Committees on Arms Export Controls
Oral evidence: Strategic Exports Controls and Russia, HC 927
Wednesday 7 December 2022
Ordered by the House of Commons to be published on 7 December 2022.
Members present: Mark Garnier (Chair); Saqib Bhatti; Neil Coyle; Mr Tobias Ellwood; Chris Law; Mrs Emma Lewell-Buck; Lloyd Russell-Moyle; Mr Virendra Sharma.
Questions 1-53
Witnesses
I: Dr Erica Moret, Policy Director, PoliSync Centre for Policy Engagement, and Senior Researcher, Sanctions and Sustainable Peace Hub, Geneva Graduate Institute; and Kevin Wolf, Partner, Akin Gump, and former Assistant Secretary of Commerce for Export Administration.
II: Kevin Craven, Chief Executive Officer, ADS Group – Aerospace, Defence, Security & Space; and Gary Somerville, Research Fellow, Open-Source Intelligence and Analysis Research Group, Royal United Services Institute.
Written evidence from witnesses:
Witnesses: Dr Erica Moret and Kevin Wolf.
Q1 Chair: Good afternoon, everybody, and welcome to the Committees on Arms Export Controls. This is a one-off evidence session looking at the effectiveness, or otherwise, of controls against Russia given the invasion of Ukraine. We have two excellent witnesses: Dr Erica Moret and Kevin Wolf. Perhaps you could give us an introduction. Erica, would you like to start with name, rank and serial number?
Dr Moret: Thank you. I am Erica Moret. I am based at the Graduate Institute in Geneva, where I co-ordinate the Sanctions and Sustainable Peace Hub. I am also policy director of PoliSync Centre for Policy Engagement. I have worked on sanctions for some 20 years.
Chair: Thank you. Kevin?
Kevin Wolf: I am a partner in the international trade group of Akin Gump, a DC law firm, calling today from home. I was the Assistant Secretary of Commerce for Export Administration during both terms of the Obama Administration. I am also a senior fellow in this area at Georgetown University.
Q2 Chair: Fantastic. We have an hour for this first session, and I think we have about eight or nine questions. I will open, and perhaps we can start with you, Erica. Should the UK and other nations have done more in terms of export controls and sanctions following the 2014 Russian annexation of Crimea?
Dr Moret: It is easy to look back with hindsight and see things that could have been done differently. That is always the case in any major crisis. The response in 2014 onwards was considered unprecedented on a number of levels, particularly due to the integrated nature of Russia’s economy with those of European countries and the EU in particular, and because of Russia’s prominent size in the global economy and in energy markets, of course. At the time, the UK was, of course, agreeing on sanctions and playing a particularly active role within the EU, meaning that consensus between the 28 member states was needed at the time. I think we could see it as a mark of success that, back at that time, unity was forged in spite of the very diverging set of interests and relations with Russia that were held by different European countries.
Could I make one other point on your question? Sanctions are never a silver bullet; they should not be seen in that way. They do not exert an impact on their own; they are only as good as the way in which they are combined with other policy instruments. They rarely serve to change behaviour in a really major way, but they can be useful when combined closely with other processes, diplomatic actions and so on. It is never easy to know what precise impact the sanctions and export controls are having in isolation from other factors, so I think we need to take into account the way they are combined with things like diplomacy, trade, wider defence activities of NATO, referrals to legal tribunals, and so on.
I will conclude by saying that, in a set of studies that I conducted with a number of colleagues in 2015 and 2016, we found that sanctions were often undermined by other activities that were going on, such as trade visits to Moscow at the same time as the sanctions were being imposed and tightened.
Chair: That is very helpful. Kevin, do you want to add anything?
Kevin Wolf: That was a terrific answer, based on more evidence than I have. My comment here is just as an Assistant Secretary who was involved at the time. My conclusion was then, and is now, that we did as much as we possibly could. I don’t think I could have convinced the allies to go any further than they went. At the time, it was more than had ever been done before. Russia didn’t proceed further. Obviously, ultimately, it didn’t work out. But I don’t have any regrets about what we did or didn’t do. We did as much as we possibly could. I will leave it at that.
Q3 Chair: So both of you are convinced that Vladimir Putin didn’t turn round and think to himself, “Well, I got away with that one. Let’s have a crack at the rest of Ukraine.”
Kevin Wolf: Oh gosh no.
Chair: Very helpful. Lloyd Russell-Moyle.
Q4 Lloyd Russell-Moyle: This question is to both of you. What do you see as the strategic intent of our export controls and sanctions implemented since the 2022 Russian invasion of Ukraine? Are we targeting the right goods and items? Could we improve the strategic control system to better meet the aims that we might have? So, what are the aims, are they the right goods, and could we improve anything?
Kevin Wolf: There is a lot of confusion in the media and other commentary about the strategic intent, but, based on both the words and the actions of the US Government and the allies, it is quite clearly to degrade Russia’s ability to wage its unjust war against Ukraine and to prevent Russia from projecting military forces beyond its borders. The goal is to have an impact on the Russian industrial base and to have a long-term impact on Russia’s ability to replace and repair military equipment lost in the war, even with otherwise overtly commercial items. The intent is not, however, to have an impact—an undue impact—on the Russian civilian population involving wholly consumer items, which is why food, medicine and other basic commercial items that are not of relevance or use to the Russian military are not covered. That is sometimes a difficult line to draw, which is why the rules need constant tweaking.
I wrote out some lengthier comments—because I am really quite passionate about your last question—about what more could be done. I go into great detail in those written comments about a dramatic increase, to be blunt, in enforcement-related resources and capacity building of export control agencies, both on the policy side and certainly on the enforcement side. I say this to the US as well, but I particularly say it for the UK and the other allies. The volume, type and scope of enforcement capability in the allied countries is really quite small relative to the US, and certainly relative to the demands that are being placed on it right now.
Q5 Lloyd Russell-Moyle: Does this lack of enforcement lead to diversion or goods getting through, do you think?
Kevin Wolf: I do. I am a compliance attorney; I provide advice to those trying to comply. I am not doing the data on diversion, so I will leave it to Erica and others to reach into that. But to be blunt, as a compliance attorney, companies are not as frightened of European export control actions as they are of US export control action. That is a function of the very small number of actual cases, the very small enforcement staff, the customs-focused enforcement people as opposed to outbound investigation, the small number of prosecutors, and the relatively light penalties, which can be seen as a cost of doing business. If you really want a structural change that dramatically reduces diversion not only in the Russia context but generally, it needs to be a radical and dramatic rethink of the volume and type of export control funding in the allied countries and as aggressive a multilateral co-ordination among enforcement officials as was the case with respect to the imposition of the sanctions in February and March.
Q6 Lloyd Russell-Moyle: My colleague will ask a bit more about enforcement and how it is potentially being circumvented, but is the success just based on whether Russia withdraws, or are there other levels or marks of success that we look at along the way? Is it the amount of items prevented from being transited? Is it the level of competency of the Russian army? Are there milestones, or is it just one success measurement—Russian withdrawal?
Dr Moret: Thanks to Kevin for a very comprehensive answer, which I will try to build on. I will tend more to the sanctions side, if you will permit me to do so.
First, as far as I know, we do not currently have a way in the UK to assess the effectiveness or success rate of the sanctions in place. That is a problem across the board in other places as well—the US, the EU, Canada and elsewhere. There have been various appointments and launches of new projects in the EU and the US to start thinking about this. That is one caveat.
It is also really hard to measure the effectiveness of sanctions in general. We know that they do not operate in a vacuum, of course; they can have unseen impacts and there are other factors at play. Having said that, there are lots of useful tools out there. There have been various studies over recent years, with very sophisticated methodologies that we can draw on. I would say that it helps to break it down in terms of successes of the sanctions and export controls. There are multiple purposes at play at any one time.
