Nowhere to go without microchips: experts named the main consequences of Western sanctions

Economic sanctions are effective against small economies, while large economies have the ability to counter and strike back. Therefore, in the confrontation with autocracies, primarily with Russia and China, Western countries should rely on the introduction and tight control of technological sanctions, according to experts from the Geneva Center for the Study of Security Policy, whose opinion is referred to in their publication by the online publication Re: Russia. This will undermine the development of their military and economic potential and make it impossible to increase their political influence in the world. Such a scenario, however, largely involves abandoning the goals of globalization and returning to the practices and institutions of the Cold War. Therefore, the concept of "friendshoring" (building trade and production chains mainly with countries that share the values of democracy) expressed by US Secretary of the Treasury Janet Yellen caused a heated debate among economists: an unequivocal answer to the question of how exactly a return to the practices of the Cold War in the long term affect the non-democratic camp, no.

Who and how are sanctions actually hitting?

The notion that Western sanctions against Russia are ineffective has become commonplace and is supported by economic statistics. Thus, according to the latest figures from Rosstat, in October 2022, the volume of output by basic types of economic activity (an indicator closest to GDP) decreased by 4.2% compared to October 2021, which is about half or even three times less than forecasts for spring 2022. However, many economists consider "optimistic" conclusions about the effect of sanctions premature. And at a recent conference in Washington, IMF experts presented a theoretical model of the impact of sanctions, showing that although sanctions inevitably hit the side imposing them, the losses of the sanctioning side turn out to be much greater.

Another review of the experience of sanctions against Russia, prepared at the Geneva Center for the Study of Security Policy (GCSP), shows that their use against a large economy does not lead to many of the expected effects, but has severe long-term consequences, ensuring its technological backwardness and loss of competitive positions in world markets.

In the past two decades, sanctions have been imposed mainly on small countries or regional powers, the exclusion of which from the world economy did not entail strong negative consequences for global markets. Now, for the first time in history, large-scale sanctions have been imposed against a large and deeply integrated economy, and this experience suggests that large countries such as Russia and China are more resistant to economic sanctions.

Firstly, the success of Western restrictions against small economies was due to the fact that banks around the world use the European SWIFT system, and the main currency for international settlements is the dollar. But large economies are able to create their own payment systems and use national currencies for settlements with partners. At the same time, enforcement of banking restrictions falls on the banking system of countries imposing sanctions (the GCSP report says that the cost of compliance with restrictive requirements for US and Canadian banks alone in 2022 will total approximately $56.7 billion).

Secondly, unlike small countries, large economies are able to impose retaliatory restrictions (counter-sanctions), which are tangible both for those who wanted to punish them and for the whole world. An example is Russia's energy war against Europe.

Thirdly, sanctions against big business in large economies are fraught with unforeseen negative consequences (as an example, the GCSP report cites sanctions against RUSAL and the Chinese state-owned shipping company COSCO, which caused disruptions in global commodity markets).

Fourthly, large countries have a large circle of partners, some of which will still in some form continue trade and cooperation with the sanctioned country, which will significantly weaken the effect of sanctions.

The ban on technology will hit both the civilian and military sectors of the economy

Despite this, the sanctions remain effective, the GCSP report says, but their main effects look different. Although sanctions are not capable of undermining the current functioning of a large economy, they can significantly slow down the development of its economic and military potential, determining its further irreparable lag in the technological race and competitiveness. Such restrictions will be effective not only against Russia, but also against China, whose ability to withstand the effect of conventional sanctions is even greater than Russia's.

Technological sanctions are causing significant damage to the Russian and Chinese economies, although in the short term this does not affect their GDP. Thus, the suspension of cooperation between the Taiwanese manufacturer TSMC and Russian business called into question the fate of the domestic processors Elbrus and Baikal, and Russian credit institutions now have to reuse microchips in bank cards. Difficulties arise not only in civilian areas, but also in the military. For example, RAND believes that the fall of six military aircraft in Russia in the fall was due to a lack of necessary Western spare parts and equipment, the import of which is impossible due to sanctions.

China needs modern Western microchips to win the race to create artificial intelligence, which opens the door to technological dominance in the 21st century. In October 2022, the Joe Biden administration imposed a ban on exports to China of super-powerful artificial intelligence microchips, equipment for their production, and a number of other semiconductor technologies. Moreover, Washington's restrictions affected not only microchips made in America, but in general all microchips made using American technologies. A week later, the US imposed restrictions on the work of its citizens in Chinese microchip factories.

GCSP experts note that in addition to the ban on the supply of high-tech products and technologies, it is necessary to introduce mechanisms for effective control of such restrictions. The Wassenaar Agreements, concluded in 1996 between 33 countries, including Russia, are not such. Therefore, a possible solution could be the revival of the Coordinating Committee for Export Controls (CoCOM), which compiled lists of "strategic" goods and technologies that could not be exported to the countries of the Eastern bloc during the Cold War and ceased to operate after the collapse of the USSR.

However, the strategy of technological restrictions and the sanctions imposed by the United States against China have become the subject of heated controversy. Famed emerging economist Dany Rodrik of Harvard sees it as a mistake: China will view such sanctions as an “aggressive escalation” and look for a way to strike back, mutual distrust and market tensions will only escalate and cause reciprocal damage to Western economies. Former Swedish Prime Minister Carl Bildt believes that the Biden administration's decision undermines the principles of free trade and gives an advantage to China, which will continue to pursue an aggressive trade policy and build bilateral trade and economic relations with many countries, which will ultimately increase its political influence in the world. Russian economist Sergey Guriev of Sciences Po, on the contrary, believes that the concept of "friendshoring" put forward by US Treasury Secretary Janet Yellen, which involves building trade and production chains primarily with friendly countries, has significant prospects and a greater economic justification than is commonly believed. . In his opinion, reducing dependence on trade with autocracies will allow Western countries to better withstand the threats emanating from non-democratic countries, and in the long run will help preserve the principles of free trade that undermine authoritarianism.