The 2021 Dan-Bunkering Case and Due Diligence 

INTRODUCTION 

In December 2021, a Danish court fined and convicted the Dan Bunkering shipping firm and its parent company, Bunker Holdings, millions for dollars and gave a four-month suspended prison to the company’s CEO over a European Union sanctions-busting scheme.[1] The company was convicted of selling jet fuel to Russian companies, which in turn transferred the fuel on to Syria in contravention of EU sanctions. The company, which is the largest bunker supplier in the world, is alleged to have made 33 sales of jet fuel worth $102 million between 2015 and 2017.[2]  

The case was investigated by Danish authorities from 2016 on, and has attracted significant media and political attention, with serious reputational and financial repercussions for Bunker Holding and Dan-Bunkering.[3] The case rested on  questions of negligence and wilful blindness. Did the jet fuel, supplied by Dan Bunkering contributed, even in a small part, to Syria’s civil war? In the words of lead prosecutor Anders Rechendorff, “even negligence can lead to a conviction, and the defendants should have analysed what was going on much more thoroughly”.[4] 

In terms of maritime sanctions – it is one of the most high-profile cases of its kind. As a case study, it serves as an example of how lack of effective compliance, particularly with dual use goods, can lead to measurable harm. What lessons can other companies and organizations working with high-risk goods in high-risk environments learn from the Dan Bunkering example? 

THE CASE 

The European Union, United States, and other jurisdictions have imposed sanctions because of the civil war in Syria. These sanctions include elements that prohibit the supply of military equipment and materials, as well as specific provisions related to the maritime, oil, petroleum, and gas sectors. In December 2014, the EU expressly prohibited the supply of jet fuel to Syria from EU territory, regardless of the fuel’s origin.[5] 

According to press reports from 2016, Russia had been transferring jet fuel to Syria through Cyprus before the EU prohibition. Once the sanctions were enacted, Russian tankers turned to at-sea transfers to avoid entering port. The Dan-Bunkering provision of fuel took place through such ship-to-ship transfers.[6] Reuters reported that such transfers saw a spike in October 2016, one of the deadliest periods of the conflict.[7] 

The case was brought to the public’s attention through a series of exposés by the Danish Broadcasting Corporation (DR), drawing significant public and political attention. According to one segment, U.S. authorities had warned Denmark about Dan-Bunkering in 2016; the Danish Business Authority and Dan-Bunkering’s bank, Danske Bank, had also done so. The report by Danske Bank outlined transactions between Dan-Bunkering and a Russian company Maritime; the Russian Ministry of Foreign Affairs confirmed that Maritime was supplying jet fuel for Russian fighter jets operating in Syria.[8]  

Dan-Bunkering to Syria transfer.

In November 2020, Bunker Holding, Dan Bunkering, and several company executives were charged by Danish prosecutors over these transactions.[9] The case had been under investigation since 2016, attracting significant media and political attention.[10] 

GOING BEYOND THE BASICS  

Screening against sanctions list is necessary but not sufficient for ensuring compliance and avoiding risk. In a press release following charges being brought in November 2020, Bunker Holding said that its internal investigation “revealed no signs that anyone within Bunker Holding or Dan-Bunkering had any knowledge of the alleged breaches of EU sanctions” and that it had “not supplied fuel to companies included in the EU sanctions list.”[11] Limiting due diligence checks to just screening against sanctions list leaves other relevant information out-of-view. 

In addition to screening against sanctions lists, effective KYC (Know Your Customer) – and, ideally, also KYCC (Know Your Customer’s Customer) – due diligence is crucial to accurately assess sanctions risks. The link between the tankers and Russia was known and knowable. Had the company dug deeper into the parties to the transfer, it may have avoided the prolonged investigation and charges being brought against the company and its executives.  

Given the operational and material reliance of the Syrian Air Force on foreign support, the risk of diversion to Syrian end users was extremely high. In addition to identifying the end user of cargo, it is also important to ensure that it is not diverted to sanctioned entities or jurisdictions. Contractual clauses requiring proof of the cargo’s final discharge are vital, particularly with goods that could be used for harm, such as in active conflict zones. But so is the knowledge that contracts might not be honoured by all actors, in all circumstances. 

It is also key to keep track of events in the press that highlight potential risks. In Autumn 2016, a period in which a substantial number of transfers occurred, the Syrian civil war was one of the leading stories in the global press. An October peak in shipments occurred even after an emergency meeting of the U.N. Security Council and several extremely high-profile events regarding air attacks in Syria were occurring.[12] All this information was readily available on the front pages of major newspapers and reputable online resources at the time. 

Violations of the EU Syria sanctions are punishable by a fine or up to four years imprisonment under the Danish Criminal Code, highlighting not only financial and reputational dangers to a company, but also the personal risk to its executives. The prosecution in the Dan Bunkering case sought two years in prison but was ultimately “very satisfied” with the conviction.[13] 

CONCLUSION 

The Dan Bunkering case is an extreme example of what can go wrong in the world of compliance. Insufficient due diligence led to deep financial and reputational harm to the company. Many a problem could have been avoided by requesting a little more information on end use, foresight of potential reputational issues, and a few cursory google searches.  

