Huawei faces dilemma over Russia left risking further US sanctions

The last time Western sanctions hit Russia after it annexed Crimea, President Vladimir Putin turned to Huawei to rebuild and upgrade the area’s communications infrastructure. Now the controversial Chinese tech company is positioned to help the Putin regime on a much larger scale, despite the threat that Washington will hit it with more sanctions.

In Crimea, Russia has “snatched Western telecom equipment in the heavily militarized area and replaced it with Huawei and ZTE,” said Hosuk Lee-Makiyama, a telecom expert at the European Center for International Political Economy. If Nokia and Ericsson leave Russia completely, Moscow will “need Chinese companies more than ever, especially Huawei,” he said.

Despite an initial dip in phone transmissions, Huawei was an early winner of the war in Ukraine. Phone sales in Russia rose 300 percent in the first two weeks of March, while other Chinese brands Oppo and Vivo also posted triple-digit sales increases, according to analysts at MTS, Russia’s largest mobile operator.

The four Russian research centers are recruiting dozens of engineers, including machine learning scientists in Novosibirsk, speech recognition researchers in St. Petersburg and big data analysts in Nizhny Novgorod. Huawei has also added new sales and business development openings in Moscow since the invasion of Ukraine, according to its website.

But experts say Chinese tech companies like Huawei and rival Xiaomi risk violating sanctions if they continue to ship phones and telecom equipment to Russia. They need Washington’s approval because the electronics often contain high-quality semiconductors or are made with American tools, making them subject to new sanctions against Moscow.

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Huawei could be hit by more sanctions from Washington — such as Trump’s order to ban ZTE from accessing US-linked technology — that would deal another major blow to the Chinese company’s operations.

“My bet would be that it’s impossible for [Huawei and other Chinese phonemakers] legally exported to Russia,” said Kevin Wolf, a former trade department official and sanctions expert.

“It is theoretically possible that [Huawei] has been able to figure out how to make a cell or base station without American tools, software etc. But it is hard to believe that they have all [semiconductors] that are not made with American tools.”

Huawei is working to cut itself off from the US semiconductor supply chain since US sanctions introduced by the Trump administration cut off access to chips. Guo Ping, the company’s rotating chair, told reporters Monday it relied on a stock of chips. He added that Huawei was redesigning products to bypass the US supply chain by getting equivalent performance from less advanced chips.

The sanctions have been most damaging to Huawei’s chip-heavy smartphone business, causing consumer product sales to fall 50 percent last year, the company said Monday. Huawei’s total revenue fell 29 percent year-on-year to Rmb 636.8 billion ($100 billion) last year, supported by more or less flat sales in its telecom and enterprise businesses.

Huawei’s heir apparent Meng Wanzhou, who recently returned to China after nearly three years of detention in Canada for alleged violations of sanctions against Iran, said Huawei teams have “been under a lot of pressure in recent years”.

“This has united us more and made our strategy clearer,” she said.

Russia needs Huawei. With the withdrawal of Apple and Samsung, half of the smartphone market is up for grabs, while the suspension of their activities in Russia by Ericsson and Nokia has left a gap in the supply of telecom equipment for broadband and mobile network infrastructure that needs to be maintained and eventually needs to be upgraded.

Russia was Huawei’s first foray into foreign markets more than two decades ago, and sanctions have deepened the relationship, finding Huawei a willing buyer of network infrastructure increasingly shunned in Western capitals and a deep pool of tech talent. As in Crimea, when Russia needed a reliable company to provide the hardware backbone of a new sanction-resistant national payment system called Mir, it turned to Huawei.

Huawei had already won a significant chunk of the contracts to roll out 4G and 5G networks in Russia, analysts said. According to market research firm Dell’Oro, Huawei and its Chinese counterpart ZTE control about 40 to 60 percent of the wireless network equipment market in Russia, while Nokia and Ericsson make up most of the rest.

Opportunities for Huawei may also lie in sharing its sanctions-resistant projects with Russia, including the Harmony operating system developed for its phones after access to Google Mobile Services was lost.

Vladimir Puzanov, chief executive of Russian phone maker BQ, told Russian media last week that the company is considering installing HarmonyOS on new devices. Huawei said it currently has no plans to “launch or promote HarmonyOS outside of China”.

Video: China, Russia and the war in Ukraine

“Huawei has a huge share of the Russian market. † † and right now the current sanctions are already weighing 200lbs on their heads so what’s scary about another 20lbs? said Yang Guang, a Beijing-based analyst with technical consultancy Strategy Analytics. “However, as a commercial organization they will have to wait and see for the time being.”

Washington keeps a close eye on Huawei. Matthew Borman, an export official at the U.S. Department of Commerce, on Tuesday threatened Chinese companies that would evade sanctions against Russia with a “complete ban on [of] not just trade, but every trade” or even “a refusal. † † as we have imposed on ZTE”.

Borman said Washington had granted a significant number of export licenses to foreign suppliers to continue selling to Huawei, but they could be revoked.

Huawei’s Guo said the company was “carefully evaluating” the new sanctions. Huawei declined to answer further questions about its plans in Russia.

Nian Liu contributed to reporting from Anhui

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