The first and most ambitious, of course, would be to halt the war, and the second would be to contain Russian advances and slow down the war machine. That is done in a variety of ways, of course: by constraining access to vital resources such as weapons, finances, internet platforms and so on; by tightening and expanding export controls on dual-use goods, which targets sensitive sectors in Russia’s military-industrial complex and limits Russia’s access to crucial advanced technologies such as drones, encryption devices, semiconductors and so on; and by restricting access to goods where Russia is vulnerable due to high dependency on external supplies. Those could be advanced semiconductors, sensitive machinery, steel, cement and so on.
Another really important function of the sanctions, which we should not forget, is the sending of a strong political signal, not only to Russia, but to other detractors of international norms; to Ukraine, to show a strong message of solidarity; and to domestic audiences. We should keep in mind that there are multiple functions and purposes at play at any one time, and it is really hard for us to judge whether they are being effective unless we have some kind of toolkit in place to enable us to do so.
Q7 Lloyd Russell-Moyle: And that toolkit doesn’t exist yet.
Dr Moret: I would say that there are toolkits out there that have assessed sanctions. For example, there is something out there called the UN SanctionsApp, which looks at UN sanctions. We actually applied that methodology to assess the earlier tranches of Russia sanctions in a couple of reports, which I would be happy to share with you. The tools are out there; it is just a matter of starting to employ them and, of course, that requires resourcing and capacity. It could be very beneficial to the UK Government and its close partners to start to engage in these kinds of practices to enable a more strategic use of the sanctions in terms of what exactly you want them to achieve and to have some markers of success along the way.
Q8 Lloyd Russell-Moyle: There have been a number of reports of Russian drones containing UK components, but also of Iranian drones being used by Russia. Is there a danger that Russia goes to other suppliers that are not sanctioned and gets around the sanctions? Is there a way that we can quantify whether sanctions degrade Russia or whether they just divert its trade to other people?
Kevin Wolf: I think you are getting at a foundational point of export controls: they are never perfect. There will always be gaps and workarounds. There are countries that are not imposing export controls. There are literally trillions of semiconductors floating around the planet that can be repurposed.
From public information, it seems as if the rather dramatic and unprecedented export controls of 37 countries plus US extraterritorial reach have been dramatically and significantly effective at degrading Russia’s ability to function in these sectors, because it does not have indigenous capability in the sectors that Erica mentioned, particularly semiconductors and civil aircraft parts.
It is never going to be perfect. One of my recommendations on the Iran side, to be blunt, is that the UK and European and other allies need to re-look at their existing Iran sanctions, which are obviously quite comprehensive, but perhaps are not quite sufficient to prevent western-branded equipment going through Iran into Russia. This goes back to my resource point earlier: these are incredibly difficult issues requiring constant evolution and tweaking to find new gaps as they evolve as new controls are imposed.
Dr Moret: I would like to go back to your earlier question in order to answer your last question. There is a very delicate balance to be struck when seeking to limit Russia’s access to all the various goods and services, financing and so on, before it starts resembling a full-blown embargo, which, of course, we do not want. We would be going back to the 1990s and controversies of the likes of Iraq, Haiti, former Yugoslavia and Cuba. That is very much on the minds of policymakers, including in the UK, to allow for the continued flow of commodities, goods and so on that are permitted.
On the other hand, though, the fact that Russia appears to be having to import Iranian-made drones and North Korean ammunition shells and rockets, according to some reports—incidentally, in potential breach of the UN arms embargo that Russia helped negotiate and agree—suggests that the measures are limiting Russia’s access to vital military goods and interrupting supply chains.
We come back to the same question: what do we want to achieve here? Is it to stop the war or to slow down the invasion? The first clearly has not been achieved so far, but we are seeing some evidence of slowing down and the withdrawal of troops. Whether that will be sustained or it is just tactical is another question. It is really important to disaggregate the idea of economic damage on the country, which is clearly the name of the game with the current sanctions—there is a very strong punitive function to them—from the political objectives. They are not always the same thing. Damaging the Russian economy is, of course, leading to some objectives of limiting access to resources, but at the same time it needs to be very closely focused on what kind of change on the ground that will bring about, what room for manoeuvre there might be, and where carrots and sticks could be played in later down the line.
Q9 Chair: You differentiated very well the strategic element of denying an invading force its ability to get hold of weapons and those more political sanctions. An army like Russia’s has a lot of other stuff that we hope it won’t use. Does there come a point where the leadership eventually says, “What the hell? It’s not going to make any difference to us. Everybody is really miserable—we may as well escalate it.” Can you run the risk of over-sanctioning a country and therefore painting it into a corner where the only way out is the one thing we really don’t want to happen?
Dr Moret: I think that is a risk. Many decades of sanctions use and sanctions scholarship have shown us that there is a kind of sweet spot with sanctions breadth and how sweeping they are. Some recent studies suggested that when it comes to the application of sectoral sanctions, something like three out of five is around the ideal spot. Applying only one type of sanction, such as an arms embargo, is very ineffective, as is a full-blown embargo. At both ends of the scale, they really never achieve their objectives, but somewhere in between, when there is a combination of different types of targeted and some sectoral measures, seems to suggest more successful outcomes.
The implications for wider industry and the activities of NGOs and so on are also really important here. In the Russian context, we see a widespread phenomenon of financial sector de-risking, private sector over-compliance, the chilling effect and so on. That is something we have seen elsewhere for many years now, in the cases of Iran, Syria, North Korea, Venezuela, Afghanistan and so on. It is happening in the case of Russia as well. The provision of very clear guidance to companies is essential, as is the understanding that the sanctions that are put in place will be amplified through the behaviour of firms around the world. We have seen the withdrawal of more than 1,000 companies from Russia voluntarily, over and above the sanctions that are in place. There is this kind of cumulative impact that goes way beyond the measures that have actually been adopted.
Q10 Neil Coyle: Linked directly to that, Erica, and your earlier point about sanctions not being a silver bullet, there are of course companies that ignore the norm and the aspiration. There has been a debate in the Commons today about BP and the profiteering in Russia that is still there. To both witnesses, what is your view on a twinning strategy to meet the strategic aim of punishing and trying to hasten the Russian withdrawal, with things like a windfall tax on companies like BP that aren’t following the international norm?
Dr Moret: It is vital, coming back to my earlier point, that a variety of different approaches and policy instruments are used at the same time. Working together with major companies at this kind of level is very important, notwithstanding the fact that there needs to be a very clear understanding of the permissible activities in countries like Russia because of the complex raft of legislation and regulations that are now in place, overlapping sanctions regimes, and the US having some of an extraterritorial nature as well. More co-ordination across the board between different sanctioning actors—in particular the close partners of the EU, the US, Canada, Australia and a number of others—is really vital here.
Kevin Wolf: I have nothing much more to add. On the export control side, it is rather binary. The point is to identify the parts, components, technology and software that are needed for Russian military equipment to continue functioning, find out where they are made and shipped from in the US and other allied countries, give countries unilateral and other authorities to regulate their flow, and then have sufficient enforcement resources and co-ordination in order to be able to prosecute those who are violating the rules. That not only has the effect there for that company, but sends a signal to help or motivate other companies to ensure their own compliance, which has a spiral effect on itself, when they realise that these rules are serious and have teeth.
