Home Economic Trends Hong Kong Traders Facilitate US Chip Exports to Russia Despite Sanctions

Hong Kong Traders Facilitate US Chip Exports to Russia Despite Sanctions

On February 24, 2022, as the incursion into Ukraine commenced, the United States prohibited the exportation of American semiconductors to Russia, save for humanitarian purposes and exceptional circumstances. The strategy aimed to enfeeble Moscow’s military prowess by withholding chips crucial to manufacturing missiles, tanks, drones, and military aircraft. Advanced integrated circuits are indispensable for guidance systems, radar, and night imaging devices, with American firms commanding a substantial market share. Nonetheless, over a year later, the conflict in Ukraine persists, partly due to US technology.

Although speculation swirls around the ostensible involvement of Chinese dual-use components procured by Moscow through third-party nations, Hong Kong’s role has remained conspicuously underexamined. An investigation by the Nikkei Asia Review, based on Russian customs data obtained from the Indian company Export Genius, reveals that a complex supply network to Russia originates in Hong Kong. From February 24 to December 31, 2022, Russia recorded 3,292 semiconductor import transactions, each valued at a minimum of $100,000. Approximately 70% of these transactions involved US chip behemoths, including Intel, Advanced Micro Devices (AMD), and Texas Instruments, with 75% being shipped from Hong Kong or mainland China.

Numerous transactions were conducted by small to medium-sized firms, some established following Ukraine’s invasion. These transactions amounted to $570 million, dwarfing the $51 million in US chip exports in the same period in 2021. One such transaction involved DEXP International, a Hong Kong-registered firm overseen by a Russian national, which sold Intel and AMD semiconductors to Atlas, reportedly under the ownership of Dmitry Alekseev, the founder of top Russian electronics retailer DNS Group.

Hong Kong’s allure stems from its lack of a comprehensive military export control system. However, it does enforce end-use verification for items with potential chemical, nuclear, or biological weaponry applications. Consequently, Hong Kong-based firms can import chips without export licensing restrictions and re-export them to China or Russia, unbeknownst to US tech giants.

While large-scale manufacturers and established integrated circuit distributors are subject to meticulous scrutiny by US authorities, a web of smaller traders—including one-person operations and startups—remains more elusive, particularly during times of ample chip supplies and prioritized inventory disposal. These smaller entities, which sometimes maintain administrative offices in Shenzhen, China’s Silicon Valley, can persist under new names even when sanctioned, as former US Trade Representative official Benjamin Kostrzewa elucidated to the Nikkei.

Furthermore, establishing a company in Hong Kong requires neither residency nor citizenship but simply the services of a local agency. The ease of registering shell companies in the former British colony enables firms to obfuscate their activities and re-export sanctioned products subsequently, a role Hong Kong has played since the Korean War when it served as a hub for supplying a sanction-encumbered Maoist China.

Rather than solely concentrating on electronic component export control, more emphasis should be placed on monitoring financial flows. Such an approach would facilitate the detection of potential sanctions violations and effectively combat money laundering and other illicit activities. An enhanced financial monitoring system could also bolster international trade transparency and security, promoting cross-country collaboration and adherence to existing regulations.

Another complication arises from the fact that akin to mainland China, Hong Kong does not acknowledge punitive measures instituted unilaterally by Washington, only those officially sanctioned by the UN. This issue is well-recognized in the US, as exemplified by the June 2022 sanctions imposed by the Department of Commerce on Hong Kong-based electronic components company Sinno Electronics due to its “involvement in military assistance to Russia.” The transfer of chips is not the only concern within Asia’s second-largest financial hub.

In October 2022, controversy ensued when Russian oligarch Alexey Mordant’s yacht docked in Hong Kong harbor. Mordant, Russia’s third-richest individual, was among the first businesspeople sanctioned by the EU, the UK, and the US at the onset of the Ukraine conflict. Despite criticism from US authorities, the yacht departed unhindered for South Africa later that month.