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Scholar Chris Miller explains the challenges (and pitfalls) of Moscow’s fight to import the Western microchips it needs for Russia’s invasion force and economy

Source: Meduza

Despite a sprawling array of international sanctions, Russia imported more than $1 billion in Western microchips in the first nine months of 2023. These microchips are vital not just for the military-industrial complex’s constant supply of weapons to the frontlines in Ukraine but also for Russia’s manufacturing of cars, smartphones, and household appliances. To learn more about the role Western microchips play in Moscow’s invasion of Ukraine and how the Russian economy operates in wartime, Meduza spoke to Dr. Chris Miller, an associate professor at Tufts University, where his research focuses on technology, geopolitics, economics, international affairs, and Russia. Dr. Miller is the author of multiple books, including The New York Times bestseller “Chip War: The Fight for the World's Most Critical Technology” and “Putinomics: Power and Money in Resurgent Russia.”

Meduza: Let’s talk about your latest book. What’s the role of microchips in the war in Ukraine? Russia’s defense industry remains highly dependent on external components, especially electronic components and technologies. Russia is reportedly trying to produce microchips by itself. What do you know about this? Are Russian microchips good enough for the defense industry’s needs, and who supplies Russia with microchips despite the sanctions? And at what cost? 

Dr. Chris Miller: I think we know a couple of things. First, we know that there’s been a lot of public discussion in the media about trying to increase the volume of chips that are produced in Russia. Before the war, there was quite a small volume produced in Russia. Now, demand has increased a lot due to the war and military production. I haven’t seen any evidence, and I’ve seen that production has meaningfully increased. The companies themselves don’t issue data, but it doesn’t seem like there’s any evidence of a production increase. Perhaps it’s increased a bit, but I don’t know that it has.

From the customs data that I’ve looked at (and I’ve done a lot of work here), I know it’s clear that Russia is still importing a fair number of the materials that you need to make chips. So, some production is still happening, and it’s clear that the materials need to be imported and can’t be produced. The big imports are still happening. It’s also clear that Russia is importing some spare parts for the tools that are used to make chips. But the imports that I’ve been able to find in Russian customs are pretty limited. I would not be surprised at all if Russia was facing issues keeping its tools functional because they need regular spare parts. 

I think the big thing is that we know that Russia is still importing lots of chips. And these are largely Western, Japanese, or South Korean-made chips. And China has become, by far, the biggest source of imports. Most of the chips Russia buys are made by the G7 plus Korea plus Taiwan and are transiting through China. There’s a bit of trade to Turkey, a bit through Central Asia, and a little bit of smuggling directly from Europe and elsewhere. But the vast majority are going through China.

Basically, Russia has managed to divert a lot of its foreign trade through China. It’s getting many of the chips that it needs. What effect does that have on defense industrial production? We know that defense industrial production has increased due to the war. We don’t know whether there are delays that are being caused by the need to find new sources for chips. We don’t know the effects of sanctioning one import channel and forcing them to set up another import channel. I suspect this is causing some delays, but there’s just no way to quantify it, given the data we have. 

Do you think that Russia has enough chips, or you can’t say because we don’t have any data? 

I think we really can’t say. That’s the honest answer. I think the fact that there had to be this big shift in trade patterns… I think it’s probably caused some delays. There have probably been some periods where Russia has had all the chips that it needs. A given type of military system will have dozens of different chips produced by a dozen different companies. So, you’re managing a really complex supply chain. And so delays can be really disruptive and costly. I would bet that there are delays happening, just given the huge shift in the supply chain and distribution networks that we’ve seen. But it’s impossible to put data or numbers on what the delays might look like. 

How hard is it to produce chips, and why has Russia never made an industry of producing them? 

Well, it’s just really hard. The manufacturing is extraordinarily complex. You basically need to source tools and materials from the U.S., Europe, and Japan, each of which has its own specialized capabilities in parts of the supply chain. And to do it efficiently, you need large volumes. Today, there are just a small number of chip makers for each type of chip. And the volumes in which it is produced in Russia are tiny because they’ve been focused primarily on industrial production. The biggest firm, Micron, produces less than 1 percent of the number of chips that the biggest companies in Taiwan do. And so they’ve got a tiny scale, and they’ve got to try to source materials and equipment from the West, which has been cutting Russia off. 

These sanctions against Russia falter without China’s cooperation. What stops the U.S. from reaching a compromise with Beijing? 

Well, I would criticize the U.S. and Europe for being insufficiently focused on this issue. I think there have been a lot of different issues in the bilateral relationship between the U.S. and China and in Europe and China, of which trade with Russia is only one. And I think both the U.S. and Europe have prioritized other issues in their relationship with China. And both U.S. and European leaders have said it’s a red line if China sends military equipment to Russia. But China has gotten very, very close to that red line without any sort of real response within the U.S. or Europe.