Q11 Mr Ellwood: I want to pursue this wider philosophical question. Obviously, sanctions are, in principle, the right thing to do, but are we not actually creating a new sanctions club of procurement that is driving innovation? I think of North Korea. They are sanctioned to their teeth. They are able to develop ballistic, cruise, intercontinental missiles—complex weapons systems—despite all the sanctions. With Iran, the successful—arguably—US sanctions have meant that they do not have a long-range ballistic missile system, but they have now moved over to the drone world, where they are actually doing rather well, innovation-wise, leading the field with the Shahed 136.
Do we need to recognise that we are creating an almost clandestine, behind-the-scenes industry of those who are sanctioned and those such as China who are sympathetic to those who are sanctioned? It is its own industry, aside from the more overt, transparent industry that we are more familiar with.
Kevin Wolf: I will let Erica answer—that is a more philosophical, broader question.
Dr Moret: Thank you, Kevin; I will try to answer that. I would say that there is a risk. We have seen that already. We see both legal and illicit trade strengthening between very heavily sanctioned countries. In some work I was doing on the North Korea arms embargo a number of years ago, one example that was given is that when Pyongyang does its arms fairs, it is not just a show of might to the rest of the world—it is actually an advertisement of the weapons systems that they have available to others.
Mr Ellwood: A garage sale.
Dr Moret: Yes, and we see a great deal of support going on. I think we are really lacking a close understanding of the various different networks and particularly the evasion routes between these different countries. I think the more we can do on knowing more about that—how it is constantly shifting and adapting, because ultimately these are very sophisticated actors and we need to be working very closely with maritime agencies, customs, policing and so on—the better. This is a real gap at the moment.
What we also see in very heavily sanctioned countries is innovation—what you could call a securitisation of the economy. We see that in Russia since 2014, with the production of domestic alternatives.
A really big issue here is the move away from the international financial system. We are seeing an increasing number of countries being either partially or fully cut off from the global financial system—the formal banking sectors—and starting to move away from the use of the US dollar and the euro and the pound. Here, we start to see a loss of control by western countries over the future of global finance, potentially.
There are some very big issues here, but there are some really robust and promising initiatives growing. I know about the ones coming out of the EU, for example, and also in the UK and elsewhere—working together to learn more about these routes and these innovations.
Kevin Wolf: It is an excellent point, and it absolutely happens. It is happening with China, for example, now. As more controls are imposed, there is more incentive for domestic innovation, involving clever people outside the US and the allied countries. It is a very real point, and it goes to the core point of export controls, which is that they are about degrading and delaying and slowing; they are never, and cannot be, about always stopping in perpetuity, because there will always be clever people who can solve indigenously the similar problems outside. It is about how much time—how many decades, how many years—you can buy yourself through the effectiveness of controls.
Effectiveness has two major prongs. After you have come up with the list of items and technology and software that are at issue, the first is the enforcement point I mentioned, and the second is the multilateral and plurilateral point—so that there aren’t opportunities for other clever people in other allied countries to fill behind. The more countries that are involved in imposing similar controls effectively, the longer the amount of time that you delay and degrade the activity in the country of concern that you are trying to stop will be extended. It is just a realistic assessment that it will never be perfect. It is how we can make it better for as long as possible.
Q12 Saqib Bhatti: Dr Moret, you referred to a sweet spot in a sanctions regime. Do you consider the sanctions that we implemented after the invasion of Ukraine to be in the sweet spot? To both witnesses, following on from that last question, are there follow-up sanctions we ought to be considering? Are we missing a trick anywhere?
Dr Moret: It is very hard for me, from the outside, to judge what the sweet spot is. What is really vital is a very detailed understanding of the various vulnerabilities of the Russian economy and its military-industrial complex, and also a really difficult point here is how to go about effecting change in the behaviour of President Putin, because ultimately, that is the really big question here.
There were some interesting studies in recent years that showed that leaders of countries with weak egos may rarely be coerced through sanctions, or you really need to have a get-out clause of some kind, such as the ability to make strategic use of sanctions flexibly—you could offer to lift some in reward for certain behaviours, and then reimpose them if that agreement was not adhered to. There is more we could be doing here in thinking about how sanctions could be used flexibly to help ease along certain talks or negotiations. Clearly, working with President Putin is one of the biggest challenges right now, and it is not a normal negotiation. I am not sure that really answered the question very well.
On what more could be done, I could actually bring your attention to some comments made a few days ago in a testimony I was involved in for the European Parliament. The Ukrainian special envoy on sanctions was there, and one of her arguments was that the Russian production of high-precision missiles needs to be disrupted further, in spite of reports that they have reached critically low levels in the last few days. For example, even now, Russia and its military-industrial companies and subsidiaries can still produce microchips that are used for high-precision missiles, and they also rely heavily on imports of semiconductors.
Others have pointed out that Russia still has a surplus in its trade balance and is making use of those revenues to fund the war. Quite a bit is being done right now with the oil embargo and price cap among G7 members, the EU and Australia. There is clearly more that could be done on the Russian banking sector, and some have argued that further sanctions could be imposed on Russia’s nuclear energy sector, which generates billions of pounds per year for the Russian economy. There is more to be done, but what is really important here is for it to be done in a very targeted way, where the problems of overcompliance and de-risking are really kept in mind and minimised and mitigated wherever possible.
Kevin Wolf: On the first question, I do not know if any more export controls in 2014 would have made any difference. They would not have changed anybody’s behaviour, and honestly, we went as far as we could with the allies. It would have resulted in more unilateral controls: we imposed unilateral US controls on basic semiconductors, military end uses and other things. I could not even convince the allies to go along with that, so we did as much as we could, but I do not know if any more would have made a difference.
With respect to things to do now on the export control side, I would list a series of topics, including data mining—I think it was part of the answer before—starting with the items that the Russian military needs now and working backwards, finding out what the sources are for the inputs, whether raw materials or components. Are there countries outside the group of 37 that are the providers of those that could be convinced to join in on the embargo and the comprehensive and co-ordinated export controls? There is not really any data analysis, or much significant analysis, just on ordinary shipping data to be able to spot red flags in the information available to the allied countries—what is going to whom when—and start connecting dots about the different parties involved.
You can do a lot in shutting down diversion merely by analysing existing data. Are there AI or IT tools that could be used to screen through all the data sets in the allied countries to find connections and chains that might be something that could be targeted for enforcement? A lot of data analytics tools already exist, in addition to getting other countries who are producers of the components that the Russian military needs. That would be an excellent continuing next best step.
Q13 Mr Sharma: Erica, what is your assessment of UK efforts regarding international co-ordination and co-operation on sanctions and export controls? Has action been taken quickly enough?
Dr Moret: Thank you for that excellent and important question. First, we almost need to take a step back and think about why the UK is co-ordinating with certain countries and not with others right now. That comes down to something of a crisis that we are seeing at the UN Security Council, where agreement on the important global challenges and crises have not been reached in recent years across a range of different issues, either because of an inability to agree or the actions of one or more of the P5 members. Here is a classic example of that, with a P5 member being at the centre of the problem.
We are seeing an explosion and acceleration of autonomous or unilateral sanctions outside the UN context. We can almost call them plurilateral sanctions because we are now seeing maybe 35 or more countries working together on Russia, for example. That is a really broad spread of countries around the world, although they are largely western countries. A core group is the UK working with the US, the EU and Canada and a number of others. The co-ordination and collaboration is unprecedented, although I would say that lots more could be done.
We have seen new types of co-ordination. For many years we have been saying that because of the stepping up of joint working on autonomous sanctions, there need to be better, more formalised processes or organisations that can allow for closer joint working, in less of an ad hoc way, but now we have seen the creation of the Russian Elites, Proxies, and Oligarchs Task Force, composed of the G7, Australia and the EU.