[1] https://shipandbunker.com/news/world/381571-four-months-suspended-prison-sentence-for-keld-demant-over-dan-bunkering-syria-sanctions-breaches and https://www.france24.com/en/live-news/20211214-danish-firms-fined-for-embargo-busting-russia-fuel-sales  

[2] ibid

[3] https://www.argusmedia.com/en/news/2159228-bunker-holding-charged-with-breaching-syria-sanctions. 

[4] https://news.yahoo.com/danish-firms-fined-embargo-busting-115221733.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAAXLkctj51Iln1TuIFYK4MrNsOS3jfVuqNvGPMI1YyaZoGp-WgDT3CkGTjOvY2PHeHpJwww1uwpWebK_SmwDFXQiYyNMf_RYEJ5Q5MvAoh6M3MYE0Z9w9gTxtpYQgmX-HvjgIfzV5O7VzyjEVAysEoXnMv1n2R_AtRsP1YasweqR

[5] https://sanctionsnews.bakermckenzie.com/eu-publishes-ban-on-exports-of-jet-fuel-and-fuel-additives-to-syria/ 

[6] https://www.reuters.com/article/us-mideast-crisis-syria-fuel-exclusive-idUSKBN13H1T8.  

[7] ibid

[8] https://www.dr.dk/nyheder/indland/danish-state-prosecutor-investigates-dan-bunkering-violation-eu-syria-sanctions. 

[9] https://www.bunkerspot.com/global/49637-global-dan-bunkering-speaks-out-on-alleged-violation-of-eu-sanctions-against-syria. 

[10] https://www.bunkerspot.com/europe/52349-europe-dan-bunkering-court-case-scheduled-for-october

[11] https://www.bunkerspot.com/europe/51763-europe-bunker-holding-and-dan-bunkering-charged-with-selling-jet-fuel-to-syria.  

[12] https://www.reuters.com/article/us-mideast-crisis-syria-aleppo-warcrimes/syria-air-force-bombed-convoy-u-n-says-in-aleppo-probe-idUSKBN1684G0 and https://news.un.org/en/story/2016/09/540932-security-council-un-envoy-appeals-russia-and-us-cooperation-pull-syria-away and https://www.reuters.com/article/us-mideast-crisis-syria-fuel-exclusive-idUSKBN13H1T8 

[13]  https://www.france24.com/en/live-news/20211214-danish-firms-fined-for-embargo-busting-russia-fuel-sales 

Russia’s Semiconductor Catastrophe: How Export Controls and Sanctions will affect Russia 

Overview

New export controls on semiconductors to Russia, in combination with sanctions impacting the Russian economy. Some estimates put the trade of semiconductors to Russia at $50 billion.[1] But these impressive number bely the fact that Russia buys end products with chips and integrated circuits and does not have a strong industrial base to produce cutting edge semiconductors themselves despite attempts by the Kremlin to build a domestic production capacity.[2]

Russia’s Global Trade Flows

CNS analyzed trade flows of semiconductors and electronics into Russia to measure the current international supply chains Russia is relying on to keep her economy running. Firstly, we analyzed COMTRADE data from the United Nations using the Harmonized System data countries report they are exporting to Russia. We used two four-digit HS (Harmonized System) codes to filter for only goods relevant to the semiconductor and microelectronics industries. This meant using codes 8541 and 8542, for semiconductors and electronic integrated circuits, respectively. The goods were measured in U.S. dollars from the 2017 to 2021 period.

What we found was two distinct trade flows. The larger of the two routes stretches towards the Atlantic, constituting primarily the Netherlands, Germany, and United States to a lesser extent. The Netherlands was the leading reporting of trade, with totals reaching $1.48 billion in goods. Germany and the United States came in second with $856 million and $366 million in goods, respectively from 2017 to 2021. The smaller, but still extremely significant of the two trade flows stretches towards the Pacific, constituting supply chains from China and Hong Kong. The dominance of trade from China and Hong Kong fluctuated based on year, but $973 million in goods were reported by Hong Kong over the four-year period with $746 million coming from the Chinese mainland.

Graph of Russian electronics trade.
Graph of Russian Electronics Trade Over Time

It is important to note the breadth and variety of semiconductors and integrated circuits. The goods Russia imports run the gamut of sophistication levels and are not all the high-end semiconductors that are the focus of the U.S.-China technology arms race, but lower end electronics for all number of industrial applications.

