Tag: Sanctions Page 1 of 2

On February 16, 2024

As for the fabricators which chips are manufactured with, well, China bought tons overseas just before the sanctions hit, BUT:

The highlight:

According to SEMI’s market research group, China isn’t slowing down. SEMI is forecasting China’s capacity to keep growing at a significant rate over the next few years. For 300mm, SEMI expects China to have 29% of the worldwide capacity in 2026, increasing from 21% in 2022 (Figure 2). The 200mm capacity is expected to grow from 16% to 24%. And foundry capacity is expected to reach 42% in 2026 up from 27% in 2022, outpacing the Taiwan foundry capacity expansions.

China has its goal set on being more chip-independent and spending less than $300 billion a year on importing semiconductors. To accomplish these goals, they are spending a lot of money on fabs and equipment, and in some cases forming JVs to get the right chips for their industries. So, will the European and US CHIPS Acts help to increase Europe’s and the US’s capacity? A little, but as Peter Wennink recently commented, the EU chip goal is unrealistic. I’ll add in as is the CHIPS Act in the US. China has a significant head start and it will take significant investment by the EU and US to catch up, and it is unlikely politicians and shareholders will continue to fund the exercise to reach the desired goal of 20%. (my bold)

The chart:

The bad news for equipment companies outside of China is that due to sanctions against foreign companies selling certain types of equipment, as well as China trying to create an independent chip market, Chinese semiconductor equipment companies are seeing above-market growth. Naura Technology, AMEC, and ACM Research at mid-year of 2023 are seeing 68%, 27%, and 47% growth respectively over 2022. Most of this is driven by the China market.

The Chinese, pre-sanctions, were not pushing indigenous chip capacity. Chinese companies preferred American, Taiwanese and US chips, seeing them as more reliable than domestic alternatives.

A chip act might have made sense IF the US was genuinely going to re-shore production, far beyond chips or IF it was going to go to war within the next two to three years.

As it is, all it will accomplish in the end is losing the Western absolute advantage in chips and transferring the market leading position to China.

Which brings us to this beautiful, semi-related bit of news:

This is great news. Daleep has already helped this Administration navigate some tough challenges, and there’s no kinder or more capable colleague. https://t.co/6OiywjPuA9

— Bharat Ramamurti (@BharatRamamurti) February 16, 2024

The effect of anti-Russia sanctions was to make Russia into the world’s fifth largest economy while massively ramping up their weapons production and overall growth rate. Germany has slipped to sixth and Russia is now a firm Chinese ally. It is true that America is making more money by supplying Europe with expensive fossil fuels, but by any rational assessment, anti-Russia sanctions strengthened America’s self-declared enemies, and weakened its allies.

In other words, the policy that Daleep was the architect of was a disaster. Yet he is lauded as capable rather than as a complete fuckup. To be fair, I suppose, he was undoubtedly following orders, but he owns the orders he follows unless he objected to them and predicted their failure.

All of this applies, times ten, to anyone involved in the anti-China sanctions, which have backfired catastrophically.

America, land of the highly paid incompetent fuck up.

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China Jumps Two Chip Generations Ahead: Why Chip Sanctions Backfired

On July 26, 2022

Faster than most expected:

Semiconductor Manufacturing International Corp (SMIC, 中芯) has likely advanced its production technology by two generations, defying US sanctions intended to halt the rise of China’s largest chipmaker.

The Shanghai-based manufacturer is shipping bitcoin-mining semiconductors built using 7 nanometer technology, industry watcher TechInsights wrote in a blog post on Tuesday.

That would be well ahead of SMIC’s established 14 nanometer technology, a measure of fabrication complexity in which narrower transistor widths help produce faster and more efficient chips.

Since late 2020, the US has barred the unlicensed sale to the Chinese firm of equipment that can be used to fabricate semiconductors of 10 nanometers and beyond, infuriating Beijing.

Now, there’s a question if they can scale, but this is still a huge step. This means that they are ahead of Europe and the US, and behind only Taiwan and Korea. This is also sooner than almost all experts predicted: China did what Western technologists thought could not be done so quickly.

