The Russian electronics industry requires $3.8bn in private investment to meet government targets. However, private investors are unlikely to contribute the full amount, and the state can only provide a fraction of the necessary funding.

Challenges of imports substitution

Since Russia's full-scale invasion of Ukraine three years ago, the country's tech sector has been struggling to replace foreign manufacturers that left Russia in the wake of the invasion. Although the country's tech industry has seen some short-term benefits from the exodus of many foreign competitors and state-driven investment, building a sustainable and competitive tech sector has proven to be a major challenge.

To localise microelectronics production and to meet growing demand for this kind of products, trillions of rubles in investments are needed, revealed a recent study by the Russian investment company KAMA FLOW.

According to the study, achieving full-fledged import substitution in Russia’s microelectronics industry – a long-standing government goal – would require massive investment. Constructing a modern microchip plant alone would cost RUB1.5-2.5 trillion ($14.2bn-23.7bn), with an additional RUB3-5 trillion ($28.4bn-$47.4bn) needed for equipment. Establishing the production of basic raw materials would require another RUB10-15bn ($94.8mn-142.1mn). Beyond that, significant funding – amounting to tens of billions of rubles – would be necessary to support design centres, integrated circuit developers and equipment manufacturers. Given the current circumstances, these figures are completely out of reach compared to the present level of investment in the sector.

Although the Russian government has provided some cash to the tech sector in recent years, those amounts are insignificant in comparison with the size of required investment. For instance, in 2023, Russian authorities allocated about RUB147bn ($1.39bn) from the budget for the development of the microelectronics sector, and another RUB210bn ($1.99bn) in 2024. In 2025-2027, the average annual size of investment in the sector is expected to be roughly RUB175.3bn ($1.66bn), the finance ministry said.

 

What's wrong with Russian microelectronics

The current state of the sector is far from prosperous. Until 2022, it heavily depended on imports, with as much as 82% component coming from outside Russia. With the exodus of many Western vendors three years ago, the issue of replacing these imports arose, and it still remains far from resolved.

The ministry of industry and trade said that in 2024, the volume of Russian electronic products output was expected to grow by a third, to RUB3.5 trillion ($33.2bn), and by 2030 to RUB6.3 trillion ($59.7bn). By that time, Russia is expected to domestically produce at least 70% of electronics components it needs.

However, as things stands now, these targets look unrealistic. The Soviet-era microelectronics industry collapsed in the early 1990s, unable to compete with international manufactures when the country opened up for global imports. For almost two decades, import accounted for practically all of the country's requirement for microchips.

Currently, Russia has three plants with a capacity of produce microchips at mass scale. These are the Mikron, Angstrem and Milandr plants, all located outside Moscow. These plants only have capabilities for producing 90-nanometre chips and is exploring mass production of 65-nm chips. There have been reports that 2028 is considered as a target.

Meanwhile, the US is eyeing a transition to 2-nm microchips, while China is trying to go below 10 nm. When Russia will be able to launch production of more advanced chips, is anybody's guess.

Under current conditions, a scenario where a foreign chip manufacturer – even one from a "friendly" country such as China – will build production facilities in Russia seems unrealistic.

At the same time, local plants are apparently focused on electronics products urgently required for the war in Ukraine, and getting through a manufacture order for some prototypes is an uphill task.

 

Too few domestic players

According to KAMA FLOW, as much as RUB336bn ($3.8bn) in private investment is urgently required by the Russian electronics industry to achieve short-term government targets, while sustainable full-fledged import substitution remains unachievable.

However, private Russian investors are not in a hurry to pump their cash into the country's electronics sector, while foreign manufacturers are staying away from a country that's been in war for three years and whose economy's prospects are uncertain.

Alexey Pavlyuchenko, one of the authors of the KAMA FLOW study, was quoted by the Russian business daily RBC as saying that in order to boost the Russian electronics industry, "there should be several independent players in each segment, in order to get two or three technological leaders in each direction under competitive conditions."

Ivan Pokrovsky, executive director of the Association of Developers and Manufacturers of Electronics (ARPE), added that the total amount of investment in electronics should be calculated in trillions of roubles for the next ten years. According to Pokrovsky, the investment schedule should be ascending as the competences and scale of investment projects expand, rather than descending, as in the current government plans.

"Thousands of equipment development projects are an area of private investment, where we need such an adjustment of market regulatory measures that will launch and support the expansion of reinvestment by private companies," he explained.

"In turn, the main area of application of government investments is the development of semiconductor technologies and the development of trusted microprocessor platforms on which equipment developers will rely. These are just a few dozen projects with large investment volumes of tens to hundreds of billions of roubles," Pokrovsky went on to say.

Arseny Dabbakh, the co-founder of the analytics group Dsight, told RBC that there are few investment funds in Russia at this point that would be willing to make any investments, while they are especially cautious, when it comes to investing in the microelectronics sector.

"There are hardly any specialised investors who are ready to invest in microelectronics," he said. "Currently, government investors, such as Roselectronics, and private investors, such as GS Group, are showing little interest."

According to Dabbakh, state-controlled AFK Sistema and its subsidiary Sitronics, which previously invested in microelectronics, are now focused on solving internal problems. "There are a few active funds, but they are more likely to invest in more promising projects," he charged, adding that these investors are normally providing sums in the vicinity of RUB50mn ($564,305) to a few hundred rubles, which is far from what the electronics industry requires.

 

Little interest from the private sector

As microelectronics is a capital-intensive segment that may require billions of dollars to take a project off the ground while payback periods are long, private investors have been unwilling to put their cash into Russia's microelectronics sector.

Fyodor Boyarkov, vice president of the Russian electronics manufacturer GS Group, told RBC that he doubts that private capital will be able to provide the microelectronics segment with any meaningful investment in the foreseeable future.

"Projects in microelectronics are, as a rule, big and long money, moreover, associated with the risk of non-payback," he explained. "Some developments will not bring profit, even though they may move technology forward, so there is little interest from investors from outside of the tech sector."