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World

CNN Exclusive: A single Iranian attack drone found to contain parts from more than a dozen US companies

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Washington
CNN
 — 

Parts made by more than a dozen US and Western companies were found inside a single Iranian drone downed in Ukraine last fall, according to a Ukrainian intelligence assessment obtained exclusively by CNN.

The assessment, which was shared with US government officials late last year, illustrates the extent of the problem facing the Biden administration, which has vowed to shut down Iran’s production of drones that Russia is launching by the hundreds into Ukraine.

CNN reported last month that the White House has created an administration-wide task force to investigate how US and Western-made technology – ranging from smaller equipment like semiconductors and GPS modules to larger parts like engines – has ended up in Iranian drones.

Of the 52 components Ukrainians removed from the Iranian Shahed-136 drone, 40 appear to have been manufactured by 13 different American companies, according to the assessment.

The remaining 12 components were manufactured by companies in Canada, Switzerland, Japan, Taiwan, and China, according to the assessment.

The options for combating the issue are limited. The US has for years imposed tough export control restrictions and sanctions to prevent Iran from obtaining high-end materials. Now US officials are looking at enhanced enforcement of those sanctions, encouraging companies to better monitor their own supply chains and, perhaps most importantly, trying to identify the third-party distributors taking these products and re-selling them to bad actors.

NSC spokesperson Adrienne Watson told CNN in a statement that “We are looking at ways to target Iranian UAV production through sanctions, export controls, and talking to private companies whose parts have been used in the production. We are assessing further steps we can take in terms of export controls to restrict Iran’s access to technologies used in drones.”

There is no evidence suggesting that any of those companies are running afoul of US sanctions laws and knowingly exporting their technology to be used in the drones. Even with many companies promising increased monitoring, controlling where these highly ubiquitous parts end up in the global market is often very difficult for manufacturers, experts told CNN. Companies may also not know what they are looking for if the US government has not caught up with and sanctioned the actors buying and selling the products for illicit purposes.

And the Ukrainian intelligence assessment is further proof that despite sanctions, Iran is still finding an abundance of commercially available technology. For example, the company that built the downed drone, Iran Aircraft Manufacturing Industries Corporation (HESA), has been under US sanctions since 2008.

One major issue is that it is far easier for Russian and Iranian officials to set up shell companies to use to purchase the equipment and evade sanctions than it is for Western governments to uncover those front companies, which can sometimes take years, experts said.

“This is a game of Whack-a-Mole. And the United States government needs to get incredibly good at Whack-a- Mole, period,” said former Pentagon official Gregory Allen, who now serves as Director of the Artificial Intelligence Governance Project at the Center for Strategic and International Studies. “This is a core competency of the US national security establishment – or it had better become one.”

Allen, who recently co-authored an investigation into the efficacy of US export controls, said ultimately, “there is no substitute for robust, in-house capabilities in the US government.”

He cautioned that it is not an easy job. The microelectronics industry relies heavily on third party distributors and resellers that are difficult to track, and the microchips and other small devices ending up in so many of the Iranian and Russian drones are not only inexpensive and widely available, they are also easily hidden.

“Why do smugglers like diamonds?” Allen said. “Because they’re small, lightweight, and worth a ton of money. And unfortunately, computer chips have similar properties.” Success won’t necessarily be measured in stopping 100% of transactions, he added, but rather in making it more difficult and expensive for bad actors to get what they need.

The rush to stop Iran from manufacturing the drones is growing more urgent as Russia continues to deploy them across Ukraine with relentless ferocity, targeting both civilian areas and key infrastructure. Russia is also preparing to establish its own factory to produce them with Iran’s help, according to US officials. On Monday, Ukrainian President Volodymyr Zelensky said that Ukrainian forces had shot down more than 80 Iranian drones in just two days.

Zelensky also said that Ukraine had intelligence that Russia “is planning a prolonged attack with Shaheds,” betting that it will lead to the “exhaustion of our people, our air defense, our energy sector.”

A separate probe of Iranian drones downed in Ukraine, conducted by the UK-based investigative firm Conflict Armament Research, found that 82% of the components had been manufactured by companies based in the US. 

Damien Spleeters, the Deputy Director of Operations at Conflict Armament Research, told CNN that sanctions will only be effective if governments continue to monitor what parts are being used and how they got there.

“Iran and Russia are going to try to go around those sanctions and will try to change their acquisition channels,” Spleeters said. “And that’s precisely what we want to focus on: getting in the field and opening up those systems, tracing the components, and monitoring for changes.”

Experts also told CNN that if the US government wants to beef up enforcement of the sanctions, it will need to devote more resources and hire more employees who can be on the ground to track the vendors and resellers of these products.

“Nobody has really thought about investing more in agencies like the Bureau of Industry Security, which were really sleepy parts of the DC national security establishment for a few decades,” Allen, of CSIS, said, referring to a branch of the Commerce Department that deals primarily with export controls enforcement. “And now, suddenly, they’re at the forefront of national security technology competition, and they’re not being resourced remotely in that vein.”

According to the Ukrainian assessment, among the US-made components found in the drone were nearly two dozen parts built by Texas Instruments, including microcontrollers, voltage regulators, and digital signal controllers; a GPS module by Hemisphere GNSS; a microprocessor by NXP USA Inc.; and circuit board components by Analog Devices and Onsemi. Also discovered were components built by International Rectifier – now owned by the German company Infineon – and the Swiss company U-Blox.