This speed, as I have noted in previous articles, is not that surprising; the technological lead always moves to the country which holds the world’s manufacturing floor. When Britain fell behind the US, it took about 30 years for them to lose their tech lead, but lose it they did. The same will happen with the US and Britain, but likely faster for obvious reasons like jets, the internet, and so on.

To put it simply, when you are right there with the factory floor, your innovation cycles are far faster, or in modern-speak, you iterate more quickly. You also have more practical experience with what actually works.

The “ban semi-equipment and semi-sales” to China card was a card, like the freezing of Russian foreign reserves, that you only get to play once at a great power. China is more than happy to subsidize chip manufacturers to learn how to make this tech domestically, and they are also crashing other key techs they’re behind in (like aviation), because it’s clear if the West would put a ban on semis, they’ll do it to anything or everything else.

China’s Job #1, and Xi has stated this publicly, is to make it so that they can’t be choked out by the US (the “West” is mealy-mouthed; the US makes the decisions, and the EU, Japan, and so on just do what they’re told, with occasional exceptions). Making Russia a locked-in junior ally with the sanctions regime made it so that China couldn’t be choked out on natural resources, and making it clear that crippling sanctions are on the board caused China to scramble to close the deficiency.

Unlike with choking out Japan over oil before WWII (which is why the Japanese felt they had to attack the US), however, the partial sanctions on China were not crippling, because unlike pre-WWII, the US is not the world’s primary industrial power, and it has its own dependencies on Chinese trade.

In realpolitik terms, because this is the case, sanctions should have been all at once, followed by war (I’m not for this, I’m massively against it, not least because of the issue of nukes). Half-assing it just gave China time to decouple its key dependencies and, as noted above, the anti-Russia sanctions were a gift from heaven to China.

The game continues, and if it were not for climate change, all the smart money would be on China as the pre-eminent world power within 20 years, probably sooner. As it is, a lot will depend on variables that humans have chosen not to control and soon will lack the ability to significantly control.

What Is Our Plan C if Sanctions and the Guerilla Trap Don’t Take Out Russia?

On March 11, 2022

First: To my knowledge, sanctions have never lead to regime change. They didn’t in Iran, Iraq, Venezuela, Libya, or anywhere else — not even North Korea and Cuba, which are still under some seriously savage sanctions.

Second: The targeted country’s leadership can still have pretty much whatever they want, it’s the population which suffers.

Third: While, in most ways, Russia is weaker than the USSR, it has a food surplus, while the Soviets always struggled. You can’t starve them out. It also has a fairly decent medical industry and access to Chinese and Indian medicines. Also, if sanctions continue, they will break our IP.

Fourth: The USSR didn’t have the largest industrial nation in the world as its ally (that would be China, not the US).

Fifth: China and Russia are synergistic. What China needs (food (desperately), oil, and minerals), Russia has. What Russia needs (consumer goods, medium to high-ish tech), China has. Plus, for China, having Russia as an ally mitigates the whole “US Navy cutting off supplies at the Straits of Hormuz” situation that every Chinese leader since Deng has stayed up nights worrying about.

Sixth: The logical response for Russia and China is to link their payments systems and to create an alternate monetary system. Because the West has repeatedly stolen billions of dollars from countries foolish enough to keep them on reserve in the West and then get on the West’s bad side, a lot of nations will move over to that system. Honestly, I’d trust China more than I would trust US not to steal my reserves, at this point.

Nobody seems to be thinking this forward. If sanctions don’t take out Russia and force it to collapse and/or have a government we like, what are we going to do next?

And as sanctions have never taken out a government, what’s our plan? Right now, it seems like the only alternative is to have a long guerilla war in Ukraine and bleed Russia dry. This strategy might work, though the human cost will be monstrous. (But then, why would the West care? We’re fighting to the last Ukrainian, after all.)

But if sanctions don’t work, and the guerilla trap doesn’t, what’s our Plan C? It’s particularly important because these sanctions are going to do a lot of damage to ourselves including, very likely, destroying the IP system that makes our rich so rich. (I, personally, look forward to Russia, and later China, breaking our IP system, but I don’t imagine high tech firms and/or Disney are as thrilled.)

Again, what’s our Plan C?

Thinking Out Ukraine Sanctions

On March 7, 2022

Question:

If you could not buy anything you wanted using Western currency, why would you sell anything to the West?

