Western sanctions on technology exports to Russia have largely failed as a third of its imports used to make new weapons come from Western companies, usually via the “friendly countries”, Kyiv School of Economics (KSE) said in its latest report.

“Coalition authorities need to address the role of third-country intermediaries in export controls circumvention schemes, including those in China, Turkey, and the UAE. They can do so by imposing sanctions on entities that have been found to facilitate export controls violations involving any companies or individuals from coalition countries,” says KSE.

Hong Kong emerges from the study as a partularly important node in this trade. 

In all, foreign-sourced critical battlefield components worth $7.3bn have arrived from companies based in the US and its allies last year, KSE estimates.

“The analysis shows that, while export controls have had some effect on trade flows, Russia continues to be able to import large amounts of goods needed for military production,” KSE said in a report shared with bne IntelliNews. “Since the imposition of restrictions, supply chains have adapted and most of the items in question now reach Russia via intermediaries in third countries, including China. Almost half of the imports in the first ten months of 2023 consisted of goods that were produced on behalf of companies from coalition countries, indicating major enforcement challenges.”

0124 Russia Foreign missile components in Russian weapons by country of producer sanctions KSE 

0124 Russia war Imports in January-October 2023 by country of origin KSE

0124 Russia war Imports in January-October 2023 by country of seller KSE 

0124 Russia war Imports in January-October 2023 by country of dispatch KSE

However, the technology sanctions have had an impact, albeit imperfect, KSE said.

“Russia has not been able to find substitutes for many products from coalition countries, in particular advanced electronics, as the continued involvement of these producers shows. This means that, fundamentally, the potential of export controls to significantly curtail Russia’s ability to wage its war of aggression on Ukraine remains intact. However, major changes to the current enforcement approach are needed to improve their effectiveness,” KSE added.

Most of the technology is arriving via countries that have refused to participate in the Western-led sanctions on Russia and have maintained commercial ties with Russia. The technology sanctions have largely failed as Russia reportedly imported more technology in 2023 than it did pre-war, much of which is being used by its military-industrial complex. If anything, Russia’s capacity to manufacture missiles and drones appears to have increased in 2023, according to KSE. 

According to estimates from the Ukrainian government, missile production capacities have also been expanded from ~50 units per month in 2022 to ~100 in mid-2023 and ~115 by the end of 2023.

Russia’s ability to manufacture more missiles has allowed the Kremlin to launch a barrage of missile strikes against Ukraine in recent weeks – the biggest since the start of the war almost two years ago. According to estimates from the Ukrainian government, missile production capacities have also been expanded from ~50 units per month in 2022 to ~100 in mid-2023 and ~115 by the end of 2023.

0124 Ukraine War Russian missile and drone strikes on Ukraine in 2023 KSE 

“Investigations reveal that Russia is actively developing new capabilities in preparation for an extended conflict. Satellite imagery has shown the construction of new facilities dedicated to aircraft repair, missile production, drone assembly, and other military purposes,” KSE reports. “For instance, aircraft plants in Kazan and Irkutsk have been expanded in recent months, which focus on Su-30 fighter jets—a pivotal aircraft type within the Russian air force. In addition, the Dubna machine building plant has seen construction, as has a facility in Kronstad, which plays a key role for missile production on behalf of the state-owned Tactical Missile Arms Cooperation.”

Non-western-made technology makes up the lion’s share of the technology imports, with China accounting for just under a third of the total, or $1.9bn, according to KSE estimates. Beijing has been careful not to openly export arms and weapons to Russia for fear of bringing down secondary sanctions on itself, but the volume of dual-use technology that exists in the grey zone between banned and not banned exports to Russia has soared in the last year. For example, China has been the main supplier of earth moving equipment that allows Russia to strengthen its defence network, but has avoided sending Russia rockets and ammo. 

In the period before the full-scale invasion (January 2021-February 2022), Russia imported an average of $1.04bn in battlefield goods per month and $3.21bn in critical components. Numbers were particularly high in the fourth quarter of 2021—$1.59bn and $4.31bn per month, respectively—as Russia prepared for the war in anticipation of export controls being imposed.

Russia appears to have been able to rework supply chains of the generic battlefield goods, and monthly average imports of $932mn were only 10.0% lower in 2023 compared to the pre-sanctions period, reports KSE. 

