take different routes, making it difficult to trace and intercept their sales.

These routes are so complex that in 2021, the Biden administration had to press semiconductor companies to provide greater transparency regarding their supply chains, but responses were voluntary. The bottleneck in chip supplies could make companies even cagier about revealing supply chain details. Taking Russian demand off the market could add further uncertainty, which industry planners would not like. Not only is it hard for the Biden administration to enforce a blockade of a supply chain it cannot quite trace, but the companies involved generally have other priorities than geopolitics.

Second, the U.S. governments punishment for companies that do not comply with the blockade may lack teeth. The administration could blacklist them by placing them on the U.S. Commerce Departments Entity List, preventing them from selling to the U.S. government. This may be an empty threat when theres already a semiconductor shortage.

Third, the world should expect Putin to turn to Russias new ally, China, for chips and end products. Already, China accounts for 70 percent of Russian computer and smartphone imports. Sino-Russian relations have improved recently, a notable development given that China did not support Russias past incursions into Georgia and Ukraine nor the annexation of Crimea.In the meantime, China has been keen to build up its position in semiconductors. Its companies are not among the top global semiconductor companies, and their production is disproportionately concentrated in lower value-added components and less sophisticated chips. Gaining access to Russian technological resources, political support, and engineers could be tempting for Beijing. This could deepen the U.S.-China rift, and monitoring Chinese sales to Russia would be extremely difficult.

Fourth, Russian military semiconductor needs can also be met by other intermediaries, small trading companies,and surreptitious networks eager for the business. U.S.-made components found in Russian military drones have already traveled through such hard-to-trace supply pathways.

Fifth, even if one takes the attitude of lets try the strategy and see what sticks, there are wider risks to keep in mind. If the standoff with Russia, combined with ongoing tensions with China, reach a tipping point, China could be motivated by the semiconductor blockade to make a move on Taiwanhome to TSMC and thus, for Beijing, the ticket to semiconductor glory. An escalation of the cold war between the United States and China could throw the bottlenecked semiconductor supply chain into further chaos and hurt U.S. interests. The crisis caused by the ongoing chip shortage alreadyshaved an estimated 1 percent off U.S. GDP in 2021. Adding more disruption to the chips industry without clear benefits may not be worth it.

Whether the chip blockade idea was a trial balloon or a real threat, the risk is Washington cannot credibly follow through. Given that Putin must be presented with severe costsdesigned, according to a White House statement, to cause widespread human suffering and diminish Russias standingit is best to make threats that Putin believes the United States is actually willing and able to carry out.

It is wise to play poker with plenty of chips on handincluding economic sanctions, military buildups, and diplomatic isolation. But Biden should keep real chips off the table.

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Don't Use Chips to Play Poker With Putin - Foreign Policy