As the one-year anniversary of the Russia-Ukraine war approaches, Taiwan’s Ministry of Economic Affairs (MOEA) announced on January 4 expanded restrictions on exports to Russia and Belarus. On top of restrictions placed last April and May on the export of 57 goods and products spanning the computer and telecommunications, sensors, lasers, and aerospace categories, additions include materials for use in nuclear energy, chemicals, and machine tools.

From the machine tool industry’s perspective, the implementation of expanded sanctions was only a matter of time. Last year’s official notice only specified that precision five-axis CNC machines and high-end controllers that could be used in aerospace military weaponry must be submitted for authorization. “Now, any kind of CNC machine is off limits,” relates the manager of a machine tooling facility in central Taiwan, reflecting as he reads from a Bureau of Foreign Trade communique.

Another machine tooling plant executive flat out stated, “Starting January fourth, exports of machine tools to Russia have basically been cut off.”

Machine tool exports to Russia up 10% since Ukraine War

Although Russia accounts for four percent of Taiwan’s machine tool exports by value, it is the fourth-largest buyer of machine tools made in Taiwan. Remarkably, however, as the one-year anniversary of the Russia-Ukraine war approaches, last year the value of Taiwanese exports to Russia grew by more than 10 percent.

“The numbers are a little ugly; after all we stand with America,” quips one industry executive, sarcastically.

Industry insiders predict that, in comparison to the avalanche-like drop in Japanese and Euro-American exports of machine tools to Russia, there are two reasons for the growth in Taiwanese machine tool exports to Russia: First, Taiwanese machine tools are unlike high-end machines from major Japanese and European makers, which can be easily used in aerospace and weaponry; second, when major manufacturers in Europe, the U.S. and Japan explicitly declared that they would cease sales to Russia, Russian buyers redirected their orders to Taiwan for civilian use, resulting in the steady growth of orders.

Huang Chien-chung, secretary-general of the Taiwan Machine Tool & Accessory Builders’ Association, relates that Russia accounts for a tiny proportion of Taiwan’s market, so that added restrictions would not have much of an impact on sales. Further, after the new regulations go into effect, Huang expects exports to Russia to decline this year.

In reality, Customs statistics underestimate Russia’s demand for Taiwanese products. Over the past year Russian customers have taken on split identities in various countries.

Chinese guts,Turkish skin, Russian bones

China is a popular hiding place

“Russian customers keep coming to me,” relates an executive at a major automobile parts and components manufacturer. Last year, just after the war broke out, major shipping companies and cargo service agents shied away from Russian business, putting a two- to three-month pause on exports to Russia. Then, together with customers, they came up with a new approach: make China the destination country instead of Russia, and collect the payment first before dispatching shipments.

Statistically, this shows up just as exports from Taiwan to Shanghai or Hangzhou, while the subsequent transport by land or air to Russia is hidden.

This executive relates that, from the second half of 2022 through the present, there has been steady growth in orders. “Right now all of our cargo destined for Russia goes through China,” he says.

Turkey is also a perfect landing spot.

“Turkish customers tell us that many Russians are opening companies in Turkey these days,” relates a CNC tooling plant manager.

Russian customers purchase half-finished Taiwanese machinery components, obtain high-end U.S., Japanese, and European controllers in Turkey for full  assembly before shipping to Russia. Or they simply keep the whole machine in Turkey, set up a production line there, and ship the finished products to Russia.

No matter what, on the accounting books, Taiwan only has a record of sales toward Turkey. Due to its close geographic proximity to the European market, Turkey enjoys a thriving manufacturing industry, and was already the third-largest importer for Taiwanese machine tools, so everything appears to be in order.

Not just goods, but currency flows through intermediary countries.

Russia was shut out from the SWIFT banking system after the war began. Accordingly, for Taiwanese vendors, Russian customers paying through trading companies in intermediary countries aligns the flow of both goods and money and prevents being watched for possible money laundering activities.

‘Zero sales on the books, but people are doing it stealthily’

Taiwanese vendors typically declare on estimates or order confirmations that sales to particular regions are prohibited, for full disclosure. However, the CNC plant manager admits that if the goods remain in an intermediary region for several months before being resold, it can be difficult to trace the final destination.

Looking at data from Central Asian countries, one finds that in the past few years, Taiwanese exports of machine tools to Kazakhstan, a country with a relatively pedestrian manufacturing industry, totaled less than US$200,000. However, last year it reached a new high of over US$3.7 million, which was 18 times that of previous years. The scuttlebut in the industry is that the unusual numbers coming from Kazakhstan are inextricably linked to sanctions. 

“It’s true that we have thought of routing through Kazakhstan to enter Russia, and we’ve also considered going through Uzbekistan, Mongolia, and China,” states a sales representative for a European tech manufacturer. Inspection times on goods have been interminable since the war began, and export permits are never issued. However, for tech manufacturers the withdrawal of U.S. competitors from the Russian market means excellent opportunities for Taiwanese businesses, who must seize the moment and act promptly.

“A lot of companies are this way. Russian sales are zero on the books, but a lot of people are still going ahead stealthily, and no one is so omniscient that they can trace where goods that go through Turkey may ultimately end up.” For this tech manufacturer it is not a great deal of business, “but no one wants to leave money on the table.”

Willing to give up 650 million

The Fair Friend Group (FFG), a major Taiwanese machine tool manufacturer, happens to be one of those companies leaving money on the table.

Ahead of the Taiwanese government’s release of goods restricted for export to Russia, FFG President Jimmy Chu announced last March that the entire group would prohibit all sales to Russia.

With one sentence, FFG closed up its Moscow office, surrendered all Russian orders, and offended several Russian customers, to the tune of more than 20 million euros in losses.

We had no choice. I didn’t want to cause trouble going forward, Chu explained.

With acquisitions all around the globe, FFG has numerous high-end machine tool plants across Europe. If an inspection showed that it was selling machines to Russia after the onset of the war, it could deal a serious blow to the company’s reputation. Resales through an intermediary region were off limits, and even ongoing maintenance services for previously sold equipment was ceased.

This posed a conundrum for the Russians. FFG received a letter from Hong Kong, asking on behalf of a customer in Mongolia for a quotation on parts and component maintenance. A cross check of the SKU number showed that the machine was sold to Russia prior to the war. Accordingly, FFG resolutely refused to answer.

After Taiwan expanded restrictions, trade routes transiting through intermediary regions could easily become sluggish. If MIT machines were found in Russia and opened up to trace their source back to Taiwan, it could be hard to explain. This is especially true regarding machines with special specifications and custom products, for which the risks are greater.

Precedents for the detection of concealed countries of production exist.

“Previously, there was a case of one company in the industry that sold machine tools to North Korea. Taiwan’s Bureau of Investigation, going on a tip from the FBI in the U.S., came around asking questions.” The CNC plant manager admits that sales over the second half of 2022 to Russian customers in Turkey grew steadily, but that this would soon have to come to a stop.

Can small- and medium-sized businesses really walk away from Russia and her population of more than 146 million people? “All I can say is that wherever there are a lot of people, there is a market,” reveals an executive at an auto parts and components manufacturer. As long as something is not on the restricted list, he will not pass on any opportunity to make money.

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Translated by David Toman
Edited by TC Lin
Uploaded by Ian Huang