How U.S. microchips are fueling Russia’s military — despite sanctions
Western microchips used to power smartphones and laptops are continuing to enter Russia and fuel its military arsenal, new analysis shows.
Trade data and manifests analyzed by CNBC show that Moscow has been sourcing an increased number of semiconductors and other advanced Western technologies through intermediary countries such as China.
In 2022, Russia imported $2.5 billion worth of semiconductor technologies, up from $1.8 billion in 2021.
Semiconductors and microchips play a crucial role in modern-day warfare, powering a range of equipment including drones, radios, missiles, and armored vehicles.
The sanctions evasion and avoidance is surprisingly brazen at the moment.
Elina Ribakova
senior fellow at the Peterson Institute for International Economics
Indeed, the KSE Institute — an analytical center at the Kyiv School of Economics — recently analyzed 58 pieces of critical Russian military equipment recovered from Ukraine’s battlefield and found more than 1,000 foreign components, primarily Western semiconductor technologies.
Many of these components are subject to export controls. But, according to analysts CNBC spoke to, convoluted trade routes via China, Turkey, the United Arab Emirates and elsewhere mean they are still entering Russia, adding to the country’s pre-war stockpiles.
A collection of 58 pieces of Russian weaponry captured from the battlefield in Ukraine, such and drones and missiles, contained more than 1,000 Western components, according to a study from the KSE Institute.
CNBC
“Russia is still being able to import all the necessary Western-produced critical components for its military,” said Elina Ribakova, senior fellow at the Peterson Institute for International Economics, and one of the authors of KSE Institute’s report.
“The sanctions evasion and avoidance is surprisingly brazen at the moment,” she added.
Murky supply chains
Not all advanced technologies are subject to Western sanctions on Russia.
Many are dubbed dual-use items, meaning they have both civilian and military applications, and therefore fall outside of the scope of targeted export controls. A microchip may have applications in both a washing machine and a drone, for instance.
Still, many of these products originate from Western nations with sweeping trade bans against Moscow and, specifically, its military. All U.S.-origin items except food and medicine are prohibited from reaching Russia’s army.
It’s difficult to stop strictly civilian microelectronics from crossing borders.
Sam Bendett
advisor at the Center for Navel Analyses
In KSE’s study, more than two-thirds of the foreign components identified in Russian military equipment ultimately originated from companies headquartered in the U.S., with others coming from Ukrainian allies including Japan and Germany.
CNBC was unable to verify whether the implicated companies were aware of the final destination of their goods. Swiss authorities said they were working with firms to “educate them on red flags,” while government spokespeople for the other countries cited did not immediately respond to a request for comment.
Separately, a study from the Royal United Services Institute found that Russia’s military uses over 450 different types of foreign-made components in its 27 most modern military systems, including cruise missiles, communications systems and electronic warfare complexes. Many of these parts are made by well-known U.S. companies that create microelectronics for the U.S. military.
More than two-thirds of tech elements recovered in KSE Institute’s study originated from companies headquartered in the U.S.
CNBC
“Over decades, non-Russian high-tech systems and technologies became more advanced and really have become industry and global standards. So, a Russian military, as well as its civilian economy, have become dependent,” Sam Bendett, advisor at the Center for Naval Analyses, said.
The ubiquity and wide-reaching applications of such technologies have led them to become intertwined in global supply chains and therefore harder to police. Meanwhile, sanctions on Russia are largely limited to Ukraine’s Western allies, meaning that many countries continue to trade with Russia.
“It’s difficult to stop strictly civilian microelectronics from crossing borders and from taking place in global trade. And this is what the Russian industry as well as the Russian military and its intelligence services are taking advantage of,” Bendett said.
Russia-China trade spikes
Those trade flows can be messy. Typically, a shipment may be sold and resold several times, often through legitimate businesses, before eventually reaching a neutral intermediary country, where it can then be sold to Russia.
Data suggests China is by far the largest exporter to Russia of microchips and other technology found in crucial battlefield items.
Sellers from China, including Hong Kong, accounted for more than 87% of total Russian semiconductor imports in the fourth quarter of 2022, compared with 33% in Q4 2021. More than half (55%) of those goods were not manufactured in China, but instead produced elsewhere and shipped to Russia via China and Hong Kong-based intermediaries.
