Before Russia’s invasion, Mikhail Pavlyuk would humblebrag about his roots in a small Western Ukrainian village where he returned each summer to mow his parents’ lawn.
(Bloomberg) — Before Russia’s invasion, Mikhail Pavlyuk would humblebrag about his roots in a small Western Ukrainian village where he returned each summer to mow his parents’ lawn.
Today, the 56-year-old former semiconductor executive is accused by the US government of illegally smuggling microchips for Russian weapons that raze Ukrainian cities.
Pavlyuk, who fled Russia last summer, was sanctioned by the US government for his alleged role in an international crime ring that purchased, transshipped and sold semiconductors to Russia via a constellation of Taiwanese, Armenian and Swiss shell companies.
This wartime parable provides a window into the complexities and challenges of tracking illicit Russian military procurement networks that often wind their way across opaque supply chains in economically fragile regions.
Until last year, Pavlyuk was among Russia’s most important semiconductor executives — an achievement Russian President Vladimir Putin recognized in 2017 with the order of merit for the fatherland. Pavlyuk co-founded AO PKK Milandr, a Russian electronics company that designs microprocessors and sells consumer technologies like smart power meters.
Headquartered near Moscow in a drab 1960s industrial city known as “Soviet Silicon Valley,” Milandr has deep ties to the Russian Defense Ministry and Federal Security Service. An archived copy of the company’s now-defunct Russian website displays its licenses to handle secret state information and sell integrated circuits to the Russian military.
The company ran into problems last year after the European Union, the US and other Group of Seven nations imposed stiff export restrictions on advanced semiconductors and other goods that can be re-purposed for military uses.
The chip ban is aimed at curbing Russia’s production of drones and precision missiles — like the Kh-101 air-to-surface guided weapon — which rely on components and technologies that are largely manufactured in Taiwan, the world’s leading producer of cutting-edge chips.
“The defense and aerospace industries require more unique chips to manage sensors, such as radars,” said Chris Miller, an assistant professor at Tufts University and the author of the book Chip War. “Russia can’t buy these kind of chips straightforward in Asia, so they have to set up schemes through third countries.”
Following the G-7 ban, key foundries like the Taiwan Semiconductor Manufacturing Co. agreed to halt their exports of chips to Russia. That dealt a serious blow to Milandr, which primarily relies on TSMC to manufacture its chips.
In order to circumvent the export ban, Milandr began placing orders for chips via a Taiwanese shell company called Sharp Edge Engineering Inc., according to the US Treasury Department’s Office of Foreign Assets Control.
The US government alleged Pavlyuk helped smuggle those chips from Taiwan to Russia through a dummy corporation in Armenia, called Milur Electronics LLC, which was created two months after Putin’s invasion.
The Treasury Department said Pavlyuk personally profited from the sale of these chips to Russia and “siphoned a substantial amount into his personal bank account” when he transferred the proceeds via a Swiss-based electronics wholesaler named Milur SA. None of Milandr’s shell companies responded to Bloomberg’s requests for comment.
Pavlyuk told Bloomberg in an email that it’s not clear to him why he’s been targeted by the US government and said he’s working to remove himself from the US blacklist.
Milandr’s current director, Alexey Novoselov, said the company mostly produces electric power meters for Russian homes and said he’s not aware of any connections to the Russian military. “I don’t know any military persons who would be interested in our product,” he told Bloomberg News in a phone interview.
“Our branches in foreign countries — like Taiwan, like Armenia — they are organized in order to simplify the connection between our company and a foundry service like TSMC,” Novoselov said.
The US allegations are “like a fantasy,” he added. “The United States State Department, they suppose that every electronics business in Russia is focused on the military. I think that is funny.”
Ukraine is now stepping up its counteroffensive with an armored assault on Russian fortifications in the south that may be part of a push to cut Moscow’s land link to its strongholds in occupied Crimea. That has coincided with continued Russian missile attacks aimed at infrastructure in Ukraine’s Odesa region.
Over the past year and a half, the Russian military has shown great interest in obtaining any and all chips it can get its hands on — even pulling them from consumer products like washing machines, refrigerators and electric breast pumps.
Moscow likely stockpiled chips in anticipation that Europe and the US would move to cut off supplies, according to Conflict Armament Research (CAR), a UK-based investigative group. But after more than 17 months of combat, Russia’s semiconductor inventory is dwindling and the military is beginning to “look beyond its pre-invasion stocks of components,” said the UK watchdog in a recent report.
In March, a CAR team in Ukraine identified three Russian weapons that contained identical semiconductors produced in August 2022 by a US-based company — marking the first documented sign that Russia is using western components manufactured after the invasion.
The fact that these chips were produced and supplied after the invasion, “demonstrates the challenges faced by export control authorities and industry in monitoring complex and opaque supply chains,” the group said.
This year, US and European officials increased pressure on the Armenian government to curb re-exports of semiconductors and other dual-use goods. While Armenia has a thriving technology sector, the nation unexpectedly became the world’s fourth-largest exporter of battlefield-ready semiconductors to Russia following Putin’s invasion.
In April, Deputy Secretary of the Treasury Wally Adeyemo visited the country to persuade its leaders to crack down on Russian sanctions evasion. Since then, the Armenian government has tightened its export regulations and imposed new controls on semiconductors and other dual-use goods.
A spokesperson with the Armenian state revenue committee told Bloomberg News there have been no attempts to export any type of military product into any country without proper authorization.
The EU is also cracking down on wartime smugglers by increasing penalties for governments that turn a blind eye to international sanctions evasion. In June, the European Commission announced its 11th sanctions package, which empowers EU member states to restrict their exports to countries that are being used to transship sanctioned goods into Russia.
“The EU wants leverage when it speaks to those countries,” said Eva Monard, a Brussels-based trade attorney at Steptoe & Johnson LLP. “Just having this tool in place will give them that leverage.”
A coordinated political and economic pressure campaign represents a potent threat for Armenia and other former Soviet states, many of which rely on a steady stream of imported US and European goods to support their economies.
“It’s all going in one direction,” said Ami Daniel, CEO of Windward Ltd., an Israeli-based maritime analytics company that tracks illicit trade. “The EU is systematically trying to cut off trade with Russia by using its influence with people and nations that are still working with Russia.”
–With assistance from Alberto Nardelli and Sara Khojoyan.
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