As Russia’s war in Ukraine enters its third winter, Western regulators enforcing sanctions on Moscow are finally turning their attention to Russia’s production and procurement of weapons and their components. Despite Western export controls on military goods and critical components, Russia has ramped up weapons production all across the board, from the drones and cruise missiles that rain death on Ukrainian civilians to the combat vehicles and artillery used to batter Ukrainian troops at the front. There are abundant reports of newly produced Russian weapons filled with Western components, such as powerful Kinzhal and Iskander missiles made with Texas Instruments chips and German coils.
The objective of Ukraine’s Western supporters is to disrupt every node in Russia’s military supply chains, deprive the Kremlin of its ability to procure military technology, and impose higher costs on the Russian military-industrial complex. As the war threatens to deplete Western stockpiles of some items, such as ammunition, the pressure is on to shift the balance between what the West can provide to Ukraine and what Russia can build on its own or procure from other sources, including Iran and North Korea. Thus, preventing Russia from circumventing export controls to access the supplies it needs to continue waging the war has become a top priority for Western regulators.
Since February 2022, the United States and 37 other countries have enacted wide-ranging export controls on Russia, but enforcement has been lagging. Russia has been successful in circumventing restrictions through a combination of tactics: rerouting critical imports via third countries or transshipment points, obfuscating customs data, and using civilian proxy entities to redirect items to military firms. Since Russia’s military production relies heavily on foreign components, companies registered in countries not participating in the sanctions—such as China, Turkey, and the United Arab Emirates—became key hubs for the reexport of Western technology.
In June 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the U.S. Commerce Department’s Bureau of Industry and Security (BIS) published a list of high-priority items and commodities of concern that are highly susceptible to being diverted to Russia and its close ally, Belarus. Recently, members of the international coalition, including the United States, the European Union, Britain, and Japan, coordinated and expanded their lists to 45 high-priority items. The items of concern, including integrated circuits, memory devices, and radio navigational receivers, are the ones that Russia uses for its precision-guided weapons systems such as the Kalibr cruise missile, the Kh-101 cruise missile, and the Orlan-10 unmanned aerial vehicle—but for which the country has no or only limited domestic production capability.
The focus on weapons supply chains has put export controls back on the list of Western priorities, echoing Cold War-era efforts to restrict the Soviet Union’s access to Western technology. The scope of relevant items today, however, is much broader than the traditional targets, military and dual-use goods. Today’s list of critical items includes a broad range of industrial and consumer items such as diesel engines, digital cameras, and electrical devices that can be repurposed to make weapons, making exports significantly more complex to track.
To improve sanctions enforcement and restrict Russia’s ability to resupply its military, the G-7 countries have increased monitoring of their companies. Regulators have issued multiple guidance and red flag alerts to keep companies abreast of a heightened risk of export control violations. The financial sector is once again at the forefront of economic warfare. In the aftermath of 9/11, financial institutions became the key venue for Western regulators to track sanctions violations. U.S. authorities, for example, could use the preeminence of the dollar and U.S. control over much of the plumbing of the global financial system to isolate adversaries such as Iran. With access to the SWIFT system used to facilitate payments worldwide, U.S. regulators and investigators could track financial transfers and enforce U.S. sanctions policy extraterritorially. Experience since 9/11 has shown that monitoring financial transactions has made sanctions enforcement and the discovery of violations significantly easier than trying to track the physical movement of goods.
A similar shift is now taking place in the enforcement of Russia sanctions, with increasing pressure on the financial sector to better monitor export control violations. In an unprecedented move, FinCEN and BIS have issued three joint alerts to financial institutions, warning them to report suspicious transactions or other behavior and updating them on Russian evasion tactics. Red flags include last-minute changes in payment routings, a customer’s refusal to provide information on end users, and lack of web presence.
