More than a year since the start of the Ukraine war, hundreds of millions of dollars' worth of U.S.-made semiconductors are flowing into Russia despite Washington's sanctions on the country, a Nikkei investigation has found.

Washington banned the export of American semiconductors to Russia, except for humanitarian purposes and other special exceptions, on Feb. 24, 2022, immediately after Russia invaded its neighbor. The move was aimed at weakening Moscow's ability to wage war by cutting off its access to semiconductors -- chips are vital components in missiles, tanks, drones and military aircraft for functions including guidance systems, radar and nighttime image sensing, and U.S. manufacturers command a large share of the market for high-performance products.

But Russia has continued to acquire chips through circuitous routes, with a large portion flowing through small traders in Hong Kong and mainland China.

To uncover these routes, Nikkei obtained Russian customs data from Export Genius, an Indian research company, and examined semiconductor import records from Feb. 24 to Dec. 31, 2022.

The records showed 3,292 transactions worth at least $100,000 each, and 2,358 of them -- about 70% -- were labeled as products of U.S. chipmakers such as Intel, Advanced Micro Devices, Texas Instruments and many others. The total value of these transactions was at least $740 million.

Of those transactions, 1,774 -- about 75% -- were shipped from Hong Kong or mainland China, and many of the shippers were small or midsize companies, some of which were established after the Ukraine invasion. The value of those transactions was $570 million.

For the same period in 2021, customs data showed only 230 high-value exports of U.S. chips from Hong Kong and China to Russia, with a total value of just $51 million.

The tenfold increase in value is just one eye-catching aspect of the data. Another is the prices given for some products. In one of the most expensive deals, Hong Kong company Agu Information Technology shipped Intel chips worth more than $10,000 apiece to Russia.

According to the Institute of International Finance, Russia's semiconductor and electronic circuit imports from January to September 2022 increased 36% from the previous year.

Such high prices may in part reflect the advanced nature of the chips that Russia is seeking.

"A large number of semiconductors with high-performance processing power is needed to control missiles and defense systems," said Junichi Nishiyama, a senior research fellow at the Institute for Future Engineering who specializes in defense technology.

Among the high-value items reported in the export data were microprocessors from Intel and AMD, as well as FPGAs from Xilinx, a subsidiary of AMD. FPGAs are a type of rewritable and programmable integrated circuit, largely used in missiles.

Shipments logged in the export data also included chips from Analog Devices, Texas Instruments and On Semiconductor -- companies all known for making quality semiconductors for industrial applications -- and high-end radio frequency chip components from Qorvo.

"Intel has suspended all shipments to customers in both Russia and Belarus," Intel said when contacted by Nikkei for comment. "Intel does not support or tolerate our products being used to violate human rights."

Texas Instruments, Analog Devices and On Semiconductor all told Nikkei they do not sell to Russia or other sanctioned countries and are in compliance with all applicable laws and regulations, including U.S. export controls. Analog Devices said it has put extra effort into combating unauthorized resales but added that it is extremely difficult to stop such shipments entirely.

But although chipmakers and established distributors face close scrutiny from U.S. authorities, there is also a profusion of smaller traders -- including one-man operations and recently established businesses -- that are more difficult to monitor.

When chip supplies are ample and offloading inventory becomes a priority, principles of "know your client" are not followed very strictly by those small, little-known chip distributors, according to multiple executives in the distribution industry. The Nikkei investigative team spent months tracking down some of these little-known trading and shell companies.

Agu Information Technology, the Hong Kong-based distributor, says on its website: "Server hardware, network equipment and components directly from the manufacturer." According to the company website, it buys from Intel and Samsung.

From September to December 2022, Agu conducted six transactions worth $100,000 or more with Russian machinery wholesale company Mistral, according to Russian customs data obtained from Cybex Exim, an Indian research company. The company exported more than 60,000 Intel semiconductors for a total value of about $18.7 million, according to the data, some involving microprocessors priced at $13,000 apiece.

When Nikkei Asia went to the address listed as Agu's head office in its company registration, reporters found an apartment complex that had corporate offices on its lower floors, but no doorplate with Agu's name.

According to Hong Kong registration information, Agu was only established in April 2022, a point that industry players say is noteworthy.

