Maldives helping Russia bypass Western sanctions on Semiconductors?

An Indian research firm Export Genius, that provides paid information on trade data, has unravelled a new trail of Russia bypassing US and Western sanctions. This information accessed and verified by NikkeiAsia claims that the Maldives has become a transit point for shipments of semiconductors to Russia. In the year after Russia invaded Ukraine, approximately 400,000 US-made semiconductors worth US$ 53.6 million were shipped to Russia via the Maldives. This information is based on Russian customs clearance data obtained by Export Genius. Thus, the Maldives was second only to China, including Hong Kong, in terms of such imports in the year after the invasion. For a country that has no semiconductor manufacturing facility, the Maldives has managed to export or rather re-export, US semiconductors equivalent to 20% of its total exports in 2021 valued at around US$ 280 million.

Records for the year prior to the invasion of Ukraine covering transactions of the same minimum value show no such shipments of chips from the Maldives to Russia. Records analyzed covered shipments valued at over US$ 50,000 each. Notably, shipments of semiconductors increased sharply in May 2022, the same month that Russian airline Aeroflot resumed flights between Male and Moscow. The flights had been suspended due to the invasion of Ukraine in February 2022. According to the customs data, fourteen exporters sent semiconductors from the Maldives to Russia. None of those companies are based in the Maldives. The London-based Mykines Corp., for example, exported approximately US$ 40 million worth of chips, or 80% of the total shipments. Earlier, April 2023, the Financial Times had reported that Mykines had shipped about US$ 1.2 billion worth of electronic equipment to Russia. Mykines is listed in Russian records as having sent shipments including semiconductors, servers, laptops, computer components, telecoms network equipment and consumer electronics. According to these customs filings, at least US$ 982 million of the goods listed as sent by Mykines are subject to restrictions on export by UK companies or individuals to Russia. The goods shipped by Mykines entered Russia from other countries, largely China.

The second company on the list was Hong Kong-based Pixel Devices. In an email to NikkeiAsia, Pixel acknowledged that it exports to Russian companies but said it “strictly adheres to the export control laws applicable to Hong Kong entities” and “deemed not to violate any applicable regulations.” The key to such shipments are freight forwarders, or intermediaries that connect shippers and transporters and handle customs procedures on their behalf. One source in the Maldives told NikkeiAsia that shipments of US chips from the Maldives to Russia were arranged by providing the name of a local forwarder in the “notify party” field of the waybill, the document containing the details of the shipment, such as its destination, the nature of the items and the route it will take.

A Maldivian Customs Service official told NikkeiAsia that data on trans-shipments is “not included in export statistics and the data is not available.” Transactions recorded in Russian customs clearance data, however, listed Maldives as the exporting country for shipments of semiconductors. Goods shipped internationally via an intermediary country are generally handled in one of two ways. One is as a “re-export,” while the other is “trans-shipments.” The flow of goods is basically the same as in re-exports, but the items are transported to another country without going through customs clearance in the intermediary country. This is probably what occurs in the Maldives.

US authorities have already taken notice of freight forwarders in the Maldives and their potential role in avoiding restrictions on shipments to Russia. In May 2022, US Commerce Department accused a company called Intermodal Maldives of aiding the export of aircraft parts to Russia in contravention of US restrictions. The company was registered in March 2022, just weeks after Russia’s invasion of Ukraine, and according to US records, based in the Maldives. NikkeiAsia also visited the Male office of Intermodal but found the name on the outside of the building and on an inside office door was that of a different freight forwarding company. Nobody answered the intercom or came to the door, and it was not possible to confirm whether the office was in fact in use.

Semiconductors have become a crucial technology for any country. National security directly depends on the availability of semiconductors, since without them a wide range of equipment is impossible to operate. Semiconductor manufacturing is extremely complex and requires the supply of many state-of-the-art technologies. While Russia is well aware of the importance of semiconductors, it has remained on the side-lines of the chip race. For a long time, Russia has tried to develop and produce its own semiconductors, but to no avail. Some developers and manufacturers have failed or gone bankrupt. Companies that remain develop chips such as Baikal and Elbrus.

Even before the start of the war in Ukraine and the introduction of tough technological sanctions, Russian chips relied heavily on Western architecture, imported components and foreign manufacturers. They also lagged behind world leaders by about 15 or 20 years. Russian government agencies and private companies often refused to use domestic semiconductors due to their low quality and obsolescence. Sanctions imposed by the West after Russia’s military intervention in Ukraine have further complicated the situation. Chips are dual-use technology, on which the operation of the Russian military machine directly depends. Therefore, after the start of the war, sanctions were immediately imposed on the supply of chips to Russia and its local manufacturers. Manufacturers were left without access to equipment and intellectual property.

In such a situation, it became almost impossible to launch new semiconductor production in Russia. However, the Russian government has announced plans to revive the chip design and manufacturing industry. But as Russia plans to spend only US$ 44 billion for this purpose it is unlikely that much progress will be made as even these funds are extremely difficult to find under severe economic pressure from the West. Immediately after Russia’s military invasion of Ukraine, leading Western chip manufacturers AMD and Intel stopped exporting to Russia. Taiwan refused to supply already produced, Elbrus and Baikal chips to Russia. In July 2022, the US Department of Commerce informed nearly a 90% reduction in semiconductor exports to Russia. Due to the lack of chips in Russia, the production of cars was suspended at that time. But this constituted only a temporary drop in supplies. Russia managed to solve the problem and through intermediaries in friendly countries, Russia began to import a record volume of chips by the fall. Initially, Russia purchased Chinese chips, but they could not completely replace their Western counterparts. China has not yet been able to establish its own production of high-end chips. Even in the case of modern chips produced in China, Beijing is in no hurry to give it to Moscow. For example, China refused to export its Loongson chips to Russia, as they recognize it as being strategically important and is in use by the Chinese PLA.

Thus, Russia focused its attention on chips that are designed and manufactured by the US and its allies. Deliveries of Western chips to Russia go through numerous intermediaries from third countries, mainly from China and Turkey. During the nine months of the war in Ukraine, despite the sanctions, Russia bought US$ 777 million worth of Western microelectronics. From 1 April to 31 October, Russia bought at least US$ 457 million worth of Intel chips. As a result, Western chips are found in newly produced Russian drones and other weapons systems. Secondary sanctions imposed by Western countries do not work and this allows Russia to keep importing. In October 2022, the US Treasury Department designated Russian national Yuri Orekhov and the two companies he controlled for procuring military and dual-use technologies from US manufacturers. The US indictment accuses Orekhov and his co-conspirators of illegally acquiring semiconductors and other microelectronics used in fighter aircraft, missile systems, smart munitions, radar, satellites, and other space-based military applications. One of their methods was to falsely claim they were acquiring items for the Russian state space corporation Roscosmos and other Russian space program entities, taking advantage of less stringent US oversight of exports for the space program.  The Russian military machine and economy thus continue to operate on Western chips. The lack of chips could have been one of the important factors in stopping the Russian invasion of Ukraine, but this did not happen. Russia continues to receive chips from Western countries and installs them in its drones and cruise missiles, which are then used to bombard Ukraine. The war in Ukraine will one day end, but it looks like it won’t be because Russia has run out of technology to supply its army. For the Maldives to get involved in this game of helping Russia bypass sanctions is a sign that it too is using hedging as a strategy to survive the difficult situation most countries in the developing world find themselves in. There may be nothing official about it, but the very fact that Russian oligarchs are using the island nation as a trans-shipment point shows that they recognise the value of such transit points. This is something to watch out for in the long run.