Asian Supply Chains

Logically, given geography and geopolitical leanings, there is concern China itself may step in to provide a workaround for getting semiconductors into Russia. This would mean higher prices for Russian end users and increased risk for any Chinese supplier. Fearing this, U.S. Secretary of Commerce Gina Raimondo came out on March 8th and threated to further cut-off China from American goods and software if Chinese companies served to undermine U.S. export restrictions and sanctions. U.S. officials have specifically threatened to punish the Shanghai-based and partially state-owned Semiconductor Manufacturing International Corporation (SMIC) for any trade with Russia.[3] SMIC is already on the US ‘entity list’ meaning that all US trade with the entity must be referred to the licensing agency.[4]

The impact of Taiwan joining the export controls could be extremely consequential for its success. Given TSMC’s outsized role in the high-end semiconductor industry, market cut-off alongside U.S. decoupling cuts off Russia’s basic electronic manufacturing base is virtually nonexistent much less a capacity to manufacture high-end chip manufacturing equipment akin to Dutch EUV innovators at ASML.[5] This is all despite government subsidies to push forward Russia’s chip manufacturing abilities.[6] This is due to several factors, including lack of development during the Soviet period, lack of qualified staff, lack of basic research, and theft by state officials.[7]

Nvidia, AMD and Intel have also pulled out of the Russian market, defacto locking Russia out of personal computers, laptops, and supercomputers.[8] AMD specifically referred to U.S. “sanctions” as the reason for the company’s pullout, without elaborating if export controls or financial restrictions were more to blame.[9] This is a direct blow to Russia’s participation in the machine learning race, as Sberbank’s Christofari supercomputer was created in collaboration with Nvidia.[10]

Impact on Global Semiconductor Markets

A secondary risk is that as a major commodity exporter, Russia’s invasion of Ukraine could impact the availability of raw materials needed to produce some semiconductors. The most relevant components to the Russia context being neon gas and pallidum.[11] Russia supplies half of the world’s neon gas, much of which is then further processed in Ukraine before entering global supply chains.[12] This supply chain provides 90% of the neon gas used by the U.S. semiconductor industry to produce chips.[13] Dutch semiconductor giant ASML reduced their reliance on neon gas in their processes after the Crimea annexation.[14] One business analyst told Fortune magazine, “Unless Ukraine becomes a long, drawn-out war, lasting over a month, there should be little impact on neon supplies”.[15]

Conclusion

Since Peter the Great traveled the European shipyards 300 years ago, opening the so-called window to Europe, Russia has relied on Western technology transfers for modernization. The world is more globalized now, but Russia continues to rely on technology transfers for development. Russia attempted import substitution of electronics after the 2014 annexation of Crimea, but many of these attempts were marred by corruption and failure.[16] The semiconductor export controls stand to leave Russia weaker, poorer, and more isolated in a way the country has not seen since the Soviet Union.


[1] https://fortune.com/2022/02/25/biden-ban-chip-semiconductors-exports-russia-ukraine/

[2] https://www.kommersant.ru/doc/5029560?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD and https://www.kommersant.ru/doc/4955528?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[3] https://www.nytimes.com/2022/03/08/technology/chinese-companies-russia-semiconductors.html

[4] https://www.federalregister.gov/documents/2020/12/22/2020-28031/addition-of-entities-to-the-entity-list-revision-of-entry-on-the-entity-list-and-removal-of-entities#:~:text=This%20rule%20adds%20SMIC%20and,)%20Co.%2C%20Ltd.%3B

[5] https://fortune.com/2021/10/19/asml-chips-euv-silicon-valley-biden/

[6] https://www.kommersant.ru/doc/4978092?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[7] https://novayagazeta.ru/articles/2018/02/26/75605-synki-otechestva and

[8] https://www.pcworld.com/article/619357/amd-officially-halts-chip-sales-to-russia.html

[9] ibid

[10] https://www.sberbank.com/news-and-media/press-releases/article?newsID=be3c0f17-e57a-49f7-bf64-900e6e81cb3f&blockID=7&regionID=77&lang=en&type=NEWS

[11] https://www.wsj.com/articles/chip-makers-stockpiled-key-materials-ahead-of-russian-invasion-of-ukraine-11647167582

[12] https://www.smh.com.au/business/markets/semiconductor-squeeze-likely-as-sanctions-on-russia-melt-supply-20220311-p5a3to.html

[13] https://www.smh.com.au/business/markets/semiconductor-squeeze-likely-as-sanctions-on-russia-melt-supply-20220311-p5a3to.html

[14] https://www.aljazeera.com/economy/2022/3/3/amid-ukraine-fallout-crisis-hardened-chipmakers-race-to-adapt

[15] https://fortune.com/2022/02/25/biden-ban-chip-semiconductors-exports-russia-ukraine/

[16] https://novayagazeta.ru/articles/2018/02/26/75605-synki-otechestva

Russia’s Aerospace Catastrophe: How Export Controls and Sanctions will affect Russia

