AI Islamists and Crypto Communists: High Tech in Isolation

Embargoes as a Turbocharger: How Sanctions Turn Engineers, Hackers and Tinkerers into the Elite of a New Shadow Economy.

hen political decision-makers in the West design sanctions against Iran, North Korea or Russia, they unquestioningly assume a supposedly fixed economic principle: only free trade and liberalization enable innovation, technological progress and thus gains in prosperity.

Sanctions cut countries off from global value chains, know-how and major export markets. Many Western governments long believed they could use this market power in a globalized economy to force other countries to bend to their will.

Yet in the shadow of this dominance, sanctioned countries have developed their own innovation ecosystems instead. In Iran, engineers developed drones and missiles – and a vibrant AI ecosystem. This happened despite export controls that cut Tehran off from Western aerospace supply chains.

North Korea’s cyber units orchestrate crypto thefts worth billions. They use sophisticated methods to evade blockchain forensics. These capabilities rival those of the most advanced Western units fighting financial crime.

China also sought alternatives when the US and its partners restricted access to high-performance chips. Programmers and companies developed models such as DeepSeek that can keep up with Western counterparts. 

It is not only sanctions that trigger adaptation. Geographic remoteness – as in Nepal – or a weak state also often force pragmatic solutions. Mobile money platforms and networks organized via social media then create a kind of everyday infrastructure for payments, trade and coordination.

Isolation and innovation can therefore reinforce each other. Scarcity breeds technological and institutional ingenuity. People and companies experiment to bypass restrictions – out of necessity, but often also out of ambition and entrepreneurial spirit.

Rhodesia’s industrial boom under sanctions

This insight is not new. After the unilateral declaration of independence by the Rhodesian minority regime in what is now Zimbabwe in 1965, Britain and later the UN imposed sanctions. They aimed at maximum isolation: oil, machines and spare parts – the country was to be cut off from everything.

But instead of collapsing, Rhodesia’s economy boomed: in the 1960s, output grew by up to six percent per year. Agriculture could rely on locally produced fertilizer. Coffee exports surged via smuggling routes through Mozambique and South Africa.

Industrial production contributed most to economic growth. A tinkering culture emerged. Engineers improvised and developed new solutions.

An already existing manufacturing sector virtually exploded: steelworks, heavy machinery, transport equipment and alloys. Companies produced copies of the famous Land Rover. The aluminium and textile industries boomed, and even aircraft were manufactured domestically.

Only the bush war from 1974 onwards put a brake on this creativity.

Necessity, the mother of all things

So it should already be clear that constraints can fuel innovation. When economies are large enough, competition can also thrive within the country. Firms compete for the best ideas. They recombine what already exists in creative ways – all the more so when a country sees itself in rivalry with an overwhelming opponent like the United States.

Weak or missing financing forces the opening of other channels: agent networks, mobile wallets, diaspora contacts and crypto.

When inputs from the world market are no longer available, people replace them with alternatives that also work locally. Isolation forces repair and reuse: people learn to keep systems running with interchangeable parts and improvised tools – spit and chewing gum.

Without foreign companies defending market share with their superior financial firepower, new solutions can spread faster if they solve everyday problems. Most of the time they do not require cutting-edge research – only the willingness to learn quickly from customer feedback and to improvise.

The loss of foreign technology, components or capital further fuels this creativity. This is especially true when formal, well-paid jobs are scarce. Through reverse engineering, people try to recreate foreign technologies using local resources.

Somalia: Mobile money as a social contract

In Somalia, mobile money did not emerge because it was the most profitable or easiest option for companies, but because traditional banking infrastructure was missing. Yet people still had to store and transfer value.

Without a functioning state or formal bank branches, Somali entrepreneurs and members of the diaspora began building networks from around 2010, as mobile phones spread. These networks relied on prepaid mobile credit and social trust. They created a mobile network that allows the widely scattered Somali diaspora to send money from all over the world to their relatives.

Nepal, by contrast, is wedged between the giant economies of India and China. Its mountainous terrain, small domestic market and low population density have limited the reach of traditional banks. Instead of physical branch networks, Nepalese banks and fintech startups built a colourful bundle of digital payment systems. In this way, they connected remote villages in the Himalayas with relatives working on the Arabian Peninsula or in India and sending remittances.

Iran: A sanctions-resistant tech power

In Iran, sanctions were meant above all to halt military development. Instead, they created strong incentives for domestic innovation. The country has decades of experience with isolation and was able to adapt quickly after sanctions were tightened in 2010.

Rather than abandoning advanced programmes, especially in the defence sector, the Islamic Republic responded with a combination of reverse engineering, smuggling networks and indigenous development.

Iranian engineers managed to develop a broad range of ballistic missiles, drones and even a domestically produced fighter jet platform – not to mention its advanced nuclear weapons programme.

