US, Allies Should Crack Down on Chinese Chip Suppliers to Russia, Researcher Says

Russia is still able to buy semiconductors for its war effort -- especially from China -- despite Western sanctions and export controls, a semiconductor policy researcher said in a new report this month. Although the restrictions are forcing Russia to pay almost double for some chips and require Russian supply chain managers to constantly find new supply lines, the report said Chinese suppliers are increasingly filling the market gap left by companies in the U.S. and elsewhere who are adhering to the export restrictions.

“The biggest failure in enforcing the controls is not that Russia continues to have some success in smuggling -- that’s not a surprise -- but that China continues shamelessly to sell Russia so much via normal trade routes,” said the report, written by Chris Miller, a nonresident senior fellow with the American Enterprise Institute. “The Biden administration and European allies have thus far been unwilling to devote political capital to push China to even partially abide by Western restrictions.”

Miller, an expert on semiconductor technology policy who has said governments may eventually require exporters to monitor their sensitive chip equipment shipments by using location tracking features (see 2403080030), said in the report that the Biden administration should “impose more frequent sanctions” on Russian and Chinese firms that are violating the U.S. restrictions. He also said the U.S. and others should force foreign distributors to invest more heavily in compliance, including by penalizing companies that help to facilitate shipments that “raise obvious” red flags.

The report said more than 80% of semiconductors bought by Russia since its 2022 invasion of Ukraine have come directly from China. Miller writes there’s a “chance” that contract manufacturers in China are “secretly” making chips for Russian customers and violating U.S. sanctions, but “no evidence has emerged that this is happening.” He said Russian companies are “straightforwardly” buying from China, which is “usually illegal under US law, but the Chinese government has turned a blind eye to this trade.”

The report acknowledges export enforcement is challenging, saying a single suitcase can fit “hundreds” of semiconductors. And because semiconductors have both commercial and military applications, it’s “impossible to exclusively target chips made for military use.”

“Some degree of trade diversion is inevitable, particularly given that Russia’s security services have been honing their skills in semiconductor smuggling since the Cold War,” the report said. “However, senior policymakers in the US and allied countries have devoted less attention and political capital to enforcing export controls than they should have, while enforcement bureaucracies are under-resourced.”

The report cites Russian customs data from the start of Moscow’s invasion of Ukraine through July 31, 2023, when firms shipping into Russia provided a manifest with information on the origin of the goods, the address they were being shipped from, the purchaser in Russia, a description of the items and more. Although some shippers likely took multiple steps to hide their cargo’s contents to avoid attracting attention, the report said many firms only added the phrase “not for military use” at the end of their goods description, even if the shipment to Russia was illegal under U.S. sanctions.

Those shipments had ties to chip companies based in Europe, Japan, South Korea, Taiwan and the U.S., the report said. But of the $90 million in “chip-making materials we found,” $73 million's worth was reported as having a Chinese origin, the report said, citing data analysis conducted alongside the Center for Advanced Defense Studies. The second-largest source of imports was Taiwan at $9 million, the report said, adding that several Taiwanese companies, including Pai Haung Technology, have “sent repeated shipments to multiple Russian electronics firms.” It also said almost all chip-making materials exports from South Korea involve products from Elmatech.

Russia has also imported “multiple pieces” of chip manufacturing equipment from the west and “dozens of spare parts,” the report said. In February 2023, it said, South Korea’s Jusung Engineering sold a $29 million shipment labeled “Machines and Equipment for the Production of Semiconductors or Electronic Integrated Circuits” to Russia-based OOO Enkor Group, which the U.S. sanctioned in September. Chinese-owned Linton Technologies, which has U.S. operations, also conducted nine transactions worth $30 million in total with Enkor -- mostly involving chip-making tools -- before Enkor was sanctioned.

Russia has also bought sensitive U.S.-origin chip equipment, the report said. The country bought three plasma-etch tools made by U.S.-based Lam Research -- two were shipped from South Korea and one was sent from Taiwan. The report said those tools were “old” and bought on the secondary market by Hong Kong-registered Smart Kit Technology -- which doesn’t have “an online presence” -- and were shipped directly from Korea and Taiwan to Russia-based OOO Izovak Engineering, which has ties to the Russian government.

The report noted that the Western companies that made these tools “had no relationship to these transactions, given that they first sold the tools in question years ago.” But secondary suppliers may have had a responsibility to stop those shipments, partly because Izovak has a “track record” of supplying equipment to Russian government-owned chip facilities.

Basic due diligence "would have flagged this as a high-risk transaction,” the report said. “Transactions such as these illustrate the need to expand export control enforcement efforts into secondary marketplaces, where older tools are traded.”

The report cites other similar transactions and calls on governments to impose more sanctions and export controls on Russian firms and their foreign suppliers. As Russia develops new “import patterns,” it said, “frequent sanctions imposition on firms dealing in restricted chips -- perhaps monthly or bimonthly -- will enhance the disruptive effects.”

Sanctions and export control authorities should also push distributors to devote more resources to their compliance and due diligence efforts, the report said. It said most chips, chipmaking materials and spare parts being bought by Russia are sold by Western semiconductor manufacturing companies to distributors, who then sell them “through additional layers of distributors.” Penalizing those distributors could help them better comply with U.S. export restrictions, the report said.

“Secondary markets and distributors should not be allowed to turn a blind eye,” it said.

Western governments should also pressure Chinese firms to stop sending chipmaking materials to Russia, the report said, saying “legitimate Chinese firms” like MCL Electronic Materials, Hangzhou Semiconductor Wafer, Guangdong Tianyu Semiconductor Technology and others “are repeatedly cited in Russian customs data as suppliers.”

Beijing will “never be a willing supporter of Western chip controls,” but Chinese companies “often” choose to comply with Western measures “when they face US punishment,” the report said. “Imposing similar costs on Chinese firms selling prohibited technology to Russia would enhance the efficacy of these restrictions.”