THE DEKLEPTOCRACY REPORT
August 20, 2024
Welcome to The Dekleptocracy Report! The Dekleptocracy Project (TDP) is a 501(c)(3) following the authoritarian money from Virginia. We’re on a mission to show how existing levers of accountability can protect democracy and prevent authoritarians, their networks, and enablers from exploiting or circumventing the US system. As always, please sign up and forward this newsletter.
BOTTOM LINE UP FRONT
Welcome to TDP’s 21st newsletter! In this issue we take a deeper dive into China’s enabling of Russia’s arms industry, inspired by a recent must-read report from a TDP partner, the Economic and Security Council of Ukraine (ESCU), that tracks this trade in detail. A key takeaway is that much of this bilateral trade is in fact technology from the US and its allies or Chinese technology derived from Western R&D and components. One solution is to thoroughly sanction Chinese and Russian entities as well as actually prosecute violators from the US and other countries that enforce sanctions against Russia for its full-scale invasion of Ukraine.
In the Digest, we look at a new set of federal subpoenas targeting New York City Mayor Eric Adams and City Hall. No one has been charged in the case, but public documents outline an alleged foreign corruption scheme around the mayor’s 2021 election campaign that involved Turkish money, an office building, fire codes and, yes, business class Turkish Airlines flights. Next, we examine a new Hungarian visa program for Russian and Belarusian citizens that threatens the integrity of the Schengen Area, the European zone of borderless travel stretching from the French English Channel coast to the EU’s eastern frontiers.
In Qui Custodiet, we discuss an open letter from lawyers and legal organizations in the US and abroad decrying the various US sanctions regimes in place around the world as a violation of the Geneva Convention for imposing collective punishment on civilian populations. We also look at recent reporting that Chinese technology giant Huawei – subject to restrictions by the US government – will launch a new chip designed for artificial intelligence (AI) processing to challenge NVIDIA. We ask if existing measures are enough to achieve US goals of slowing China’s AI ambitions.
In Around the World, we travel first to Bangladesh, where the South Asian country has entered a transition following horrific violence against primarily student protestors. Two US lawmakers have called for sanctions against at least two key officials from the outgoing government to deter future violence, particularly by ruling-party backed gangs, and potentially send a signal to India, which backed the disgraced former prime minister. We then look at the Thai Constitutional Court’s decision to oust Prime Minister Srettha Thavisin over a cabinet appointment. What could look superficially like a move to reign in a potentially corrupt official (the appointee reportedly had a criminal record) looks in the Thai context like the latest power move by royalist and military elements to assert control in an already febrile political environment.
China as the Great Enabler
Last month’s NATO summit in Washington produced a declaration by all 32 alliance heads of state that took China to task for being “a decisive enabler of Russia’s war against Ukraine,” and singled out “its large-scale support for Russia’s defense industrial base.” The alliance warned that China “cannot enable the largest war in Europe in recent history without this negatively impacting its interests and reputation.” The New York Times observed that it was the first time NATO matched Washington’s rhetoric about Beijing’s massive material support for Moscow in its full-scale invasion of Ukraine. Now an important report from the Economic and Security Council of Ukraine (ESCU), a TDP partner, titled “Third Best Option”, is providing a crucial analysis of how this support not only funnels Chinese equipment to Russia but serves as a primary conduit for technology critical for Russian military production from NATO and its partners in Asia. While these findings underline the critical need for Washington to double down on sanctioning the supply networks, warning off financial facilitators and prosecuting evaders, it is also time to make clear to both Western and Chinese companies that they need to choose between Russia and access to global markets.
A separate essay could be written about Hungary’s role as a signatory to the statement, given its role as China’s closest European partner (technically Hungary’s president, not prime minister is head of state and signatory, giving Viktor Orbán plausible deniability). But the declaration also put strong words in the mouth of another European leader, French President Emmanuel Macron, who (in)famously said on a 2023 visit to China that Europe had to resist becoming “America’s vassal”. During Xi’s visit to France in May, Macron relied on charm to push Xi to pressure Vladimir Putin to back down in Ukraine. As the war passed 900 days last week, soft diplomacy to stymie Chinese dual-use exports to Russia has not worked, while in May, now-former UK defense minister Grant Shapps warned that “lethal aid is now, or will be, flowing from China to Russia.”
The ESCU report underlines the scale and critical nature of China’s support for Russia in its long war. It notes that by early 2023, the “countries of the sanctions coalition” (a useful shorthand for the US, UK, EU and Asian-Pacific allies) had effectively blocked direct supplies and exited joint ventures for precision machine tools (specifically CNC machines), with some notable exceptions. China has stepped in and is now supplying 80-90% of machine tools to Russia. However, a central message of the ESCU report is that Western inputs remain critical to this trade. Understanding just how these critical coalition tools, components and consumables make it through China to Russia offers insight into how to target it.
