There are many ways a Chinese company might sidestep US sanctions and provide technology products to Russia. It could hide US 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 would be foolish for trying, and the Chinese government 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 US technology or production equipment. A separate package of financial restrictions cut Russia 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, it would 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 might be tempted to fill the void.
Beijing and Moscow seem close — there is “no ceiling” for their cooperation, China said last 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 embargos.
We know about these sanctions-busting schemes because they are exactly how Chinese electronics companies ZTE and Huawei Technologies skirted restrictions on sales to Iran.
However, they got caught, and the punishments were severe.
In March 2017, ZTE was hit with a US$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 CASE
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 smartphones and networks, the Shenzhen-based company was forced to reduce production. The result was a 29 percent drop in sales last year.
Even domestic revenue fell 31 percent, highlighting the simple reality that you cannot sell what you cannot make.
Any Chinese executive running the risk-return calculation on skirting the sanctions on Russia needs to remember two things: The US is getting very good at catching those who breach sanctions, and the punishment could hurt not only that company, but China as a whole.
US President Joe Biden was blunt when he last week reiterated a warning to Chinese President Xi Jinping (習近平) that “he’d be putting himself at significant jeopardy” if he helped Russian President Vladimir Putin.
China has rejected suggestions that it would try to bypass the embargos, but has made clear that it opposes them.
“There has been unnecessary damage to the normal trade exchange with Russia, including between China and Russia,” Chinese Ministry of Foreign Affairs spokesman Wang Wenbin (汪文斌) told a regular news briefing in Beijing last 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 would 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 knows the rules, with representatives of the Chinese 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 act as snitches if they feel that others in the supply chain are not following the rules, US Deputy Assistant Secretary of Commerce for Export Administration Matthew Borman said.
TECHNOLOGY DEPENDENCE
Thus, not only are the chances of getting caught higher than ever, but Beijing has a vested interest in ensuring that 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 US firms Intel, Qualcomm and Nvidia, it still needs software from Synopsis and Cadence Design Systems, as well as tools from Applied Materials and Lam Research. 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 is a real possibility. Should anyone be found breaking Russian sanctions, and Beijing seen aiding and abetting them, Washington might 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, is not worth sacrificing its long-term plan to become a global technology superpower that can stand on its own two feet.
Tim Culpan is a technology columnist for Bloomberg Opinion. Based in Taipei, he writes about Asian and global businesses and trends. He previously covered the beat at Bloomberg News.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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