We have also seen unprecedented buy-in from certain other countries, such as Switzerland, where I am based. Although the enforcement has been criticised, they have gone way beyond what they have done in the past. We have also seen a range of lower and mid-income countries around the world supporting sanctions voluntarily in different ways. That is a crucial point, because what you do not want is countries around the world filling the gaps that the EU, the US, the UK and others are leaving, for example with the oil and gas measures.
The more buy-in that can be agreed, the stronger the impacts will be, but this is a really big challenge because typically non-western countries object to the use of autonomous sanctions. What we have seen in the past, on Iran sanctions, for example, was the US negotiating with India not to purchase a certain amount of oil from Iran in return for a defence deal with the US, so I wonder whether we are going to see more agreements like that going forward.
I will let Kevin answer on the export controls, but since the invasion we have seen the United States, the EU, the UK, Canada, Australia, New Zealand, South Korea, Japan and other countries working together to adopt what I would say is the broadest and most sweeping set of export controls since the end of the Soviet era, which go way beyond the current multilateral export controls regime. I will hand over to Kevin.
Kevin Wolf: Real quick, I want to start with a compliment for all the allies. I worked a lot with them when I was in government. The UK—what is now called the joint unit—was among the best of the export control agencies around the world, so you should be quite pleased with the competence, capability, leadership and cleverness there, notwithstanding the resource issue for the UK and other allied counties.
With respect to effectiveness over time, I need to point out on this issue and broader issues the growing ineffectiveness of the multilateral structure that was created in the 1990s. Of the four multilateral review systems around which the UK, the US and others have built their export control system, Russia is a core member of three of them. The consensus-based approach of the regimes requires that all members agree to any change, so basically Russia has a veto over any progress on the types of items that warrant control for conventional military and non-proliferation objectives. That was evidenced by last week’s complete failure of the Wassenaar Arrangement to agree to any significant changes involving all these very significant national security issues that we were describing earlier, particularly in microelectronics.
It is evidence that we need a new way of thinking, so my main advocacy would be that the UK, the US and the smaller group of close allies within the group of 37 that are democracies and have common objectives should be coming together on an ad hoc basis first, but eventually in a formalised new regime, to better co-ordinate the list and the enforcement of items that warrant control, both for classical non-proliferation in conventional weapons objectives—which, again, is being blocked by Russia being a member of the Wassenaar Arrangement—and for non-classical national security objectives that Russia and other countries are presenting in terms of a more strategic issue, which is the foundation of the current Russia controls.
The existing regimes do not contemplate or account for any type of country-specific strategic controls. That would be my first compliment for the UK export control authorities and their work with the allies—it is really extraordinary, as Erica mentioned. But in terms of structural next steps, we really need to move beyond the system set in the 1990s to be truly effective.
Q14 Neil Coyle: Thank you for the pat on the back, Kevin, but I will go a little further. I think the UK sanctions have about one fifth of the number of people in organisations compared with the US. If there was a league table, where do we fit and who do we need to catch up with?
Kevin Wolf: On the export control resources, to be blunt, nobody has anywhere close to what the US has. We have 140 or so special agents who do nothing but export control enforcement, and they are housed with the same unit that does the export control policy. No other country has anything close to that. It is orders of magnitude greater in terms of resources than the UK and other allies, because the demands that are being placed by the China-specific issues and these Russia issues are dramatically different from what the systems were created for. Again, in terms of capability, competence and dedication, you are clearly a world leader, but on numbers, bodies and systems, all countries are largely failing.
Q15 Lloyd Russell-Moyle: You mentioned that in the US, enforcement and decisions are in the same unit. Do you think that is vital to have efficient enforcement? They are separate here in the UK.
Kevin Wolf: Absolutely, and I have seen at first hand how effective it can be, because these are very complicated and novel issues. Most countries—except, I think, Singapore—defer to their customs authorities, which are obviously terrific, but their mindset, structures, systems, history and funding are all focused on inbound issues and do not have a sense for these diversion issues institutionally. Individuals, of course, are quite good but, institutionally, they are not focused on the outbound side. Because of the nuance of this area, having enforcement officials, staff and experts who are solely focused on the outbound issues and the diversion issues, in addition to multilateral co-operation among export enforcement officials, is really critical to the effectiveness.
Dr Moret: Could I add something?
Chair: We are running a bit over time, but please go ahead.
Dr Moret: Thank you. I was just going to add that it should not necessarily be an ambition to all be like the US, because ultimately they have so much more in the way of resourcing, staffing and enforcement powers. What is critical here is to think collectively about who can offer what and who has different things to offer. In past sanctions regimes, we have seen quite beneficial diplomatic roles of the US playing the bad cop and the EU, with the UK as part of it at the time, playing a softer role. That was quite effective in the Iran nuclear talks. We also have to understand that they are having a joint impact, but we do not currently understand what that joint cumulative impact is.
Each country and each grouping can offer different things. The UK has the City of London and the appeal of private schools, the property market and sophisticated financial measures. The EU is the biggest trading bloc in the world. Within the EU, there are all different types of diplomatic relationships with Moscow, and I think back to what former President Obama said: without the EU at the time, the sanctions by the US would be nothing, because of the very small trade relationship that the US had at the time.
I would say that more working can be done together, and that is also with regard to sanctions lifting. What is the thinking here? How do you avoid a protracted sanctions regime that goes on for 10 to 20 years, which Russia could adapt to? When would it happen, and under what conditions? What does Russia need to do for certain areas of the sanctions to be lifted, with snap-back provisions, in order to make it a flexible and strategic tool that can be adapted over time and does not just get stuck in a protracted set of measures for many years?
Q16 Chris Law: Kevin, how can countries effectively ensure that goods and items that do not need export licences do not end up in Russian systems?
Kevin Wolf: If they do not need licences, then that is part of the point of not regulating them. Apologies, I am misunderstanding your question. If there is a policy judgment determining that an item is for ordinary commercial applications and not part of the strategic objectives—
Q17 Chris Law: Basically, what I am asking is we have many items that go out that don’t need export licences, but at the same time we don’t want them to end up in the hands of the Russian military to use themselves. Does that mean that we need more licensing or more tracking of the products that are going out? What do we need to do?
Kevin Wolf: I see. There are three ways in which export controls work: lists of specific items, activities and support of specific end uses, and prohibitions with respect to shipments of unlisted items to specific end users of concern.
With respect to unlisted items that don’t individually require a licence, what is needed is something that the UK has in part, similar to the US: a general end use prohibition on otherwise uncontrolled exports of items if there is knowledge or reason to believe, or if it has been informed that the item is for a military end use or a military end user. That authority should be more widely imposed by allies; it doesn’t really exist in a lot of countries. It is limited largely to catch-all controls that were created in the 1990s. If the export of an otherwise unlisted item is for the development or production of a weapon of mass destruction—a chemical missile or a nuclear or biological weapon, then there is a regulatory obligation. But to answer your point about unlisted items, the end use and end user controls need to become more uniform and enforced.
I forgot to mention one main point throughout all my answers. In terms of the structural change in the UK and in other allied countries, where the US leads is in the ability of the export control authorities to be nimbler, and to impose list-based end user and end use controls outside the scope of the multilateral regime system in order to respond more quickly and aggressively to non-classical national security issues. That requires Parliaments and legislatures to give their export control agencies much more discretion to impose list-based end user and end use controls outside the multilateral system. That is really quite limited now in the EU and the Pacific allies, as well as in the UK. That is my structural answer to a broader point.
Q18 Chris Law: I think that might in part answer my next question. Should countries prioritise efforts to stop military and dual-use goods ending up in Russian systems?