Western sanctions on Russia are fairly close to: “You can sell us oil, wheat, and gas, but we’ve frozen all your foreign currency reserves we can touch (almost all of them), and we won’t sell you anything that’s useful to you. Anyone who tries to do so using our system is committing a crime, even if not in one of our countries, and we will punish them.”

It’s hard to imagine that Russia is going to keep selling us what they have. Naked Capitalism reprinted a good article by Olga Samofalova (second half, you can skip the first.):

Stopping gas supplies to Europe is even more disastrous in terms of consequences for both sides. Russia will not be able to transfer West Siberian gas, which goes through European pipelines, to other markets. There is no gas pipeline for such a volume to China or other Asian countries. To send gas by sea by tankers, it needs to be liquefied, but Russia does not have so many LNG plants for this, or gas carriers too. This means that Russia will have to stop production. ‘In the western direction, if without Turkey, there is about 150 billion cubic meters of gas from Russia. Where will we put so much gas if we don’t supply it to Europe? Nowhere. We’ll have to stop lifting the gas. This means that the world market will lose these volumes, and immediately there will be a large deficit of gas in the supply-demand balance of the European Union,’ says Yushkov.

‘No matter what anyone says, Europe will have nowhere to take such volumes of gas from. The world is not able to increase production by 150 billion cubic meters. Europeans will try to switch to other energy sources. An attempt to switch to coal will fail, since Russia is also the largest supplier of coal to the EU. The Europeans will try to launch everything that is possible: all the shut-down nuclear power plants [to reopen], the closed coal deposits in Germany and Poland.’

Now, this isn’t quite accurate. One of the main reasons that Iran is finally getting a renewal of the Iran deal is that the West needs oil and gas supplies from Iran back on the market. But even so, there will be a huge effect.

The core thing to understand here is that we in the West don’t know how to handle supply shocks. The last generation that knew how was the Lost, and they’re all dead. No one alive even remembers a properly-handled supply side shock, as we mishandled the OPEC oil shock catastrophically, and even those people are mostly aged out, unless they’re 80 and in Congress.

The Covid supply shocks have pretty much proved it. We could go into all the issues like price gouging, monopoly concentration, supply chain dispersal, just-in-time, consolidated shipping, the hollowing out of the trucking industry, and blah blah, blah, but it doesn’t really matter. Bottom line, we aren’t handling it well. All we really know how to do is raise interest rates and use central bank policy to keep wages below the rate of inflation, thus making the majority of the population even poorer.

So what happens when Russia cuts us off from a whole pile of minerals, hydrocarbons, and food that we need? Russia is the number one wheat exporter. Ukraine is #5. Gas we’ve already discussed. Oil will spike. Energy costs will go through the roof. Most titanium comes from Russia and is used to build planes, and if Boeing and Airbus have cut Russia off even from repair manuals and spare parts, why should they let the West have any?

I’m not 100 percent on this, but if Russia reacts the way I believe it would be rational for them to act, then we will have a supply shock bigger than the OPEC crisis, especially as it is being added to the Covid shock. Our companies will, of course, use the opportunity to increase their profits even more and price gouge (something they mostly didn’t do in the 70s), and we will get massive inflation.

I lived through the 70s. In the late 70s, during a period of about two years, the price of candy bars (you can tell how old I was) went from 25 cents to a dollar.

This is likely to be worse.

The Russians are also just not going to pay back their debts to Western countries in any form they can use. A law has already been passed where companies owing money to countries with sanctions can pay in rubles to the Russian government, who will then handle any negotiations, for example. More such measures will continue. Freezing reserves amounts to theft, and Russia is not going to pay back thieves.

Russia will probably also break all Western IP. With some under-the-table Chinese help, they’ll then set up production.

Meanwhile, China is thrilled — whatever they’re saying. Xi recently told the Central Committee that China could not rely on world markets for food security. But as a locked-in junior partner with a land border, Russia is a safe provider, especially since a lot of markets will be closed to it, and as we mentioned, Russia’s the #1 producer of wheat. Oil and gas supplies can always be interdicted at the Straits of Hormuz by the American navy, but Russian land supplies are not so simple, etc, etc.