CNN sent emailed requests for comment last month to all the companies identified by the Ukrainians. The six that responded emphasized that they condemn any unauthorized use of their products, while noting that combating the diversion and misuse of their semiconductors and other microelectronics is an industry-wide challenge that they are working to confront.

“TI is not selling any products into Russia, Belarus or Iran,” Texas Instruments said in a statement. ” TI complies with applicable laws and regulations in the countries where we operate, and partners with law enforcement organizations as necessary and appropriate. Additionally, we do not support or condone the use of our products in applications they weren’t designed for.”

Gregor Rodehuser, a spokesperson for the German semiconductor manufacturer Infineon, told CNN that “our position is very clear: Infineon condemns the Russian aggression against Ukraine. It is a blatant violation of international law and an attack on the values of humanity.” He added that “apart from the direct business it proves difficult to control consecutive sales throughout the entire lifetime of a product. Nevertheless, we instruct our customers including distributors to only conduct consecutive sales in line with applicable rules.”

Analog Devices, a semiconductor company headquartered in Massachusetts, said in a statement that they are intensifying efforts “to identify and counter this activity, including implementing enhanced monitoring and audit processes, and taking enforcement action where appropriate…to help to reduce unauthorized resale, diversion, and unintended misuse of our products.”

Jacey Zuniga, director of corporate communications for the Austin, Texas-based semiconductor company NXP USA, said that the company “complies with all applicable export control restrictions and sanctions imposed by the countries in which we operate. Military applications are not a focus area for NXP. As a company, we are vehemently opposed to our products being used for human rights violations.”

Phoenix, Arizona-based semiconductor manufacturing company Onsemi also said it complies with “applicable export control and economic sanctions laws and regulations and does not sell directly or indirectly to Russia, Belarus or Iran nor to any foreign military organizations. We cooperate with law enforcement and government agencies as necessary and appropriate to demonstrate how Onsemi conducts business in accordance with all legal requirements and that we hold ourselves to the highest standards of ethical conduct.”

Swiss semiconductor manufacturer U-Blox also said in a statement that its products are for commercial use only, and that the use of its products for Russian military equipment “is in clear breach of u-blox’s conditions of sale applicable to customers and distributors alike.”

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Exclusive: Biden task force investigating how US tech ends up in Iranian attack drones used against Ukraine

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Washington
CNN
 — 

The Biden administration has launched an expansive task force to investigate how US and western components, including American-made microelectronics, are ending up in Iranian-made drones Russia is launching by the hundreds into Ukraine, multiple officials familiar with the effort tell CNN. 

The US has imposed tough export control restrictions and sanctions to prevent Iran from obtaining high-end materials, but evidence has emerged that suggests Iran is finding an abundance of commercially-available technology. 

Last month, the UK-based investigative organization  Conflict Armament Research examined  several drones that had been downed in Ukraine and found that 82% of their components were manufactured by companies based in the US. 

Among the components found in some of the drones are processors built by the Dallas-based technology company Texas Instruments, according to an investigation by the Ukrainian Armed Forces and a source familiar with the US inquiry, as well as an engine made by an Austrian firm owned by Canada’s Bombardier Recreational Products. Both companies have condemned any use of their technology for illicit purposes. 

Their apparently unintentional ensnarement in Iran’s drone manufacturing industry underscores how inexpensive products intended for civilian use can be easily retrofitted for military purposes, and often fall just outside the bounds of sanctions and export control regimes.  

Texas Instruments said in a statement to CNN that “TI is not selling any products into Russia, Belarus or Iran. TI complies with applicable laws and regulations in the countries where we operate, and partners with law enforcement organizations as necessary and appropriate. Additionally, we do not support or condone the use of our products in applications they weren’t designed for. ”

Bombardier Recreational Products  said in a statement that it was launching an investigation into how the engines ended up in the drones.

The investigation has intensified in recent weeks amid intelligence obtained by the US that the Kremlin is preparing to open its own factory for drone production inside Russia as part of a deal with Iran, the officials said. 

Iran has already begun transferring blueprints and components for the drones to Russia to help with production there, CNN has reported, in a dramatic expansion of the countries’ military partnership. 

Agencies across Washington are involved in the task force, including the departments of Defense, State, Justice, Commerce and Treasury, with one official describing the inquiry as an “all hands on deck” initiative. The effort is being overseen by the White House National Security Council as part of an even bigger, “holistic approach” to dealing with Iran, a senior administration official said, from its crackdown on protesters and its nuclear program to its deepening role in the war in Ukraine.

But the drone issue is particularly urgent given the sheer volume of US-made components, many of them manufactured in the last couple years, that have been found in the Iranian drones Russia has been deploying across Ukraine against civilians and critical infrastructure. 

Conflict Armament Research found that the Iranian drones they examined in Ukraine in November had “higher-end technological capabilities,” including tactical-grade sensors and semiconductors sourced outside of Iran, demonstrating that Tehran “has been able to circumvent current sanction regimes and has added more capabilities and resiliency to its weapons.”