In the civilian sector, sanctions led to parallel systems in civil aviation and semiconductors. Twenty-four airlines operate in Iran – in the whole of the United States the figure is twenty-six. Pilots are particularly experienced in dealing with unforeseen problems. Competition and necessity drive them.

The constant shortage of spare parts and foreign service forces them to innovate continuously and set up their own repair centres. A new research centre develops its own solutions where used parts are no longer available – and since Russia joined the club of sanctioned countries, Aeroflot has been sending its aircraft to Iran for maintenance.

Iran’s isolation also preserved an industrial base that was destroyed in many other countries once they opened up to Western markets – and were then overrun by foreign firms. Of all the countries in its region, Iran has retained the highest share of manufacturing and industry. The Islamic Republic is home to diverse industrial clusters: mechanical engineering, materials laboratories, electronics, automotive, energy and telecommunications. Local supplier networks serve these sectors. Together they form complex value chains within Iran’s borders. For them, reliability matters more than high tech. Deliveries need to arrive when they are needed – not only when sanctions or smuggling routes allow it. This has created a resilient industrial ecosystem. This “resistance economy” is also a source of national pride: it shows the world that the country can build modern technologies while the West tries to slam the door shut. (Data Source: World Bank, 2026, own depiction)

Microelectronics and artificial intelligence “Made in Iran”

Sanctions pushed Iran towards its own local chip design and assembly capacities. Their products are not only militarily important. They also create jobs for hundreds of thousands of young Iranians in engineering offices, factory halls and IT firms – often better paid and more future-proof than classic government jobs. The share of women in technical degree programmes and research institutes is also striking. For some, this enables social mobility within a rigid Islamic society.

They also work in start-ups that develop their own payment and e-commerce solutions, cloud services and messaging apps, because foreign services are blocked. In this way, a kind of “Iranet” has emerged: a partly controlled, partly subversive parallel internet.

Beyond that, Iran is also emerging as an AI pioneer. Despite US embargoes, Tehran has been implementing its own national AI strategy since 2021. Iran aims to rank among the global top 10 in AI for governance and the digital economy. Together with China and Russia, even Supreme Leader Khamenei is personally driving this agenda.

A 1.68‑billion‑dollar fund for AI infrastructure – such as GPU data centres and AI parks – as well as R&D subsidies is intended to accelerate research and commercialisation.

Thanks to Iran’s human capital, with millions of STEM graduates working for relatively low wages, an AI ecosystem and local hardware development have taken shape. Military applications such as AI‑enabled drones and cyber security can also be transferred to civilian uses.

Supplier firms provide many industrial companies with components and metal casings. (Picture source: Teheran Times, 2022)

China at the forefront of the AI race

Western export controls on advanced semiconductors and production technologies – such as those from ASML that are used to train large language models – restrict access. In response, Chinese companies and researchers have optimised their software, hardware and data strategies. This allows them to achieve high performance with less powerful chips that are still available domestically. China is pushing this logic to the extreme.

With DeepSeek, a Chinese company has developed a language model whose performance is comparable to Western models, even though it was trained on hardware that is several generations behind the technological frontier. Hardware constraints force Chinese engineers to invest extra effort in efficiency. They make models smaller, cheaper and less compute-hungry. This has often led to clever algorithmic shortcuts and new optimisation techniques.

Home-grown AI solutions can be integrated more efficiently into Chinese society because they reflect local priorities. They help pupils in remote areas access tutoring, support doctors in under-served clinics and assist pig farmers in caring for their animals.

Washington’s export controls were meant to slow China down. Instead, China has turned this pressure into new momentum and is investing heavily in its own AI infrastructure, from data centres to national compute networks. Every year, large cohorts of new AI specialists enter China’s labour market, reinforcing this push. In this way, China increasingly challenges America’s strategic dominance.

In 2018, AI talent was still few and far between. But China and the US have long since extended their lead. China's Tsinghua University has worked its way up to the top of the top 10 – ahead of Harvard and MIT. (Data source: Tsinghua AI Report, 2018)

North Korea’s dark arts

Of all places, North Korea – perhaps the most isolated country in the world and cut off from most payment flows – has become a centre of the “crypto revolution”, although it uses its capabilities for cybercrime rather than constructive purposes. Cryptocurrencies have become a survival tool for the regime in Pyongyang, and its hacking apparatus has become its weapon. North Korean cyber units prowl crypto exchanges, gaming platforms and blockchain bridges, attacking them with malware, phishing and social engineering. They pair these skills with patience and discipline. Experts now describe North Korea’s hacking machinery as a state-backed cyber mafia.

Pyongyang orchestrates a complex web of cross-chain transactions and money-laundering techniques whose sophistication rivals that of Western financial investigators. The country has built up expertise in cryptography, networking and digital finance. Cryptocurrency is one of the few scalable ways to obtain hard currency without shipping physical goods.