China is really trying to accumulate and to make profits and gains on the fact that Russia is economically isolated.
Olena Yurchenko
“This should not be taken as a surprise because China is really trying to accumulate and to make profits and gains on the fact that Russia is economically isolated,” Olena Yurchenko, advisor at the Economic Security Council of Ukraine, said.
China’s trade department did not respond to a request for comment on the findings, nor did the Russian government.
Meantime, Moscow has also increased its imports from so-called intermediary countries in the Caucasus, Central Asia and the Middle East, according to national trade data.
Exports to Russian from Central Asia and Caucasus countries has increased significantly since Moscow’s full-scale invasion of Ukraine, trade data shows.
CNBC
Exports to Russia from Georgia, Armenia and Kyrgystan, for instance, surged in 2022, with vehicles, aircraft and vessels accounting for a significant share of the uptick. At the same time, European Union and U.K. exports to those countries rose, while their direct trade with Russia plunged.
“A lot of these countries really cannot sever certain types of trade with Russia, especially those nations which are either bordering Russia, like Georgia, for example … as well as nations in Central Asia, which maintain a very significant trade balance with the Russian Federation,” Bendett said.
The governments of Georgia, Armenia and Kyrgyzstan did not respond to CNBC’s request for comment on the increase in trade.
Sanctions clampdown
The burgeoning trade flows have prompted calls from Western allies to either get more countries on board with sanctions, or slap secondary sanctions on certain entities operating within those countries in a bid to stifle Russia’s military strength.
In June 2023, the European Union adopted a new package of sanctions which includes an anti-circumvention tool to restrict the “sale, supply, transfer or export” of specified sanctioned goods and technology to certain third countries acting as intermediaries for Russia.
The package also added 87 new companies in countries spanning China, the United Arab Emirates and Armenia to the list of those directly supporting Russia’s military, and restricted the export of 15 technological items found in Russian military equipment in Ukraine.
If we have certain moral values … we cannot be giving [to Ukraine] with one hand and then giving to Russia with the other.
Elina Ribakova
senior fellow at the Peterson Institute for International Economics
“We are not sanctioning these countries themselves. What we are doing is preventing an already sanctioned product, which should not reach Russia, from reaching Russia through a third country,” EU spokesperson Daniel Ferrie said.
However, some are skeptical that the measures go far enough — particularly when it comes to major global trade partners.
“[The sanctions] may work against, let’s say, Armenia or Georgia, which are not big trade partners for European Union or for the United States. But in when it comes, for instance, to China or to Turkey, that’s a very unlikely scenario,” the Economic Security Council of Ukraine’s Yurchenko said.
Others say that responsibility ultimately lies with the companies, which need to do more to monitor their supply chains and avoid their goods falling into the wrong hands.
“The companies themselves should have the infrastructure to be able to track it and comply with export controls,” Ribakova said.
“If we have certain moral values or national security objectives, we cannot be giving [to Ukraine] with one hand and then giving to Russia with the other.”
Microsoft Chief Executive Officer (CEO) Satya Narayana Nadella speaks at a live Microsoft event in the Manhattan borough of New York City, October 26, 2016.
Lucas Jackson | Reuters
Microsoft‘s Build developer conference kicks off on Tuesday, giving the company the opportunity to showcase its latest artificial intelligence projects, following high-profile events this month hosted by OpenAI and Google.
One area where Microsoft has a distinct advantage over others in the AI race is in its ownership of Windows, which gives the company a massive PC userbase.
Microsoft CEO Satya Nadella said in January that 2024 will mark the year when AI will become the “first-class part of every PC.”
The company already offers its Copilot chatbot assistant in the Bing search engine and, for a fee, in Office productivity software. Now, PC users will get to hear more about how AI will be embedded in Windows and what they can do with it on new AI PCs.
Build comes days after Google I/O, where the search giant unveiled its most powerful AI model yet and showed how its Gemini AI will work on computers and phones. Prior to Google’s event, OpenAI announced its new GPT-4o model. Microsoft is OpenAI’s lead investor, and its Copilot technology is based on OpenAI’s models..
For Microsoft, the challenge is twofold: keeping a prominent position in AI and bolstering PC sales, which have been in the doldrums for the past two years following an upgrade cycle during the pandemic.