"It's difficult for a new company to handle Intel's semiconductors, which are subject to strict inventory controls," said an executive at a major Japanese semiconductor trading company. Agu's name, moreover, was not on Intel's list of official distributors. Intel told Nikkei it "has no record of any transactions with Agu Information Technology Co."

Agu did not respond to emailed questions about its inventory procurement, and did not return more than 10 phone calls.

Other transactions of $100,000 or more include several by Hong Kong-based DEXP International. According to Russian customs data, the company exported semiconductors from Intel and AMD to Russian electronic components wholesaler Atlas on at least 13 occasions for a total of $2.5 million from October to November 2022.

DEXP was established in 2018 and has an office in a shared office building in Hong Kong. According to its Hong Kong registration information, a Russian national was involved in creating the company and held all shares until May 2022.

Atlas is wholly owned by Dmitry Alekseev, who founded the major Russian electronics retailer DNS Group. Alekseev is one of a number of Russian millionaires named on a website calling for sanctions on them that is endorsed by the Ukrainian government.

After the invasion of Ukraine, Atlas imported semiconductors on 235 occasions with a total value of $49 million, according to data obtained from Export Genius covering transactions worth at least $100,000.

Atlas' registered address is the same as that of DNS, though Nikkei was unable to find any recorded transactions between the two companies. Alexeev did not respond to Nikkei's inquiries about Atlas' operations.

Cracking down on secondary sales of chips to Russia or other sanctioned parties is no easy task.

In June 2022, the U.S. Department of Commerce imposed sanctions on Hong Kong-based electronic components trading company Sinno Electronics and others for "involvement in Russian military assistance."

But most of the companies examined as part of Nikkei's investigation are not on the U.S. sanctions lists.

"We have already sanctioned more than 500 companies and will continue to monitor them in cooperation with other countries," the U.S. Commerce Department told Nikkei when asked about how it is enforcing sanctions against Russia.

The department's spokesperson added, however, that "it is not surprising" that Russia is turning to countries outside of the Global Export Control Coalition as well as illicit networks to obtain semiconductors. Members of the GECC, a U.S.-led framework for enforcing sanctions on Russia, include the European Union, Japan, South Korea and the U.K. -- but not China and Hong Kong.

Benjamin Kostrzewa, a former official at the Office of the U.S. Trade Representative and now an international trade lawyer in Hong Kong, explained why such enforcement is not easy. "Small trading companies in Hong Kong and elsewhere can continue to operate under new names even if subject to sanctions," Kostrzewa told Nikkei Asia.

The nature of the global chip trade adds to the difficulty of keeping chips out of Russia.

Semiconductor manufacturers such as Intel and AMD generally outsource their sales to specified and notable distributors -- some well-known ones include Arrow, Avnet and WPG Holdings -- that in turn follow know-your-client practices and provide guarantees to the manufacturers that they will not do business with sanctioned parties. In some cases, however, excess inventories from various electronics makers are sold on to smaller traders or other companies.

Distribution beyond that point becomes difficult if not impossible to track.

"There are many formless shell companies and small trading companies in Hong Kong that serve as receptacles for secondary sales" to Russia and elsewhere, said a manager at Avnet, a leading U.S. semiconductor distributor. Cracking down on such traders is almost impossible. "If you spot one illegal trade, they can just change their name or use their other trading companies' names," the manager said. "Their sources of semiconductors are questionable, and the quality won't be guaranteed. Big tech companies won't buy from such sources."

Shenzhen, a Chinese port city near Hong Kong, is home to a huge market where semiconductors and electronic components from around the world are traded. Many Hong Kong trading companies that supply semiconductors to Russia have offices in Shenzhen, Nikkei analysis showed. An employee at a Japanese trading company said it is possible that Hong Kong companies export products there because "customs inspections are lax."

Despite the difficulties, some argue that more can be done to close loopholes that allow Russia to obtain chips.

"The government and the manufacturers haven't been aware for a long time that they should be really checking who's buying their goods, because the supply chain is so globalized. Especially [if] it's in another country, it's very difficult to keep control on these goods," said Diederik Cops, an expert on export controls at the Flemish Peace Institute in Belgium.

"The government should collect information as much as possible using security and intelligence services, and they should [share this] with companies so that the companies could be more aware of the risks. Also, the government has to share information with all the global partners," he added.

By: DocMemory
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