Apr 18, 2023
Russian Memo Said War Leaves Moscow Too Reliant on Chinese Tech
(Bloomberg) -- Senior Russian officials privately raised concerns some 10 months ago about the risks of becoming too dependent on Chinese technologies after sanctions by the US and the European Union shut off access to alternative suppliers.
A previously unreported assessment from inside Russia’s Ministry of Digital Development, Communications and Mass Media suggests that some senior officials are worried that Chinese companies such as Huawei Technologies Co. Ltd. could come to dominate the Russian market and may pose a risk to the country’s information security and networks.
European officials familiar with the document said it suggests that Russia has backed itself into a corner since it struggles to produce advanced technology domestically and has been cut off from other foreign markets following the invasion of Ukraine. The report, drafted in the summer of 2022, highlights chips, network devices and electronics as areas of particular vulnerability.
Since then, the Russian authorities have managed to import some sanctioned US and European components via third countries, including through mainland China and Hong Kong, Bloomberg previously reported. But the US and the EU are tightening efforts to enforce their trade restrictions, suggesting procuring advanced technology may get more difficult.
The European officials said the assessment had been shared among several people in the General Staff of the Armed Forces, Russia’s most senior military body, as well as some on the Security Council, which includes the country’s defense and foreign affairs ministers and is led by President Vladimir Putin.
The Russian worries about becoming over reliant on companies such as Huawei, China Mobile Ltd. and others echo some of the concerns raised in the US and parts of Europe about the security risk involved in using Chinese technology in sensitive parts of their information networks.
The analysis also underlines one of many strategic costs that the Kremlin has incurred since most economic ties to the EU and the US were severed due to the war: increased leverage for China.
The officials familiar with the memo said it confirms more recent reports that Russia has been seeking to source several technologies from China, such as radio electronics, routers, base stations, microelectronics, chips and materials used in semi-conductors.
While the officials said the document makes no mention of weapons, the US has sanctioned several Chinese companies for supplying components and goods allegedly used for military purposes in Ukraine.
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There are still no signs of direct military support from China to Russia and the US and its allies are confident they would be able to detect any movement of significant military equipment from China, a European diplomat familiar with that assessment said.
The Biden administration has warned Beijing not to provide Moscow with weapons. China has repeatedly said it hasn’t supplied Russia with weapons and accuses the US of stoking the conflict by providing arms to Ukraine.
The memo references multiple conversations between Russian and Chinese officials, including four video conference calls, in which the authors say supplies of tech components, boosting production capacity inside Russia and potential Chinese investments in Russian industry were discussed. According to the people familiar with the Russian document, those talks included officials from the ministry of trade and industry in Moscow and their Chinese counterparts, as well as representatives of Russian and Chinese companies.
The Chinese Foreign Ministry said it could not verify the authenticity of the information and that Beijing has a normal trading relationship with Russia. The Ministry of Digital Development, Communications and Mass Media in Moscow didn’t reply to a request for comment.
Russia prepared a list for Chinese officials detailing the goods it needs, also including equipment used in communications, networks, broadcasting and data centers, according to the people familiar with the document.
Russian officials still have ambitions of producing critical equipment themselves and people who spoke with Bloomberg say the memo suggests they are worried that their reliance on China may also hold back their domestic industry. That said, the Russian military started trying to replace foreign-made components with locally produced parts in its weapons systems years ago, and that effort has mostly failed, underlining the challenges Moscow faces in replicating advanced technology.
Not all the goods mentioned in the paper contain US- or EU-made parts, but, according to the Russian authors’ assessment, there are likely no technologies in the segments of interest that don’t at least depend on US or European intellectual property or production equipment such as chipmaking gear.
China has repeatedly criticized the use of sanctions to isolate Russia, but its companies have nevertheless been careful not to be seen in breach of US and EU measures, fearing that they could find themselves in the crosshairs of economic restrictions of their own. At a meeting with Putin last month, Chinese President Xi Jinping committed to significantly increase bilateral trade.
In March, Xi also met with Russian Prime Minister Mikhail Mishustin where the two committed to expand cooperation on trade, including on hi-tech, according to the news agency Xinhua. Russia is willing to strengthen cooperation with China in such areas as investment, trade, energy, natural gas, peaceful use of nuclear energy, aviation and aerospace, scientific and technological innovation, cross-border transportation and logistics, and strengthen communication and cooperation in the safety of supply and industrial chains, food security and other issues, Mishustin said.
Total two-way merchandise trade between China and Russia jumped 72% to $190.3 billion in 2022 versus the pre-pandemic level of $110.9 billion in 2019, according to the Geneva-based Trade Data Monitor. The data show a marked increase in Russian imports of Chinese smartphones, motor vehicles and construction equipment. In return, Beijing increased its purchases of Russian energy products like oil, coal and natural gas.
The EU and Group of Seven nations have now stepped up their focus on sanctions circumvention, especially by enhancing their monitoring of so-called dual-use goods that can serve either military or civilian purposes. That effort has involved applying diplomatic pressure on third countries and putting in place tools to identify and target companies that may be helping Russia to get around restrictions.
Last Thursday, the US sanctioned dozens of entities in 20 countries it accused of helping Moscow evade sanctions.
The officials said that the memo describes how some more sensitive items such as radio-electronic devices may reach Russia through so-called partner channels.
Under that system, a manufacturer moves the items via land to an intermediary which then exports them to Russia, often via a third country. Transactions would be carried out in local currency, and product labels and customs documents could be altered, according to accounts of the Russian assessment. Some equipment may be unbranded.
Lower risk products such as mobile phones are often shipped through more regular paths but are increasingly sold through third-party dealers rather than directly.
The European officials said that the paper sets out Russian concerns that having communications networks depend on Huawei devices poses a danger to information security, as well as to the reliability of networks and diminished opportunities for domestic providers. The assessment even suggests considering restrictions on technologies produced by Huawei and other Chinese companies in order to avoid a scenario of total dependence.
Huawei’s press office in Berlin said it wasn’t able to immediately respond to a request for comment. The company has repeatedly rejected such allegations.
Among other potential countermeasures, it suggests:
- Imposing quotas on Chinese goods
- Pushing Chinese firms to shift production to Russia
- Demanding Chinese providers use Russian nationals and sub-contractors
- Limiting the use of unbranded equipment
- Incentives such as long-term contracts and subsidies for Russian developers and telecommunication companies
Given the state of Russia’s communications networks, the officials said that the memo’s authors saw no immediate pressure for Russia to rush into full scale agreements with Chinese companies and Moscow had another one to two years to buy time that would be useful to enhance its domestic capacity and capabilities. That assessment though is now almost a year old.
--With assistance from Colum Murphy, Agatha Cantrill and Bryce Baschuk.
©2023 Bloomberg L.P.