Eric Woods, March 22 2022

Overview

Russia’s civil aviation sector is already in a deep crisis due to the growing package of export control and sanctions leveled against the country. The sanctions and export controls are affecting the country’s civil air fleet on multiple levels and exacerbating decades of neglect in key sectors of the country’s industrial base. The U.S. and EU sanctions, in particular, have led companies to freeze technical support, spare parts, supply of aircraft, leasing of aircraft, and maintenance to Russia. Around 700 of Russia approximately 900 aircraft designed for civil aviation will be affected in one way or another.[1]

Russia’s civil air fleet is overwhelmingly reliant on Western manufactured engines. Previous rounds of sanctions have stimulated Russia’s domestic development of composite materials and avionics, but full commercial engines will be a difficult transition in conditions of near autarky.[2] Aviation data acquired by the Wall Street Journal shows that of commercial aircraft serving of in storage in Russia, there are 370 Boeing aircraft and 345 Airbus.[3] The third most-popular planes are produced by Sukhoi, but these airframes are reliant on joint Russian-Western partnerships. According to the analysis of the Wall Street Journal, only 17% of Russia’s domestic air fleet is domestically produced.

Import Substitution

The natural instinct for Russian leaders, and Putin in particular, is to involve Russia’s expansive military industrial base in the creation of domestic products. Russia has a number of research centers with wind tunnels that test hypersonic flight and cutting-edge aircraft. In fact, civil aviation engines under development such as the PD-8 and PD-14 are being developed under the auspices of state arms manufacturer Rostech.[4] Despite these competitive advantages in research and design of cutting-edge aerospace technology, Russia’s debt-laden and unwieldy defense enterprises are not able to produce globally competitive products despite years of government efforts.[5]

Compounding problems is Russia’s lack of a robust domestic electronics industry. Modern airplanes are reliant on a great deal of integrated circuits and advanced electronics. Despite robust attempts to build a domestic manufacturing capacity, Russian chipmakers were already struggling to meet orders for domestic import substituted chips before February 24th.[6] Deliveries of the Irkut-produced MC-21 domestic airliner, a self-declared replacement for these foreign aircraft set was set for mass production in 2022, but may be delayed due to chip shortages.[7]

Safety and Maintenace

Russia’s Air Ministry is extending the licenses of aircraft creating fears that the ministry is simply lowering safety standards for flights.[8] There are early indications that this approach may already be putting passengers in danger. The semi-independent Russian business daily Kommersant, carried reports that there have been at least two incidents of autopilot failures on Airbus 320 flights made by the Russian carrier Ural Airline.[9] Some in Russia hope older Airbus 320s and 747s using the older CFM56 engines will be easier to maintain via secondary markets. A professor at Moscow’s Higher School of Economics told the newspaper, “We are in a situation where there are no good options. Either don’t fly at all or take risks”.[10]

Russia has domestic maintenance crews in place, but without the proper parts, tools and materials it will be difficult to maintain the fleet over the long haul. Some companies have looked to the UAE and Turkey for more advanced repairs that cannot be done in Russia, but fear of secondary sanctions has thwarted this according to managers at Russian airline companies.[11] Aeroflot in particular has pointed to the UAE and China as potential destinations for critical repair and maintenance.[12] Creative attempts to avoid the sanctions and export control regime, such as putting dozens of Russian aircraft into foreign registries, has so far, been prevented by the Kremlin.[13]

Chinese investment and intervention to prop up or save Russia’s economy from collapse remains the million-dollar question. With access to vast capital reserves and technology, China is theoretically poised to step into the gap left by Western providers if there is the political will to do so in Beijing. Fears of secondary sanctions have put a damper on investment so far. Officials from Russia’s air ministry told Interfax that attempts to procure replacement parts so far have been rebuffed.[14] Absent political will from top leadership in Beijing, there is little reason for profit-oriented companies to invest their money in a market with a business environment as toxic as Russia’s.[15]

Conclusion It may take years for Russia to bring its domestic Boeing and Airbus equivalents into serial production enough to make up for the losses.[16] Officials are speeding up the certification process of domestically produced engines.[17] But the problem remains that in relying on global supply chains for domestic civil aviation has put Russia in a place, where an entire sector of the economy is now at a breaking point. Without the involvement of foreign companies in the market, and without the ability to procure spare parts, Russia’s civil aviation sphere faces nothing short of catastrophe.


