Opportunity in Chaos
"In the midst of chaos, there is also opportunity." This oft-quoted aphorism, written by Sun Tzu in The Art of War, highlights one of the most concerning yet frequent components of conflict—namely, that wars tend to cause power vacuums external actors are eager to exploit. Historically, nations may have been the most likely to exploit the power vacuums created by conflict, but in modern times, governments may also be joined by corporations in their attempt to exploit instability for gain. Nowhere can this be more clearly seen today than in Russia's invasion of Ukraine.
Russia's invasion of Ukraine in February 2022 shattered 75 years of peace in Europe, and, in the weeks since, the conflict has turned into a bitter, slow-moving struggle throughout much of eastern Ukraine. Yet, while Ukrainians fight the Russians with guns and drones, the United States and its Western allies have chosen to fight with dollars and euros. The sanctions placed by the United States and European Union against the Russian Federation have ranged across nearly every sector, from oil to agriculture and more. These sanctions have accompanied the voluntary withdrawal of thousands of Western corporations from Russia, depriving the Russian consumer economy of everything from McDonald's to American Express.
A central pillar of the Western sanctions regime placed on Russia, however, lies in technology. To sanction Moscow, Washington enacted an expanded version of the Foreign Direct Product Rule (FDPR), which uses export controls to effectively prevent the export of US technology or software products to Russia and block any company worldwide from exporting products made or manufactured with US technology or intellectual property to Russia. This restriction—the broadest export control rule ever implemented by the Commerce Department—effectively hampers Russia's ability to source advanced technology parts, such as complex biotechnologies and high-end manufacturing and electronics.
US officials hoped that the expanded FDPR, in concert with similar actions by US allies in Europe and Asia, would limit Russia's ability to develop its technological base. In the short term, these restrictions would thus pose an immediate threat to the Kremlin, as many of the country’s military parts rely on Western resources. For example, Russian drones rely on technology parts sourced from Western toys and other consumer electronics, meaning that US export restrictions would prevent the Russian military from effectively arming its forces in the future. This consequence is especially meaningful given that, due to the continued offensive in Ukraine, Russia is rapidly losing its military equipment and needs a future supply of technology parts to rebuild its drones, airplanes, and missiles. If Western sanctions cut off those resources, future Russian military rearmament might become near impossible. Furthermore, over time, the end of Western technology exports to Russia will hamper Russia's indigenous technological development, including in non-military sectors, which will translate into slower economic growth and decrease Russian firms' long-term economic competitiveness. In this way, the FDPR was designed both to hurt the Russian military immediately and weaken the Putin regime in the long term, such that Russia would be unable to compete with the West in the future.
Or, at least, this was how the FDPR was supposed to work. Contrarily, the mass departure of Western companies and the technology sanctions placed on Russia have instead created an opportunity for an eager third party: China. In the last 30 years, Chinese firms have rapidly gained ground in critical high-technology sectors, ranging from Huawei's increasing growth in telecommunications and 5G to the data processing power of Tencent and ByteDance. However, in a global market largely dominated by US firms, Chinese companies have largely been restricted to expansions within mainland China, where restrictions on foreign firms and support from the Chinese Communist Party (CCP) have allowed Chinese technology companies to grow without pressure from foreign competitors.
Indeed, when Chinese firms have attempted to expand abroad, they have often faced significant pressure from US competitors and the US government for several reasons. In many cases, despite the impressive growth of Chinese firms, many of them still lack the resources of their US counterparts, so they are unable to capture market share and beat out US firms like Apple or Amazon. Furthermore, the close links between the CCP and many Chinese technology firms mean that the United States and its allies have often deemed Chinese firms a national security risk and limited their operations. For example, the United States famously led a campaign to encourage governments worldwide to ban the Chinese telecommunications giant Huawei from constructing their 5G network.
However, with sanctions on Russia, Chinese technology firms now face one of the greatest opportunities they have ever had. Russia is a market of 150 million people, and the Western competitors that Chinese firms have historically faced are now out of the country for the foreseeable future. At the same time, indigenous Russian technology firms have been decimated by their inability to source parts under the FDPR, leaving them unable to compete with any major companies. Thus, many Chinese firms may smell opportunity in Russia and leap at the chance to enter this new market.