Ways to market
The ESCU report lays out the three ways for China to supply Russia with machine tools, and, crucially, these routes generally apply to other industrial goods needed for military production, such as ball bearings or chemical additives. First, China acts as a “re-export hub” – the ESCU provides staggering data that, in 2023 and the first quarter of 2024, some 340 Chinese entities exported Western machine tools to Russia worth nearly US$570 million, with 70% of recipients appearing to be involved in the military industrial complex. Second, 22 of the 30 largest CNC makers based in sanctions coalition countries have a manufacturing presence in China, accounting for around US$50 million in supplies over the same period. Third, Chinese CNC makers dependent on coalition ties (partnerships, R&D networks, etc.) supply Russia with machine tools incorporating advanced foreign technology.
The report also notes that the US and the EU have not directly sanctioned around 90% of the largest Chinese suppliers working with Russia (or even many of the Russian “civilian” importers directly or indirectly supplying the Russian military-industrial complex, for that matter). This even applies to intermediary companies that were founded after Russia’s full-scale invasion of Ukraine in February 2022 or are even owned or run by Russian citizens. But the ESCU importantly also shifts responsibility to manufacturers, noting that “Western companies do not control their distribution networks, the activities of their subsidiaries, or the ultimate destination of the final products, of which their components and software become a part.” It concludes that this inaction in the private sector undermines the effectiveness of financial sanctions, by failing to stop proliferation of goods and technology in the first place.
Part of this proliferation risk, of course, is baked into the integration of technology supply chains between the US (and other coalition countries) and China, the world’s largest bilateral trade relationship, along with the EU-China trade axis. One telling example in the report is a large Chinese CNC producer providing supplies to Russia that has a branch in the US, a German R&D Center, partnerships with multinationals in France, Germany, Japan and Switzerland; imports components from Japan andTaiwan; and uses Australian software. This underlines interdependence, but also the risks that companies potentially take by engaging with Russia.
Creating (dis)incentives
China’s trade volumes with Russia, around US$240 billion in 2023, have surged, almost doubling in monthly terms, since the beginning of the war and many analysts believe substantial additional volumes are going through third countries, primarily in Central Asia. While this includes both civil and dual-use goods, it is substantial, but pales compared to Chinese trade with sanctions coalition countries. The Chinese state and many companies rightly guess that they can take advantage of a sanctions-saddled Russia without losing access to US or European markets, giving them enormous leverage in a seller’s market.
How can the US and allies shift the balance? The first step, as the ESCU flags, is to make both coalition and Chinese companies conduct due diligence of their own supply chains and comply with the sanctions regime. This means moving away from what the report calls “the reactive, cautious, and ad hoc application of primary and secondary sanctions” and “begin strategically and massively countering Russian trade networks to achieve real supply chain disruption”. Over the past year, the most successful single step in this direction, we would argue, was the Biden’s administration’s decrees in December 2023 and May 2024 targeting foreign financial institutions that do business with sanctioned Russian entities. This has had a major impact on Russian entities, with Chinese banks now reportedly refusing to process nearly all payments coming from Russia due to compliance worries. Still, there are many ways around this, including the use of cryptocurrency and third parties in other countries.
While we do not believe sanctions are, in and of themselves, a solution, they are a weapon, but one the US has chosen to use too cautiously in the case of China and Russia. A reliance on sectoral sanctions means that significant swathes of the Russian military-industrial sector, its logistics chains and intermediaries, are not sanctioned as individual entities. In practice, this makes compliance all but impossible. Sufficiently resourced, a more aggressive approach of individually sanctioning each company and its directors and shareholders down the chain can defeat the perceived risk of “whack-a-mole” by designating adversary networks faster than they can regenerate. And, again, we note that the US, UK and EU have all failed to launch a major civil or criminal prosecution against a large Western company since Russia’s hybrid invasion of Ukraine in 2014, despite the reality that technology from Western countries continues to provide the backbone of both Chinese and Russian military production. Failure to act decisively now, in this conflict, also sends a dangerous signal to China that we might greet a future attack on Taiwan with the same indecisiveness and unwillingness to force companies to choose between the global market and an aggressor. Right now, many companies are choosing both and profiting.
Feds pressure Hizzoner over Turkey ties
In recent days, the New York Times reported on a fresh round of grand jury subpoenas issued in July in the corruption investigation of New York Mayor Eric Adams’ 2021 election campaign. Notably, the Tristate area’s last major corruption prosecution – of New Jersey Senator Richard Menendez – focused in part on strategic corruption linked to Egypt. As far as we can tell from published sources, Turkish state influence and money was allegedly behind Adams. The allegations may not involve literal stacks of gold bars per the former NJ lawmaker, but for New Yorkers they are eyebrow raising on multiple fronts. To quote the Times, the documents allege that the mayor “conspired with the Turkish government to receive illegal foreign donations and pressured the Fire Department to sign off on Turkey’s new high-rise consulate in Manhattan despite safety concerns.” He also, erm, received Turkish Airlines upgrades. No word if he got bonus Miles & Smiles points.