I mean, we certainly see lots of Chinese drones used by Russian military forces and all the components, including chips, that Russia uses in military production. In my view, the U.S. and Europe have wrongly prioritized other issues in their relationship with China. It hasn’t wanted to create new sources of tension with China to push to cut off supplies to Russia.

In February last year, you wrote an essay for The New York Times in which you said there is no world leader today with a better track record for using military power than Vladimir Putin. Do you believe that Putin can actually win the war in Ukraine?

I think certainly our estimation of Putin’s ability to wield military power skilfully has changed a lot in the last two years. 

Unlike the wars in Georgia in 2008 and Ukraine in 2014, it’s very clear that Russia finds itself in a much, much more difficult position in this war than I expected it to be in. It’s pretty clear the Russian government thought the war would be over in a matter of weeks, аnd in fact, they are approaching two years of conflict. 

I also think there are certainly some voices in Moscow who believe the war is still winnable. If you listen to Putin’s press conference last week, he brought back the terms of denazification and demilitarization of Ukraine, which were the terms that he initially used as his war aims when he started the war. I think there’s still uncertainty in Moscow as to what victory exactly looks like. But there are a lot of people who still hope Ukraine can be forced to submit to Russia when it comes to key questions about the government in Kyiv and Ukraine’s international status.

And so that that looks something like victory. It’s a much more costly victory than Putin hoped for, but I think people in decision-making positions in the Kremlin still hope a victory along those lines remains possible. 

And what do you think? 

I think that Russia has repeatedly underestimated Ukraine, not just in the past two years but over the past decade. I think Russia is still underestimating Ukraine. The theory of victory in Russia right now looks something like the following: (1) U.S. support might decline, (2) Trump might win, and if that happens, (3) European support will decline. And then, if all those things happen, Russia thinks Ukraine will just be unable to continue fighting. 

I think that understates the extent to which a key factor in the war has not been Western aid — it’s been Ukraine’s willingness to fight and the effectiveness of its fighting. Western aid has been important, but in the early months, there wasn’t much Western aid, and Ukraine was still quite effective. So, I think the Russians probably still underestimated Ukraine, but I do worry that Ukraine will find itself in a very difficult position if Western aid declines. 

What do you think about the possibility of using billions of blocked Russian assets? If world leaders agree on transferring frozen Russian assets to Ukraine, how will this affect trust in keeping national reserves in dollars and euros?

Some European politicians think that the difference between freezing and seizing [assets] is significant. I’m not sure I really see the difference. If your assets are frozen, you can’t use them. How different is that from fully seizing them, even if they’re just frozen? Russia’s not going to get them back for years, if ever. 

I think it’s already the case that countries that perceive they might in the future be in a conflict with Europe, with the G7, have already adjusted where they keep their reserves. I think for smaller countries, it’s possible to move their reserves to China. I think for larger countries, there aren’t really very many options other than China. 

China can’t move its reserves to any other currency because there’s no other currency where you can put several trillion dollars. So, China has basically limited choices. And I think the rest of the countries that would perceive themselves potentially in a future situation like Russia have already taken these types of measures. That basically just means, obviously, that Iran and some of the Gulf states will compete for diversification, although their economies are tied to the dollar. So, it’s very difficult.

I understand the argument that seizing the reserves creates an incentive, but if you actually look at who will be impacted by that and who will start shifting money around, it’s actually harder to see exactly where that impact will be. 

From your point of view, what explains how Russia has survived all the West’s sanctions? How have the sanctions succeeded, and how have they failed?

I think we, collectively, myself included, overestimated the sanctions in a couple of different ways. 

First, we overestimated the extent to which the sanctions would disrupt manufacturing supply chains, аnd so we saw the auto sector in a big way. But I think outside of autos, there was much less impact on manufacturing and operations than I would have expected. That’s one place we underestimated.

In terms of aggregate economic output, I wrongly expected the war to be short. I underestimated the extent to which there would be a huge surge of defense spending in Russia and that this would increase output at a time when the non-military economy was decelerating. And, so, because I didn’t expect a big surge in military spending, I also didn’t expect the labor market to remain so tight, which means I didn’t expect consumer spending to be so tight.

So, many of my outlook errors came from failing to expect a long war, coupled with a big surge in military spending. I think that really changed a lot of the forecasts for sanctions impact. If you were expecting sort of like 2014: a short war, not a big change in military spending, and just the sanctions plus the existing policy. I think the sanctions have actually looked more significant, whereas actually, they’ve been counteracted in some ways by the increase in military spending, which has had a positive economic impact in terms of employment, in terms of wages, in terms of GDP, and in terms of long-term cost. But the short-term effect has been positive. 