In a recent note on Dell to investors, Morgan Stanley analyst Erik Woodring wrote that he remains “bullish on the PC market recovery” due to commentary from customers and recent “upward revisions to notebook” original design manufacturer (ODM) builds.
Technology industry researcher Gartner estimated that PC shipments increased 0.9% in the quarter after a multi-year slump. Demand for PCs was “slightly better than expected,” Microsoft CFO Amy Hood said on the company’s quarterly earnings call last month.
New AI tools from Microsoft could offer another reason for enterprise and consumer customers to upgrade their aging computers, whether they’re made by HP, Dell or Lenovo.
“While Copilot for Windows does not directly drive monetization it should, we believe, drive up usage of Windows, stickiness of Windows, customers to higher priced more powerful PCs (and therefore more revenue to Microsoft per device), and likely search revenue,” Bernstein analysts wrote in a note to investors on April 26, the day after Microsoft reported earnings.
While Microsoft will provide the software to handle some of the AI tasks sent to the internet, its computers will be powered by chips from AMD, Intel and Qualcomm for offline AI jobs. That could include, for example, using your voice to ask Copilot to summarize a transcription without a connection.
What’s an AI PC?
The key hardware addition to an AI PC is what’s called a neural processing unit. NPUs go beyond the capabilities of traditional central processing units (CPUs) and are designed to specifically handle artificial intelligence tasks. Traditionally, they’ve been used by companies like Apple to improve photos and videos or for speech recognition.
Microsoft hasn’t said what AI PCs will be capable of yet without an internet connection. But Google’s PIxel 8 Pro phone, which doesn’t have a full computer processor, can summarize and transcribe recordings, recommend text message responses and more using its Gemini Nano AI.
Computers with Intel’s latest Lunar Lake chips with a dedicated NPU are expected to arrive in late 2024. Qualcomm’s Snapdragon X Elite chip with an NPU will be available in the middle of this year, while AMD’s latest Ryzen Pro is expected sometime during the quarter.
Intel says the chips allow for things like “real-time language translation, automation inferencing, and enhanced gaming environments.”
Apple has been using NPUs for years and recently highlighted them in its new M4 chip for the iPad Pro. The M4 chip is expected to launch in the next round of Macs sometime this year.
Windows on Arm
Qualcomm, unlike Intel and AMD, offers chips powered by Arm-based architecture. One of Microsoft’s sessions will talk about “the Next Generation of Windows on Arm,” which will likely cover how Windows runs on Qualcomm chips and how that’s different from Intel and AMD versions of Windows.
Intel still controls 78% of the PC chip market, followed by AMD at 13%, according to recent data from Canalys.
In the past, Qualcomm has promoted Snapdragon Arm-based computers by touting their longer battery life, thinner designs and other benefits like cellular connections. But earlier versions of Qualcomm’s chips were limited in what they offered consumers. In 2018, for example, the company’s Snapdragon 835 chip couldn’t run most Windows applications.
Microsoft has since improved Windows to handle traditional apps on Arm, but questions remain. The company even has an FAQ page dedicated to computers running on ARM hardware.
AI everywhere else
Microsoft will also be hosting sessions like “AI Everywhere” covering how to “accelerate generative AI models” on devices that run in the cloud.
An “Azure AI Studio” session will look at how developers can create their own Copilot chatbots, which may be similar to what Google and OpenAI are doing with Gemini and ChatGPT. Imagine, for example, a company creating a chatbot that can help employees select health benefits.
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Boaz Weinstein, founder and chief investment officer of Saba Capital Management, during the Bloomberg Invest event in New York, US, on Wednesday, June 7, 2023.
Jeenah Moon | Bloomberg | Getty Images
Boaz Weinstein, the hedge fund investor on the winning side of JPMorgan Chase’s $6.2 billion, “London Whale” trading loss in 2011, is now taking on index fund giant BlackRock.
On Friday, Weinstein‘s Saba Capital detailed in a presentation seen by CNBC its plans to push for change at 10 closed-end BlackRock funds that trade at a significant discount to the value of their underlying assets compared to their peers. Saba says the underperformance is a direct result of BlackRock’s management.
