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Both the OS and its processes run as processes on the host kernel. Its hardware is virtual. A block device is emulated inside a file in the host filesystem. Consoles and serial lines are impemented by ptys in the host. There are also two network drivers, one implemented in terms of a slip device in the host, the other as an ethertap device, plus a couple more in the works which use other interfaces such as TUN/TAP.
The kernel normally runs with as a normal unprivileged user, so even though you may be logged in as root in the virtual machine, that gives you no extra permissions on the host.