Tim Culpan

It Would Be Folly for China to Bust Russia Sanctions

There are many ways a Chinese company might sidestep US sanctions and provide technology products to Russia. It could hide American imports behind third-party suppliers, implement layers of shell companies to obfuscate source and destination, or create elaborate schemes to hide data from forensic accountants. They’d be foolish for trying, and Beijing itself would likely step in to stop them.

The US and its allies were swift to act after Moscow’s invasion of Ukraine. Washington led a coalition of more than 30 countries that halted the supply of US goods and services, or those that use American technology or production equipment. A separate package of financial restrictions cut the nation off from global banking systems.

Russia can cope for a little while, but if its war in Ukraine drags on and sanctions remain in place then it’ll eventually run out of the components needed to not only build weapons and military vehicles, but run servers and networks used by the civilian population.
Chinese companies may be tempted to fill the void. Beijing and Moscow seem close — there is “no ceiling” for their cooperation, China said this week — and the two countries are united in their disdain for what they see as Western imperialism. Helping out a friend by shipping some US chips, or computers that contain them, might seem like a friendly gesture and possibly even a lucrative one.

In addition to the aforementioned methods of masking its supply chain, a major Chinese corporation could also mislead its bankers, use external staffing companies to employ engineers in the target country, or simply claim that a subsidiary was no more than a business partner and thus not subject to US embargoes.

We know about these various sanctions-busting schemes because they’re exactly how electronics companies ZTE Corp. and Huawei Technologies Inc. skirted restrictions on sales to Iran. But they got caught, and the punishments were severe. In March 2017, ZTE was hit with a $1.2 billion fine and cut off from buying the US components necessary to make many of its products. The company was forced to suspend operations, fire its board, and replace its management team. Revenue plummeted and the company has struggled to recover ever since.

Huawei this week showed just how damaging sanctions can be. Banned from buying the crucial communications and computing chips needed to power the latest 5G phones and networks, the Shenzhen-based company was forced to reduce production. The result was a 29% drop in sales last year. Even domestic revenue fell 31%, highlighting the simple reality that you cannot sell what you can’t make.

Any Chinese executive running the risk-return calculation on skirting the Russian sanctions needs to remember two things: The US is getting very good at catching violators, and the punishment could hurt not only that company but China as a whole.

President Joe Biden was blunt when he reiterated a warning this week to President Xi Jinping that “he’d be putting himself at significant jeopardy” if he helped his Russian counterpart, Vladimir Putin. China has rejected suggestions that it would try to bypass the embargoes, but has made clear it’s opposed to them. “There has been unnecessary damage to the normal trade exchange with Russia, including between China and Russia,” Foreign Ministry Spokesman Wang Wenbin said at a regular news briefing in Beijing this week.

Notable about this round of sanctions is the large coalition Washington has built to enforce them. It now has dozens of governments that have been updated on the rules and what to look out for. They will in turn serve as its eyes and ears around the world. In Asia, briefings have been held with industry groups and chambers of commerce in Singapore, Malaysia, South Korea and China.

Even if it chooses not to be a willing informant, Beijing too knows the rules, with representatives of China’s Ministry of Commerce meeting their counterparts in Washington soon after the embargo was announced. The US also has export-control attaches stationed in foreign countries, and companies themselves are likely to be snitches if they feel others in the supply chain are not following the rules, Deputy Assistant Commerce Secretary Matthew Borman said.

Thus, not only are the chances of getting caught higher than ever, but Beijing has a vested interest in ensuring no one breaks the rules.

Bans apply to components and hardware, as well as the software and equipment required to produce them. So while China is working hard to wean itself off chips made by Intel Corp., Qualcomm Inc. and Nvidia Corp., it still needs software from Synopsis Inc. and Cadence Design Systems Inc. as well as tools from Applied Materials Inc. and Lam Research Corp. Any product made using inputs from these companies is subject to the bans.

It could be more than a decade before Beijing can completely replace the entire design and manufacturing supply chain; losing access now would be disastrous. And that’s a real possibility. Should anyone be found breaking Russian sanctions, and Beijing seen aiding and abetting them, Washington may be forced to broaden its punishments — instead of merely forbidding sales to Russia using US technology, Chinese businesses could also be cut off.

That would set China’s drive for technology independence back a long way. The smart move for Beijing now is to comply with the sanctions and make sure its companies do, too. Helping out a friend, and making a quick buck, isn’t worth sacrificing the nation’s long-term plan to become a global technology superpower that can stand on its own two feet.