26.04.23 Sanctions Review

The One-Sided Fence: American chips worth hundreds of millions of dollars are entering Russia via China, and there seems to be no way to prevent this

Despite efforts by the United States and the Western coalition to impose sanctions against Russia, geopolitical fragmentation has hindered their efforts. Indeed, chips and microcircuits from major American manufacturers such as Intel, AMD, and Texas Instruments, including those used in the military-industrial complex, continue to enter Russia. To add to this, Indian authorities have refused to comply with price caps. According to an investigation by Nikkei Asia, over the past year, the volume of shipments entering Russia via Hong Kong and China has increased more than tenfold, reaching $740 million. The results of the investigation did not come as a surprise to one official from the US Department of Commerce, while his former Hong-Kong based colleague warned that blocking shipments completely would prove to be difficult. The products are predominantly being imported by shell companies which obtain products from the US through third parties, and even if sanctions are imposed on these businesses, new companies will emerge in their place.

An investigation by Nikkei Asia, an online publication based in Japan and affiliated with the Nikkei 225 stock index, has revealed that Russia is still buying large quantities of US-made chips and microcircuits, evading sanctions in the process. The investigation, which relied on Russian customs data provided by the Indian research firm Export Genius, has estimated the total volume of chip and microcircuit shipments to Russia in 2022 and mapped their main routes.

According to the Export Genius database, there were 3,292 transactions worth at least $100,000 each, with 2,358 of these (or about 70%), involving products from leading US semiconductor manufacturers, including Intel, AMD, and Texas Instruments among others. The total value of these transactions exceeded $740 million. The majority of the shipments were sourced from Hong Kong and mainland China, amounting to 1,774 transactions worth $570 million. These transactions were mainly processed by small companies, many of which were set up after the Russian invasion of Ukraine, some with the involvement of Russian citizens. In comparison, the supply of American chips from China to Russia in 2021 totalled just several hundred transactions with a total value of $51 million.

Nikkei Asia's investigation also revealed that, compared to 2021, Russia has been purchasing more expensive chips. For instance, in one of the largest deals to date, the Hong Kong-based company Agu Information Technology supplied Intel chips to Russia at a price of over $10,000 each. The chips that Russia has been purchasing, along with others manufactured by companies such as AMD and Xilinx, have a variety of uses, including in the country’s military-industrial complex, where they can be used for missile control and air defence systems.

Representatives of the American companies whose products were found in the Export Genius database told Nikkei Asia that they strictly comply with sanctions and are unaware of any supplies of their chips to Russia. However, a representative from Analog Devices acknowledged that it is impossible to ensure that all of their business partners comply with sanctions, particularly when dealing with small companies operating in different regions.

Having studied the activities of various Chinese firms within the Export Genius database, the authors of this investigation found that the aforementioned Agu Information Technology was established in April 2022. Its registered address was found to be a residential building, and attempts to contact the company's representatives via email or phone were unsuccessful. The company's website describes itself as an Intel distributor, but Intel has denied this claim. The market experts that spoke with Nikkei Asia argue that it would be challenging for such a new company to become an authorised dealer for a corporation like Intel. Nevertheless, from July 1 to December 31, 2022, Agu Information Technology managed to sell $18.74 million worth of chips to the Russian firm Mistral. Similar to Agu Information Technology, Mistral had no prior activity before the war.

Another such case is the supply of Intel and AMD products to the Russian firm Atlas by DEXP International, a Hong Kong-based company. From October to November 2022, 13 transactions were carried out worth $2.53 million. DEXP is an electronics and household appliances brand affiliated with DNS, a Vladivostok-based federal retailer. A Russian citizen reportedly played a role in the creation of DEXP International. According to Nikkei Asia, Dmitry Alekseev, the co-owner of DNS, also owns Atlas. The investigators were not able to obtain information regarding how Atlas uses the semiconductors it has purchased.

A spokesperson for the US Department of Commerce told Nikkei that ‘it is not surprising’ that Russia continues to acquire dual-use goods, including semiconductors, by indirect means. According to his former colleague, who now works as a lawyer in Hong Kong, even if the US and its allies were able to impose sanctions on the companies that have been helping Russia to sidestep sanctions, this is unlikely to lead to a complete collapse of the supply chain. New companies will simply crop up in place of those which have been sanctioned. Indeed, the trade relationship between the US and its allies and Asian countries continues to operate as it did before the war, and only the Western coalition has imposed sanctions on Russia. This makes it somewhat difficult to effectively isolate the Russian economy and to cut off Putin’s war machine.