From Japan to Russia: Unravelling the Semiconductor Supply Chain

Semiconductors, the tiny chips that power our modern world, have become a major point of contention in international trade disputes. These chips are critical components in everything from smartphones and computers to cars and military equipment. As such, they have become a strategic resource, with countries around the world vying for control over their production and distribution.

As the war in Ukraine rages on, countries around the world have enacted numerous export controls to prevent Russia from accessing critical semiconductors used in military equipment. However, recent reports have shown that Russia is still able to access some of these semiconductors via third parties in countries that do not respect such export controls. Why is the stopping of semiconductors to Russia important for Ukraine’s success, what did the recent report highlight, and why are supply chains difficult to control?

How stopping semiconductor exports helps Ukraine

A war started by Russia in February 2022 was meant to last only three days. What was widely considered to be the second-best army in the world, after a year, has proven itself to be the second-best in Ukraine. Now, as Ukraine launched its counteroffensive, many around the world watch the news feeds hoping that Ukraine will successfully drive a wedge between Russian forces and bring a collapse to the land bridge that sits between Crimea and the rest of Russia.

While Western nations around the world have supported Ukraine with funding and arms, there is very little else that can be done short of an outright invasion; the moment foreign-sanctioned troops step foot in Ukraine, that nation will be declaring war against Russia, something that no one wants to do. However, soldiers, guns, and bullets are not the only way an invading nation can be defeated. Destroying an economy and severing diplomatic relationships can be just as effective.

For example, Western restrictions on Russian oil have resulted in Russian oil revenues significantly dropping, and this has directly led to less funding available for the Russian military (at least, Russia now has a large budget deficit, meaning that it is on borrowed time). Of course, some countries (such as India) have taken advantage of these actions and purchased large quantities of oil from Russia at record-low prices, but in the long run, this is not sustainable, especially if Russia continues to escalate violence in Ukraine as India risk being viewed as a pariah state.

Another example of how the West has managed to significantly impact Russian capabilities is by limiting their access to high-end semiconductors via export controls. As all modern military equipment is heavily dependent on semiconductors, cutting the supply of semiconductors prevents new weapons from being manufactured. In the case of Russia, numerous aspects of its military are dependent on Western components, including processors, memory, positioning, and even optical systems. 

In fact, due to the limited access to Western semiconductors, Russia’s ability to manufacture modern long-range missiles and tanks has been significantly impacted, so much so that numerous amounts of evidence show how Russia has reduced its missile attacks and pulling cold-war era tanks out of storage to fight in the front lines. The consequences of this are that reduced missile attacks help to limit what targets Russia can hit (in this case, residential and children’s hospitals), and older tanks sent to battle are far more vulnerable to small arms fire and modern anti-tank weapons.

It's worth noting that the types of semiconductors being exported play a crucial role in this scenario. For instance, high-performance semiconductors, which are essential for advanced military equipment, are more likely to be subject to export controls. Understanding the specific types of semiconductors involved could provide further insights into the impact of these export controls. 

According to an investigation by Nikkei, semiconductors made by Japanese manufacturers are still entering Russia, despite sanctions. These transactions primarily go through third countries, such as China, circumventing Japanese laws that regulate direct exports. In March 2022, Japan aligned with U.S. sanctions and restricted the export of domestically produced semiconductors, but these measures have not completely stopped the flow of chips.

Let's delve deeper into a specific case. Consider the case of the Hong Kong-based trading company that exported semiconductors made by Japan's Kioxia Holdings to a Russian company. This provides a concrete example of how export controls are being bypassed and the potential consequences for the companies involved. 

A recent report shows Japanese components bypassing export controls

A new report from Nikkei has revealed that, despite strict export controls on Japanese semiconductors, Russia is still able to access these parts for use in its war effort. Japan was one of the first few nations to join the West in preventing key semiconductor supplies to Russia back in March 2022, and its export controls prevent critical semiconductors used in military applications from being shipped to Russia.

However, the new report from Nikkei shows how third-party distributors in countries such as China are able to circumvent these exports as they reside in nations that do not have such controls. This issue is especially concerning for component manufacturers as they will often have agreements with distributors that they must follow export controls for those components, as the manufacturer is legally beholden to those restrictions. Thus, distributors found to be selling to Russia could put manufacturers in trouble for violating export controls, despite not being involved with the sale.

The complexity of the global semiconductor supply chain further complicates the situation. Semiconductors often pass through multiple countries and companies before reaching their final destination, making it difficult to track and control their movement. This complexity underscores the need for international cooperation in enforcing export controls. 

This situation highlights the need for additional measures to stop the indirect flow of goods and make sanctions more effective. As an official from the Ministry of Economy, Trade and Industry pointed out, 'general semiconductors were subject to the regulations from the beginning', but the current approach has not been entirely successful. 

The report from Nikkei also highlights that millions of units worth over $11 million have been shipped to Russia, all originating from Japanese manufacturers and that China accounts for over 70% of the sales (with South Korea and Turkey following).

Why are supply chains difficult to control?

In the case of Japanese export controls, Japan has no power over other nations, making it impossible to enforce export controls over Japanese products entering third-party nations (such as China). While the original manufacturer could be fined for failing to perform due diligence on its customers, it is very easy for shell companies to be formed that purchase parts from distributors in quantity and then smuggle those parts to Russia. 

To make matters worse, introducing export control against nations that don’t respect export controls from the nation where semiconductors are manufactured doesn’t work in the long run, simply because of the many nations that exist around the world. For example, China could be prevented from receiving any semiconductors whatsoever, but it wouldn’t take long for a small nation in Africa, the middle east, or even South America to set up a smuggling ring, thereby circumventing any and all controls.

Moreover, the rapid advancement of semiconductor technology poses another challenge. As new types of semiconductors are developed, regulations need to be updated to ensure that they are also subject to export controls. This requires a deep understanding of the technology and its potential applications, highlighting the need for technical expertise in regulatory bodies 

Of course, in these situations, manufacturers would be more readily able to vet those customers as they would be purchasing military-grade parts in quantity from countries that have never historically purchased such parts.

Overall, the West is doing everything it can to prevent semiconductor shipments to Russia, and it is certainly having an effect. But as the Russian war effort becomes increasingly strained, it is highly likely that more extreme measures will be taken to obtain much-needed semiconductors, and thus the West must be ready for what comes next.

Looking ahead, we must consider the potential long-term implications of the current situation. How might the circumvention of export controls impact the global semiconductor industry? Could it lead to changes in international trade relations or export control policies? And what could it mean for the ongoing conflict in Ukraine? These are questions that policymakers, industry leaders, and all of us as global citizens need to grapple with.