National Security Council official John Kirby told reporters earlier this month that the US would be sanctioning three Russian companies involved in acquiring and using the Iranian drones, and is “assessing further steps we can take in terms of export controls to restrict Iran’s access to sensitive technologies.” 

Much of that work has fallen to the task force, officials said, and among its first tasks has been to notify all of the American companies whose components have been found in the drones. Congressional staffers briefed on the effort told CNN that they hope the task force provides lawmakers with a list of US companies whose equipment is being found in the drones in an effort to force greater accountability by urging the companies to monitor their supply chains more closely.

The task force is also having to coordinate with foreign allies, since the components being used in the drones are not limited to those produced by American companies.  Conflict Armament Research also found that “more than 70 manufacturers based in 13 different countries and territories” produced the components in the Iranian drones they examined.

In October, CNN obtained access to a drone that was downed in the Black Sea near Odesa and captured by Ukrainian forces. It was found to contain Japanese batteries, an Austrian engine and American processors. 

Iran may also be acquiring near-exact replicas of western components from China, according to a study published last month by the Washington-based Institute for Science and International Security. “China plays a larger role than previously assessed in enabling Iran to manufacture and supply drones to Russian forces,” the report found. “It appears that Chinese companies are supplying Iran with copies of Western commodities to produce UAV combat drones.”

The White House believes it is successfully driving home the scale of the issue with allies. The senior administration official told CNN that there was “growing broad and deep international consensus on Iran, from the EU to Canada to Australia and New Zealand, which is being led by US diplomacy.”

There is no evidence that any of the western companies are knowingly exporting their technology to be used in the drones, and that is partly why the task force’s job has been so difficult, officials said. 

The task force has its work cut out for it in tracing supply chains for the microelectronics industry, which relies heavily on third party distributors and resellers. The microchips and other small devices ending up in so many of the Iranian and Russian drones are not only inexpensive and widely available, they are also easily hidden. 

Iran also uses front companies to buy equipment from the US and EU that may have a dual use, like the Austrian engines, that Tehran can then use to build drones, according to the Treasury Department, which sanctioned several of those companies in September. 

 That makes supply chain monitoring a challenge, though experts say US and European companies could be doing a lot more to track where their products are going. 

“American companies should be doing a lot more to track their supply chains,” said Dmitri Alperovitch, the former chief technology officer at the cybersecurity firm CrowdStrike. 

Keeping better track of resellers is a first step, he said, but the task is admittedly difficult because so many of these companies’ products are so commoditized and available off-the-shelf and online for civil purposes. Ultimately, neutering some Iranian front companies with sanctions and cutting off their supply from some western companies will be akin to “a game of whack a mole,” Alperovitch said, noting that they “can easily find another supplier.”

He added that the real “weak underbelly” of US policy when it comes to export controls is enforcement—and prosecuting the specific individuals involved in the illicit transactions. 

“We have to beef up the resources for enforcement of our sanctions to achieve the desired effect,” Alperovitch said.

“You can put companies on the [sanctioned] entities list,” he added, “but if you don’t actually go after the people involved, it doesn’t mean a whole lot.” 

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World

When China and Saudi Arabia meet, nothing matters more than oil

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Hong Kong
CNN
 — 

Chinese leader Xi Jinping is visiting Saudi Arabia this week for the first time in nearly seven years, during which he signed a comprehensive strategic partnership with the world’s largest oil exporter and met leaders from across the Middle East.

The visit is a sign that China and the Gulf region are deepening their economic relations at a time when US-Saudi ties have crumbled over OPEC’s decision to slash crude oil supply. As Xi wrote in an article published in Saudi media, the trip was intended to strengthen China’s relations with the Arab world.

The partnership agreement signed by the two sides includes a number of deals and memoranda of understanding, such as on hydrogen energy and enhancing coordination between the kingdom’s Vision 2030 and China’s Belt and Road Initiative, according to the official Saudi Press Agency (SPA). It did not provide specific details.

China is Saudi Arabia’s biggest trading partner and a source of growing investment. It’s also the world’s biggest buyer of oil. Saudi Arabia is China’s largest trading partner in the Middle East and the top global supplier of crude oil.

“Energy cooperation will be at the center of all discussions between the Saudi-Chinese leadership,” said Ayham Kamel, head of Eurasia Group’s Middle East and North Africa research team. “There is great recognition of the need to build a framework to ensure that this interdependence is accommodated politically, especially given the scope of energy transition in the West.”

Governments around the world have committed to drastically cutting carbon emissions over the coming decades. Countries such as Canada and Germany have doubled down on renewable energy investments to expedite their transition to net-zero economies.

The United States has significantly increased domestic oil and gas output since the 2000s, while accelerating its transition to clean energy.

The Russian invasion of Ukraine in February has triggered a global energy crisis that has left all countries racing to shore up supplies. And the West has further scrambled the oil markets by slapping an embargo and price cap on the world’s second biggest exporter of crude.

Energy security has also increasingly become a key priority for China, which is facing significant challenges of its own.

Last year, bilateral trade between Saudi Arabia and China hit $87.3 billion, up 30% from 2020, according to Chinese customs figures.

Much of the trade was focused on oil. China’s crude imports from Saudi Arabia stood at $43.9 billion in 2021, accounting for 77% of its total goods imports from the kingdom. That amount also makes up more than a quarter of Saudi Arabia’s total crude exports.