The situation is noticeably different for the broader set of critical components, where a monthly average of $2.29bn in 2023 represents a 28.8% drop vs. before February 2022. Thus, export controls appear to show some results for certain goods.

But all-in-all, Russia imported battlefield goods worth $8.77bn in January-October 2023, while imports of critical components reached $22.23bn.

0124 Russia war Composition of Russian imports in January-October 2023 KSE

0124 Russia war Imports in January-October 2023 by country of producer KSE

Four categories of goods dominate battlefield goods: communications equipment ($2.76bn in January-October 2023 or 31.4% of the total), semiconductors ($2.06bn, 23.5%), other electronics ($1.78bn, 20.3%), and computer parts ($1.37bn, 15.6%).

Seven categories dominate critical components: automotive parts ($5.63bn or 25.3% of the total), other electronics ($5.37bn, 24.2%), communications equipment ($3.38bn, 15.2%), computer parts ($2.94bn, 13.2%), semiconductors ($2.21bn, 9.9%), bearings and transmission shafts ($1.33bn, 6.0%), and navigation equipment ($1.01bn, 4.6%).

0124 Russia war Mapping of Russian imports of battlefield goods in January-October 2023 KSE 

KSE identified a total of 485 types of components, including semiconductors, computer parts, electronics, automotive components, and bearings. The data relies on Ukrainian officials' findings of these components in Russian equipment on the battlefield.

However, the share of Western components in more sophisticated weapons made by Russia is much higher. A recent deconstruction of an unexploded Russian missile showed that only 14% of the components were Russian-made with the rest coming from the West. Separately, KSE reports that 95% of all parts found in Russian weapons on the battlefield were sourced from producers in coalition countries, with 72% accounted for by U.S.-based companies alone.

Russia has been innovative in sourcing the now hard-to-get components; exports of Western washing machines to Kyrgyzstan, for example, have soared in the last year, which are stripped of their microchips that are then used in Russian smart missiles.

The US has been trying to stymie the exports through its "foreign-direct product regulations" (FDPR) that allows it to act against goods made in third countries if they involve US-origin content, software, or technology in their production.

While the FDPR provisions are challenging to enforce, especially in countries like China, the data suggests that the goods were sold to Russia through distributors and intermediaries, the Financial Times reports.

Experts highlight the difficulties in applying FDPR on a country like China over which the US has little leverage, but suggest that targeting distributors and middlemen in sanctions lists could be effective in addressing the diversion of controlled items.

The whole sanctions regime has failed to produce the impact on Russia’s economy or its ability to manufacture materiel that was hoped when the regime was first introduced in the first weeks of the war. The FT reported last year that not a single barrel of Russian crude oil has been sold below the oil price cap of $60 that is part of the sanctions on Russia’s oil exports. More recent sanctions such as the twelfth sanctions package approved in December have shifted focus from punishing Russia to simply making the existing sanctions work more effectively.

Although the majority of the technology imports are made by countries not participating in the sanctions, there is also a significant share of Western-made technology. Products from companies such as US-based chipmaker Analog Devices  and and  Texas Instruments play a promient role and have been found in Russian missiles. Analog's imports to Russia increased from $123mn in 2021 to $269mn in the first nine months of 2023.

The FT earlier reported that at the end of last year, hundreds of Western companies confessed to ignoring sanctions and continuing to export to Russia, although none of the companies were named. The companies confessed as part of the Western crack down on sanctions dodging, in the hope of avoiding more severe punishment for trying to keep their trade with Russia secret.

Highlighting the problems of controlling the trade, Analog Devices said that it had ceased all sales into Russia and Belarus, instructed distributors to halt shipments to these regions, and emphasised that any post-sanctions shipment into these areas would be a direct violation of their policy. However, the distribution daisy-chain that Russia has set up makes it almost impossible for a producer to know where their products will end up after the they have delivered them to the first counter-party.

“Improved export controls enforcement will ultimately not be possible without buy-in from the private sector, especially coalition-based producers of goods needed for Russia’s military industry. Any effective control of the supply chain has to begin with the initial sale of an item to a distributor as it becomes increasingly complicated to trace its physical whereabouts and impede any illicit activities post-sale,” says KSE.

 

The Kyiv School of Economics (KSE) is a bne IntelliNews media partner and a leading source of economic analysis and information on Ukraine. This content originally appeared on the KSE website.