Chinese Tech Giants Quietly Retreat From Doing Business With Russia

Chinese Tech Giants Quietly Retreat From Doing Business With Russia

Firms are pulling back under pressure from U.S. sanctions and suppliers, but stay mum in face of warnings from Beijing

Chinese tech companies are quietly pulling back from doing business in Russia under pressure from U.S. sanctions and suppliers, despite calls by Beijing for companies to resist overseas coercion.

Several major companies are curtailing shipments in Russia, where Chinese tech firms dominate the market for many products, without making any public announcements, according to interviews with people familiar with the matter.

They include PC giant Lenovo Group Ltd. and smartphone and gadget maker Xiaomi Corp., the people said. In contrast to many Western firms, the companies have avoided making public statements about Russia's war in Ukraine or their business there as Beijing opposes Western sanctions.

Consumer drone giant SZ DJI Technology Co. made the unusual move of announcing the suspension of its business last month in both Russia and Ukraine pending a compliance review.

China's exports of tech products to Russia fell sharply in March from February, with shipments of laptops declining more than 40%, smartphones down by nearly two-thirds and exports of telecom base stations down 98%, according to the most recently available Chinese government trade data.

The pullback follows waves of wide-ranging financial sanctions and export controls imposed by the U.S. and its allies on Russia following its invasion of Ukraine in late February. The U.S. has threatened to punish Chinese companies that flout the rules.

Major U.S. chip companies that supply Chinese firms are pressing customers to comply with the rules and ensure their semiconductors don't end up in third-party goods shipped to Russia in violation of the rules, according to people familiar with the matter.

One supplier sent a letter to all its customers in March pushing them to comply, while sales staff have reached out as well to ensure compliance, according to one of the people.

China's Ministry of Commerce last month acknowledged that the sanctions have disrupted China's trade with Russia, but urged companies "not to submit to external coercion and make improper external statements."

The sharp decline in tech exports to Russia highlights the sweeping nature of the West's sanctions and their ability to reach deep into supply chains to compel the behavior of companies based far away, even when the governments of countries where those firms are based oppose them.

China's overall exports to Russia fell 27% in value from February to March, official trade data show.

China has expanded its tool kit of measures to counter foreign sanctions, including rules that could compel Chinese companies not to comply with foreign sanctions it deems unjustified, though so far Beijing hasn't issued any such noncompliance orders.

As U.S. sanctions hit Chinese companies, the actions threaten to widen the rift between the U.S. and China on the Russia-Ukraine conflict and further galvanize China's ambitions to develop supply chains independent of U.S. technology.

Western sanctions include strict controls that block exports to Russia's defense sector and the export of products made using U.S. equipment, software or blueprints, even when those products are made by non-U.S. companies.

The measures have proven especially effective in the technology sector, whose complex global supply chains offer numerous levers for the U.S. government to pull.

Despite the wide-ranging nature of the sanctions, some items have been able to slip through. For example, the Russian telecom operator Beeline, owned by Dutch company Veon Ltd., said earlier this month that it took a delivery in March of telecommunications equipment from Chinese telecom giant Huawei Technologies Co.

It said the shipment resulted from a 2021 assessment of future infrastructure needs, saying the delivery was "in full compliance with all applicable laws, including U.S. export controls."

In April, U.S. Commerce Secretary Gina Raimondo said export controls by the U.S. and allies have cut Russia's imports of high-tech goods by more than half, and left Russia short on semiconductors and struggling to find parts for its military.

In an interview with The New York Times in March, she threatened Chinese companies with penalties if they fail to comply with sanctions.

If a Chinese PC company were cut off from a key chip supplier, "that would be catastrophic," said Steve Brazier, chief executive of market research firm Canalys. "You can understand why they might be motivated not to get caught by that."

Although U.S. sanctions contain carve-outs for some consumer electronics devices, they must be sold directly to nongovernmental organizations or consumers for the exports to be permitted, said Kevin Wolf, a former Commerce Department official and a partner in Akin Gump Strauss Hauer & Feld LLP.

Most major tech vendors sell their products via third-party distributors and retailers on the ground.

Among Chinese companies to halt shipments to Russia is Lenovo, the world's largest maker of personal computers and the No. 2 seller of the devices in Russia, behind HP Inc., last year.

The company, a top PC seller in the U.S., halted shipments shortly after Russia's war started and foreign sanctions began to take effect, though some existing inventory remains for sale in the country, according to suppliers, logistics companies and market researchers who track the movement of company products.

Xiaomi, the No. 2 phone seller in Russia last year behind Samsung Electronics Co., has also cut shipments to Russia, according to people familiar with the matter, with one distributor operating in the region saying there has been no deliveries in recent weeks.

Not all Chinese companies are keeping a low profile on the Russia conflict.

DJI's announcement last month that it would suspend its business in Russia and Ukraine made the company a rare example of a Chinese company publicly halting activities over the conflict.

The company did so following reports of the use of its drones in the conflict and complaints from Ukrainian officials of technical glitches in its products.

"DJI has taken this action not to make a statement about any country, but to make a statement about our principles," a company spokesman said. "DJI abhors any use of our drones to cause harm, and we are temporarily suspending sales in these countries in order to help ensure no one uses our drones in combat."


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