Illicit chip flows to Russia seen slowing, but China, Hong Kong remain transshipment hubs

HONG KONG/WASHINGTON — Semiconductors and other restricted goods shipped through China and Hong Kong to fuel Russia's war effort fell by a fifth this year previously undisclosed US Commerce Department data shows, but Hong Kong remains a global sanctions evasion hotspot.

Transshipments through Hong Kong of Common High Priority Items (CHPL) — advanced components including microelectronics deemed by the US and European Union as likely to be used for Russia's war in Ukraine — fell 28 per cent between January and May, a US Commerce Department official told Reuters.

For the same period, transshipments of those items through mainland China, excluding Hong Kong, fell 19 per cent, the official said.

Reuters is reporting the previously undisclosed numbers for the first time.

Asked about transshipment of dual-use goods through China into Russia, the Commerce Department referred Reuters to earlier statements outlining its efforts to "restrict Russia's access to the technologies and other items that it needs to sustain its brutal war against Ukraine."

Both Hong Kong and China are seen by the US government as key global nodes for Russia to source materials for its military, including semiconductors and drone parts.

"I think there's some cause for being at least optimistic that we have been able to slow down some of this trade," the official said, but added: "China is still our number one concern."

The United States and its allies have accused China of supporting Russia's war in Ukraine, in part by exporting parts and equipment needed by Moscow's weapons makers.

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The US State Department and Treasury imposed several rounds of sanctions on entities around the world with alleged commercial links to Russia's military, including shell companies in Hong Kong that had been diverting semiconductors.

The official, who spoke on condition of anonymity, said the dip in illicit flows was the result of several factors, including aggressive enforcement by US authorities, as well as engagement with companies whose products are being transshipped.

"We are talking to any company whose items are showing up on the battlefield," the official said, without giving names.

The official declined to share the full data set with Reuters, citing the need to protect the department's access to the information. "What I can say is we have confidence in the source related to imports into Russia."

The Hong Kong government did not respond to questions from Reuters about the transshipment of goods into Russia, but said it "does not implement, nor do we have the legal authority to take action on, unilateral sanctions imposed by other countries."

It added, however, that it was "enforcing vigorously" sanctions imposed by the United Nations Security Council, pursuant to the instructions of China's Foreign Ministry, including those with regard to North Korea.

China's Customs Administration and Foreign Ministry gave no response to Reuters' requests for comment.

There was no response to Reuters' questions from the Russian embassy in Washington.

A separate customs dataset from C4ADS, a Washington-based global security non-profit, showed that over 200 Hong Kong-registered firms shipped nearly US$2 billion (S$2.69 billion) worth of goods to Russian buyers between August and December 2023.

The data, outlined in an upcoming report by The Committee for Freedom in Hong Kong Foundation (CFHK) and reviewed by Reuters, showed US$750 million worth of CHPL items — ranging from high-end chips by Nvidia and France's Vectrawave, to lower-end chips from Texas Instruments and Intel — were shipped via Hong Kong between August and December 2023.

Some of these restricted goods were shipped to sanctioned Russian firms, CFHK said.

Nvidia said in a response to Reuters questions that it halted sales to Russia in March 2022 and requires its customers to comply with all applicable US laws.

Texas Instruments told Reuters it "strongly opposes" the use of its chips in Russian military equipment and the illicit diversion of its products to Russia.

Intel said it operates in strict accordance with US export regulations and sanctions and holds suppliers and distributors accountable to the same standards.

Vectrawave did not respond to a request for comment.

"Our research has highlighted numerous instances where Hong Kong-based companies have facilitated the transfer of sensitive technologies and commodities, undermining international security and stability," said Samuel Bickett, a lawyer and author of the CFHK report.

High-end chips

The 2023 customs data from C4ADS showed that two of the Nvidia shipments, worth US$1.58 million and US$1.21 million, were shipped to a Moscow-based firm named "Lotos" by a consignor called Malachor Electronics with a secretarial address in a plush office building in Hong Kong's central business district.

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The director of Malachor, Colin Stevenson, who has a listed United Kingdom address, could not be reached for comment.

Between August and December last year, a total of US$17.6 million worth of Nvidia goods were shipped into Russia by Hong Kong consignors after being traded in countries including China, Taiwan, Turkey, Thailand, Serbia and the United Arab Emirates, according to customs records reviewed by Reuters.

Consignments included "Jetson TX2" Edge AI systems, which are among the components used in drones the Ukraine government has discovered on the battlefield.

"Pre-owned Jetsons are available through many second-hand channels. Although we cannot track products after they are sold, if we determine that any customer is violating US export controls, we will take appropriate action," said John Rizzo, an Nvidia spokesperson.

Rizzo did not give details about the shipments to Lotos.

Other high-end consignments included two shipments worth US$1 million each of semiconductors from Vectrawave that were labelled as microprocessors. Vectrawave is a maker of specialised semiconductors for high-tech communication and defence systems including radar.

The ease of setting up and registering new firms in Hong Kong has led to a proliferation of shipping and logistics firms and other intermediaries that have also facilitated restricted trade and monetary flows with Iran and North Korea, according to the CFHK report and an examination of Hong Kong companies registry filings by Reuters. Some of these have been sanctioned by US authorities.

Reuters found shuttered offices on visits to industrial buildings in Hong Kong close to the city's Kwai Chung container port for consigners named in customs records and corporate filings. One firm, Align Trading, the consigner for the Vectrawave chips, had an address that was a mouldy room stacked with hundreds of Hong Kong companies registry letters.

Li Yanqing, a Chinese director for Align, had a listed address in Jiujiang in southern China and could not be reached.

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