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When US officials looked for ways to fine Iran for supplying drones to Russia for the Ukraine war, they soon ran into a problem: the Iranian maker of the unmanned aerial vehicle was already hitting Washington’s heaviest fines.
But it wasn’t the drone maker’s Chinese suppliers, officials learned. So The Treasury Department this month blacklisted five Chinese companies and one of their employees, frozen their assets in the United States, and barred US companies or individuals from doing business with them.
The Chinese network has been responsible for selling and shipping “thousands of aerospace components” to Iran, including some that can be used in unmanned aerial vehicles (UAVs) like those that have landed in Russia, the finance ministry said.
More sanctions against Chinese manufacturers could be on the way. The Biden administration warned last fall that China was considering providing lethal aid to the Russian military for the first time. Chinese President Xi Jinping arrived in Moscow on Monday for three days of talks with Russian President Vladimir Putin on a range of issues, including the war in Ukraine.
The United States would likely respond to increased Chinese military aid by punishing the Chinese companies and financial institutions involved, as it did earlier this month, analysts said. Any US sanctions in response to Chinese arms shipments will likely be more limited than the devastating package deployed against them the Russian economy last year after the Russian invasion Ukraine.
“I think this move indicates the direction of US sanctions policy,” said Edward Fishman of Columbia University, a former State Department official. “For months, US officials have made it clear that they would impose sanctions on any company involved in supporting Russia’s military-industrial complex, regardless of where the company is located. You made good on that threat.”
US officials said they had information suggesting Beijing was considering supplying arms to Russia, which Secretary of State Antony Blinken warned would pose a “serious problem” for relations with Washington. So far, Xi has limited his support for Moscow to rhetorical support and an offer to negotiate a peaceful settlement Ukraine, which the government in Kiev rejected as a non-starter.
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On Monday, Xi and Putin met with John Kirby, a National Security Council member, in Moscow for more than four hours Spokesman said it was unclear whether Beijing plans to supply deadly weapons to its ally. “We still don’t think China has taken it off the table. We still don’t believe and haven’t seen any evidence that they’re moving in that direction,” Kirby said.
New US sanctions against Chinese companies, banks or officials involved in such a move would exacerbate already strained economic relations between the United States and China, which face several immediate threats.
Taiwanese President Tsai Ing-wen is scheduled to visit the United States next month, brushing aside protests from China that claims the self-governing island. A special committee of the House of Representatives criticizes the activities of the Chinese Communist Party in high-profile hearings. And amid one of the slowest economic growth rates in China in decades, the Biden administration is eyeing new restrictions on US investment in Chinese tech companies unrelated to the war.
“There are a number of different scenarios that could play out, all of which would further disrupt the relationship,” said Craig Allen, president of the US-China Business Council. “Recalibration and derisking is happening. That could quickly accelerate to a higher level [economic] decoupling.”
In the March 9 announcement, the Treasury targeted a Chinese network it said would supply Iran Aircraft Manufacturing (HESA). The Tehran-based aerospace company produces armed drones, including the Shahed-136, which Iran has sold to Russia.
In 2008, the United States blacklisted the Iranian company as a “specially expelled national” for its support of the Iranian Revolutionary Guard Corps. The action prohibited any person or company in the United States from doing business with the manufacturer.
One of the Chinese companies sanctioned this month, Hangzhou Fuyang Koto Machinery, used a Hong Kong front company to supply “millions of dollars” worth of aerospace components, including light aircraft engines, to HESA, the Treasury Ministry said.
“Iran is directly involved in the civilian casualties in Ukraine caused by Russia’s use of Iranian UAVs in Ukraine,” said Brian Nelson, the Treasury Department’s undersecretary for terrorism and financial intelligence. “The United States will continue to target Iranian global procurement networks that supply Russia with lethal UAVs for use in its illegal war in Ukraine.”
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The Announcement was not an isolated action. When the United States attempted to thwart Russia’s Wagner Group military campaign in Ukraine in late January, it went after a Chinese company that Washington said had provided the paramilitary unit with satellite reconnaissance photos for use on the battlefield.
The Treasury Department officially appointed Spacety, a Changsha-based satellite provider, and banned US individuals and companies from doing business with it. Spacety satellites collected images of locations in Ukraine “to enable Wagner combat operations there,” the Treasury Department said. The company denied the allegations, insisting its activities “do not involve any military use.”
Mao Ning, a spokeswoman for China’s Foreign Ministry, criticized the sanctions in a press conference earlier this month. “China has consistently opposed the US side’s unilateral sanctions, which violate international law and fundamental norms of international relations. We will remain resolute in protecting the legitimate rights and interests of Chinese companies in accordance with the law,” she said.
The United States has increased the use of sanctions in recent years, making them an important foreign policy tool. The Treasury has 398 Chinese companies or individuals over their involvement in Iran, nuclear proliferation, human rights abuses in Xinjiang or Repression in Hong Kong, according to a new report by Emily Kilcrease of the Center for a New American Security.
Separate measures bar Americans from buying securities of 68 companies in China’s military-industrial complex, while the Commerce Department’s Entity List bans the transfer of US technology to another 603 companies or individuals.
In crafting a future sanctions response, the United States would consider the scale of military aid provided by China and the openness of the aid, analysts said. Mass shipments of artillery shells by Chinese government armories, for example, would incur a harsher penalty than uniforms shipped through a third country with no evidence of direct knowledge of the Chinese government.
“The US would need to assess how large the supply of lethal aid is and by what means, what companies or government agencies,” said Thomas Feddo, founder of Rubicon Advisors and a former Treasury Department sanctions official.
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The prospect of further sanctions looms, although doubts have been expressed about the functioning of such instruments. Repeated US warnings of fines in the weeks leading up to the February 24, 2022 attack failed to dissuade Putin from attacking Ukraine.
The United States has frozen the assets of Russia’s central bank, barred high-tech goods from reaching Moscow and ordered multinationals to leave the country. When the US and European Union imposed sweeping sanctions last year, some economists predicted Russia’s economy would shrink by 15 percent.
Instead, Russia’s gross domestic product fell by just 2.2 percent last year and, according to the International Monetary Fund, is expected to grow faster than Germany this year.
US officials insist the sanctions are gradually undermining Russia’s economic might and military prowess. Russian industrial production has fallen for nine straight months. The Russian government runs a massive budget deficit. And Putin was forced to divert money he would rather spend on his war machine to economic purposes.
“Our economic tools are constraining the Kremlin,” Deputy Finance Minister Wally Adeyemo said in a speech last month. Some say the high stakes and potential risks make it unlikely China will ultimately choose to arm the Russians, which Xi described as “good neighbors and reliable partners” on Monday.
Scott Kennedy, a China specialist at the Center for Strategic and International Studies in Washington, said Xi wants to maintain strong ties with Moscow. But he also values China’s trade links with the US and Europe, which would jeopardize arms supplies.
“That would be a pretty dramatic change. That would be a sea change,” Kennedy said. “It is unlikely that China will make such a momentous decision. The world would look different the day after if they continued.”