The subpoenas target the mayor himself, City Hall and his election committee. It should be underlined that no one has been charged in this case yet. And a year until the next election is a long time in politics. Yet the investigation is still sending waves through city and state politics as Adams’ credibility with the governor and legislature in Albany, which hold many purse strings, and his own voters, craters. In a wide-ranging Manhattan Institute poll April 2024 poll, only 16% respondents said they would re-elect him. It found residents were worried about the city’s handling of the migrant crisis and crime. The latter sentiment is arguably a hangover from a post-COVID crime wave that has already largely abated, but a spate of violent attacks on the Subway system has eroded confidence in the mayor and the police force. Corruption in fundraising in the New York Mayor’s office is nothing new – Adams’ predecessor, Bill de Blasio, was forced to pay US$475,000 by a city ethics board for misusing funds on a police detail during a failed presidential primary bid in 2020. In recent decades, New York City mayors have avoided major prosecutions in office (Rudy Giuliani’s legal troubles came years after leaving Gracie Mansion). If federal prosecutors and a grand jury find the conduct serious enough to bring charges before voters get a chance to judge Adams next year, it will suggest one of the most serious cases involving foreign corruption in the city’s recent history.
Hungary’s Russia visa scheme undermines Schengen
As an outside observer, it seems Hungarian Prime Minister Orbán has been enjoying himself since his country took over the six-month rotating presidency on July 1. He has shuttled between world capitals on a mission to end the Ukraine war, although it appears no one has seen his peace plan, if it exists. And, as the Center for European Analysis (CEPA) put it recently, Orbán is able “to troll the very institution he is supposed to chair”. CEPA noted that the European response has been to downgrade the diplomatic import of presidency-sponsored gatherings and settle business in other venues. No one has moved to try and cut short the presidency. Yet, beginning last month, his government may have gone too far with a domestic immigration program that issues two-year working visas to citizens of Belarus and Russia. Lithuania’s reaction as an EU state with (unlike Hungary) an actual border with these two states, was outrage – its home minister demanded a formal explanation from Hungary and warned of a “security threat in the Schengen area”, a reference to the open-border zone stretching from the English Channel to the Polish border, generally allowing the free movement of people and goods. Underappreciated is that the Hungarian government has already opened the door to Chinese police officers to operate in Hungary for up to 180 days per year, as part of the security agreement reported by VSquare in April.
To its credit, the US has already reacted, showing its displeasure with this and other policies by restricting Hungarian passport holders’ ability to participate in the US Visa Waiver program. So far, EU institutions have not done anything substantive, Ylva Johansson, the European Commissioner for Home Affairs, said earlier this month that “if their easy access scheme is a risk, we will act”. While waiting to see if the EU will push for a broader measure under the 1985 treaty that set up the Schengen Area, individual countries can act to “temporarily” reimpose border controls with Hungary or intervening states on security grounds. This was done during COVID and has solid legal footing. Four of the five EU states that immediately border Hungary are part of the Schengen Area (the fifth, Romania, is awaiting final approval to eliminate land border controls). But containing Hungary could be a challenge, especially if neighboring Slovakia, whose government is friendly to Orbán’s policies, does not cooperate. It’s unclear if Austria would either, even though it does already monitor crossings with Slovakia for asylum seekers. Lack of action from the EU would be a critical mistake amid a suspected campaign of Russian sabotage across the continent and the UK in recent months. Opening the borders to the EU and NATO to Belarusian and Russian citizens amid a hot war is arguably far more reckless than any of Orbán’s quixotic peace missions.
Do US sanctions violate the Geneva Convention?
In an open letter to American President Joe Biden, a group of lawyers and legal groups, including the National Lawyers Guild, called on the administration to drop the use of economic sanctions as a tool of statecraft. Using the 75th anniversary of the ratification of the Geneva Convention, the letter calls sanctions a form of “collective punishment” and therefore in violation of the letter and spirit of the Convention. Notably, the letter focuses on certain countries, stating: “Hundreds of millions of people currently live under such broad U.S. economic sanctions in some form, including in notable cases such as Cuba, Iran, North Korea, Syria, and Venezuela.” Russia and Belarus are notable by their absence, while the letter asks why the US does not sanction violators like Saudi Arabia or Turkmenistan. Covered by some news agencies and left-wing websites, the letter deserves an airing and raises important issues of fairness and real suffering. At the same time, many question the efficacy of sanctions. Notably, the Washington Post’s ongoing series, Money Wars, has been looking at this issue with on-the-ground reporting. This includes coverage of Syria, where comprehensive international sanctions have pushed the Assad regime (and possibly its sponsors) to engage in massive amphetamine production and smuggling, essentially turning it into a narco-state, and crippling sanctions on Venezuela’s state oil company have so far failed to force President Nicolás Maduro to accept the outcome of the election.