Kevin Wolf: Yes. Absolutely. That is a core priority, and one of the primary purposes of all our export control systems now, in addition to the classical and traditional WMD and the evolving China issues. Because it is a priority, Governments should treat it as such by finding support and the authorities to impose the unilateral and plurilateral controls that I referred to earlier. Absolutely.
Q19 Mrs Lewell-Buck: Good afternoon, Dr Moret and Kevin. In one of its reports, RUSI has pointed to Russia having clandestine procurement networks, which are circumventing sanctions. Do either of you have any examples or information that you can share with us regarding any other circumvention of sanctions and export controls on Russia?
Kevin Wolf: Erica, all yours.
Dr Moret: Thank you, Kevin. I am afraid I don’t have any specific examples because I am not working directly on that. I am not conducting any studies on it at the moment, but I am trying to follow it from elsewhere.
One point is that there have been fears of diversion of some of the weaponry systems being provided to Ukraine. There was one report about an anti-tank missile being offered on sale on the dark web. Other studies have suggested that some of those stories have created or amplified by Russians as information campaigns, so we need to be wary of those efforts and check sources.
I will probably hand back to Kevin to try to answer the rest of the question. From what I understand, the Ukrainian military is well organised, and those dispersing weapons on behalf of NATO, the EU, the UK and others are no doubt documenting the dispersal of those weapons in a rigorous, methodical and hopefully harmonised way. I think some of the fears that some of the weapons could be lost, sold or stolen and diverted to illicit markets, are probably a small price to pay in light of the urgent need coming from Ukraine at the moment.
Kevin Wolf: Absolutely. I will defer to later witnesses for actual examples. I gave structural and systemic ways to address the issue, but given the nature of my work, I do not have direct evidence of the versions you were referring to.
Q20 Mr Sharma: How effectively can donor countries stop military equipment gifted to Ukraine, especially advanced weaponry, from falling into Russian hands? Who wants to take a lead?
Kevin Wolf: Erica sort of answered that question briefly, and my answer would be the same. This is different from the kind of situation where exports occur for stockpiling, and you worry about diversion. It is absolutely not in the Ukrainian Government’s existential interest to allow such diversion to occur. Given the public information about the massive rate at which weapons and ammunition are being consumed, that is a lesser concern than defeating Russia on the battlefield and ensuring it is evicted from Ukraine. It is a legitimate issue, but it is different to every other kind of diversion context given the existence of an actual war.
To the extent that there is attention on this issue, emphasis should go on working with allies, or the countries that border Ukraine, and towards doing more capacity building diversion on the outbound side. But we should not be too concerned, other than the tracking that the State Department is doing—which I referred to in my public comments—on the inbound side. It is actually the opposite direction; massive amounts more of ammunition, weapons and funding are needed from a lot more sources, given the burn rates we are reading about.
Mr Sharma: Erica, do you want to add anything?
Dr Moret: I do not have too much to add over what I have already said. I think it is clear that there are some risks associated with supplying large volumes of military equipment in situations of instability and conflict. Many people think back to the cases of Iraq and Afghanistan, where we saw a failure of adequate co-ordination, recording and tracking of what was being delivered, and, as a result, huge volumes of weapons went missing. That created major problems for the state and the wider region.
It looks like, at least from the outside, those lessons seem to have been learnt. There are co-ordination measures that have been established by NATO, the EU and others. There are public statements providing assurances that the weapons that are being delivered and received are being recorded. There has also been a strengthening of, for example, the EU Border Assistance Mission to Moldova and various other initiatives. I think it is a really different context to something like Iraq or Afghanistan. As Kevin already said, I would be highly surprised if the Ukrainian state allowed many to slip through, given the need for the various items at this time.
Q21 Mr Ellwood: Before I go to my original question, I have one on the double-edged sword of sanctions. I am just back from Odessa, where I have been with some members of the Defence Committee. We bumped into an issue there whereby weapons systems were being slid across the table—that was appreciated—but some of the ammunition that was required was licensed or manufactured in countries that did not have licensing agreements to see it sold on to a third party. I wondered if you are conscious of this, and how much it is affecting the ability of the Ukrainians to fight?
Kevin Wolf: I am sorry, but I did not fully understand the question. If Erica did, she should go ahead and answer.
Mr Ellwood: Okay. I will give an example. You have the AS-109, which is a towed artillery piece that uses a standard NATO shell—they are not actually standard, but they are made across Europe. Ukraine is trying to get more of these shells so they can fire them, and they are finding that those who have large quantities of them, are refusing to slide them across the table because Europe is running out. That is simply because the original manufacturer—Germany in many cases—says, “Sorry, we don’t want to play. We don’t want to see our ammunition sold to one person, then sold again or slid across and used in Ukraine.”
Kevin Wolf: It is less of an export control issue in the context of what we are speaking about and a more of a national judgment about what should be controlled and what concerns they have. That goes to appeals to other Governments to provide support and think differently about past concerns in light of the situation in Ukraine. I do not have much more to offer in terms of clever responses. Erica is better than me, so I will defer to her.
Dr Moret: I don’t either, actually—apologies. I agree with Kevin that it sounds like it is ultimately a political decision and probably one that reflects concerns by different Governments over what their electorates may think and stories that could come out in the press if something goes wrong. Again, I think it is a delicate balancing act that probably needs fall to each sovereign Government when it comes to decision making on these issues.
Q22 Mr Ellwood: But Ukraine perhaps has underlined simply how much both weapons and equipment are moving around behind the scenes in order to get to the frontline on either side of the equation. Do you see the world of export controls and sanctions policies changing in any fundamental way because of what is happening in Ukraine?
Kevin Wolf: In terms of lessons learned and what might happen going forward, I would hope there would be all the various structural changes that I rattled off earlier. Those include more unilateral authority given by legislators to their export control agencies to impose plurilateral controls among a group of countries that are techno-democracies outside the scope of the limitations of the regime process, as well as a structural change of more multilateral enforcement co-ordination, and movement of not just customs officials but also export control and sanctions-focused enforcement authorities. There are a lot of lessons to be learned about how the system can work better as a result of this issue. In terms of which weapon should go to whom and when and where and from which countries, I will have to defer to other types of arms experts on that front.
Dr Moret: I will answer that as well, more on the sanctions side; thank you very much for the question. I would say that the current sanctions that are in place against Russia will no doubt mark a turning point for future sanctions use and indeed for international relations in many years to come. I think this will be something of a litmus test for such broad-sweeping sanctions. This is ultimately a G20 member, a major economy and a major energy producer. This is something of a test. We haven’t really done anything like this before. I think it is quite critical. I would almost say that the future of sanctions is on the balance here, depending on what the outcomes are.
Really important here is the messaging of those employing the sanctions. When journalists call me and want to talk about Russian sanctions, they always say, “Are they working?” I think that is the danger here; there is too much expectation being placed on them. Really what is vital is how they are being combined with other measures. The impacts on global trade and finance particularly are ones to watch. The implications for business around the world, supply chains of all types of goods, including essential goods, and for financial pathways and so on again are being reshaped in poorly understood ways at the moment.
But going forward we are going to need to see more co-ordination, close working and a better understanding of the cumulative impacts of these multi-layered multiple sanctions regimes. It is not enough for the UK to look just at its own sanctions, or the US to look at its own sanctions, because ultimately they are all there at the same time. They are having a much bigger effect than just each individual unit. There are some other new things going on, such as the legal discussions on making use of compensated assets for reconstruction and for humanitarian efforts. That is also pretty unusual.
Finally, disinformation needs to be taken into account more proactively. Russia is the originator of a very sophisticated set of disinformation campaigns, and this includes regarding sanctions and their impacts, so I would say that a concerted strategy in how to deal with that and tackle that, including in relation to sanctions, needs to be forged across the board with the UK and its major partners. Otherwise, the legitimacy of sanctions could be called into question going forward. Future support for the measures by the global south, which could become vital, could also be called into question if the disinformation is not tackled and knocked on its head.