“Stability of energy supplies, in terms of both prices and quantities, is a key priority for Xi Jinping as the Chinese economy remains heavily reliant on oil and natural gas imports,” said Eswar Prasad, a professor of trade policy at Cornell University.

The world’s second largest economy is heavily reliant on foreign oil and gas. 72% of its oil consumption was imported last year, according to official figures. 44% of natural gas demand was also from overseas.

At the 20th Party Congress in October, Xi stressed that ensuring energy security was a key priority. The comments came after a spate of severe power shortages and soaring global energy prices following Russia’s invasion of Ukraine.

As the West shunned Russian crude in the months that followed the invasion, China took advantage of Moscow’s desperate search for new buyers. Between May and July, Russia was China’s No. 1 oil supplier, until Saudi Arabia regained the top spot in August.

“Diversity is a key ingredient for China’s long-term energy security because it cannot afford to put all of its eggs in one basket and turn itself into a captive of another power’s energy and geostrategic interests,” said Ahmed Aboudouh, a nonresident fellow with the Middle East Programs at the Atlantic Council, a research institute based in DC.

“Although Russia is a source of cheaper supply chains, nobody can guarantee, with utmost certainty, that the China and Russia relationship will continue to shore up 50 years from now,” Aboudouh said.

The Saudi Press Agency cited Saudi energy minister Prince Abdulaziz bin Salman as saying Wednesday that the kingdom would remain China’s “credible and reliable partner in this field.”

Saudi Arabia also has strong motivations to deepen energy ties with China, according to Gal Luft, co-director of the Institute for the Analysis of Global Security.

“The Saudis are concerned about losing market share in China in the face of a tsunami of heavily discounted Russian and Iranian crude,” he said. “Their goal is to ensure China remains a loyal customer even when the competitors offer [a] cheaper product.”

Oil prices have fallen back to where they were before the Ukraine war on fears of a sharp global economic slowdown. The extent to which the Chinese economy can pick up pace next year will have a huge bearing on how bad that slump will be.

Beyond security of supply, Saudi Arabia could offer Beijing another prize with bigger geopolitical ramifications.

Riyadh has been in talks with Beijing to price some of its oil sales to China in the Chinese currency, the yuan, rather than the US dollar, according to a Wall Street Journal report. Such a deal could be a boost to Beijing’s ambitions to expand the Chinese currency’s global influence.

It would also hurt the long-standing agreement between Saudi Arabia and the United States that requires Saudi Arabia to sell its oil only for US dollars and to hold its reserves partly in US Treasuries, all in return for US security guarantees. The “petrodollar system” has helped preserve the dollar’s status as the top global reserve currency and payment medium for oil and other commodities.

Although Beijing and Riyadh never confirmed the reported talks, analysts said it was logical that the two sides would be exploring the possibility.

“In the near future, Saudi Arabia could sell some of its oil and receive revenues in Chinese yuan, which makes economic sense as China is the kingdom’s top trading partner,” said Naser Al Tamimi, senior associate research fellow at ISPI, an Italian think tank on international affairs.

Some believe it’s already happening, but that neither China nor the Saudis want to highlight it publicly.

“They know too well how sensitive this issue [is] for the United States,” said Luft. “Both parties are overexposed to the US currency and there is no reason for them to continue to conduct their bilateral trade in a third party’s currency, especially when this third party is no longer a friend of either.”

Xi’s visit could mark another step “in the erosion of the dollar’s status” as reserve currency, he added.

Nonetheless, there are limits to the growing ties between Riyadh and Beijing.

“The Biden administration’s approach to the Middle East has concerned the Saudis, and they see a growing relationship with China as a hedge against potential US abandonment and a tool for leverage in negotiations with the United States,” said Jon B. Alterman, director of the Middle East Program at the Center for Strategic and International Studies, a Washington DC-based think tank.

The Biden administration has reoriented its policy priorities with a focus on countering China. At the same time, it has indicated its intention to downsize its own presence in the Middle East, sparking worries among allies there that the United States may not be as committed to the region as it used to be.

“All that being said, Chinese-Saudi ties pale in both depth and complexity to Saudi-US ties,” Alterman said. “The Chinese remain a novelty to most Saudis, and they are additive. The United States is foundational to how Saudis see the world, and how they have seen it for 75 years.”

Despite the possibility of shifting to yuan transactions, it’s too early to say Saudi Arabia would ditch the dollar in pricing its oil sales, analysts said.

Eurasia Group’s Kamal believes it’s “highly unlikely” that Saudi Arabia would take such a step, unless there is an implosion on the US-Saudi relationship.

“In essence there could be discussion on pricing of barrels to China in yuan, but this would be limited in size and probably only correspond to bilateral trade volumes,” he said.

Prasad from Cornell University said countries like China, Russia, and Saudi Arabia are all eager to reduce their dependence on the dollar for oil contracts and other cross-border transactions.

“However, in the absence of serious alternatives and with few international investors willing to place their trust in these countries’ financial markets and their governments, the dollar’s dominant role in global finance is hardly under serious threat,” he said.

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The West just scrambled the oil market. What happens next is up to Russia

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London
CNN Business
 — 

Most Russian crude oil exports to Europe are now banned, marking the boldest effort yet by the West to pile financial pressure on President Vladimir Putin as his brutal war in Ukraine enters its tenth month.

