Like the war Ukraine continues to rage as authorities crack down on the smuggling of US technology in support of Russia’s war effort, an initiative with implications for the tech industry. An important example of this is the Russian drone program, with a December 2022 expose describing US chips, circuit boards and amplifiers found in downed Russian drones, and mapping part of the supply chain that trades such items to Russia despite Western sanctions.
This has raised wider concerns about the diversion of Western technology to Russia to support illicit end-uses, such as, for example, the Russian government’s use of facial recognition technology to deal with dissidents.
In response, the United States and its partners recently imposed new sanctions against Russia to mark the one-year anniversary of the invasion of Ukraine, including expanded export controls on drone parts, electronics, industrial equipment and other items. The US 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 direct 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 monitoring sales channels.
Overview of sanctions against Russia
The United States and its partners (including the United Kingdom, the European Union, Canada, Australia and Japan) have imposed a series of sanctions and export controls on Russia, including the following:
- dealing with prohibited parties (such as major banks, oligarchs and companies owned by oligarchs, and companies in the Russian defense industrial base);
- new investment in Russia; And
- exports to Russia of certain items, including a wide variety of electronics, drone components, software, sensors and lasers, marine equipment, aerospace equipment, power supplies and industrial equipment.
In particular, U.S. export controls can be global in scope and apply to all U.S.-origin items wherever they are located; non-U.S. items containing 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 severe penalties, including civil penalties of up to $353,534 (adjusted annually for inflation) or twice the value of the transaction, and criminal penalties of up to $1 million and/or 20 years in prison.
Concerns over diversion of goods to Russia
US officials are deeply concerned about the continued diversion to Russia of items restricted under sanctions and have made it a policy focus. This concern is reflected in the March 2023 advisory mentioned above, in which the US Department of Justice, US Treasury Department and US Department of Commerce collectively warned the industry about the risk of third-party intermediaries attempting to purchase goods on behalf of Russia, pointing out certain warning signs.