The Russian Federation government is considering adding chip designers Baikal Electronics and MCST to the list of 'backbone enterprises.' The status will provide Baikal and MSCT with numerous benefits, including subsidies. State aid might help these companies to transition the production of their chips from Taiwan to China. Meanwhile, it is unclear whether fabs like SMIC and Hua Hong are interested in making chips for Russian companies and risk additional sanctions.
"Such a move could also be aimed at transferring the production of Russian processors from the Taiwanese TSMC, which abandoned their production due to sanctions, to Chinese factories," a report by CNews reads.
China to Save Russian Chip Industry?
Amid the global chip deficit, prominent Chinese foundries like SMIC and Hua Hong have landed large orders from existing and new clients. Officially, SMIC has been operating at over 100% capacity for several quarters now, so it is unclear whether it can even make chips for Baikal and MCST. Another question is whether those companies can legally produce those processors.
Right after Russian forces invaded Ukraine in late February, the United States, United Kingdom, and the European Union imposed multiple restrictions on exports to Russia aimed to restrict the country's military and intelligence capabilities. Under the new rules, American companies need to obtain a license from the U.S. government to export semiconductors, computers, telecommunications, information security equipment, aircraft components, dual-use items, and other high-tech gear or components to Russia. Non-American companies need to obtain a similar export license from the U.S. if they use any technology developed in the States, which applies to nearly all high-tech products on the planet.
While many media outlets highlight ASML, the world's largest supplier of lithography equipment, as the key maker of semiconductor production tools, there are a half-dozen U.S.-based companies (Applied Materials, KLA, Lam Research, etc.) that build fab equipment without which fabs cannot function. As a result, virtually all foundries in the world need to obtain an export license from the U.S. government if they want to make chips for companies like Huawei, Phytium, Sunway, or essentially all Russian chipmakers.
License applications to produce chips for the said companies are undertaken with a presumption of denial. So given the current attitude towards Russia, it is unlikely that SMIC and Hua Hong can actually help Russia to save its two major developers of CPUs. Furthermore, it is unclear from where Baikal could get contemporary Arm licenses as the U.K. has also imposed sanctions against the Russian high-tech industry.
Nonetheless, it looks like the Russian government is desperate enough to consider subsidizing local chip designers first and find out its potential capabilities later.
Strategically Important Companies?
Baikal Electronics is the developer of Arm and MIPS-based system-on-chips that are used mostly for PCs and other computer-based devices used by various governments, but which are actively promoted among large PC OEMs by the government (without any tangible success). MCST develops Elbrus processors designed for heavy-duty, mission-critical, service, and personal computing. Some of Baikal and Elbrus chips have been officially positioned as dual-use processors. Both companies used TSMC for manufacturing of their chips. But TSMC was forced to cease supplying them due to export restrictions (at least until obtaining an export license from the U.S. government).
Backbone enterprises, or strategic enterprises, are companies that are essential for a particular industry, hire loads of people, are big taxpayers, or have a significant influence in the economic development of the country. For example, 1C, Yandex (which is registered in Schiphol, the Netherlands, but which is largely based in Russia with offices in 30 more countries), and Kaspersky Labs are considered backbone or strategically important companies. These important companies can get multiple benefits from the government, including subsidies, government assurances for loans, tax deferrals, and more.
While Baikal Electronics and MSCT are important for the Russian chip industry, they are not big employers or major taxpayers. Therefore, there are two main reasons to help them with federal money: to keep them afloat as they hire valuable specialists and to try transition production of their processors from TSMC to China-based SMIC (which has nodes down to 14nm and some more advanced developers) and Hua Hong (with its most-advanced node being 65/55nm). The government will review the possibility of including Baikal and MCST into the list of strategically important companies in April.
Moving production of a chip design from one foundry to another (i.e., from one process technology to another) is a very complex process that involves a redesign of its physical implementation. This endeavor takes a lot of time (as it includes all the steps typically associated with a launch of a new chip) and costs a lot of money.
Help, or Harm?
For Russia, it is important to keep its leading chip designers alive, and this is where state aid might help. Furthermore, there are companies calling to support makers of servers and PCs based on chips from local developers.
"The technologies that such companies are engaged in are undoubtedly crucial for the development of all sectors of the Russian economy," said Maxim Koposov, chief executive of Promobit, a manufacturer of Bitblaze servers and data storage systems based on Elbrus processors. He calls for the government to support companies who use Russian processors. "In fact, they are backbone/strategic enterprises, although they may not meet the currently accepted criteria for the number of employees and revenue."
But the very inclusion of Baikal Electronics and MSCT into the list of strategically important enterprises might hurt them, as they will likely become targets for further sanctions by the U.S. and the West in general.
"The list of enterprises important for the country is closely monitored from abroad," said one source from the Russian high-tech industry. "So, [by including them in the list] the state itself helps [foreign governments to] to create and update sanctions lists."
Another source from the industry believes that it will be more helpful to distance these design centers from the state government and only include them into the list of strategically important entities after the situation stabilizes.
