Since the invasion of Ukraine on February 2022, Russia has faced an array of sanctions from the international community. The country's tech ecosystem has not been spared from the repercussions, with over 1,000 companies curtailing their operations in Russia. Russia has been making several moves to counteract the effects of the sanctions.
Since the invasion of Ukraine on February 2022, Russia has faced an array of sanctions from the international community. The country's tech ecosystem has not been spared from the repercussions, with over 1,000 companies curtailing their operations in Russia. However, the country has been making several moves to counteract the effects of the sanctions, and one of the latest developments is the move to launch its own Android phones through the National Computer Corporation (NCC).
International sanctions on Russia date back to March 2014, when in response to the Russian annexation of Crimea, several nations, notably the US, Canada, the EU, and international organizations, imposed several restrictions that quickly beset the Russian economy. Speaking at a news conference in November 2014, Russia's finance minister, Anton Siluanov said,
“We’re losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent,”
acknowledging the damage caused by the sanctions. According to a report by CESifo Forum, Russia’s GDP increased by only 0.7 percent in 2014 but declined by 2.3 percent the next year, and so began a series of long recessions in the country. Although the Russian economy rebounded subsequently, the GDP growth of the nation continued to lag behind that of the global economy, indicating that Russia's significance to the world economy has been on a downswing since the invasion of Crimea.
Yet, on February 24, 2022, Russia initiated a full-scale invasion of Ukraine, and this was followed by another rollout of sanctions. The first set of sanctions was targeted at Russia’s banking and financial sector but also included the technology sector. On the same day of the invasion, the British Prime Minister, Boris Johnson, announced what was at the time considered the "biggest ever" set of sanctions against Russia. All of the major Russian banks' assets were frozen, and hi-tech exports were also banned.
Along with attempting to limit access to strategic technology, the Western world seemed determined to cripple Russia’s economy. Boris suggested that “Russia should be squeezed from the global economy, piece by piece.”
"We will continue to target Putin's war machine with sanctions from every angle until this senseless war of choice is over,"
the United States Treasury Secretary, Janet Yellen said. Generally speaking, the extensive restrictions that were deployed by the United States and others on Russia were intended to have long-term destabilizing effects. A Fact Sheet released by the White House on the same day of Ukraine’s invasion stated,
“Today’s actions include sweeping financial sanctions and stringent export controls that will have profound impact on Russia’s economy, financial system, and access to cutting-edge technology.”
Semiconductors, computers, telephones, equipment for information security, lasers, and sensors were among the first products that were subject to strict export regulations. These limitations were further increased by focusing on Russia's oil refining industry and strengthening regulations on the export and re-export of sensitive dual-use technology, software, or products that could aid Russia's military endeavors.
Russia’s Efforts to Curtail the Effects of the Sanctions
Despite rising sanctions, a looming recession, and a migration of foreign companies, Russia has stepped up its efforts to achieve technological independence, the most recent of which is to manufacture its own Android phone. The decision came a few days after the US Department of Commerce forbade the exportation of phones and other devices to Russia that cost more than $300.
The NCC - a Russian state corporation that focuses on the development of information technology products and services - was the largest IT corporation in Russia in 2019 with a revenue of 215.7 billion rubles, and still maintains a top ranking today. The company expects to build 100,000 smartphones and tablets by the end of this year. Alexander Kalinin, the company's founder, also pledged 10 billion rubles to the venture with the aim of gaining 10% of the consumer market by 2026.
Russia has also made efforts to manufacture its chips, following restrictions on chip exportations placed on the country by the Biden administration. The dual-purpose technology is majorly responsible for the Russian military apparatus's capacity for operation. The restrictions applied to expensive GPUs sold by Silicon Valley firms Nvidia and AMD.
The ban impacted Russia’s military capacity and economy in general, at one point, Russia resorted to smuggling chips into the country from China, and the majority of these illegal imports turned out to be subpar. The current diplomatic priority of the United States, however, is to stop China from providing Russia with items that are subject to American export restrictions.
In recent times, Russia has also strived to create a national payment system, which will enable individuals to conduct transactions without relying on Western payment systems like Visa and Mastercard. The imposition of sanctions on Russia's finance sector included the exclusion of many significant Russian banks from SWIFT (the world’s principal global payments network) as well as the full stalling of operations for MasterCard and Visa, which served domestic payments in Russia and were also used by migrants to make transfers.
To circumvent international constraints, Russia has been stretching the limits of its domestic financial system. Mir, the nation's domestic payment system launched in 2014 is responsible for 34.9% of debit and credit card issuance as well as 31.9% of all domestic card transactions in Russia. It is accepted across all of Russia and in eight other nations.