Kevin Wolf: To say what I said differently and to follow up on Erica’s point, there is another way to think about it. We are at an inflection point about the purpose, role and use of export controls, which is as significant as the change in the role and purpose of export controls that occurred at the end of the cold war, where it moved from a largely strategic focus to non-proliferation, where the inherent nature of the item was to focus and return back to a broader strategic approach to imposing controls over items beyond the classical items that have some inherent relationship to a weapon. That was in order to degrade a specific country’s ability to function in key sectors and to degrade its military.
It is a really delicate, difficult time now in the theory, role, purpose and use of export controls in light of that transformational change that is occurring, which is why the co-ordination that Erica referred to on the sanctions front is equally important in order to establish coherent policies that are effective, because they are plurilateral. Outside the regime process is critical, otherwise this could descend into chaos, uncertainty, backfilling and a system that is worth nothing. Anyway, that is my broad sweep point in response to your question.
Chair: Fantastic. Thank you very much indeed for the last hour. That brings us to the end of the first half of our session. A huge thank you to you both, Dr Erica Moret and Kevin Wolf. We are very grateful to you. The wonders of modern technology bring you from across the oceans. Thank you.
Witnesses: Kevin Craven and Gary Somerville.
Q23 Chair: Good afternoon, and welcome to the second session of the inquiry of the Committees on Arms Export Control into sanctions on Russia. We have with us two new witnesses: Kevin Craven and Gary Somerville. Can I ask the two of you to provide your name, rank and serial number and give a quick introduction? Gary, can we start with you?
Gary Somerville: Hello, everyone. My name is Gary Somerville. I am a research fellow at RUSI, where I work on the open-source intelligence and analysis research group and specialise in using open-source intelligence methodologies to track, map and expose sanctions evasion activity. It is mostly related to North Korea but, starting from this year, there has been a lot more work on Russia.
Kevin Craven: I am Kevin Craven. I am the CEO of ADS Group, the trade association for aerospace, defence, space and security. Prior to that, I was in industry, very much in the defence space.
Q24 Chair: Thank you very much. Gary, can I ask you the first question? It will be very similar to the one that I asked at the beginning of the last session. Should the UK and other nations have taken more steps to support Ukraine following the 2014 annexation of Crimea, including a greater level of sanctions and export controls on Russia?
Gary Somerville: It is a little difficult now to answer that question. In hindsight, you can say yes, we probably should have done, with regard to supporting Ukraine, but that is not my area of expertise. With regard to export controls, for example, it is easy enough to say now that, yes, more could have been done. Whether or not it would have deterred Russia is another question—for example, they did not exactly expect the war to go on for as long as it has and to have an impact on their stockpiles of weaponry and military equipment, as it has done now. If export controls had been implemented much more stringently after the 2014 annexation, we do not know whether or not that would have actually prevented Russia’s actions.
When it comes to the export controls on Russia now, this has not been an unprecedented regime. If we look at the history of Russia’s ability to acquire foreign technology, particularly for the benefit of its military, that goes back about 100 years. Their intelligence services have been making great strides and acquiring all sorts of technology to the benefit of the military, into the 1970s and 1980s. In fact, that led to a US-led effort, starting in 1985, called Operation Exodus, which was a multinational effort among NATO and partner nations to proactively go after Russian procurement networks operated by its intelligence services and shut them down to prevent Russia from continuing to acquire this technology in breach of the embargo—which, at that time, would have been CoCom—which was in place prior to the Wassenaar agreement. To answer your question, I think more could potentially have been done, but I doubt whether it would have had an impact in February 2022.
Q25 Chair: Again, this is a two-part question. One part is, can you deprive Russia of this technology? I think that you half-answered that question. The other part is a political one, which goes back to the question that I posed to the previous witnesses. Did Russia come away from the sanctions after 2014 and think, “That wasn’t so bad. We can probably get away with invading the whole of Ukraine now”? As a result of that, did it feel almost emboldened that the west had not done more?
Gary Somerville: That is probably a bit beyond the scope of what I can answer definitively, in terms of my area of expertise.
Chair: Fair enough. Chris, over to you.
Q26 Chris Law: Gary, how effective have the post-invasion export controls and sanctions been on Russia?
Gary Somerville: In that regard it is, again, very difficult to measure the impact and effectiveness of sanctions, in terms of the number of shipments that have been stopped or deterred that, if the sanctions were not in place, would have provided the technology that is required for the benefit of Russia’s military-industrial complex. It is very difficult to put a number on that.
However, it is always beneficial to have these sorts of sanctions and export controls in place to, essentially, restrain Russia’s ability to wage war, particularly within the context of Ukraine, of course. This has also allowed domestic law to have mechanisms in place to go after companies, as well as deterring them from actually trying to support Russia and supply Russia with microelectronics. Those that continue to do so can be identified and investigated, because now, in order to export a number of goods and items—even those that are not necessarily under export control but that may go to a sanctioned military end user or to a military end use—they would have to declare that, whatever they are exporting into Russia now, is not going for those purposes. If they are aware of it, they would have to falsify documentation, such as end user certificates. We have seen a number of cases since February 2022 brought against a number of individuals worldwide who have been engaging in this and falsifying end use certificates to ship items to military-affiliated companies.
To echo a point made earlier by both Kevin and Erica, there is no silver bullet policy. There is no one policy that could fix the problem of Russia acquiring, in this case, microelectronics for the benefit of its military. They are going to get through, even the export-controlled ones, but it is better that the controls are there, in that they severely restrict Russia’s ability to rebuild its military, and its stockpiles of weapons, at the rate that it needs to. At the moment, we are seeing, essentially, the expenditure massively taking over its ability to replace them. It also massively increases the costs at which they can acquire these electronics.
In terms of the ”Silicon Lifeline” report, which we published in August this year, a large number of foreign microelectronics make up these Russian weapon systems—everything from UAVs and radio communication systems to long-range precision strike missiles—so they are reliant on western microelectronics. According to Russian domestic law, in order for a foreign microelectronic to be used in one of these systems, there essentially has to be clearance from the security services to say that there is no domestic alternative available. That again should suggest that they do not have the domestic infrastructure in place to reproduce the microelectronics at the same level of quality and en masse to put into their own weapon systems.
Q27 Chris Law: I think you have largely answered this, but is the key problem controlling exports that do not need licences? Is that the main factor?
Gary Somerville: From what we have seen inside Russian weapons systems, a number actually do require export licences but a large number do not. Off the top of my head, we identified 450 components in the report, of which 81 required an export licence, probably coming from the US. There are also certain other components from European manufacturers. If they use US proprietary technology, they are still subject to US export controls. That is interesting in two ways. First, they are able to still acquire the export-controlled items, many of which perform functions that are critical for a lot of these weapon systems to work. Even if you have, for example, non-export-controlled microelectronics that you can find in a range of consumer goods, that system would not function correctly without that one particular processor, for example.
Q28 Chris Law: I was interested in the numbers that you just gave. You said that 81 need licences, but that still leaves 80% of the 450 items that you looked at. Could we go further than we are currently doing with regard to licences, or are these generally easily found items?
Gary Somerville: It is very difficult. To echo Kevin’s point from earlier, in terms of introducing more licensing on some of these items, it would complicate things massively for the export of some items for other countries as well. As for the best way of going forward, with regard, for example, to some of these non-controlled items—not necessarily classed as dual use—there are so many that it will be difficult to put a blanket ban on them or an embargo on Russia so that it cannot even acquire them. However, if the exporter or distributor is aware that they will be going to a military end user—namely those on, say, sanctions lists, which are published by a number of authorities, such as the UK, and the US Government has a very comprehensive one as well—that would even deny Russia the ability to import, or, rather, deny an exporter the ability to export, even non-controlled items to that entity.