The hedge fund wants board control at three BlackRock funds and a minority slate at seven others. It also seeks to oust BlackRock as the manager of six of those ten funds.
“In the last three years, nine of the ten funds that we’re even talking about have lost money for investors,” Weinstein said on CNBC’s “Squawk Box” earlier this week.
At the heart of Saba’s “Hey BlackRock” campaign is an argument around governance. Saba says in its presentation that BlackRock runs those closed-end funds the “exact opposite” way it expects companies to run themselves.
BlackRock “is talking out of both sides of its mouth” by doing this, Saba says. That’s cost retail investors $1.4 billion in discounts, by Saba’s math, on top of the management fees it charges.
BlackRock, Saba says in the deck, “considers itself a leader in governance, but is crushing shareholder rights.” At certain BlackRock funds, for example, if an investor doesn’t submit their vote in a shareholder meeting, their shares will automatically go to support BlackRock. Saba is suing to change that.
A BlackRock spokesperson called that assertion “very misleading” and said those funds “simply require that most shareholders vote affirmatively in favor.”
The index fund manager’s rebuttal, “Defend Your Fund,” describes Saba as an activist hedge fund seeking to “enrich itself.”
The problem and the solution
Closed-end funds have a finite number of shares. Investors who want to sell their positions have to find an interested buyer, which means they may not be able to sell at a price that reflects the value of a fund’s holdings.
In open-ended funds, by contrast, an investor can redeem its shares with the manager in exchange for cash. That’s how many index funds are structured, like those that track the S&P 500.
Saba says it has a solution. BlackRock should buy back shares from investors at the price they’re worth, not where they currently trade.
“Investors who want to come out come out, and those who want to stay will stay for a hundred years, if they want,” Weinstein told CNBC earlier this week.
Weinstein, who founded Saba in 2009, made a fortune two years later, when he noticed that a relatively obscure credit derivatives index was behaving abnormally. Saba began buying up the underlying derivatives that, unbeknownst to him, were being sold by JPMorgan’s Bruno Iksil. For a time, Saba took tremendous losses on the position, until Iksil’s bet turned sour on him, costing JPMorgan billions and netting Saba huge profits.
Saba said in its investor deck that the changes at BlackRock could take the form of a tender offer or a restructuring. The presentation noted that BlackRock previously cast its shares in support of a tender at another closed-end fund where an activist was pushing for similar change.
At the worst-performing funds relative to their peer group, Saba is seeking shareholder approval to fire the manager. In total, BlackRock wants new management at six funds, including the BlackRock California Municipal Income Trust (BFZ), the BlackRock Innovation and Growth Term Trust (BIGZ) and the BlackRock Health Sciences Term Trust (BMEZ).
“BlackRock is failing as a manager by delivering subpar performance compared to relevant benchmarks and worst-in-class corporate governance,” the deck says.
If Saba were to win shareholder approval to fire BlackRock as manager at the six funds, the newly constituted boards would then run a review process over at least six months. Saba says that in addition to offering liquidity to investors, its board nominees would push for reduced fees and for other unspecified governance fixes.
A BlackRock spokesperson told CNBC that the firm has historically taken steps to improve returns at closed-end funds when necessary.
“BlackRock’s closed-end funds welcome constructive engagement with thoughtful shareholders who act in good faith with the shared goal of enhancing long-term value for all,” the spokesperson said.
Weinstein said Saba has run similar campaigns at roughly 60 closed-end funds in the past decade but has only taken over a fund’s management twice. The hedge fund sued BlackRock last year to remove that so-called “vote-stripping provision” at certain funds and filed another lawsuit earlier this year.
BlackRock has pitched shareholders via mailings and advertisements. “Your dependable, income-paying investment,” BlackRock has told investors, is under threat from Saba.
Saba plans to host a webinar for shareholders on Monday but says BlackRock has refused to provide the shareholder list for several of the funds. The BlackRock spokesperson said that it has “always acted in accordance with all applicable laws” when providing shareholder information, and that it “never blocked Saba’s access to shareholders.”
“What we want is for shareholders, which we are the largest of but not in any way the majority, to make that $1.4 billion, which can be done at the press of a button,” Weinstein told CNBC earlier this week.
WATCH: CNBC’s full interview with Saba Capital’s Boaz Weinstein
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