Broadly speaking, Russia has been trying to substitute imports with domestic production, but its annual imports of high-tech goods totaling over $19 billion show that the country’s economy has been heavily dependent on these imports, and despite a directive to disentangle companies from Western software, Russian businesses, and government-owned industries continue to be highly dependent on imported software and hardware. The Russian economy has been described as "an internally corrupt, western technology-dependent resource behemoth" that is plagued by a natural resource curse in a study by a group of acclaimed experts.
Will these domestic solutions save Russia from the stringent effort of the Western world to cripple its technological advancements? Speaking to Hackernoon, Tom Kellermann, senior vice president of cyber strategy at Contrast Security said, "It will not." According to him, the sanctions imploded the Russian tech industry,
“Between the restriction of access to western hardware and software to the historic flight of Russian technologists to other countries, the sector collapsed."
Tom believes that Russian phones' inability to use contemporary apps and western cloud infrastructure will undermine their viability.
The state of Russia’s Technology startups
To a large extent, Russia's economy is highly dependent on oil and gas. Russian officials frequently emphasized the need to develop a high-tech sector and diversify the economy away from its reliance on this sector. The nation set a goal to achieve net zero emissions by 2060 in 2021. Evidently, startups and innovation are not the Russian economy's strongest suit, According to StartupBlink, the Startup Ecosystem of Russia is ranked at number 29 globally, and shows a negative momentum decreasing -20 spots since 2021.
Mikko Hyppönen, Chief Research Officer of WithSecure, said while speaking to Hackernoon,
“Russia’s technology exports are astonishingly small. It's the biggest country on the planet, yet not many of us can name a Russian smartphone or computer brand!”
He claims that in actuality, the most successful software from Russia is Tetris, which was created in 1984! Other international success stories from Russia are unfamiliar to those outside the technology industry: Softline, Infowatch, Acronis, Parallels, Nginx, Kaspersky, Agnitum, and Cboss, among others. But the democratic west wants to have nothing to do with Russian companies, these companies have had their share of troubles.
The multiple sanctions have had an obvious and substantial impact on tech startups, with many finding it difficult to get the resources and finance they need to expand. Western companies are not the only ones leaving, many IT experts have fled the country also. In addition to the negative effects of private enterprises' decisions to leave the Russian market, the Russian economy is also experiencing a brain drain as a result of its human resource leaving the nation.
According to Matthew Murray, a senior official in the U.S. Commerce Department, the sanctions will set back Russia's venture capital sector by about a decade. He claims that it takes money and investors to build an innovative economy. But as long as there are sanctions in place, Russia won't receive either.
Maxim Kachinkin, a software engineer and Android Tech Lead at Dodo Brands company, one of the biggest growing franchises originally from Russia said,
“Many engineers don't want to stay and work in Russia and for a Russian company and will simply leave. They don't see their future in Russia and don't want to pay taxes to Russian authorities.”
Even though the Russian government previously provided tax incentives to support domestic tech enterprises and entice specialized personnel back into the nation, the tech sector is still hurting. After the announcement of the provision, the Massachusetts Institute of Technology said that it will end its collaboration with the Russian government to establish a high-tech research institute in Moscow. To establish the Skolkovo Institute of Science and Technology, or "Skoltech," MIT and the Russian Skolkovo Foundation entered into a partnership in 2010. The undertaking served as the foundation for the $3 billion Skolkovo Innovation Center, a government initiative to create a local Silicon Valley which was a big flaw.
What Lies ahead?
An investigation by DGAP claimed that the government of Russia pursues digital sovereignty with two key objectives in mind: information control and technological independence. Although Russia has made strides in recent years to better manage the internet, the assessment concluded that its people and economy cannot yet be entirely cut off from the global internet and foreign technologies without suffering severe repercussions. The lofty objectives for achieving technology sovereignty by the Russian government are not currently being realized due to insufficient funding for digital development.
According to Tom,
"The only Russian tech ecosystem that is and will thrive is the cybercrime service-based economy. Russia still has a 'Silicon Valley,' it exists in the Darkweb."
Richard Gardner, CEO & Founder at Anthrop LLC speaking to Hackernoon said that he expects that the Russian plan to sidestep sanctions with its operating system will fall flatly on its face. According to him, you need only look at the technology the country has offered on the battlefield to get a sense of what a logistical nightmare this proposition will become. It will take decades, and perhaps even a generation, for Russia’s tech community to recover from Putin’s geopolitical boondoggle.
For the most part, the future of Russia’s economy amidst sanctions is uncertain. In Mikko Hyppönen's opinion,
“The future of Russian tech looks bleak. This won't change until the leader in the Kremlin changes and Russia leaves Ukrainian territory.”