[1] https://www.kommersant.ru/doc/5239501

[2] https://www.kommersant.ru/doc/5236969

[3] https://www.wsj.com/articles/russia-cant-fly-without-the-westbut-may-eventually-propel-china-11646738302

[4] https://rostec.ru/news/rostekh-izgotovil-uzly-dlya-demonstratora-dvigatelya-dlya-ssj-new/ and https://rostec.ru/news/odk-i-gazprom-dogovorilis-o-sotrudnichestve-pri-sozdanii-dvigateley-na-baze-pd-14/

[5] https://ridl.io/en/the-inner-workings-of-russia-s-military-industrial-behemoth/

[6] https://www.kommersant.ru/doc/5009185?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[7] https://www.kommersant.ru/doc/5236969 and https://trends.rbc.ru/trends/industry/622b2d7b9a7947dd4d90bc07

[8]https://www.kommersant.ru/doc/5249920

[9]https://www.kommersant.ru/doc/5249920

[10] ibid

[11] https://www.kommersant.ru/doc/5239501

[12] https://www.kommersant.ru/doc/5236969

[13] https://thebell.io/neizbezhnyj-defolt-valyutnyj-kontrol-natsionalizatsiya-inostrannogo-biznesa-i-ostanovka-mezhdunarodnyh-rejsov

[14] Китай отказал России в поставках авиазапчастей (interfax.ru)

[15] https://thebell.io/rossiyu-mozhet-zhdat-defolt-chto-eto-znachit-i-v-chem-raznitsa-s-1998-godom

[16] https://www.kommersant.ru/doc/5260739

[17] https://www.kommersant.ru/doc/5250027

Effects of Sanctions on Russia’s Pharmaceutical Landscape

Minh Ly, March 18 2022

A One-Sided Drug Trade

            Although the economic sanctions wielded by the West against Russia do not target its pharmaceutical industry or medical supply chain, the resulting ripple effects may adversely impact both. Since the early 2000s, Russia has had a keen interest in developing its biotech industry. This included both the agricultural and the pharmaceutical sector. While the agricultural sector was relatively successful and Russia rose to become the world’s largest provider of wheat, the pharmaceutical sector did not achieve the same level of growth. Russia relies heavily on the international market, mainly from its European trade partners, to cover the quantity and diversity of medical drugs its citizens consume. In 2019, Russia was importing 70% of the drugs the nation was consuming.[1] Russia’s pharmaceutical industry struggles to domestically produce an adequate amount of medical drugs and is therefore reliant upon imports.

            One of the reasons for Russia’s lack of medicine manufacturing capacity is its dependence on the international supply chain for pharmaceutical precursors, namely active pharmaceutical ingredients (API). The relationship between Russia’s imports and exports of APIs can be seen in Graph 1 below.

Graph 1: The amount of imports, in purple, outstrip Russia’s exports, in blue, for active pharmaceutical ingredients. Russia’s pharmaceutical sector still relies on imported APIs for its drug production.

Although the value of imported and exported APIs have a similar trend from 2007 to 2021, the number of imports average to more than three times as much as exports. Russia imported 85% of its API consumption in 2019, which corroborates with the deduced information that Russia is heavily reliant on the international market to sustain its pharmaceutical sector and domestic medical drugs manufacturing. However, the total value of imports fluctuates within the recorded period in Graph 1, with increased imports in 2012 and 2018 while decreasing in 2015 and 2021. The fluctuation may reflect the mixed success of the national plans to improve the biotech and pharmaceutical industry. Russia’s Pharma 2020, one such national plan, promised to pump $4 billion into developing the industry[2] and explains the increase in Russia’s API demands from 2010 to 2013. The import regression from 2013 until 2018 is a visible sign of Pharma 2020 losing steam after its inception. The decrease after 2018 could be the effect of Russia’s Pharma 2030, an updated national plan. Although international movement and trade were hampered by the coronavirus in 2020, the foundation laid by Pharma 2020 should not be ignored. Major objectives of the Pharma 2020 plan included “localization and import substitution”[3] and Pharma 2030 leveraged these developments to improve Russia’s pharmaceutical sector. Despite these improvements, Russia still could not close the gap between its API imports and exports. Russia’s medical drugs trade data, shown in Graph 2, corroborate the mixed result of its national plans.

Graph 2: Russia’s import of medical drugs, in blue, far outstrips the amount that it exports, in purple, to partner countries.

The difference between Russia’s imports and exports for medical drugs is immediately noticeable in Graph 2. The statistic that 70% of drugs consumed in Russia were exported in 2019 is visible here and would seem to be the case for 2011 and 2013 as well. The peaks and valleys of this graph correlate to Graph 1, indicating that medical drug supplies share similar effects from Pharma 2020 and Pharma 2030 as the pharmaceutical sector’s API imports. However, there is less fluctuation of imports for medical drugs, showing a higher level of consistency for Russia’s dependence on the international market to sustain its supplies. The Russian invasion of Ukraine and resulting sanctions have indirectly reduced the supply of medical drugs such as insulin in Russia[4], emphasizing their dependency on imports.