The oil embargo, which was agreed upon in late May, took effect in the European Union on Monday. It was accompanied by a new price cap on Russian crude set by G7 countries. That’s designed to limit the Kremlin’s revenues while allowing countries such as China and India to continue to buy Russian oil, provided they don’t pay more than $60 a barrel.

What happens next will likely hinge on the response from Moscow, which has vowed not to cooperate with the price cap and could slash its production, rattling global energy markets. Global crude prices were up 2.6% on Monday as investors watched nervously for the next move.

Here’s what you need to know about the oil embargo, the price cap and the potential impact.

The European Union now prohibits Russian crude oil imports by sea, setting up the bloc to have phased out 90% of oil imports from Russia. It’s a huge move given that Europe received roughly a third of its oil imports from Russia in 2021. More than half of Russia’s exports went to Europe 12 months ago.

There are a few exceptions. Bulgaria received a temporary carve-out. The embargo also doesn’t target imports via pipeline. That means the Druzhba pipeline can continue to supply Hungary, Slovakia and the Czech Republic. (Germany and Poland are working to end pipeline imports from Russia as soon as possible.)

But the embargo is significant. In 2021, the EU imported €48 billion ($50.7 billion) worth of crude oil and €23 billion ($24.3 billion) of refined oil products from Russia. Two-thirds of those imports arrived by sea.

A ban on Russian refined oil products, such as diesel fuel, imported by sea will launch in early February.

The European Union, plus the other members of the G7 — the United States, Canada, Japan and the United Kingdom — and Australia also agreed on Friday to cap the price of Russian crude oil at $60 a barrel, a policy aimed at Moscow’s other customers. This measure took effect Monday, too.

The price cap, which can be adjusted over time, is designed to be enforced by companies that provide shipping, insurance and other services for Russian oil. If a buyer pays more than the cap, they would withhold their services, in theory preventing the oil from being shipped. Most of these firms are based in Europe or the United Kingdom.

Despite unprecedented sanctions from the West, Russia’s economy and the government’s coffers have been padded by its lucrative position as the world’s second largest exporter of crude oil behind Saudi Arabia.

In October, Russia exported 7.7 million barrels of oil per day, just 400,000 barrels below pre-war levels, according to the International Energy Agency. Revenues from crude oil and refined products currently stand at $560 million per day.

By quickly phasing out imports, Europe hopes to limit inflows to Putin’s war chest, making it harder for him to continue his war in Ukraine.

But countries like China and India have stepped in buy surplus barrels. That’s where the price cap comes in.

G7 countries don’t want Russian oil taken off the market entirely, since that would push up global prices at a time when high inflation is hurting their economies. By enacting a price cap, they hope that can keep barrels flowing, but make the business less profitable for Moscow.

That’s far from certain. Countries like Poland and Estonia wanted a lower price cap, emphasizing that $60 is too close to the current market price for Russian oil. At the end of September, Russian Urals crude was trading just under $64 a barrel.

“Today’s oil price cap agreement is a step in right direction, but this is not enough,” Estonian foreign minister Urmas Reinsalu tweeted Friday. “Why are we still willing to finance Russia’s war machine?”

Enforcement could also prove difficult. Russia and its customers could start using more ships and insurance providers outside Europe and the United Kingdom to circumvent the rules, increasingly relying on what’s termed a “shadow fleet.”

“Capacity in that fleet has been growing, and it could probably handle Russian volumes for a while,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm.

Kremlin spokesperson Dmitry Peskov said Monday that Moscow will “not recognize any price caps.” Russian Deputy Prime Minister Alexander Novak said Sunday that Russia would not export oil to countries adhering to the cap, even if that will mean cutting production.

Oil prices have fallen sharply since the spring as fears about a global recession that may hit demand have come to the fore. Now, all eyes are on Russia’s response. Peskov said the price cap was a step towards “destabilizing the world energy markets.”

Moscow needs to find replacement customers for 1.1 million barrels per day of crude that had still been flowing to Europe, according to the IEA. That may not be easy, especially as coronavirus restrictions and a growth slowdown in China affect demand from the world’s second biggest economy.

The price cap adds to the uncertainty. Would-be customers may decide buying Russian cargoes has become too risky and complex, taking another batch of buyers off the market.

As the Kremlin has threatened, Russia may reduce its oil output as a result. The IEA has estimated Russia will slash output by an additional 1.4 million barrels per day by early 2023.

Other factors will dictate prices, too. Rare protests in China have raised questions about the country’s commitment to its “zero-Covid” policy, and demand could increase if its economy picks up pace.

The Organization of the Petroleum Exporting Countries, or OPEC, could also alter its output. The cartel on Sunday decided to stick with previously announced production cuts, giving it more time to assess the effects of the embargo and the price cap.

Europe’s embargo on refined oil products in February could also be a flash point for energy prices, since the region remains dependent on Russian diesel. Finding alternative sources in just two months may be tricky.

— Anna Chernova contributed reporting.



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World

South Korea’s booming arms industry rolls out the big guns in bid for global reach

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Changwon, South Korea
CNN
 — 

With a blinding yellow flash and a concussion that shakes bones, K9 self-propelled howitzers launch artillery shells onto a hill that’s just been hit by rockets fired from helicopters. Then K2 tanks roar in, speeding up roads and firing as they go.