As TDP argued in our previous issue, passive reliance on economic sanctions is simply ineffective. To achieve specific changes, sanctions need to have a specific, realistic theory of change and be actively enforced, including against our own companies, as part of a broader strategy. One reason the open letter does not focus on Russia is that our sanctions have largely focused on targets directly related to its war effort, and ordinary Russians are not suffering more than usual, according to most accounts. If we were able to provide our enforcement institutions with more authority and budget, the chance of injustice is far diminished. Properly resourced, relying on information-driven precision targeting, designation of key figures and entities alike, and follow-up enforcement in a rapid cycle based on the military concept of a “kill chain”, US sanctions authorities like OFAC could identify and close down whole dual-use supply networks, many connected to the US, potentially saving many lives.
Huawei’s AI chip challenges NVIDIA and US measures against China
As the Wall Street Journal reported recently, Chinese tech giant Huawei Technologies appears poised to launch a new chip for artificial intelligence (AI) use on the Chinese market, overcoming US sanctions and trade measures designed to hobble the sector. The WSJ reports that TikTok parent ByteDance, search giant Baidu and state-owned China Mobile are among companies that may be the first buyers of the 910C chip when it ships, possibly as soon as October. This is a clear defeat for the previous and current administrations’ China trade policy. The US Federal Communications Commission designated Huawei as a national security threat under President Donald Trump and it was added to the US Entity List. More recent export controls blocked NVIDIA from selling its most advanced chips to Chinese customers. For its part, the Chinese government has not added to the bonhomie by promising to “delete” US technologies domestically. According to the WSJ, there are varying Western judgments about the attributes of the new chip and supply chain capacity. But the emergence of the 910C will likely drive a new round of trade restrictions to try and keep key components in short supply.
Pressure to sanction Bangladeshi officials over rights abuses
Several Members of the US Congress have called for travel bans on senior Bangladeshi officials as the suppression of protests, mainly by students, has led to hundreds of deaths in recent weeks. The timing of the calls is striking as in recent days the prime minister, Sheikh Hasina, re-elected in January amid conditions that were not assessed as free or fair by the US or UK, has now stepped down. A caretaker government, led by Nobel Peace laureate Muhammad Yunus, was sworn in last week with a mandate to organize free elections. The US proposals are aimed at two key security ministers involved in the crackdown, according to a statement from Senator Chris Van Hollen (D-MD), a member of the Foreign Relations Committee, and Representative Lloyd Dogget (D-TX), notably including the use of the Global Magnitsky Act. The message appears aimed at incentivizing the until recently ruling Awami League, its student wing and the security forces not to get in the way of the new government or elections. The statement’s note about “tepid concern” appeared to be a swipe at the Biden administration, which reportedly “toned down” its criticism of Sheik Hasina at India’s request, according to a Washington Post report. This suggests that the real audience for the US Congressmen is the Indian government, which has used fear of Islamists in Bangladesh as an excuse to prop up a violent and undemocratic regime. As Bangladesh’s interim government prepares fresh elections, chances appear high that the future of the South Asian country of 170 million people will be hostage, in part, to the wider US-India relationship, covered in detail by TDP in a recent newsletter.
Thai court ousts PM on ethics charges
Most prime ministers try to leave before they’re pushed, but for Srettha Thavisin, Thailand’s PM until a few days ago, the country’s top court – not the National Assembly or voters – kicked him out of office. His official transgression was appointing a lawyer with a criminal conviction to his cabinet this year. The decision follows a complaint from a former senator who had been appointed by the military. Meanwhile, the Constitutional Court also dissolved the progressive Move Forward movement and blocked its leaders from politics for ten years for an “unconstitutional” proposal to repeal the country’s draconian and notorious royal defamation laws. Observers fear that Srettha’s ouster – making him the fourth sitting Thai leader in 16 years the court has removed – is not rigorous enforcement of the law but a royalist establishment move to exert political control. It is one that could backfire and bring about chaos. So far, the center has held, and the National Assembly has elected Paetongtarn Shinawatra – daughter of populist leader Thaksin Shinawatra, as PM. So, what’s next? Srettha was an ally of the Thaksins, but a Thaksin has replaced him. Meanwhile, the elder Thaksin, who returned from a 15-year exile, was indicted in June for royal defamation. Move Forward, which won the most votes at the last election, is banned. Whatever deal that was holding Thai politics together appears to be fraying. Using the courts and anti-corruption laws to oust parliament’s chosen leader may be preferable to tanks on the street again, but Thai democracy appears to be fading.