Consequences of Sanctions

Russia’s dependency on the international market for its pharmaceutical precursors and medical drug supplies puts the nation in a precarious position when these sources are compromised. Russia’s invasion of Ukraine has engendered waves of strict economic sanctions against key Russian sectors and leaders by the West. The United States and many European countries have already rolled out sanctions against Russia on key technologies and banks, crippling its ability to conduct business. Aside from items listed on international export control regimes, however, these sanctions do not target the pharmaceutical sector directly and exceptions for medical supplies are in place.[5] This has not stopped Russian medical supplies from being affected. The ripple effects from these sanctions could have detrimental consequences on Russia’s entire economy, including its pharmaceutical sector and medical supplies. Already, pharmaceutical companies are struggling to import important ingredients.[6]

One such peripheral consequence is the devaluing of the Russian ruble, which will reduce Russia’s buying power for medical drugs and the pharmaceutical precursors for domestic drug production. Additionally, sanctions on Russian banks will cause disruptions and complications for payment transactions for Russian pharmaceutical importers and their trade partners. Major airlines and shipping companies have also suspended operations in Russia, severally limiting supply routes. These difficulties, along with moral and reputational pressure, may discourage establishing and continuing trading relationships with Russian entities. These discouragements may ultimately impact Russia’s ability to continue the high volume of medicine and API imports to meet the demands of its populace, who consumed 6,173 million packages in 2019.[7] A multitude of companies not named by sanctions are already withdrawing from the Russian market for a combination of these reasons.[8] Panic buying and hoarding of imported medical drugs induced by worries over sanctions has also reduced supply and artificially inflated demands.[9] India, one of the top ten sources for Russia’s medical drugs, is paying close attention to the Russian invasion of Ukraine and is considering how the ripple effects will influence its pharmaceutical exports to Russia and Ukraine.[10] Compounding the peripheral consequences listed is the sources of medical drugs that Russia traditionally imports from, which is shown in Graph 3.

Graph 3: Russia’s major source for medicine is from European countries as well as India and the US.

            The countries in Graph 3 are the top 14 sources for Russian import of medical drugs. The European Union, which a vast majority of the countries on Graph 3 are a part of, is discouraging Russian aggression through sanctions. Sanctions implemented by these countries, although not directly targeting Russia’s medical drugs supply chain, could impede exports of medicines to Russia[11], whose medical supplies such as insulin, are running low. Top sources for Russian API imports, shown in Graph 4, also share a similar dynamic as medical drug imports, although with more leeway for Russia’s pharmaceutical sector. China is the largest provider of API for Russia, which is the source for most of its API imports. Other major exporters of API to Russia include several EU countries as well as the US and Ukraine, who are all implementing sanctions against Russia. Impediments of APIs imports from these countries would not have as significant of an impact as medical drugs due to China’s central role as Russia’s primary API provider. However, as Russia lacks the capacity to domestically manufacture a sufficient amount of medicine, it would need to seek alternative sources to maintain the medical supply that is indirectly affected by sanctions. Turning to China to aid in this endeavor would be one of the few options that Russia has remaining.

Graph 4: Russia’s top active pharmaceutical ingredient trade partners have China as a major provider and several EU members.

China is in an excellent position and has the capacity for the surge of drug and API demand, likely to result from Russia’s predicament. One of the staple characteristics of China’s biotech industry is its contract development and manufacturing organizations, which include the production and provision of medical drugs and active pharmaceutical ingredients. As Graph 4 and Graph 5 show, Russia is already one of the top ten importers of China’s API supplies. Aside from Korea, China’s API trade flow is one-sided, with more exports than imports. China’s pharmaceutical infrastructure would welcome this surge of demand from Russia because it is an opportunity to enhance China’s influence over Russia as well as strengthen China’s pharmaceutical sector. Imports from China is likely to increase due to the potential impact on Russia’s ability to acquire medical drugs from European partners, where it traditionally obtains these goods. Russia might either directly import medicines or lean on its domestic pharmaceutical sector to manufacture them, which requires increasing API imports from China. Ultimately, this could increase China’s leverage over Russia and alter the relationship between these two world powers.

Graph 5: China is a major export of active pharmaceutical ingredients. Aside from Korea, China’s API trade is mostly one-sided, skewed towards export.

Conclusion

            Russia’s invasion of Ukraine has resulted in dire consequences in the form of international condemnation and economic sanctions. These sanctions target key technological sectors and Russia’s banking system. They do not directly target the pharmaceutical or medical sectors. However, these sanctions will have ripple effects on all of Russia’s economy and will be detrimental to even non-targeted sectors and a variety of important supplies. The pharmaceutical industry and medical supplies could be amongst those indirectly impacted by the sanctions. Despite sanctions not applying to medicines, Russia could be restricted from a major reliable source of medical drugs, impeded by the peripheral effects of sanctions, which it heavily depended on securing from European trade partners. Russia would be forced to find alternative sources or rely more heavily on its pharmaceutical sector to provide the necessary medical supplies to its citizens. China may be an appealing resource and trade partner for Russia. However, the reliance on China could shift their relationship and cost Russia some of its political influence. As Russia becomes a pariah on the international stage, China could expand its influence in Russia and regions where Russia’s influence wanes. China’s increase in influence may pose a significant threat to the national interest of the United States, especially in the economic and geopolitical realm. The competition between the United States and China may become more pronounced as Russia becomes further isolated due to its invasion of Ukraine. The vacuum created by Russia’s isolation could usher in a new geopolitical and economic balance of power defined by a United States and Chinese rivalry.


