30.06.23 Sanctions Review

Southern Corridor: The West is struggling to disrupt the supply of electronics to Russia, with investigators uncovering new schemes and channels for such deliveries

Russia has been using companies registered in Kazakhstan to procure computers and other electronics, and Kyrgyz 'shell' companies to supply microchips and other components critical to the aviation industry, according to 'Radio Free Europe/Radio Liberty.' During the war, Kazakh and Kyrgyz exports of certain product categories to Russia have grown many times over, and in some cases, by a factor of hundreds or even thousands. Experts admit that completely cutting off such supplies will be challenging. However, even a reduction in these supplies would weaken Russia's military-industrial complex and its capabilities in the war with Ukraine. Thus, the fight against these illicit activities has become the central focus of new sanctions against Russia. Moreover, if this battle proves relatively successful, the 'chip famine' is likely to spill over to the entire Russian economy.

As Re:Russia has previously reported, the struggle against sanctions circumvention schemes and routes in the supply of high-tech products is becoming a central objective of Western sanction policy. Strengthening control over the enforcement of existing restrictions is implied in the recently announced 11th package of European sanctions. Analysis conducted by experts from the Kyiv School of Economics and the Yermak-McFaul Group has revealed that, in 2022, there was even an increase in these deliveries: in the fourth quarter of 2022, Russia imported 25% more dual-use chips, microchips, and other goods than they did before the war.

The main suppliers of such products are Chinese and Hong Kong shell companies (as previously detailed by Re: Russia in our report on how these schemes operate). However, a significant portion of this merchandise flows through Russia's southern neighbours, from Turkey to Kyrgyzstan. Just recently, David O'Sullivan, International Special Envoy for the implementation of EU sanctions, along with colleagues from the United States and the United Kingdom, discussed this matter with the government of Georgia. O'Sullivan also visited Uzbekistan, Kazakhstan, and Kyrgyzstan for the same purpose.

Meanwhile, a recent investigation by 'Radio Free Europe' details how these shipments are structured, using the specific examples of Kazakhstan and Kyrgyzstan. In 2022, imports of similarly coded products to Kazakhstan and Kyrgyzstan increased nearly sixfold. Moreover, a quarter of these deliveries came from EU countries. The export of sub-sanctioned goods from Kazakhstan to Russia increased by at least three and a half times. The most significant growth was observed in computer supplies to Russia. Within a year, Kazakhstan increased its imports of computers sevenfold, amounting to $1.2 billion. The deliveries from Kazakhstan to Russia, which the investigators were able to trace, are estimated to be worth $296 million. For comparison, in 2021, Kazakhstan exported computers to Russia worth only $127,000.

Exports of dual-use goods from Kazakhstan to Russia, 2021–2022, USD

One of the companies described in the investigation as a supplier of sanctioned electronics to Russia is 'EltexAlatau.' In just one day in December 2022, this company imported over 100 shipments of dual-use electronics into Russia, which, Kyiv believes are used by the Russian military forces in Ukraine. Among these shipments were microchips produced by the American company Analog Devices, similar to the ones Ukrainian soldiers found in thermal imaging scopes of captured Russian tanks. The Russian branch of the Kazakh exporter has previously openly stated on its website that its 'regular' customers included the Ministry of Defence, the Federal Security Service (FSB), and the Federal Protective Service (FSO) (this information has now been removed from the website).

Exports of dual-use goods from Kyrgyzstan to Russia, 2021-2022, in USD

Russia obtains various goods via Kyrgyzstan, including aircraft, helicopter, and drone parts. However, as recently as 2021, Kyrgyzstan had no involvement in trade flows related to such products at all. Nonetheless, in 2022, the country imported aircraft parts worth $3.5 million, with a significant portion of these purchases made directly from the United States. Exports to Russia worth $1.5 million have been confirmed. Additionally, in 2022, Kyrgyzstan began re-exporting various electronics to Russia that were previously absent from its domestic market, such as processors, controllers, telecommunications equipment, capacitors, and more. The supply of electronic integrated circuits, including those used in aviation, increased nearly sevenfold.

Many of these Kazakh and Kyrgyz companies have been identified by the journalists at “Radio Free Europe/Radio Liberty” as shell firms used to bypass sanctions. They were registered in the early months of the war in Ukraine and were seemingly established solely for this purpose. Some of the supply routes investigated by journalists involved a logistics company registered and physically located in Latvia, while in other cases, goods were delivered directly to Russia without even entering the territory where the shell firms were registered.

In 2022, one Latvian freight company connected to a Kazakh shell firm sent over 250 shipments of electronics and other products in just a single month. Among these shipments, 71 consisted of goods that were already banned for import into Russia at the time. Seven of the shipments contained products classified as 'high-priority' for export control by the United States, including microchips and telecommunications equipment. The customs documents scrutinised by journalists did not indicate that these electronics ever crossed the border into Kazakhstan, meaning that they travelled directly to Russia after passing through Latvian customs. In December 2022, the Russian company ITC, believed by investigators to have received this cargo, held a conference in St. Petersburg on the development of parallel imports.

Experts acknowledge that it will not be possible to block the supply of dual-use goods through third countries completely, even with secondary sanctions (as companies involved in supply chains can be replaced), but even a reduction in such shipments will weaken the Russian military-industrial complex. In the face of Ukraine's growing technological capabilities, this could play a significant role in the dynamics of the military campaign, especially considering that there are already signs of Russia's depleted defence potential (as Re:Russia has previously discussed). However, if the fight against electronics supply channels sees even limited success, the 'chip hunger' could extend to the Russian economy as a whole.