As the war in Ukraine rages on, authorities are cracking down on the smuggling of U.S. technology in support of Russia’s war effort, an initiative with implications for the tech industry. One significant example of this is Russia’s drone program, with a December 2022 expose describing U.S. chips, circuit boards, and amplifiers found in downed Russian drones, and mapping part of the supply chain trafficking such items to Russia in spite of Western sanctions.
This has prompted broader concerns regarding the diversion of Western technology to Russia in support of illicit end-uses, such as, for example, the Russian government’s use of facial recognition technology to crack down on dissidents.
In response to this, the United States and its partners recently imposed new sanctions against Russia to coincide with the one-year anniversary of the invasion of Ukraine, including expanded export controls over drone components, electronics, industrial equipment, and other items. The U.S. government followed this up with an advisory warning companies of the risk of third parties diverting their products to Russia.
Suppliers of electronics, drone components, and other sanctioned items face the risk that third parties will divert their products to Russia’s defense industrial base or to the battlefield in Ukraine, given the Russian military’s continued demand for battlefield equipment. Companies can mitigate this risk by conducting due diligence on counterparties and by auditing sales channels.
Overview of Russia sanctions
The United States and its partners (including the United Kingdom, the European Union, Canada, Australia, and Japan) have imposed a range of sanctions and export controls against Russia, prohibiting, among other things:
- dealings with restricted parties (such as major banks, oligarchs and oligarch-owned companies, and companies in Russia’s defense industrial base);
- new investment in Russia; and
- exports to Russia of certain items, including a broad range of electronics, drone components, software, sensors and lasers, marine equipment, aviation and aerospace equipment, power supplies, and industrial equipment.
In particular, U.S. export controls can have worldwide reach, applying to all U.S.-origin items, wherever located; non-U.S. items incorporating more than a “de minimis” level of “controlled” U.S. content; and non-U.S. items that are the “direct product” of certain U.S. technology or software.
Violations of sanctions and export controls carry stiff penalties, including civil penalties of up to the greater of $353,534 (annually adjusted for inflation) or twice the value of the transaction, and criminal penalties of up to $1 million and/or 20 years’ imprisonment.
Concern over diversion of items to Russia
U.S. officials are deeply concerned over the ongoing diversion to Russia of items restricted under sanctions, and have made it a policy focus. This concern is reflected in the March 2023 advisory noted above, in which the U.S. Department of Justice, the U.S. Department of the Treasury, and the U.S. Department of Commerce jointly warned industry of the risk of third-party intermediaries seeking to procure items on Russia’s behalf, identifying certain red flags to note.