[1] https://investinrussia.com/data/files/sectors/russian-rharmaceutical-market-trends-2020.pdf

[2] https://www.nature.com/articles/nm0511-517.pdf?origin=ppub

[3] https://novamedica.com/media/smi/p/8691-the-pharma-2030-strategy-promoting-globalization

[4] https://www.themoscowtimes.com/2022/03/09/fears-in-russia-over-pharmaceutical-supplies-a76840

[5] https://www.bloomberg.com/news/articles/2022-03-14/pfizer-halts-trials-in-russia-but-will-continue-to-supply-drugs

[6] https://www.wsj.com/articles/western-drugmakers-are-still-providing-medicines-to-russia-11647081002

[7] https://investinrussia.com/data/files/sectors/russian-rharmaceutical-market-trends-2020.pdf

[8] https://www.nytimes.com/article/russia-invasion-companies.html

[9] https://novayagazeta.ru/articles/2022/03/10/boleznennye-sanktsii

[10] https://www.businesstoday.in/latest/corporate/story/russia-ukraine-war-can-impact-indias-pharma-sector-experts-warn-323814-2022-02-24

[11] https://www.reuters.com/business/healthcare-pharmaceuticals/drugmakers-device-companies-say-sanctions-may-hinder-medical-supplies-russia-2022-03-03/

CAATSA: The Most Important Sanctions Authority You Have Never Heard Of

Cameron Henderson, Ian Stewart, 15 March 2022

Since the Russian Federation’s invasion of Ukraine that began in late February, the US has spearheaded sanctions efforts targeting key entities in strategic sectors and individuals in Russia. While media coverage frequently focuses on those impacted by the sanctions, little attention is often given to the process through which the sanctions are authorized. In the instance of Ukraine, one of the authorities the United States can leverage is a lesser-known law: the Countering American Adversaries Through Sanctions Act (CAATSA). President Trump signed CAATSA into law in August of 2017, which authorizes the implementation of sanctions by executive order of the President or statutes passed by Congress on entities undertaking “significant transactions with Iran, North Korea, or Russia.”[1]

While the origins of this legislation are linked to Russia’s annexation of Crimea in 2014, the most pertinent provision of CAATSA to the current Ukrainian crisis are those in Section 231, which details that sanctions may be imposed on entities that knowingly engage in a significant transaction with entities that are part of or support the “defense or intelligence sectors of the Government of the Russian Federation”.[2]  This specific authority has been used multiple times since its inception, most notably the sanctioning of Turkish defense entities in December of 2020[3] and for sanctioning Russian entities in March of 2021 for the poisoning and imprisonment of Aleksey Navalny. [4]

The provisions of CAATSA allow the US to impose a combination of sanctions provisions on entities in third countries for undertaking significant transactions with the countries of concern:[5]

  • Export-Import Bank Assistance for exports to sanctioned persons
  • Export sanctions – restrictions on the issuing of licenses to export any goods or technology to the sanctioned persons
  • Loans from US financial institutes or international financial institutions
  • Prohibition on the provision of services from financial institutions
  • Procurement sanctions which prohibit the US government from procuring goods or services from the entity
  • Foreign exchange restrictions
  • Banking restrictions prevent the use of banking services when there is a US nexus (n.b. this can extend to all transactions using the US Dollar).
  • Restrictions on property transactions
  • Ban on investment in equity
  • Exclusion of corporate officers or principal executive offers

This list can be thought of as a menu of measures that the US has access to under the CAATSA authorities. What does this mean for the situation in Ukraine? Since CAATSA facilitates the implementation of sanctions on entities in third countries that aid the Russian defense sector, it will be an important tool for deterring support to the Russian defense sector. The Russian economy is already rapidly declining from the sanctions implemented by many western states. With these measures in place and Russia’s reliance on imports for many goods, such as aero-engines, there will be a necessary  incentive to look to other countries’ markets to substitute the goods no longer being provided by the West.

This is where CAATSA comes in. Under the provisions of CAATSA, if foreign entities in China or India, for example, were to supply the Russian defense sector with strategic technology, those third-party state’s entities may be subject to US sanctions. The opposite is also true – entities cannot purchase goods that qualify as “significant transactions” from the Russian defense sector, which is a major supplier of military systems globally without the risk of being subjected to US sanctions. In short, the CAATSA authorities effectively force countries and companies to decide between engaging with the Russian defense sector or engaging with the international marketplace, including the global financial system which is dominated by the use of the US dollar.

The implications for CAATSA need to be worked through on a country-by-country basis. The US President can waiver the sanctions under certain circumstances. But the US will likely be circumspect in issuing waivers and will look to use the CAATSA authorities to separate a foreign country from the Russian defense sector. The CAATSA authorities will thus be an important tool through which the US can wedge countries away from Russia.