I think the second aspect is that there were a lot of people — I wouldn’t have included myself in this category — who were expecting that the sanctions would actually cause an immediate financial crisis when they were imposed. And even if you look at the ruble selling off and controls that were imposed in February and March 2022, there was a chance that it could have happened, but it didn’t. And after that, the financial sanctions were just less meaningful. The Central Bank and the Finance Ministry, I think, pretty skilfully managed to deal with the effects of that. 

Third, there were some people who remembered what the U.S. did to Iran in terms of oil exports and thought, well, the U.S. did it in Iran; they can do it to Russia. And that missed the fact that Russia exports as a producer, as you know, four times more than Iran. It’s impossible to take that much oil off the market without having a major price impact, which the West wasn’t willing to tolerate. And so I think if you were expecting Iran-style oil sanctions to be politically viable in the West, that was the wrong expectation. What we’ve seen instead is that in the U.S. and Japan, and in Europe, energy prices have been super politically important, and that’s really limited Western leaders’ willingness to impose tough oil sanctions. 

Do you think Western political leaders are frightened of the sanctions’ impact on oil prices? 

Yeah, for sure. 

You mentioned the skillful technocrats from the Russian Central Bank and the Finance Ministry. According to Politico, Elvira Nabiullina is the top “Disrupter of Europe.” Do you think these individuals bear responsibility for the war’s continuation by preserving the Russian financial system’s resilience? 

I think that’s right. I think, if you didn’t have that team of technocrats running the financial system and if they hadn’t spent the previous half-decade reforming the banking system, building up Russia’s reserves, and keeping the budget deficit low, Russia would have found itself in a much, much more difficult position. One of the key factors [for the continuation of the war] in terms of Russian domestic politics is that the typical Russian hasn’t really felt the costs of the war in an economic sense yet. We’re now two years into the war, and wages are higher, and living standards are higher by many metrics. But the real costs of war are coming. The technocrats’ job was to give the military time to fight the war. And they’ve given them time. 

What are the vulnerabilities of Putin’s regime from your perspective? What weaknesses or internal contradictions do you see?

Two weeks before Prigozhin was marching on Moscow, I would not have predicted that anyone would be marching on Moscow. And so I think we all need to be humble in our predictions. The Russian political system always looks more stable than it actually is. The instabilities may come in surprising ways, and we don’t always see them in advance. 

The second thing is that a lot of the tension builds up in ways that are deliberately not made visible because the Russian political system tries to cover them up and keep them invisible. I think there’s a fair amount of discontent with how the war has gone, especially among the elite, regarding what the future looks like. That doesn’t mean there will be a new group of people marching in Moscow, but I think those concerns are real. 

In the economic sphere, for typical people, unemployment is low, wages are rising, and they don’t really feel the economic costs. I think in the elite, there’s a recognition that military spending increases GDP, but it doesn’t increase wealth in the long run. It builds up all these issues over time. I think the elite basically recognize that fact and are looking for what the five-year trajectory is and what the 10-year trajectory is. It doesn’t look good relative to where it was before.

I think that set of questions about where we’ll be in 10 years, the answer to that is not clear. And so I suspect there are people in the elite who wish there were better answers. And the only answer is, well, you’ve got to like Putin again and six more years of the exact same thing. I think that dynamic — that stagnation dynamic — is a political problem. But I don’t think it’s a problem that necessarily comes to the surface in 2024. It could just persist for a long time. And, you know, it’s worth remembering that for a long time, since 2013, the economy has basically just barely grown. 

The Russian economy appears to be “overheating” due to rising military spending and production. Do you anticipate a recession? What might that look like?

The Central Bank has said it wants to cool the economy, and it has been hiking interest rates to do so. I think whenever you’re in that type of situation, you have a choice: Do you want to cool the economy, or do you want to accept higher inflation? Both have economic and political downsides, and I’m not sure which will seem more attractive, but I think certainly, in the next three months before the election, there will be a strong incentive to keep everyone as happy as possible.

But even afterward, the war thus far has been a war in which more people have experienced rising wages. And so turning it around, which is what the Central Bank would like to do, brings real political risks. I don’t have a highly confident view here, but I wouldn’t be surprised if the Kremlin decides to let inflation stay higher than it should be and keep the high-end overheating because it doesn’t want to increase unemployment or have wage rates low.

The economy can’t be overheated for long.

Well, it can't be forever, but it can stay overheated in 2024.