How China and Russia are beating the West’s tech ban
The order from David Wetzky was innocuous enough. His company, Strandway LLC, was hoping to buy a piece of technology from a US manufacturer: an oscilloscope scanner typically used to test electronics.
In reality, Wetzky did not really exist. It was a pseudonym used by Boris Livshits, a Russian citizen accused of posing as a legitimate businessman so he could smuggle high tech electronics and semiconductors out of the US.
The devices were shipped in April last year to a quiet town in America’s suburbia, Merrimack in New Hampshire. From there, they were allegedly picked up by Israeli-American Alexey Brayman, who repackaged the technology, tore up the invoices and added fake export documentation before sending them to Europe, US court filings state.
Months later, another Russian citizen, Vadim Konoshchenok, was stopped on the border between Estonia and Russia. In his car, agents found 35 semiconductors, many of them US origin, which he had been trying to conceal and carry across the border, according to a US indictment.
Last months, US officials accused Livshits, Brayman and Konoshchenok, along with three other Russians and an American, of running a smuggling ring dedicated to squirrelling technology out of America to Moscow, some of which could have been used for developing nuclear or hypersonic weapons.
A lawyer for Brayman told CNN in December he was entitled to the “presumption of innocence”. He was released on bail. Livshits is believed to be at large. Konoshchenok is awaiting extradition from Estonia.
The case is thought to be just the tip of the iceberg. The dark market for semiconductors and other high tech parts has been growing, fuelled by shortages in China, sanctions imposed on Vladimir Putin’s Russia since the invasion of Ukraine, and US restrictions on the sale of high-tech chips to China.
“Given the sanctions against Russia and China, there is going to be an increase in the grey market, and black market and illegal channels," Ron Black, chief executive of semiconductor technology company Codasip, says. “We have to prepare for this.”
The black market for technology between the West and East has a long history. During the Cold War, Soviet defectors admitted to using intelligence agents to infiltrate American and British semiconductor companies in an effort to steal technology.
After the fall of the Iron Curtain, covert trade in Western technology continued though concerns shifted towards Chinese technology theft.
However, the war in Ukraine and tensions between the West and China have elevated the issue from a commercial concern to a strategic threat.
Illicit black market trading and smuggling, where semiconductors are transferred or stolen in breach of sanctions, sits alongside a well-established “grey market” for chips, where resellers trade semiconductors into third countries without the permission of the manufacturer, or use them in alternative applications in breach of contract.
Getting an accurate value for these illicit markets is difficult, but between the black market and counterfeit chips, it is estimated to cost the industry billions of pounds each year.
Experts compare the problem to the trade of conflict diamonds in West Africa during the 1990s.
“It starts off with pure economic reasons, unofficial channels selling diamonds or other luxury goods cheaper than official channels,” says Black. “Unfortunately, semiconductors can be used for multiple illicit purposes, it’s not just a cheaper washing machine to wash clothes, it's purchases to take the chips out and put them in a missile.”
Last year, the Royal United Services Institute (Rusi) studied dozens of pieces of Russian military equipment and found multiple US, European and Japanese semiconductors that had been repurposed in weaponry.
Transceivers produced by Dutch company Nexperia were discovered in a nuclear-capable Kh-101 cruise missile. Parts from US company Texas Instruments were found in Russia’s KUB-BLA “kamikaze” drones. Technology from US company Analog Devices was uncovered in military radios and jamming systems.
There is no indication the Western companies knew their technology would end up in Russian military equipment. Nexperia, Texas Instruments and Analog Devices all denied doing business with Russia and suggested unauthorised reselling or contract breaking by third parties was behind Rusi’s findings.
It is also is possible the devices were smuggled into the country, brought in before the conflict began, or prised out of consumer electronics and re-used.
Such efforts are monitored by Russia’s secret service, which vets parts acquired from the West for backdoors.
“Since Russia’s invasion of Ukraine, they have expended a significant amount of military equipment en masse,” Joe Byrne, a research fellow at Rusi, tells The Telegraph. “Western produced components are critical to those systems.”
“This goes back to the Cold War. Even when Putin was an agent in Dresden, he was operating around people tasked with stealing technology. It has long been part of Russia’s plans.”
Last year a woman was arrested while travelling from Macau to China with a fake baby bump allegedly containing more than 200 semiconductor chips, Bloomberg reported, in one of the most eye-catching examples of the underground trade.
As well as black market dealings, there is the “grey market”: semiconductor companies may sell microchips or technology to resellers in good faith, before they are moved and shifted through a web of shell companies and traders in jurisdictions with little oversight, rather than used as stated in their contracts.
In its study of Russia’s illicit semiconductor supply chain, Rusi found components were often moved to trading hubs such as Hong Kong, before being taken on by Chinese resellers and transferred into Russia.
“Procurement agents may set up front companies in Hong Kong or Malaysia, and then transship them to Russia,” says Byrne.
Black says there are ways the industry can try to tackle the illicit chip trade. Batch or lot numbers on chips can be easily faked or altered, but semiconductor companies can put unique identifiers on each chip, allowing companies to “investigate to see if customers are in breach of your legal restrictions”.
Byrne, the Rusi research fellow, adds there are open source and artificial intelligence tools, which track shipping data and company filings, that can be used to flag suspect orders.
The problem seems only likely to mount as restrictions on trade tighten. US sanctions have made it increasingly difficult for Russia to access semiconductors, while White House officials are now pushing for further restrictions on China.
In particular, they are lobbying the Netherlands to introduce export controls that will block advanced chip making equipment from being sent to China.
The Semiconductor Industry Association, which includes some of the world’s biggest chip companies and distributors, says its members are “committed to combating illicit chip diversion”.
The body said earlier this month: “The ubiquity of chips in a range of consumer products makes controlling these items an issue of magnitude. Most weapons systems are designed with chips that have a multitude of civilian uses, the same that can be found in cars, laptops, and home appliances.”
A Nexperia spokesman condemned Russia’s “illegal invasion of Ukraine” and said the company complies with international sanctions, “which we fully support, therefore, we have no Russian customers and do not sell to Russia even through distributors.”
“In the event that it becomes known to us that any of our distributors violate sanctions, our policy is to immediately cease all further deliveries and cease working with that organisation. While we have put in place the necessary compliance processes, such third-party behaviour cannot always be controlled or prevented by us.”
A Texas Instruments spokesman said the company did not sell components in Russia, Belarus or Iran. “We do not support or condone the use of our products in applications they weren't designed for,” they said.
An Analog Devices spokesman said the company had “ceased business activities in Russia, and in the Russian-backed regions of Ukraine and Belarus, and promptly instructed all of our distributors to halt shipments of our products into these regions.
“Any post-sanctions shipment into these regions is a direct violation of our policy and the result of an unauthorized resale or diversion.”