Now, let’s talk about the confusion of money for real economic goods. Money does a lot of things, but money cannot buy what a society cannot produce. Conversely, as Keynes pointed out desperately (and was ignored) anything a country can actually make, it can afford. So when you see things about money, or even stock markets, remember, China is the largest industrial state. Russia is the largest wheat exporter and a vast exporter of oil, gas, and minerals. Russia can survive this if they stop their economy from seizing up, because bottom line, they can feed and heat themselves. The food may be a bit boring, but it’s food.

China is hooking up Mastercard and Visa clients who were cut off with UnionPay and their Mir Card. This isn’t something that would happen if the CCP didn’t give the green light, not a chance. Russia’s SWIFT alternative and China’s are going to be hooked together. China’s banking system actually produces more loans than the US at this time, so they’ll keep the Russians afloat.

Many people think the Chinese will screw the Russians since the Russians need them so badly. They may, but I don’t think so. This is Western thinking, the same stupid, short-sighted greed that led us to ship the majority of our industrial base elsewhere, so a few oligarchs and politicians and consultants could get rich.

China needs an ally. They need good will. Give Russia cheap loans and help when they need it, be the country that helped them when almost no one else would or even could, and Russians will remember that for generations. China doesn’t need a resentful ally, they need a willing, happy, and healthy one. They don’t need an ally who they’re strangling with debt, and right now, loading Russia down with usurious debt in the middle of this crisis would make things worse.

Remember, people often fail to pay back debts they hate.

Contrary to Western propaganda, while there have been cases where China has loaned countries too much at too high rates, generally, Chinese development loans have been below market rates. This is because what the Chinese want isn’t a revenue stream, it’s resources. So they’ll build your mines, your factories, and your transportation networks, and throw in some smart cities, hospitals, and schools too, as a form of domestic subsidy. What they’re going abroad for is resources.

So my guess is that China doesn’t screw Russia to the wall, helping cripple them further and making Russia resent them during their moment of need. They aren’t modern Westerners. That doesn’t mean they don’t expect things in return, they sure do, but what Russia needs and wants to sell them, lines up perfectly with their needs, and there’s no need to screw Russia. In fact, I expect Chinese technicians to flood Russia and help with their infrastructure issues, oil industry, and so on. It’s enlightened self-interest and enlightened beneficience. To use econospeak, this is a positive sum game.

China and Russia have issues, sure, but they need each other massively, and each of them almost perfectly fixes the other countries weaknesses and needs. Russia will definitely be the junior member of the Alliance (and Russian tendencies to think in realpolitik geopol terms mean they get this and won’t even even resent it, as long as they feel fairly treated.)

The wildcard here is India. India and Russia have had good relations, indeed, have been friends, since independence. The Indian people themselves have genuinely fond feelings for Russia that they don’t have for the West or the US. But Indians hate the Chinese because of their territorial disputes.

If I were China, I’d just go to Modi and settle the territorial disputes generously. Give them a bunch of land, lay it on thick. I don’t expect them to do this, because it’s an emotive issue, but most of the land the countries dispute is basically worthless. It just doesn’t matter if India has that land. If China were to do this, it could probably move India into its alliance group, or at least keep it neutral.

So, let’s assume that Russia survives sanctions. Western elites don’t think it will, but Western elites are used to sanctioning powers like Iran and Venezuela, not a great power that China needs in its pocket, which has a huge land border with China. It’ll be ugly.

Assume Russia retaliates and there’s a big inflation shock. The West tries to get China to enforce sanctions, China says all sorts of mealy-mouthed stuff, but basically doesn’t do anything. The West then has three options:

Full scale sanctions on China. If they do this, the OPEC crisis will look like a walk in the park. It will be a great depression. China is the world manufacturing center and the West cannot, yet, decouple.
Targeted sanctions, like the chips sanctions that damaged Huawei so badly. These won’t make China change its mind, but it’s what Westerners do, especially Americans, so I assume this is the default.
Try and cut a deal.. “All sanctions off and some stuff you want if you cooperate.” This is probably the best option for the West, but I don’t think China will go for it, because ever since Obama, the US has said that China is actually enemy #1. They’ll probably figure (I would) that once Russia is taken out, all deals are off and China is next in the crosshairs.