To boost efforts at export controls, a new international coalition was formed in June. Dubbed the Export Enforcement Five (or E-5, consisting of Australia, Britain, Canada, New Zealand, and the United States), the group has issued joint guidance to coordinate export control enforcement and prevent the diversion of critical items to Russia through third countries. This new development shifts the burden of compliance from exporters to the banking sector. Banking institutions are now asked to enhance their due diligence on top of the already existing sanctions compliance obligations. This could include requests for additional documentation, such as end-user certificates and contracts, as well as looking out for unusual or abnormal transactions.
The pressure seems to be bearing fruit. As of September, U.S. banks had reported 400 suspicious transactions to the U.S. government. The U.S. Commerce Department has utilized these reports of suspicious activities in one-third of its investigative cases, including one that involved three Russian nationals accused of sending U.S. microelectronics to Russia via third countries. As the result of successful collaboration among U.S. government agencies, such as Task Force KleptoCapture and the Disruptive Technology Strike Force, multiple illicit procurement networks have been uncovered. The latest case involved disrupting Russia’s international supply chains for semiconductors and dual-use electronics via China, Turkey, and the UAE.
The EU, too, is gradually stepping up its efforts to investigate evasion. Late October, a court in the Netherlands convicted a dual Russian-Dutch citizen of illegally selling computer chips to companies linked to Russia’s defense sector, rerouting the shipments via the Maldives. In June, the EU unveiled an anti-circumvention tool designed to act as deterrence against rerouting through third countries. If applied, the tool would allow the EU to restrict the export of goods and technology to third countries considered at high risk of circumvention. The EU’s upcoming 12th sanctions package is slated to address a weak spot of EU sanctions—the reexport of critical items. If the measure is adopted, EU companies would finally be obliged to add clauses to their contracts prohibiting the export of weapons components to third countries, as it is already the case in the United States. Brussels has also improved its information sharing by compiling member states’ national lists of export controls. The coordination of national export control lists would close loopholes by preventing Russia and its suppliers from exploiting regulatory differences among EU member states.
Yet, to be ahead in the constant cat-and-mouse game between export controls and evasion, G-7 countries need to tweak their approach. Merely shifting the compliance burden onto financial institutions will not automatically lead to fewer export control violations. Banks lack in-house technical expertise on weapons components, and while compliance departments are good at implementing know-your-customer rules, the software systems they employ are notoriously bad at identifying dual-use goods and capturing violations. This means that banks and other companies can’t do it alone—a whole-of-government approach is needed. Instead of governments passing the buck to the private sector, better coordination is urgently needed among customs, export control agencies, intelligence services, and financial institutions to map out the entire supply chain and identify evasion tactics.
Secondly, the nexus between money laundering and export control evasion has become particularly strong. Evaders rely heavily on shell companies, front companies, and various opaque structures to hide ultimate beneficial ownership. It makes it incredibly hard for government authorities and the private sector to scrutinize supply chains. Public registries can tackle the issue of beneficial ownership, a common weak spot in sanctions and export controls. But to do so, the EU still needs to do its homework by improving the state of public registries, ensuring accurate and accessible data across EU member states, and harmonizing beneficial ownership rules. In Britain, the Economic Crime and Corporate Transparency Bill went into effect at the end of October to address the issue of limited partnerships, which are notorious for their lack of filing requirements and tax transparency.
Finally, Western regulators need to understand that Russia has a comprehensive strategy of military-civil fusion, including the systematic exploitation of export control loopholes. Academic research institutes, the nuclear energy conglomerate Rosatom, energy giants such as Gazprom, and an entire gamut of seemingly civilian entities are actively engaged in the transfer of high-priority items to Russian defense companies. The West urgently needs to cast the net much wider, placing comprehensive restrictions on any company, including ostensibly civilian ones, working with the Russian and Belarusian military-industrial complex.
As Valery Zaluzhny, the commander in chief of Ukraine’s armed forces, has pointed out, the outcome of the war will to a great extent be determined not only by the quantity but also by the quality and technological sophistication of each side’s weapons. Clamping down on export control violations, their perpetrators, and financial enablers is a key way to ensure that Ukraine breaks through the current deadlock on the battlefield.