Q29 Lloyd Russell-Moyle: Your report calls for multilateral effort to close down Russia’s ability to continue acquiring replacement foreign-made components critical to the war machine. What form does that effort have?
Gary Somerville: There are a number of ways forward on this. For nations that, in the report, we have identified as the key, not suppliers, but certainly manufacturers, of particular microelectronics that Russia favours in its weapons systems, a number of things can be done. Mostly, it is about having consistency in the export control lists for different regimes, in terms of which items are subject to export control, as well as consistent sanctioning of organisations, individuals and companies that have been identified as being affiliated with the Russian military or that have been supplying the Russian military or Russian military-affiliated companies, say, with export-controlled goods.
In addition, there needs to be better co-ordination on the enforcement side. We need to understand, first, how Russia’s procurement networks operate overseas and to identify the methodologies and red flags. Most notably, in terms of the work we have been doing, there are trans-shipment hubs in third countries or jurisdictions, which Russia has been making heavy use of, and that also filters down to manufacturers, distributors and exporters. We need to have an understanding of that to identify the red flags essentially. For example, you could be sending a shipment of microelectronics, including some export-controlled ones, which you have a licence for to send to a company in Hong Kong, but that company is a reseller and would then forward those on to Russian military entities knowingly. In that sense, there is a means to better educate people and share the intelligence and understanding in terms of how Russia is actually acquiring the microelectronics they desperately needs.
Q30 Lloyd Russell-Moyle: Did the Government respond to your report?
Gary Somerville: We have an ongoing engagement programme between the UK Government and some of us on this issue.
Lloyd Russell-Moyle: They have responded to the whole report, or is it just a dialogue—
Gary Somerville: We have spoken to individuals from several Departments in response to the report.
Lloyd Russell-Moyle: But the Government have not published anything or responded in full—it is a dialogue.
Gary Somerville: Not that we have seen, no.
Q31 Lloyd Russell-Moyle: Have the Government changed much since the report? Have they implemented any changes that you know of?
Gary Somerville: Not that I am aware of, no.
Q32 Lloyd Russell-Moyle: You mentioned enforcement. In the previous panel, we heard a bit about where the enforcement teams are based. What is your perception of how the UK does enforcement on end use?
Gary Somerville: I do not have the expertise to answer that question, I am afraid.
Q33 Lloyd Russell-Moyle: You were talking about trying to make sure that the enforcement networks were more co-ordinated. Is your perception, then, that they are not co-ordinated at the moment?
Gary Somerville: That is not what I am saying there. Looking at Kevin’s response, we are seeing greater co-ordination both inter-agency and across different countries, so it is moving in the right direction. But, again, you are never going to have a perfect system. Fixing this issue, or at least throttling Russia’s ability to acquire these controlled items, is the way forward. As for how effective the enforcement arms are at co-ordinating at the moment, I cannot really answer that.
Q34 Lloyd Russell-Moyle: Some regimes will give preference to trusted providers—so you are not just a trusted exporter but a trusted receiver. We do not operate a system like that. The German and Swiss systems will look at the receivers, inspect them, and then, if they fear that there is diversion, will block them receiving further goods. The UK does not do anything along those lines, and does not block receivers, routinely, on a list. Is that something we should consider doing?
Gary Somerville: Again, I do not think I have the expertise on UK export control efforts to answer that.
Lloyd Russell-Moyle: That is fine. Thank you.
Q35 Mr Ellwood: Kevin, it is good to see you. Is it worth just expanding on who you actually represent, for the benefit of the Committee? Do you want to just do that for a second?
Kevin Craven: Yes, we represent around 1,200 companies, of whom about 45% are primarily focused on defence. However, many of the others have a portion of their activities in defence, so there is quite a lot of crossover.
Q36 Mr Ellwood: They go from the tiny, but perhaps niche, expert companies to the very big ones that we would be more familiar with from reading about them in the papers.
Kevin Craven: They do. We have 32-odd prime and mid-tier members, who would be the large household names that you are aware of, and some 900 who fit into the SME category.
Q37 Mr Ellwood: Given the nature of what they are involved in, making and manufacturing, many of them will be internationally facing. Is that right?
Kevin Craven: Yes, you might say that.
Q38 Mr Ellwood: So, can you just say how the consequences of the conflict have impacted those businesses, as a whole, or could you not generalise?
Kevin Craven: I could cover some of that. First, in terms of the sanctions being introduced after February, a large number of our companies acted responsibly and ethically, and voluntarily took measures to prevent trade, activities or services with Russia, specifically, and some of them suffered fairly big losses.
We had one particular company where it cost something like £54 million to stop trading at that point. There are other examples of smaller SMEs, where sales resource is very scarce, and they might have had a sales campaign running for three or six months that came to a halt, and the opportunity cost of halting that work was prevented.
So, unquestionably, there has been some economic impact. The flipside of that is, of course, that Ukraine does represent some opportunity for some of the producers, in terms of their activities.
Q39 Mr Ellwood: Certainly, that will be the case, but complying with sanctions will, of course, be the main issue. How has that affected many of your members?
Kevin Craven: It has hurt, in many ways. One of the interesting impacts has been it drawing into the net a much wider group of companies, particularly from the civil aerospace sector, who perhaps had not had to deal with arms control and licensing issues before that.
Q40 Mr Ellwood: That leads me on to my next question, as your members may have subsequently needed advice and support. This is unfamiliar territory. Would that be correct?
Kevin Craven: Absolutely correct. I think we should acknowledge that the ECJU and the Foreign Office have worked very hard to ensure that the UK industry was kept up to date. There were a number of webinars held early in the process that were helpful. There was a challenge, in terms of the timeliness of the information, partially because the situation was changing rapidly—the advice was changing rapidly. So those webinars defaulted more to a website, in terms of trying to keep up to date. Is that website the best in the world? Probably not. If you are familiar with it, it works okay. If you are not familiar with it—we have had some instances of companies struggling to navigate it.
Q41 Mr Ellwood: Okay. That is interesting. But, in general, have you been pleased with the ECJU’s support? Have they been more front-footed during this time?
Kevin Craven: They have done a good job under trying circumstances.
Q42 Mr Ellwood: What about enforcement activity and making sure that people are complying?
Kevin Craven: As always, enforcement and compliance are challenging in terms of the processes that companies have to go through. The pace of the notices to continue or to cease has been challenging. Although there are a set of transparent service measures, they probably do not go far enough in enabling companies to keep track of processes. We have had instances where decisions have been delayed for very long periods of time. On the actual enforcement side, I do not have any specific examples I can point to where that has been problematic.
Q43 Mr Ellwood: Have you, as an organisation, been involved? Have they included you as a conduit, if you like, to get the messaging out?
Kevin Craven: They have. I think it is an area where there could be some improvements. We work very closely with the ECJU in terms of providing access to industrial experts in the field and signposting our members, particularly those members who have not dealt with the regime before, to the right place and the right information.
Mr Ellwood: That is very helpful. Thank you very much.
Q44 Chair: On your dialogue with the ECJU, do you find them to be very responsive when you have issues you want to raise with them?
Kevin Craven: Generally, they are very helpful. In terms of queries that individual companies have about navigating the system or getting decisions, that has been less good. Sometimes we have found that the helpline has not been able to answer the question either at an appropriate timescale or, in some cases, at all.
Q45 Chair: Do you think that is because they are overworked or just not very good?