This produces a paradoxical combination: a society that remains underdeveloped in many sectors – with only around 1.2 million internet connections for some 25 million people – and at the same time world-class capabilities in navigating and exploiting the global crypto ecosystem.

In 2025, the Lazarus Group – which, according to reports, Kim Jong-un himself helped build up – managed to steal 1.5 billion US dollars from the crypto exchange Bybit. According to blockchain analytics assessments, North Korean actors accounted for close to 60 percent of global crypto theft that year. The loot is laundered through Chinese “laundromats”. OTC brokers in Southeast Asia buy the stolen coins at a discount and move them on.

Hardware for rockets and satellites

Since 2006, North Korea has been under a UN arms embargo. Yet the regime has still managed, through creative procurement methods, to bring dual-use goods, machinery and electronics into the country and to use crypto-financed revenues to develop rockets, satellites and cyber weapons.

Although even Beijing and Moscow have long formally supported sanctions, much of the smuggling still runs through China: chips, electronics and other sensitive components. North Korean engineers then try to copy these imports at home via reverse engineering.

To support this, Pyongyang runs a network of fake IT workers. They assume foreign identities to land remote jobs abroad and thereby funnel additional know-how and income back to the country. In this way, designs for semiconductors, uranium processing and even rocket and satellite technology have made their way into North Korea.

Ukraine, of all places, has become a particularly important hub. There, networks of middlemen offer seats in “laptop farms” from which North Korean hackers can access the digital world.

These revenue streams also make the regime more resilient. It builds its own data centres and cyber units. The shadow IT economy draws in young people and offers them career prospects – albeit in the service of a highly repressive state.

Kim Jong-un’s cybercrime ecosystem (Source: Multilateral Sanctions Monitoring Team, 2025)

Isolation: breeding grounds for elites

Isolation does not just force a few engineers to improvise. The result is not a simple copy of Silicon Valley behind barbed wire, but a completely distinct innovation system. It is leaner and far more willing to try unconventional solutions. Above all, it focuses on immediate needs, because domestic demand becomes the only real market.

In open economies, the most talented engineers, scientists and entrepreneurs often migrate to global centres of technology, finance and academia. The domestic talent pool dries up. In sanctioned countries, however, their options abroad remain limited.

Companies there also cannot simply outsource their workflows abroad. As a result, human capital concentrates at home. Dense professional networks enable rapid knowledge transfer.

Cut off from importing foreign solutions, people in Iranian workshops, North Korea’s hidden coding schools and China’s independent AI labs are trained to become the solution themselves. Pressure and hardship thus turn into a powerful engine of technological development.

Isolation can also break the power of entrenched interests that block progress and change. These include trade unions, regulators, incumbent firms and lobby groups that stifle competition. The focus shifts to effectiveness rather than balancing interests. Governments concentrate resources on a few promising sectors.

We can observe something similar in Ukraine on both sides of the front, where cobbled-together drones now shape the battlefield.

A double-edged sword

On the one hand, isolation narrows individual opportunities, and poverty and repression can become entrenched. On the other hand, it sharpens the focus on innovation, redirects talent and forces societies to build alternative systems that are highly advanced in specific domains.

Sometimes, these systems even radiate out into the rest of the world – as in the case of China’s AI ecosystem. And since, with America’s trade wars, almost every major economic area outside the West now faces some form of sanctions, the big economic blocs increasingly trade with one another.

Huawei: A high-tech giant that shouldn’t exist

Huawei’s headquarters in Shenzhen, China. (Image source: Huawei, nd.)

In 2024, the Chinese ICT group Huawei reported revenue of 862.1 billion yuan, 22.4 percent more than in 2023 – its strongest growth rate in five years. The company managed to leverage its huge home market and diversify its business.

Yet back in 2019, the US had cut Huawei and 68 of its affiliates off from key technologies: Google services, high-end chips, semiconductor manufacturing tools and robotics. After the company had digested the initial shock by 2021, it entered a far‑reaching restructuring phase.

Huawei’s very survival depended on replacing sanctioned components and services with alternatives it could control itself: domestic suppliers, newly designed devices and software ecosystems that were far less dependent on US platforms.

The Mate 60 Pro became the symbol of this adaptation strategy. When experts tore the device down, they found a Kirin processor made in China by Shanghai-based chipmaker SMIC – using a process roughly in the 7‑nanometre class and produced without EUV tools. TechInsights took this as a sign that China’s domestic chipmaking is advancing despite export controls that were meant to block access to such cutting-edge manufacturing technology.

Huawei not only managed to replace Western inputs. The company also broadened its base, built up an entire ecosystem in China – from chips to cloud and devices – and scaled it up.