This is part of DX Korea, a four-day South Korean defense expo held in September at a firing range in Pocheon, about 30 kilometers (18.6 miles) from the North Korean border.

The display – presented to a crowd of 2,000 people including military officials from more than two dozen countries – is one way South Korea sells weapons.

And President Yoon Suk Yeol wants to sell more of them – enough for Seoul to jump four places up the ranks to become the world’s fourth-biggest arms exporter.

“By entering the world’s top four defense exporters after the United States, Russia and France, the (South Korean) defense industry will become a strategic industrialization and a defense powerhouse,” Yoon said.

To do that, South Korea will have to outsell – in ascending order – the United Kingdom, Italy, Germany and finally China, which held 4.6% of the export market in the 2017-2021 period, according to the authoritative Stockholm International Peace Research Institute (SIPRI).

That’s no easy task, yet Seoul is already well on its way. From 2012 to 2016, it had just 1% of the global market. It more than doubled that in the following five-year period, capturing 2.8% – by far the largest increase among any of the world’s top 25 arms exporters.

In 2021, it sold $7 billion worth of weapons overseas, according to the Export-Import Bank of Korea.

And the South Korean defense industry believes it has the arsenal to grab an even bigger slice of the pie.

South Korea’s weapons exports have ballooned in recent years, but the country has been building its arms industry for decades, spurred on by its troubled relationship with its northern neighbor.

As of 2020, military expenditures represented 2.8% of South Korea’s gross domestic product, according to SIPRI, well above the 2% threshold considered a minimum by many US allies.

“The North Korean threat has given us a good reason, a motivation to make sure that our weapons are very good,” says Chun In-bum, a former lieutenant general in the South Korean Army.

Technically, the Korean War never ended, because the document that stopped the combat in 1953 was an armistice, not a peace treaty.

In the first decades after the fighting ended, South Korea’s defense was heavily dependent on American troops and weaponry.

Things began to change in the 1970s, when the US was distracted by the war in Vietnam and the Cold War with the Soviet Union.

South Korea began to take more responsibility for its own defense and invested $42 million in US military aid in factories to produce M-16 rifles, according to the Korea Development Institute (KDI).

By the end of the decade, Korean researchers under the direction of the country’s National Defense Science Institute had succeeded in making all basic weaponry, according to a 2014 KDI report.

With the ever-present threats from the North, Seoul initiated a National Defense Tax to pay for the development of a modern military, including the armored systems and other military equipment that Korean defense companies are marketing today.

Back on the hillside after the live-fire demonstration, prospective customers listened intently to the pitches of the South Korean representatives.

Delegations had arrived from as far afield as Mexico, Thailand, Nigeria and the Philippines. An Indian general asked for the ranges of a weapon on display. Qatari officers inspected a K2 up close.

Conspicuously, none of the potential customers were from Ukraine.

But that doesn’t mean South Korea’s arms industry isn’t seeing a role in Ukraine’s war with Russia.

A US defense official told CNN this month that Washington intends to buy 100,000 rounds of artillery ammunition from South Korean arms manufacturers to provide to Ukraine.

The rounds will be transferred to Ukraine via the US, allowing Seoul to stick to its public pledge that it would not send lethal aid to the war-torn country.

In a statement issued after the planned purchase was first revealed in The Wall Street Journal, the South Korean Defense Ministry said it had not changed its position on shipping weapons to Ukraine, and that it believed the “end user” of the ammunition was the US.

Russian President Vladimir Putin had said late last month that South Korea had decided to send “arms and ammunition” to Kyiv, which would “ruin our relations” with them – a claim denied a day later by President Yoon.

A South Korean presidential decree that enforces the country’s Foreign Trade Act says its exports can only be used for “peaceful purposes” and “shall not affect international peace, safety maintenance, and national security.”

South Korea is also a signatory to the United Nations’ Arms Trade Treaty, ratified in 2014 with the intention of keeping close control on who gets weapons and under what conditions they can be used. Ukraine is a signatory but hasn’t ratified it.

But the planned US ammunition transfer isn’t the only way the influence of South Korea’s arms industry will be felt in Ukraine.

In September, South Korea signed a deal with Poland for its biggest arms sale ever, in which it will supply Warsaw with almost 1,000 of Hyundai Rotem’s K2 tanks, more than 600 of Hanwha’s K9s, and dozens of fighter jets from Korean Aerospace Industries.

The deal will enable Poland to replace many of the weapons that Warsaw has sent to Kyiv.

“Poland needed weapons to defend themselves, and that’s exactly what we’re providing,” Chun says. “We Koreans understand that without weapons to defend yourself, the end result is a tragedy.”

The constant threat of a North Korean attack is one reason military production lines were established in the southern port city of Changwon, the cradle of South Korea’s modern arms industry.

The city is in a natural basin, surrounded by mountains on all sides, making it easier to defend. The city’s main road, Changwon-daero, has a 14.9-kilometer (9.25-mile) stretch that can double as a runway in times of national emergency.

At its southern end is the Changwon National Industrial Complex, established in the 1970s and home to the Hanwha Defense and Hyundai Rotem factories, where artillery pieces and tanks trundle off the assembly lines.

