Exclusive-Illicit chip flows to Russia seen slowing, but China, Hong Kong remain transshipment hubs By Reuters

By James Pomfret and Michael Martina

HONG KONG/WASHINGTON (Reuters) – Semiconductors and other banned goods shipped through China and Hong Kong to fuel Russia’s war effort have fallen by a fifth this year, previously undisclosed U.S. Commerce Department data shows, but Hong Kong remains a global hub for sanctions evasion.

A U.S. Commerce Department official told Reuters that transshipments through Hong Kong of high-priority shared goods — advanced components including microelectronics that the United States and European Union consider likely to be used in Russia’s war in Ukraine — fell 28% between January and May.

The official said that transshipments of those materials via mainland China, excluding Hong Kong, fell by 19% during the same period.

Reuters news agency publishes previously undisclosed figures for the first time.

When asked about the re-shipment of dual-use goods via China to Russia, the US Commerce Department referred Reuters to previous statements outlining its efforts “to restrict Russia’s access to the technologies and other items it needs to support its brutal war against Ukraine.”

The US government views Hong Kong and China as key global hubs for Russia to obtain materials needed for its military, including semiconductors and drone parts.

“I think there are some reasons to be at least optimistic that we’ve been able to slow some of this trade,” the official said, but added: “China remains 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 arms makers.

The U.S. State and Treasury departments have imposed several rounds of sanctions on entities around the world with alleged business ties to the Russian military, including front companies in Hong Kong that were processing semiconductors.

The official, who spoke on condition of anonymity, said the decline in illicit flows was the result of several factors, including tough enforcement by U.S. authorities, as well as dealing with the companies whose products are transshipped.

“We are talking to any company that shows its weapons on the battlefield,” the official said, without revealing names.

The official declined to share the full data set with Reuters, citing the need to protect the ministry’s access to information. “What I can say is that we trust the source regarding imports to Russia,” he said.

The Hong Kong government did not respond to questions from Reuters about the reshipment of goods to Russia, but said it “does not enforce, and we do not have the legal authority to take action on, unilateral sanctions imposed by other countries.”

It added that it “firmly implements” sanctions imposed by the UN Security Council, in accordance with the instructions of the Chinese Foreign Ministry, including those related to North Korea.

China’s customs administration and foreign ministry did not respond 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 nonprofit, showed that more than 200 Hong Kong-registered companies shipped nearly $2 billion worth of goods to Russian buyers between August and December 2023.

The data, detailed in an upcoming report by the Hong Kong Freedom Commission (CFHK) and reviewed by Reuters, showed that CHPL goods worth $750 million — ranging from high-end chips from Nvidia (NASDAQ:) and France’s Vectrawave, to lower-cost chips from Texas Instruments (NASDAQ:) and Intel (NASDAQ:) — were shipped via Hong Kong between August and December 2023.

CFHK said some of the banned goods were shipped to Russian companies under sanctions.

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

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

Intel said it operates strictly in compliance with U.S. export and sanctions rules and holds suppliers and distributors 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 goods, undermining international security and stability,” said Samuel Beckett, a lawyer and author of the CFHK report.

High quality chips

Customs data for 2023 from C4ADS showed that two of the Nvidia shipments, worth $1.58 million and $1.21 million, were shipped to a Moscow-based company called Lotus by a consignor named Malachor Electronics with a secretarial address in a posh office building in Hong Kong’s central business district.

Malachor’s director, Colin Stevenson, who has a listed address in the UK, could not be reached for comment.

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

The shipments included Jetson TX2 artificial intelligence systems, which are among the components used in drones discovered on the battlefield by the Ukrainian government.

“Pre-owned Jetsons are available through a variety of resale channels,” said John Rizzo, an Nvidia spokesman. “While we cannot track products after they are sold, we will take appropriate action if we determine that any customer is in violation of U.S. export controls.”

Rizzo did not provide details on the shipments to Lotus.

Other high-end shipments included two $1 million shipments of semiconductors from Vectra Wave, which are classified as microprocessors. Vectra Wave is a manufacturer of specialty semiconductors for high-tech communications and defense systems, including radar.

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

Reuters found shuttered offices during visits to industrial buildings in Hong Kong near the city’s Kwai Chung container port for shipping companies listed in customs records and corporate filings. One company, Align Trading (NASDAQ: ), which shipped the Vectra Wave chips, had an address in a musty room stacked with hundreds of Hong Kong company registration letters.

Li Yanqing, a Chinese director of Align, had a registered address in Jiujiang in southern China that he could not reach.