Servant of Two Masters: Without the creation of a new and comprehensive export control system, sanctions are unable to stop the rearmament of the Russian army using Western components

Efforts by the US and its partners to halt the sale of parts needed for weapons production to Russia have, at best, a limited effect, as Moscow has managed to establish alternative supply chains. The picture of such shipments is becoming more complete thanks to numerous independent investigations. However, the lack of an effective export control system makes it impossible to close these channels. A fundamental reform of this system is needed, which would include creating mechanisms to track the movement of goods along the supply chain, strengthening the work of government agencies in the sanctions coalition countries, and placing responsibility on the producers of weapons components themselves, under the principle of 'know your customer,' which has long been used in the banking system to combat money laundering. Otherwise, there is an absurd situation where Western governments, through budgetary funds, finance arms supplies to Ukraine, while the manufacturing companies simultaneously supply components to the Russian side through commercial intermediaries.

According to experts, imports of high-tech components from the West have continued to play a key role in the build-up of Russia’s military potential. Moreover, for some items (including high-precision missiles), the volumes of Russia’s arms production has even increased when compared with pre-war levels, according to a join study by the Kyiv School of Economics (KSE) and the Yermak-McFaul Working Group. was able to increase its missile production from about 50 units per month in 2022 to about 115 per month by the end of 2023 thanks to imported components.

At the same time, about 95% of all Russian weapons parts found on the Ukrainian battlefield were manufactured by foreign companies. The National Agency for the Prevention of Corruption of Ukraine found almost 2800 such parts, of which 72% (2007 parts) were produced in the United States, another 6% (180 parts) in Switzerland, 5% (150 parts) in Japan and just 4% (112 parts) in China.

The authors of the study categorise Western imports used in Russian arms production into two groups: 1) military goods (which, according to the classification used by the US, EU and UK, are those most important for the creation of military products); and 2) critical components, the list of which the researchers compiled independently. The latter included a wide range of predominantly civilian goods and parts that can be used in military production. In total, the researchers studied Russian imports of 45 military goods and 485 critical components.

Russia's imports of military goods halved in the first six months following the Russian invasion of Ukraine. However, they then began to rise again and in 2023 they were worth $932 million per month – just 10% below pre-war levels. Imports of critical components suffered more, falling to an average of $2.29 billion per month in 2023, which was 28.8% less than the pre-war value. In the first ten months of 2023, Russia imported $8.77 billion worth of military goods and $22.23 billion worth of critical components.

Of the military goods it purchased, Russia bought the highest amount of communications equipment ($2.76 billion), semiconductors ($2.06 billion) and computer components ($1.39 billion). These were largely produced in China (41%), the US (25.5%), Taiwan (7%) and the EU (6.1%). Of the critical components it imported, Russia purchased the most auto parts ($5.65 billion), as well as communications equipment ($3.38 billion), computer components ($2.94 billion) and semiconductors ($2.21 billion). These goods were mainly produced by companies from China (41.2%), the US (15.1%), the EU (6.8%) and Taiwan (4.7%).

Thus, the countries that are members of the export control coalition continue to play a key role in the supply of military technology to Russia (Re:Russia has previously written about this coalition here), which produced 48.5% of all military goods imported by Russia in January-October 2023. Further, the main routes for transporting both such goods and critical components to Russia were via third countries, primarily China (which accounted for 38% of military goods and 38.9% of critical components), Hong Kong (30.9% and 18.1%, respectively), Turkey (6.9% and 8.4%), the UAE (3.3% and 4.2%), and EAEU countries (2.0% and 2.5%).

Independent investigators are increasingly able to reconstruct the Russian military-industrial supply chain, and an increasing number of publications are publishing the results of their investigations. For example, The Insider found that 98 types of microchip used in nine types of Russian weapons systems (including Su-24 aircraft, Kinzhal and Kalibr missiles, Orlan drones, Russian-made Shahed 136 and others) are still being supplied to Russia via China. And an investigation by a global network of investigative journalists (OCCRP) found that more than 98% of cotton pulp imported into Russia, which is a key component for gunpowder production, comes from Kazakhstan and Uzbekistan. From January to September 2023, Uzbek companies supplied this to Russia to the value of about $8.7 million, almost 70% more than in the entirety of the previous year. Additionally, Kazakhstan sent almost 60% more of such raw materials to Russia in 2022 than it did in 2021. Cotton pulp from Central Asian countries is being received by Russian companies, which have been sanctioned by the US, Switzerland, and Ukraine.

Last year, proposals were drawn up to organise systems for the effective control of military supplies along their entire chain of custody. In a new joint report by KSE and the McFaul Group, the experts again propose a number of measures to strengthen the sanctions regime, including harmonising, expanding and simplifying the export control regime, extending it to end suppliers and not just intermediaries (which are often specially designed firms), and introducing stricter (including criminal) liability for sanctions violations, including those that occur as a result of negligence.

For effective control, a technological solution must be found to track the movement of military goods and critical components along the supply chain. Columnists from The New York Times who support this idea suggest that in order to tighten control over exports to China and Russia, simple geolocation tools with tamper-proof protection, such as Apple's AirTag, which costs less than $30, should be used. If, according to geolocation data, the equipment does reach Russia, it should be deactivated. They propose to extend similar measures to complex production tools that require software to use. Such programmes should be deactivated when the equipment enters Russia.

To enforce export control measures, it is necessary to improve the efficiency of government institutions in the countries that make up the sanctions coalition, except for the US, which is largely ill-prepared for such activities. In the EU, for example, differences in national legislation and enforcement practices hinder compliance with export controls. In addition, export companies need to join the export control system. Their motivation to do so should be increased by investigating suspicious transactions involving dual-use goods and by introducing an adequate system of fines and penalties for violations.

Exporters should be required to adhere to the KYC (Know Your Client) rule, which has long been a standard in the financial industry in the fight against money laundering, when it comes to trading partners. James Hodson, a member of the International Working Group on Sanctions, agrees with this proposal, noting in a piece for The Insider that it is virtually impossible to combat sanctions circumvention without the introduction of KYC.

Experts believe that while building such export control systems for dual-use goods is not an easy task, it is necessary not only in the case of Russia, but also to ensure greater global security more generally. Indeed, the ever-increasing number of militaries with control over vast territories where they are able to establish their own military production makes a system of control over the supply of technological components quite urgent. However, there are also several arguments to the contrary. For example, such a system would raise costs for Western producers and open niches for producers from countries that are not a part of the export control coalition to compete with them. However, the absence of an effective system creates a situation where Western countries transfer arms to Ukraine at the expense of budgetary funds, while at the same time manufacturing companies supply components to Russia through commercial intermediaries.