Overseas orders are rolling in this year, notably the landmark deal with Poland which the Korea Defense Industry Association estimates to be worth $15.3 billion.

Hanwha puts its share of that agreement at $2.4 billion, its largest contract for the K9.

Poland is one of nine countries – alongside South Korea, Turkey, Finland, India, Norway, Estonia, Australia and Egypt – to buy the howitzer from Hanwha.

Lee Boo-hwan, an executive vice president of Hanwha Defense’s overseas business division, says the company wants to be a long-term partner to countries that buy its weapons. To that end, it is setting up new manufacturing facilities in Australia, Egypt and Poland.

“My workers are very happy to share our technology,” Lee says. “It is our main strategic focus to enter (new) markets.”

It’s also about continuously updating and improving the product, he says, and that’s happening inside South Korea.

The company has already prototyped the K9A2 tank, which situates the crew outside the turret to make them less vulnerable to attack, and is developing “a more futuristic, next generation version,” Lee says.

“It is fully automated operation, unmanned platform,” with artificial intelligence to let it learn on the battlefield, he says.

At a sprawling, modern complex in Changwon, Hanwha’s robots churn out the artillery pieces for K9s at the rate of one unit every three to five days.

A combination of robots and humans combine on a seven-station assembly line to put together what will eventually be 47 metric tons of steel, machinery and electronics.

One robot, more than two stories high, welds the turrets, the brightness of the white-hot procedure lighting up the cavernous assembly building.

Further down the line, another robot bores holes in the green-painted steel, switching bits automatically as it goes about its work with an accuracy of 1/100th of a millimeter, thinner than a human hair, according to a Hanwha Defense official.

Once the robots are done, it is the turn of Hanwha’s workers. Each hull as it goes along the line bears the pictures of 11 of them.

“We provide excellence by name,” says Lee, the Hanwha executive vice president.

At each assembly station, there’s a “tollgate,” with green, yellow and red lights. Any worker can stop the line with a red light and summon engineers if they spot a problem.

At the final stop is the bore sighting, where the accuracy of the K9’s gun is tested on a target at the far end of the workspace.

The completed units then go outside for performance testing, causing the ground to vibrate as they roar along a paved road near their top speed of 67 kilometers per hour (42 mph).

Test drivers spin the tracked howitzer one way then the other, the rubber pads on the tracks leaving donuts on the concrete.

As the drivers put the units through their paces, Lee explains how Hanwha customizes K9s for its overseas customers: those bound for northern climates like Norway get extra heat sources for the crew; those made for hotter places like India or Egypt get more air conditioning. Some of the factory’s K9s are headed for Poland this year.

Jack Watling, senior research fellow for land warfare at the Royal United Services Institute in London, says South Korea is the perfect testing ground.

Its seasons range from deep-freeze winters to monsoons and summer heat of 30 degrees Celsius or higher – and it has both flat and mountainous terrain.

“That is a pretty unique set of complex variables in terms of having a vehicle that’s reliable across climatic conditions,” Watling says.

And that’s attracted foreign buyers, he says.

Just a few miles from where the K9 artillery pieces are being tested, the K2 tanks at the Hyundai Rotem factory are being put through their paces.

Again, the latest customer is Poland.

“This is our first time directly exporting our (K2),” says Kim, the Hyundai Rotem VP.

Orders from South Korea’s military keep the K2 assembly line busy enough – but the Polish order means Hyundai Rotem can add capacity.

This is essentially like buying a new car off the lot. In the tank world, you can’t quite drive your new K2 home that day, but you get the idea.

“The most important thing is that it is currently being produced,” Kim says.

Hanwha Defense has its eyes on one market in particular – the United States, the world’s largest defense market.

“We want to enter the US market with support from a US local company and also, we want to contribute to the US Army and the US local defense industry,” says Lee, the Hanwha VP.

In 2021, US military spending was $801 billion. But South Korean weapons and ammunition exports to the US accounted for only $95 million, according to the US Commerce Department.

Overall, US military spending was more than the next nine countries combined, according to SIPRI. South Korea ranked 10th.

But the South Korean defense industry should be seen as a partner that complements its American counterpart, rather than competes with it, Chun says.

That massive US military budget includes huge expenditure on top-shelf items. That’s not what Seoul is selling, he points out.

“There are portions of a spectrum of weapons that the United States does not make, because they feel they don’t need to. It doesn’t make a profit for their industry. That’s what we’re targeting. The systems that we have sold to Poland are exactly those kind of systems,” he says.

“I’m hoping that the United States understands that this is a partnership,” Chun adds.

“The United States makes the greatest and best weapons in the world,” he says, “but they don’t make all of them.”

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Business

Japan’s economy shrinks for first time in a year

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Japan’s economy unexpectedly shrank for the first time in a year in the third quarter, stoking further uncertainty about the outlook as global recession risks, a weak yen and higher import costs took a toll on household consumption and businesses.

The world’s third biggest economy has struggled to motor on despite the recent lifting of Covid curbs, and has faced intensifying pressure from red-hot global inflation, sweeping interest rate increases worldwide and the Ukraine war.

Gross domestic product fell an annualized 1.2% in July-September, official data showed, compared with economists’ median estimate for a 1.1% expansion and a revised 4.6% rise in the second quarter.

It translated into a quarterly decline of 0.3%, versus a forecast 0.3% growth.

