How sanctions and restrictions on the export of Western CNC equipment hurt the Russian military-industrial complex

16:11, 07.05.2024

Since the onset of the full-scale invasion, the Ukrainian Council of Economic Security has been tracing the supply chains of dual-use goods to Russia. In 2023, the ESCU focused all efforts on blocking Russia's access to foreign computer numerical control (CNC) machines. 

Why is this significant? 

CNC machines are precision equipment used in the production of virtually any type of Russian weaponry deployed against Ukraine. Despite efforts in "import substitution," the actual dependency of Russia's military-industrial complex on Western equipment prior to the invasion was striking—70-90%. Yet, Western exports of CNC machines to Russia during the two years of invasion remained largely unrestricted. However, the current situation is radically different. 

What happened since December 2023? 

According to Executive Order 14114 of the Biden administration, any foreign financial institutions were prohibited from conducting transactions related to the transfer of CNC machines and components to such equipment to Russia. 

As part of the 12th sanctions package, the European Union imposed a total ban on the export, re-export, and transit of European CNC machines to Russia. The list of prohibited goods from the CNC sector is perhaps the most comprehensive among all members of the sanctions coalition. 

Sanctions akin to European ones in scale were introduced by the United Kingdom and Japan, with the latter being an undisputed leader in the global CNC technology market. 

Taiwan and South Korea, which significantly increased industrial equipment exports to Russia in 2023, also introduced unprecedented restrictions in the CNC sector following the disclosure of cooperation data with Russia and diplomatic pressure from Western allies. Taipei and Seoul's export controls still lack approximately 30 categories of goods related to the CNC technology sector, but there are positive trends. Taiwanese machinery representatives, for example, are fundamentally changing their approach to sanctions compliance by implementing GPS trackers and remote control systems for machines. 

What happened in the last 30 days? 

The EU is preparing the 14th sanctions package, which is expected to be adopted in late spring or early summer of this year. As reported by Reuters, among other measures, the European Commission proposes to impose sanctions against Russian and foreign suppliers of industrial equipment. Additionally, the EU is seeking ways to compel European companies to influence their overseas subsidiaries, which continue to assist the aggressor. This is particularly crucial for the CNC sector, as most key manufacturers have subsidiaries in countries not belonging to the sanctions coalition, including China. 

The May sanctions package of the USA included the largest foreign supplier of CNC machines to Russia, namely the Hong Kong-based company Silver Technology Limited. According to data provided by the ESCU to the US, EU, and UK sanctions authorities, Silver Technology Limited exported CNC machines and components to Russia for over $25 million in 2023 alone. 

In addition to the Hong Kong supplier, the US government sanctioned more than 10 companies that manufacture and supply CNC machines to Russian military enterprises, including distributors of Chinese equipment and subsidiaries of Rosatom. And finally, in April, the US Department of Commerce added six more customs codes related to CNC equipment to its export control. The ESCU experts have repeatedly emphasized the importance of updating national export control regulations in this sector. 

What are the interim results? 

As a result, Chinese banks have begun to block transactions related to the transfer of CNC machines to Russia, and the export of such equipment from China has decreased by 15%. 

The information field of Russia has seen an increase in news about active development of domestic CNC machines and critical components. 

Such statements can be viewed as indicators of the success of Russian import substitution or as elements of aggressor propaganda. However, they certainly indicate Russia's problems with access to foreign equipment, including Chinese. Moreover, the development of its own precision engineering is undoubtedly a challenging, if at all realistic, task for Russia. And for producing quality weaponry, precision machines, and their continuous technical support are already essential. Any challenges in this sector can affect the quality of the final military products.