“It’s Not Hard to Evade Sanctions”

The imposition of sanctions should have halted the export of Western technology to Russia. Personal sanctions (SDN list) prohibit US citizens and businesses from doing business with specific Russian individuals and businesses. Sectoral sanctions (SSI list) prohibit them from transacting with entire industries. Secondary sanctions may be imposed on non-US companies found in violation of US prohibitions. Any export of high-tech products to Russia requires special permission, and such permission is only granted in exceptional circumstances (i.e. it cannot be issued). Analog Devices, Texas Instruments, and other major microelectronics companies have ceased commercial operations in Russia.

Nonetheless, products from these companies are occasionally discovered in Ukraine — in the remains of Russian drones and missiles. The components arrive in Russia via a chain of intermediary companies in various countries: for example, an American company may purchase them from a manufacturer and sell them to a Chinese company, which sells them to a Russian intermediary who is not formally affiliated with the military-industrial complex, and the intermediary will pass the goods to the weapons manufacturer. Here and here, for example, IStories explained how these schemes work.

Is it possible to completely deprive the Russian defense complex of Western components? Most likely not, according to export control expert Eric Woods of the James Martin Center for Nonproliferation Studies in the United States of America.

“The rules are written in a way that even Americans themselves find difficult to understand”

— Russian intermediaries that assist the defense industry in purchasing microelectronics in order to evade sanctions have even increased imports since the war began. What makes this possible?

— Your investigation has clearly demonstrated how primitive their schemes are — it's ridiculous. Their typical strategy is to disguise one product as another, using transit through third countries and front companies as intermediaries.

Russia used to buy components from Europe directly. A recent example: German security services discovered a company that the FSB used to purchase dual-use components for Novichok [a group of nerve agents developed by the USSR, some of which are binary chemical weapons]. Although the front companies are now in China, the tactics remain the same. And it's usually legal because not all of the components are subject to export controls. And these front companies are not subject to sanctions.

— Don't sanctions only apply to military and dual-use chips? And consumer electronics can enter Russia legally?

— It is critical to differentiate between sanctions and export controls. People frequently mistake them for the same thing. Yes, they serve the same purpose, but sanctions and export controls use different mechanisms. There are many overlapping rules, and these rules are written in a way that even Americans themselves find difficult to understand.

If I am a US citizen and want to export something to Russia, I must first determine whether the goods are subject to export controls. All goods subject to export control are dual-use goods, but not all dual-use goods are subject to export control; following the collapse of the USSR, the US simplified the rules, making it easier to export such items. Businesses are perplexed by this.

Consumer electronics are not subject to export control. But in this case, everything is dependent on the context, on the end user. If my grandmother orders electronics, it is legal; if it is a Russian military enterprise, de jure an export permit must be obtained, although de facto it will not.

We have a lot of sanctions, but not enough knowledge about how they work. The laws are so complex that customs officers at airports and ports struggle to understand everything. Smugglers take advantage of that. It's not hard to evade sanctions.

— Is it possible to fully control the export of consumer microelectronics and keep them away from the military?

— If the military or special services require export-controlled components, they usually obtain them through intermediaries. Yes, it is more difficult and costly, but if the customers have the time, energy, and resources, there is not a problem.

— Component manufacturers assure us that they do not supply anything to Russia and combat against illegal imports. How true is this?

— These companies claim that they do not send goods to Russia, Iran, or North Korea. They don't, it's true. However, their customers are capable of doing so. And some businesses have thousands of customers. Manufacturers want to make money, not spend millions of dollars checking every customer. When a customer walks in and says, "Here's a million dollars, I need a product," you don't ask questions.

There is, for example, a case study. One American firm sold computer equipment directly to a Russian company that manufactures launchers for the S-400 surface-to-air missile system. "We can't do that, this is a missile factory in Moscow," the compliance department told its bosses. However, that warning went unheeded.

Another example, as reported by the Washington Post, is an American company that manufactures advanced weapons, such as hypersonic missiles for the Pentagon. And they sold the technology to a company in the United States, who then sold it to another, and the technology is now in Chinese weapons. According to a Chinese scientist interviewed by WashPost, this American technology is incredible, and they couldn't work without it.

It's hard to verify everything when there are a lot of intermediaries involved. But companies have to ask questions.

“The scheme has been in place since Soviet times”

— How long has the Russian defense complex been using these schemes with intermediaries and transit countries?

— The scheme of using third countries to gain access to export-controlled goods has been in place since Soviet times. Documents and studies from the 1970s and 1980s show that the Soviet Union received a large amount of computer equipment and electronics from the US. During Stalin's era, the Coordinating Committee for Multilateral Export Controls (COCOM) was formed to ensure that dual-use technologies were not introduced into the USSR. Third countries, such as Finland, did, however, trade with both sides.

Before February 24, there were numerous instances of prohibited goods being imported through Finland or Estonia, for example. Of course, they will not simply cross the border today. Estonia and Finland are working to secure their borders with Russia. Furthermore, there is almost no trade with Russia, making it more difficult to conceal. More successful attempts are now being made in Taiwan and Hong Kong, rather than in Europe.