Naturally, the United States and its allies have sought to prevent this scenario through comprehensive international sanctions. Since a vast majority of international intellectual property for technology comes from the United States, the new FDPR technically bans Chinese technology firms from operating in Russia. Thus, if Chinese firms were to violate these bans, the result would be legal penalties and potential loss of access to the US market. However, Chinese technology firms have a history of trying to skirt US sanctions without the US government noticing, driven by the extreme potential for profit. In 2017, the Chinese telecommunications and electronics firm Zhongxing Telecommunications Equipment (ZTE) was caught after it sold its products to Iran, violating US sanctions on the country for several years. Now, with Ukraine, many of the same whistleblowers who warned the US government about ZTE in Iran fear that ZTE, Huawei, and other Chinese firms will violate US sanctions to operate in Russia, given the vast amount of money that could be made.
However, even if Chinese firms choose not to skirt US sanctions, the Russia-Ukraine war provides a tremendous opportunity for Chinese firms to operate in Russia. First, US sanctions like the FDPR apply to US intellectual property or products derived from it, but they do not apply if Chinese firms sell Chinese intellectual property in Russia. Given the rapid growth of the Chinese homegrown innovation sector, it would be no shock if Chinese firms still chose to sell products based on Chinese domestic innovations in Russia. Furthermore, once the Russia-Ukraine conflict ends, the hostility created between Russia and the West and the warmer ties between Moscow and Beijing means that Chinese firms will likely reenter the Russian market far before their Western counterparts.
A Technological Race
The result of these actions is that Chinese technology firms are poised to capitalize on the Russian market, with major global consequences. First, expansion into the Russian market will make Chinese firms much richer and larger than they have been before, allowing them to fund better research and development and more effectively challenge US and other Western firms for market share. Given that many Chinese technology products and research often are built around dual-use civil and military capabilities, this better-funded research and development will help improve the technical capabilities of both Chinese firms and the Chinese military. In the escalating technological cold war between the United States and China, unfettered access to the Russian market would only give China a stronger and stronger edge moving forward.
Furthermore, access to the Russian market is also likely to strengthen the gargantuan advantage that many Chinese firms and the Chinese government have in data. With data from tens or even hundreds of millions of customers, Chinese firms will be better able to train big data algorithms and support research into key sectors like artificial intelligence and machine learning. This research could further increase Chinese civilian and military technology capabilities, enabling greater competition with the United States. Lastly, the entry of Chinese firms into Russian markets may enable Chinese firms to expand their research and investment operations in the country. Russia has a highly educated workforce, owing to the Soviet Union's universal education systems, making such workers useful for Chinese firms to expand their operations. Chinese firms could also attempt to buy out nascent Russian technology firms, as China has already expressed potential interest in performing such buyouts in other sectors like energy production. In the technology field, such buyouts would slightly strengthen Chinese technology firms and their research by giving them access to valuable Russian intellectual property, though the direct technology transfer effects would not be too large, given China remains ahead of Russia in several emerging technologies like artificial intelligence.
However, sales are also a two-way street, and the entry of Chinese firms into Russia will allow Beijing to share technologies with Moscow that will help keep the Russian military competitive for years to come. Therefore, Chinese firms have the potential to even prop up Putin's regime, ultimately destroying the point of Western sanctions and bolstering a powerful adversary for Western states. This possibility demonstrates the dangerous effect that the entry of Chinese technology firms into Russia might have on the West and the need for Western leadership to consider how they can prevent Chinese firms from circumventing sanctions and strengthening Russia. In the long run, this entry will only strengthen revisionist powers like Russia and China at the expense of the United States and liberal democracies worldwide.
Therefore, the United States needs to take targeted steps to prevent Chinese firms from violating US sanctions and dominating the Russian market. The United States should incentivize individuals to provide credible evidence that any technology firms, Chinese or otherwise, are violating US sanctions on Russia to increase the likelihood of whistleblowers—like those against ZTE—coming forward. The United States must also continue to highlight to Beijing the importance of ensuring that Chinese firms comply with sanctions on Russia. This compliance would, in many ways, be in China’s self-interest, especially as the Chinese government has repeatedly tried to stake out a more neutral position on the Russia-Ukraine conflict. The United States could also attempt to ensure Chinese companies comply with US sanctions by increasing the potential penalties violating firms may face, such as limiting their ability to operate or sell within the United States or its allies. Such steps would be important ways to incentivize compliance with US sanctions and ensure that this opportunity is not used in a manner that weakens the liberal international order.