For example, in the case of India, several India-facing news sources have highlighted concerns about the implications for the Indian defense sector, which buys many military systems, such as helicopters and anti-tank weapons from Russian entities and are cooperating with Russia to produce Brahmos missiles.[6] The US could use CAATSA to discourage such cooperation.

Further, in the case of China, CAATSA may be an instrument through which the US will discourage cooperation with Russia.  China is likely to push back against the US use of CAATSA as impinging on its sovereignty. China is also somewhat more resistant to CAATSA-like measures because it has been pursuing indigenization of strategic technology supply chains for many years and the fact that the US has already sanctioned many key Chinese entities and sectors. However, despite this, CAATSA can enact substantial real costs on Chinese entities that supply Russia’s strategic sectors if the US decides to put pressure on China’s support for Russia in this way.

There are likely to be additional countries and sectors that are affected by CAATSA. For example, Russia has long been one of the leading exporters of nuclear reactors. While there are good reasons to tread lightly in sanctioning Russian entities involved in current nuclear cooperation projects overseas, because Russia has committed to take back the spent nuclear fuel, CAATSA is likely to be explored as an instrument through which to dissuade countries from embarking on new reactor construction projects with Russia.[7]

Conclusion

CAATSA is an important sanctions instrument that deserves more attention. It is likely to be a key instrument for the US in further isolating Russia following its invasion of Ukraine. The US is likely to leverage CAATSA authorities in countries such as China and India that have thus far been hesitant to restrict cooperation with Russia in relation to defense and strategic technology. Companies in these countries will be forced to decide between doing business with the Russian defense sector and engaging with the broader international marketplace. While the US can waive CAATSA sanctions provisions under some circumstances, it can be expected that the US will take a tough line with any country continuing to engage with Russia. CAATSA authorities are thus likely to be central to the future direction of US relations with many countries around the world.


[1] https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information/countering-americas-adversaries-through-sanctions-act

[2] https://www.state.gov/section-231-of-the-countering-americas-adversaries-through-sanctions-act-of-2017/

[3] https://2017-2021.state.gov/the-united-states-sanctions-turkey-under-caatsa-231/index.html#:~:text=Today%2C%20the%20United%20States%20is,main%20arms%20export%20entity%2C%20by

[4] https://home.treasury.gov/news/press-releases/jy0045

[5] https://www.state.gov/countering-americas-adversaries-through-sanctions-act-of-2017/sections-231-and-235/

[6] https://economictimes.indiatimes.com/news/defence/caatsa-what-it-is-why-it-is-in-news-how-it-can-hurt-india/articleshow/89986708.cms

[7] See for example the comments of Richard Nephew: https://twitter.com/RichardMNephew/status/1502657309448851458

Export Control and Emerging Technology Control in an Era of Strategic Competition

Reproduced from nonproliferation.org

Context

CNS has been focused both on the question of emerging technology controls and on the question of export controls in an area of strategic competition. CNS has been undertaking detailed sectoral mapping in relation to several emerging technologies, including artificial intelligence, aerospace and avionics, high-performance computing, biotechnology, cybertechnology, telecommunications, and semiconductor technologies. CNS will soon be launching resources intended to help governments and the private sector to manage these technologies in this new security environment. CNS is also working to benchmark and develop good practices in relation to the cybersecurity of export-controlled information. This article is intended to provide a broader framing to the work CNS is undertaking concerning export controls in an era of strategic competition. CNS staff would be happy to brief officials from governments or the private sector on these topics.

Nonpro Note Introduction: Export Control and Emerging Technology Control in an Era of Strategic Competition

The nature of export controls is changing. In recent years, the export control landscape has been evolving as a result of strategic competition between the United States and China. However, Russia’s invasion of Ukraine on 24th February 2022 had an instant catalyzing effect on the evolution of export controls. While in recent decades export controls have been relatively geopolitically neutral tools aimed at preventing Weapons of Mass Destruction proliferation and preventing WMD terrorism, the tools are evolving to become a central instrument through which the US and allies are seeking to stem the development of advanced military capabilities in an emergent China and a revisionist Russia. An important aspect of this relates to so-called emerging and foundational technologies.

The purpose of this article is to provide an overview of changes taking place in relation to export controls, particularly from a US perspective. The article focuses on the issue of emerging technology. However, in the context of the targeted export control measures adopted by multiple countries against Russia following its invasion of Ukraine, this article also examines the broader context of the evolution of controls. The article briefly examines the future of multilateral export controls and argues that the measures adopted against Russia may provide the foundation for a new form of export control coordination. The article identifies specific tools that states should adopt and also emphasizes emerging technologies that should be considered for control in the context of strategic competition.

Read the paper for insight into how export controls are evolving in an era of strategic competition.