Imports from the United States are subject to such schemes. For example, Alexander Fischenko has been illegally exporting microelectronics for years, including brands whose products have been found in Russian weapons in Ukraine. Another group of people was detained in New York in December for doing the same thing.

In general, there is so much corruption and mismanagement in the Russian military industrial complex that I believe it all depends on the level of every enterprise’s management.

— The West began imposing sanctions back in 2014, but it seems that Russian arms manufacturers were not concerned about this, as they did not replace foreign components in their weapons.

— They were planning to. To address this issue, a huge sum of money was allocated to the defense complex. But I have no idea where that money went, and neither does Putin. Perhaps to the corrupt, lying management. In this regard, I am very happy for the Ukrainians.

— Do the sanctions have any effect in the end? Or are they completely ineffective?

— I strongly disagree. Many studies show that the Russian defense complex has really fucked up since 2014. Sanctions are working. Those cases of sanction evading that we become aware of are smugglers' success stories.

Yes, there are businessmen who take advantage of sanctions to supply Russia with military components worth millions of dollars. But are these shipments sufficient? We don't know for certain. All we know is that Dmitry Medvedev was enraged that tanks could not be produced quickly enough.

— It seems that the fact that these components are manufactured in China plays a significant role in supplying the Russian defense industry...

— And also they are manufactured in Malaysia, Indonesia, and elsewhere. As a result, the United States requires the assistance of Malaysia, Indonesia, and all other countries that produce these components in order to combat sanctions violators. However, this is nearly impossible.

If China wants to halt such flows, it can. The question is whether Beijing knows about this. I am not an expert on China, but it is possible that the Chinese authorities, like Putin, are living in an information bubble. The main question is whether they will want to. It's difficult to cooperate with a country that keeps talking about war with China. I mean, why should China assist the United States in its fight against Russia?

— Why not move chip production to more dependable countries?

— It would be very expensive. Producing components in Malaysia, Indonesia, and other countries is more cost effective. Only the most modern components are manufactured in the United States. The obsolete models are manufactured in Southeast Asia.

— And how does Russia get access to modern components?

— I haven't seen any advanced chips arrive in Russia's military-industrial complex. Manufacturers of radiation-resistant chips, or advanced gyroscopes, for example, check who they do business with. These products are not sold through distributors.

However, old chips work just as well. Although electronics are important, a cruise missile is just a plane that does not land.

— The United States can impose secondary sanctions on non-US companies for collaborating with sanctioned Russian individuals. How efficient are they?

— If I were a Taiwanese firm, I would be concerned about secondary sanctions. Americans have a lot of money and are willing to spend it in Taiwan, and losing the American market would be disastrous. Mainland Chinese companies may be concerned as well, but it all depends on who they consider their primary customer.

— I recall you saying once that Russian arms manufacturers purposefully use obsolete components in their products in order to evade export controls. What other tricks do they employ to obtain Western components?

— Many criminal cases in the United States are brought because a company does not apply for a license from the Bureau of Industry and Security. It's like gun smuggling in that you bring in one product disguised as another. International trade is on such a scale that you can hide in plain sight for a while. In some countries, the law simply does not cover all of the nuances of exporting various microchips.

“Russia is decades behind even Malaysia”

— Can the Russian defense industry quickly establish import substitution — or, at the very least, switch out American components for Chinese ones?

— Even in the Soviet Union, microelectronics lagged far behind American standards, and they frequently copied American chips rather than developing their own ones. I'm not sure Putin will be able to separate the military-industrial complex from its American components.

As for replacing Western components with Chinese ones, many American chips are part of complex supply chains that include companies with offices in China. To some extent, they are already Chinese. It is unclear whether Russia's defense industry will be able to transition to Chinese-designed electronics.

— Is it possible that use of lower-quality components will cause Russian missiles to strike civilian targets more frequently?

— Missiles strike civilians when inaccurate weapons are used in densely populated areas. Missiles, particularly those designed and built during the Cold War, are not as accurate as the military portrays them, despite being modernized under Putin. Or when you have no idea what you're shooting at. It could be due to inattention, a lack of knowledge about the target (for example, when using old Soviet maps), or political pressure to launch. During the war, we've seen it all.

The Americans have what's known as a battle damage assessment, in which the military checks if and how the targets are reached. I'm not sure how this works in Russia, but if these reports are falsified, as others are, to tell their superiors what they want to hear, that's too bad for them. In this regard, the human factor is more important than electronics.

— What would happen to Russian armament if the military lost access to Western components?

— I've spoken with a number of Russian experts. Without Western technology, they believe it would be just a 1970s-era armament.

— Can Russia establish its own microelectronics manufacturing without using Western equipment?

— Russia's microelectronics manufacturing capabilities are decades behind those of even Malaysia. The equipment required to start its own production is large, heavy, hard to hide and to smuggle. Perhaps Russia will be able to purchase used equipment. Or perhaps the Chinese semiconductor market will grow. In any case, Putin has had two decades to build a semiconductor industry. And his attempt was as “successful" as the war itself.