So what happens is probably #2 (targeted sanctions), at first. The West hurriedly moves some production back home (but not much, rentier societies are too high-cost for manufacturing) and a ton to low cost western allies, like Mexico. Once it feels confident, it ratchets up the sanctions, and we are in full cold war. I’d guess four to eight years, but it’s really hard to time these things. You can know something is inevitable, like this cold war, and not be sure when. I’ve been talking about this for years, and now it’s started. The Cold War is on: It’s just only with Russia right now. It will spread to China. If the West gets too emotional and foolish and tries to force China right now, it could happen with a year.

So we move into a new Cold War, in the middle of terrible inflation and possibly even a depression. One can expect most of the South to go with China/Russia. They may have voted against Russia in the UN General Assembly, but their arms appear to have been twisted hard. As soon as its credible to move to the monetary area China and Russia are setting up, they’re going to move their monetary reserves en-masse — unless they’re a Western client state, because the West has now repeatedly stolen other countries reserves.

This means most of Africa. Most of South America will want to, as China is their primary source of development loans, but they may be too scared. Any Asian country which isn’t an American ally will go. India is an unknown.

But at the end, you have China which is world’s most populous country, with the biggest industrial base, and even (in purchasing power parity terms) the highest GDP on the other side, along with Russia, and the Number 2 nuclear power, likely still with a massive military, and a ton of southern resource states, all oriented around China. (Though some, like the oilarchies, will try to remain neutral.)

I don’t see this as a competition in which we are the top-dog. Feels like a 60/40 thing to me, and we’re the 40. For too long, we have thought that money and financial games were the same thing as an economy, and that we could just buy whatever we wanted so it didn’t matter who made it, grew it, or dug it up. That world is ending. It was killed by us, with our sanctions, ironically.

Welcome to interesting and shitty times. Put aside your belief in our superiority: We’ve been top dogs for about 200 years now, in some places 500 years, so it’s hard. But all periods in which one group is dominant end, and we’re probably living through that end.

The China Trap

On March 2, 2022

I’d really hate to be China’s leadership right now. This is rock/hard place for them. If they don’t keep Russia alive, they will have no ally when it’s their turn, but the US and Europe are likely to put a ton of pressure on them for sanctions & that will start the cold war earlier than they wanted (for them — it’s already started for Russia).

Obama famously pivoted to China, calling it the biggest threat. Trump slapped on sanctions and used a ban on semiconducters to absolutely savage Huawei, the flagship Chinese tech company, whose phones were rivaling Apple and Samsung, and whose 5G technology was the most advanced and ready-to-deploy in the world.

They put immense pressure on Europe to not use Huawei 5g tech and largely succeeded.

When Biden came in, he removed none of Trumps sanctions.

In effect, the US has been declaring China its enemy for about 12 years now, through both Democratic and Republican administrations, and over the last few years, anti-China sentiment in DC has solidified. As far as I can tell, it is truly bipartisan.

China has known that a cold war with the US was inevitable for a couple of years now, though they suspected it before. They had hoped to keep Europe as a neutral customer, but Europe has bowed down to the US whenever push comes to shove, so China, like Russia, appears to regard Europe as an American satrapy — a subject state who will do what the US says.

The US and Europe will now put immense pressure on China to comply with sanctions on Russia and to not help Russia get around them.

My guess is that China will not, substantially, comply. The calculus is simple: Cold war with the US is coming, and if they let Russia get taken out, they lose a powerful ally and will then be surrounded, rather than having most of their Western flank covered by another Great Power.

Russia has repeatedly told the West to go fuck itself with regards to sanctions. They regarded, even before this war, more sanctions as inevitable. All that the war has done, they believe, is move the sanctions forward. China is likely to have the same calculus: sanctions, tariffs, and so on are never removed, only increased over time.

Both China and Russia have their own SWIFT alternatives. They will hook together and be offered to the rest of the world. As non-US allies have seen, with Venezuela, Iran, and now Russia (among others) that the US will even freeze reserves, they will join the Chinese and Russian systems and settle trade in Yuan. They will move reserves out of the US/European system.

This is, however, a huge hit to both China and the US. The US cannot currently decouple from China — it’s impossible. The US actually needs China more than China needs them. Remember, China is the largest industrial power, not the US.

