Yes it affects the AI, it works really well in certain situations. Try the third german mission "desert stronghold", there are 10 or so canisters of it in the ammo box in front of your starting squad. I have 3 men load up on it and then use smoke all along the frontline where it helps your units and the AI units advance against the emplaced MG's/orelki.
You can place your squads in it just like cover although it can be hard to find them until the smoke clears