Kevin Craven: As always, they are under-resourced. I think that is fair to say. They have also been undergoing a transformation programme; they have changed to a new system over the last 18 months or so. That has been challenging. That is coming to an end now, so hopefully we will see an improvement.
Q46 Chair: You have been part of the process of helping them to make sure that the service offering at the end of the transformation programme is what is needed to be efficient. At the end of the day, the important point is that your members are providing lots of jobs for people in the UK, and helping with our economy and generating the taxation that pays for all sorts of things that we hold as valuable. If there is a problem with the way a Government Department works that hinders your ability, within the law, to make money, it would be very useful from our point of view to know more about that.
Kevin Craven: I think it is fair to say that there is a great deal of constructive engagement. In terms of things that could improve the system, one particular point I might make would be on the interfaces with other Government Departments. Although there is transparency over the processes within the ECJU, when queries go across to the advisory Departments, such as the MOD and the FCDO, there is no service parameter around them responding, and there is no ability within the ECJU to force them to respond in a timely manner.
One of the interesting things to note might be the withdrawal notices. There have been over a thousand of those in the last year or so in which applications for licences have been withdrawn but with no indication of the reasons why. We have a suspicion that some of those might be simply the length of time it has taken to get an answer—in other words, the opportunity has passed. Things have been generally constructive. There is perhaps work to do on transparency of reporting. That might be helpful. Some things could be done, and we would be happy to write to you with some recommendations.
Q47 Chair: That would be very helpful. I will ask one final question before we go to Virendra. We have mainly talked about the process and how the system works, but have you found that there have been quite odd decisions about the type of things that have been put on the restricted lists—things that do not make obvious sense? Have you found some political problems, rather than process problems?
Kevin Craven: No, is the short answer. Again, there is an anecdotal suspicion—if I can put it that way—that for some of the withdrawals, or those where no decision has been forthcoming for a long time, the delay is not due to concrete grounds for denying the application but because there might be other reasons—
Chair: Strategic reasons?
Kevin Craven: Correct.
Chair: Okay, that is very helpful.
Q48 Mr Sharma: Kevin, are your members still exporting to Ukraine, or is that now mainly achieved by donor Governments gifting equipment?
Kevin Craven: The vast majority that we are aware of is going via the Government-to-Government route, and that activity is being co-ordinated directly by the MOD and DIT.
Q49 Mr Sharma: But are some members doing it directly?
Kevin Craven: There are emerging opportunities that are beginning to happen. Certainly at the beginning it was all being done via the MOD and DIT. Now we are seeing inbound inquiries from Ukrainian trade associations and organisations looking at possibilities, but I am not aware that that is happening at any great volume yet.
Q50 Chair: We have more or less come to the end of our questions. Is there anything we have missed? Gary, is there anything you want to add?
Gary Somerville: An interesting question was asked earlier about how Russia’s procurement networks operate abroad. My team has been doing some work looking at how they evolved after February 2022, which Members might find quite interesting.
We have been looking at shipment-level trade data going to a number of companies that we know to be front companies for military-affiliated companies. This has all been done through open source methods. We are finding that a lot of microelectronics that have been found in Russian weapon systems are being diverted to a third-country jurisdiction trans-shipment point. One of the critical ones is Hong Kong.
We are finding a massive increase in shipments. When we look at overall shipment-level trade data going from, say, February to October this year, we can see a large increase in the number of shipments of microelectronics going from Hong Kong companies to Russia. We know they are going to front companies of these Russian military-affiliated companies.
When we come to who is actually shipping them over—these companies in Hong Kong—they are in some cases operated by Chinese nationals. In fact, one is now a sanctioned company. The US added it to their entity list, and the US Department of the Treasury sanctioned it. It is operating at least three other companies in Hong Kong that continue to make shipments over to Russia. The shipments have in fact increased in number since the original company was sanctioned.
That shipping brings up an interesting point. When you want to designate an entity that is flagrantly breaching exports controls, it is much more beneficial to target the individuals behind the company, rather than the company itself; otherwise, they simply create another company. When exporters need to do a due diligence check, the first check they do is a sanctions screening—has this company been designated and does it appear on any US, UK or EU lists? If it doesn’t, they can go ahead with the shipment. That is just one step they have to do; they have to do a range of others as well, but that is the first one. If they just look at the company name and it is not sanctioned, they think it is okay to export and it won’t be diverted to Russia.
We are seeing a lot of Russians based overseas—particularly in Hong Kong—who have been there for seemingly several years and have begun shipping a lot of microelectronics to Russia. Again, the number has been increasing massively. In one particular example, we saw a large increase in shipments to one of these military-affiliated front companies in November and October last year, in the run-up to the invasion. The shipments then dropped off in March, April and May, and then picked up again during the summer. They have already exceeded the 2021 shipment levels in value.
Looking at it in terms of how the Russian procurement networks have adapted, they are now using a lot of Russian overseas nationals to try to essentially acquire goods in the jurisdictions they are based in—for example, Hong Kong—and then re-export those goods to Russia.
Q51 Lloyd Russell-Moyle: Are these British or NATO components—components from allied countries—and are you able to point back to the joint unit to say, “We think this one is diverted?”
Gary Somerville: In terms of what we are seeing, yes. The shipment-level trades include the brand of manufacturer of those goods, usually with a description that can be quite specific and sometimes not so much, depending on how it is reported. In terms of the actual components, we are seeing a lot of stuff produced by United States companies—Texas Instruments analogue devices—but also a number of European companies as well, like STMicroelectronics and NXP Semiconductors in the Netherlands as well.
When looking at this in terms of what lessons UK companies and exporters should be learning from this, it is that certain jurisdictions have lax export controls. If you want to send a shipment of now-obsolete microelectronics to a Hong Kong company that is then going to resell them, because some of these ones specialise in doing that, ideally you need to do an enhanced due diligence check. For example, who is that company then trading with? Who are they actually selling to? Do they have any other companies that they are operating that may be trading with, say, one or two entities in Russia?
Q52 Lloyd Russell-Moyle: If you shut down the Hong Kong route, would Russia just find another route to go through, or are there certain places—because of what you said—that are more lax on their re-exporting requirements that we already know about? In the past, we have talked about a presumption of denial; could we list them as needing a slightly higher threshold to be met?
Gary Somerville: I would say yes. I know that the US does this with certain trans-shipment points: it has identified Hong Kong as being one of them, as well as Singapore and UAE.
Like I say, this is still ongoing work. We have been focused on Hong Kong, but we have identified several other trans-shipment points since the invasion, and Russia is of course exploiting those lax export controls to try to continue acquiring those microelectronics. In a sense, though, we are playing a game of whack-a-mole—we are never going to absolutely shut down these routes entirely—but they are not easy to set up. If we can shut them down, that could have an impact and increase the costs for them to such an extent that it would hinder their ability to replenish their stockpiles of weapons and military equipment.
Q53 Chair: Thank you. Kevin, any last words on behalf of your members?
Kevin Craven: Two, if I may. First, I would note that in the RUSI report, of the 450 components identified, only five came from UK sources. It is probably worth noting the different scales of that.
Finally, I would also note that these multilateral sanctions and the greater co‑ordination between allies is incredibly helpful in making them effective, but it also brings in a wider scope of companies and organisations, in particular those unfamiliar with the regimes. SMEs and new sectors that are experiencing these regimes might need a little bit more support in terms of navigating the complexities of the system, which goes to the resource point that your previous panellists mentioned.
Chair: Fantastic. Thank you both very much indeed for coming along and giving evidence this afternoon. It has been absolutely fascinating—obviously, there is a very big issue happening at the moment—so I and all of our members are very grateful to you.