BIS, Treasury, State Warn CEOs About Chip Shipments Ending Up in Russia

Alan Estevez, undersecretary of the Bureau of Industry and Security, said he recently held phone calls with executives from the five “top companies” whose microelectronics are most frequently found in Russia. He was joined on those calls by Brian Nelson, the Treasury Department’s head of terrorism and financial intelligence, and Jose Fernandez, a senior State Department official, where the three officials shared trade data with the executives showing their shipments of more mature, legacy chips were being forwarded by Chinese businesses to Moscow.

Estevez, speaking on the Derisky Business podcast hosted by the Center for a New American Security, stressed that those chips didn’t need an export license to go to China, and the U.S. companies weren’t necessarily violating U.S. export controls. But the three agencies want the companies to stop selling to certain Chinese suppliers that are known to resell those items to Russia’s military.

“We told them this is not a call about compliance or that you're doing something wrong,” Estevez said. “These are all legacy chips, right? So they're not chips” that “are banned in [China]. But they are things like analog device controllers” that are being sent to Russia.

“It's not good for them,” Estevez said of the U.S. executives. “Companies do not want their stuff ending up in apartment buildings and hospitals and town squares in Kyiv or Kharkiv or Odessa or wherever in Ukraine.”

Estevez said the three U.S. officials shared the names of the Chinese companies with the CEOs and asked their firms to “stop using them.” And if the U.S. firms didn’t directly sell to those Chinese companies, Estevez said he told them to “figure out how they got your parts,” including by doing “some extra screening.”

He said the response from the five U.S. companies was “very good,” and they’re currently reviewing the trade data. “If they find a direct hit, they've dropped those companies from their list of approved resellers,” Estevez said. “If not, they're trying to track how it ended up going from here to there.”

The action appears similar to the “red flag letters” BIS has been sending in recent months to U.S. companies whose foreign customers have been found selling controlled items to Russia. BIS sent those letters along with a list of nearly 700 companies -- mostly based in China -- that the agency said have been buying and reselling sensitive U.S.-origin dual-use parts later found in Russian missiles and drones shot down in Ukraine (see 2406060041).

Estevez said his agency hasn’t yet added the Chinese suppliers or resellers to the Entity List because there’s “so many, and they’ll just change their name anyway.” But “if I see a really bad actor, obviously we’ll do that.”

He also said he raised this issue with his counterpart at China's Ministry of Commerce. “I asked him: 'These are goods going to Russia. You say you want the Ukraine war to end, but you're building up the capacity there.’ And his response was, ‘These are things for Game Boys and washing machines.’” Estevez said he told the Chinese official that the chips are actually being used in Russian missiles and drones.

Asked whether the U.S. needs to impose harsher penalties, or turn to financial sanctions, to better convince Chinese companies not to sell sensitive items to Russia, Estevez said he regularly speaks about those possibilities with Nelson, who oversees some sanctions work at Treasury.

The two speak every two weeks “to make sure we’re in sync on this stuff,” Estevez said. “We're always looking at when to ratchet” up restrictions.

Estevez also acknowledged that U.S. export controls haven’t done enough to stop Russia from buying sensitive parts for its military. “When you look at the numbers,” he said, “I thought we would be more effective sooner.”

He said Russia for years has practiced building ways to circumvent export restrictions. “Russia has been doing this since the '50s -- probably since before that, but since the '50s for sure -- building diversion routes and diversion capabilities and diversion techniques,” he said. “So they have a long history of practicing this.”

Although Russia is buying from Turkey, India and various countries in Central Asia, he said China is its largest supplier of microelectronics. “It's all about China,” Estevez said, adding that “90% of the flow of U.S. brand microelectronics flows through China to Russia.”

Estevez also made a pitch for more BIS resources (see 2312040041 and 2312070074). He said the agency needs about $75 million in additional funding per year and “another $100 million over a four- or five-year period to rebuild” its IT “foundation,” he said.

That money would go toward more licensing officers, more enforcement agents and more “supply chain illumination tools” for those officers and agents, Estevez said, so they “have the data they need to build cases.”

He would also hire more employees to work on international affairs issues, which would help the agency as it tries to build support for export controls among allies. “It can't just be me and Borman and Kendler out on the road all the time,” he said, referencing Deputy Assistant Secretary for Export Administration Matt Borman and Assistant Secretary for Export Administration Thea Kendler, who frequently travel to other countries to work on multilateral export control efforts.

So far, Congress hasn’t been swayed by BIS requests for more funding. Lawmakers denied a request for a $30 million funding increase for FY 2024 (see 2403040061), and the House Appropriations Committee this month proposed a $186.7 million budget for the agency for FY 2025, $4.3 million below the FY 2024 enacted level and $36.7 million below President Joe Biden’s budget request (see 2406250035).

Estevez said BIS is currently speaking with lawmakers on the Hill. “There's so much that we need,” he said.