U.S. Semiconductor Firms, Having Outsourced Production Overseas, Struggle To Trace Evasion
- By Todd Prince
WASHINGTON -- U.S. semiconductor firms must strengthen oversight of their foreign partners and work more closely with the government and investigative groups, a group of experts told the Senate Committee on Homeland Security and Governmental Affairs, saying the outsourcing of production overseas has made tracking chip sales more difficult, enabling sanctions evasion by Russia and other adversaries.
U.S. semiconductor firms largely produce their chips in China and other Asian countries from where they are further distributed around the world, making it difficult to ascertain who exactly is buying their products, the experts told the committee at a hearing in Washington on February 27.
The United States and the European Union imposed sweeping technology sanctions on Russia to weaken its ability to wage war following its full-scale invasion of Ukraine in February 2022. Russia’s military industrial complex is heavily reliant on Western technology, including semiconductors, for the production of sophisticated weapons.
“Western companies design chips made by specialized plants in other countries, and they sell them by the millions, with little visibility over the supply chain of their products beyond one or two layers of distribution,” Damien Spleeters, deputy director of operations at Conflict Armament Research, told senators.
He added that, if manufacturers required point-of-sale data from distributors, it would vastly improve their ability to trace the path of semiconductors recovered from Russian weapons and thereby identify sanctions-busting supply networks.
The banned Western chips are said to be flowing to Russia via networks in China, Turkey, Central Asia, and the Caucasus.
Spleeters said he discovered a Chinese company diverting millions of dollars of components to sanctioned Russian companies by working with U.S. companies whose chips were found in Russian weapons.
That company was sanctioned earlier this month by the United States.
'It's Going To Be Whack-A-Mole'
The committee is scrutinizing several U.S. chip firms whose products have turned up in Russian weapons, Senator Richard Blumenthal (Democrat-Connecticut) said, adding “these companies know or should know where their components are going.”
Spleeters threw cold water on the idea that Russia is acquiring chips from household appliances such as washing machines or from major online retail websites.
“We have seen no evidence of chips being ripped off and then repurposed for this,” he said.
“It makes little sense that Russia would buy a $500 washing machine for a $1 part that they could obtain more easily,” Spleeters added.
In his opening statement, Senator Ron Johnson (Republican-Wisconsin) said he doubted whether any of the solutions proposed by the experts would work, noting that Russia was ramping up weapons production despite sweeping sanctions.
“You plug one hole, another hole is gonna be opening up, it's gonna be whack-a-mole. So it's a reality we have to face,” said Johnson.
Russia last year imported $1.7 billion worth of foreign-made microchips despite international sanctions, Bloomberg reported last month, citing classified Russian customs service data.
Johnson also expressed concern that sanctions would hurt Western nations and companies.
“My guess is they're just going to get more and more sophisticated evading the sanctions and finding components, or potentially finding other suppliers...like Huawei,” Johnson said.
Huawei is a leading Chinese technology company that produces chips among other products.
James Byrne, the founder and director of the open-source intelligence and analysis group at the Royal United Services Institute, said that officials and companies should not give up trying to track the chips just because it is difficult.
'Shocking' Dependency On Western Technology
He said that the West has leverage because Russia is so dependent on Western technology for its arms industry.
“Modern weapons platforms cannot work without these things. They are the brains of almost all modern weapons platforms,” Byrne said.
“These semiconductors vary in sophistication and importance, but it is fair to say that without them Russia … would not have been able to sustain their war effort,” he said.
Byrne said the depth of the dependency on Western technology -- which goes beyond semiconductors to include carbon fiber, polymers, lenses, and cameras -- was “really quite shocking” considering the Kremlin’s rhetoric about import substitution and independence.
Elina Ribakova, a Russia expert and economist at the Peterson Institute for International Economics, said an analysis of 2,800 components taken from Russian weapons collected in Ukraine showed that 95 percent came from countries allied with Ukraine, with the vast majority coming from the United States. The sample, however, may not be representative of the actual distribution of component origin.
Ribakova warned that Russia has been accelerating imports of semiconductor machine components in case the United States imposes such export controls on China.
China can legally buy advanced Western components for semiconductor manufacturing equipment and use them to manufacture and sell advanced semiconductors to Russia, Senator Margaret Hassan (Democrat-New Hampshire) said.
Ribakova said the manufacturing components would potentially allow Russia to “insulate themselves for somewhat longer.”
Ribakova said technology companies are hesitant to beef up their compliance divisions because it can be costly. She recommended that the United States toughen punishment for noncompliance as the effects would be felt beyond helping Ukraine.
“It is also about the credibility of our whole system of economic statecraft. Malign actors worldwide are watching whether they will be credible or it's just words that were put on paper,” she said.
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