It’s still a terrible trap, though, and the Chinese will, I think, play to mitigate. The US will not slap the worst sanctions on just yet, but will rush to move production to low-cost US allies.

There is an alternative, of course. China could buckle, agree to join the “rules-based order,” and play by American rules. The issues here are threefold.

First: This means China is not allowed to take control of value chains, which provides much of the real profit. Probably 15 percent or so of the value in a value chain comes just from that. They will have to keep paying US intellectual property fees, which amount to another ten to 15 percent in a lot of industries.

Intellectual property, if it’s not obvious, is on the table. Certainly Russia will stop paying these fees, that’s almost certain.

Second: Playing by Western rules means, the Chinese believe, staying stuck in the middle income trap and not making it to high income. This is one of those places which is a genuine trap: Decoupling will be a huge hit, but staying in the system and playing by the rules set up to favor the US and its allies means being in a system which keeps China from becoming a rich nation.

Third: There is an emotional component. As much as many Europeans, especially eastern Europeans, hate and fear Russia, China has a deep resevoir of hate for Europe, and the US for the “century of humiliation,” for Taiwan (to them a rebellious province which they would have retaken years ago if the West didn’t support it), and of course, a lot of hatred for Japan, the West’s primary Asian ally, for its invasion, occupation, and atrocities before and during WWII.

Emotionally, the Chinese are primed to tell the West to go fuck itself. They didn’t see why they should’ve play by rules made even when they were at their weakest. The “rules-based international order” to them is nothing but a set of rules set up by people who don’t want them to be a great, rich nation again. Rhetoric from the US has solidified this impression, and I think more correctly than not.

So the “cut a deal and compromise” really means “accept the current world order and play by rules that China thinks are unfair to them, and are made without their input.”

My guess is that China will do whatever it takes to keep Russia alive and to stop Western sanctions from achieving their declared aim: To collapse the Russian economy and cause regime change. Viewed pragmatically, I think that is the right call if you are the Chinese leadership, because the other two options (acquiescing to Western rules or letting Russia collapse and facing the West w/o Russia) seem worse.

I would guess, and it is just a guess, that this takes about four to eight years, because the US would be insane to decouple now, and China also wants time to prepare. But emotions are running high and a lot of policies have been made without clearly thinking through their consequences lately, so I while I think it’s odds on, I won’t be surprised if emotions rule instead. The decoupling may happen sooner.

Welcome to the new Cold War. Remember, in this one, the world’s biggest industrial power and most populous nation is on the other side. This isn’t 1950 or even 2000. China is the biggest trade partner of more nations than the US, not the other way around.

And China needs what Russia has: wheat, oil, and mineral resources.

Cold War 2.0 isn’t one in which the West are necessarily the favorites to win.

Ukraine: The Ethical Dimension & Sanction Decision Making

On February 28, 2022

Ok. Deep breath.

Is what is happening in Ukraine worse than what happened in Iraq?

Why was the US not hit with crippling sanctions, like is being done to Russia?

Think this stuff through on your own, and if you get it, your belief that anything happening is being driven by ethical considerations will go away, and you’ll be able to think clearly.

Now, let’s talk sanctions. They’re more severe than initial indications, and Russian reserves have been blocked, as was done to Venezuela and Afghanistan (this, plus sanctions, is what is starving Afghans to death this winter, by the way).

Now, put yourself in Putin’s shoes. Assume the sanctions really are severe enough to collapse Russia and kill millions and, not incidentally, remove you from power at which point you, your family, and everyone close to you, will be killed. (That’s what is most likely if Putin loses power.)

You are a nuclear superpower with a Great Power military. What do you do? Do you just sit there? Or do you try and use that military to force the return of your reserves and some reduction in the worst sanctions?

(I don’t think the sanctions are quite that severe, but I could be wrong; I’m still thinking it through. However, many commenters — and even politicians — are clear that this is what they want: To collapse Russia under sanctions. But Russia is not Venezuela, or Iran, or Afghanistan.)

Put yourself in Putin’s shoes, and remember, he’s been known to raze entire cities.

Putin Looks to Win Both the War & the Peace

On February 25, 2022