On top of being squeezed by a global slowdown and soaring inflation, Japan has been dealing with the challenge of the yen’s slide to 32-year lows against the dollar, which has magnified cost-of-living strains by further lifting the price of everything from fuel to food items.

“The contraction was unexpected,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute, adding that the biggest aberration were the larger-than-expected imports.

“But the three key pillars of demand – consumption, capital expenditure and exports – remained in positive territory, if not robust, so demand is not as weak as the headline figure shows.”

However, the risks to Japan’s outlook have risen as the global economy teeters on the brink of recession.

Economy Minister Shigeyuki Goto said a global recession could hit households and businesses.

At home, policymakers and citizens are bracing for a potential eighth wave of the Covid pandemic, adding to the gloom for private consumption which makes up more than half of the Japanese economy.

In the third quarter, private consumption grew 0.3%, a touch above consensus estimate for 0.2% growth but slowing sharply from the second quarter’s 1.2% gain.

“Growth should turn positive in Q4, amid a rebound in inbound tourism and a smaller trade deficit, but the eighth virus wave and rising inflation will limit the recovery,” said Darren Tay, Japan Economist at Capital Economics.

Tay noted that non-residential investment increased by 1.5% quarter-on-quarter, below consensus of a 2.1% rise and Capital Economics’ own estimate for a strong 3% growth rate.

Exports grew by 1.9% but were overwhelmed by hefty gains in imports, meaning external demand subtracted 0.7 percentage points from GDP.

Prime Minister Fumio Kishida’s government is stepping up support for households to try to ease the effects of inflation, with 29 trillion yen ($206.45 billion) in extra spending in the budget. The Bank of Japan has also maintained its ultra-loose monetary stimulus program to help revive the economy.

Capital Economics’ Tay sees a tough 2023 for Japan.

“As for 2023, Japan will be dragged into a mild recession in H1 by a global downturn that will weigh on exports and business investment.”

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World

Germany blocks sale of chip factory to China over security fears

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London/Berlin
CNN Business
 — 

The German government has blocked the sale of one of its semiconductor factories to a Chinese-owned tech company because of security concerns.

Germany’s economic ministry said in a statement that it had prohibited Elmos Semiconductor, which makes chips for the automotive industry, from selling its factory in Dortmund to Silex, a Swedish subsidiary of China’s Sai Microelectronics.

The decision had been taken “because the acquisition would have endangered the public order and safety of Germany,” the ministry said in a statement.

Silex announced in December that it had signed an agreement with Elmos to buy the factory for €85 million ($85.4 million).

Silex did not immediately respond to CNN Business’ request for comment. Elmos said in a statement that both companies regretted the government’s decision.

“The transfer of new micromechanics technologies … from Sweden and significant investments in the Dortmund location would have strengthened semiconductor production in Germany,” Elmos said, adding that it was considering whether to take legal action.

“We have to take a close look at company acquisitions when important infrastructure is involved or when there is a risk of technology flowing to acquirers from non-EU countries,” German economy minister Robert Habeck said at a press conference.

He added that the semiconductor industry in Europe, in particular, needed to guard its “technological and economic sovereignty.”

The planned deal had rattled German authorities concerned that Chinese investment in its critical infrastructure could compromise its intellectual property and leave it exposed to political pressure from Beijing.

Similar concerns motivated the German government to intervene in plans by Chinese shipping giant Cosco to buy a 35% stake in the operator of a Hamburg port terminal last month.

Officials limited the planned investment in Hamburger Hafen und Logistik to 24.9%. Several government ministers, including Habeck, has pushed for the deal to be blocked entirely.

The tensions have arisen at a difficult time for the German economy, which is sliding into a recession triggered by the crisis over Russian energy. Germany’s manufacturers and exporters are eager to maintain their close relationship with China.

Only last week, Chancellor Olaf Scholz met with Chinese leader Xi Jinping in the first visit by a G7 leader to Beijing in roughly three years, a trip designed to shore up export markets as Germany’s ties with Russia — once its biggest supplier of natural gas — continue to unravel.

A delegation of top industry CEOs, including the bosses of Volkswagen

(VLKAF), Siemens

(SIEGY) and chemicals giant BASF

(BASFY), traveled with Scholz to Beijing to meet with Chinese business executives.

But Habeck struck a note of caution on Wednesday. Addressing the blocked chip deal, he stressed that “Germany is and will remain an open investment location” but that it was not “naive”.

The visit came just a month after the United States introduced stringent controls on chip exports to China, a move designed to protect its national security and bolster its domestic semiconductor industry.

In early October, the Biden administration banned Chinese firms from buying advanced chips and chip-making equipment without a license.

The rules threaten to strike a huge blow to China’s ambitions to become a tech superpower as they not only bar exports of chips made anywhere in the world using US technology, but also the export of the tools used to make them.

— Laura He contributed reporting.

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Business

China’s exports shrink unexpectedly in October from COVID curbs, rising inflation and interest rates

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China’s exports and imports unexpectedly contracted in October, the first simultaneous slump since May 2020, as surging inflation and rising interest rates hammered global demand while new COVID-19 curbs at home disrupted output and consumption.

The bleak October trade figures highlight the challenge for policymakers in China as exports had been one of the few bright spots for the struggling economy .

Outbound shipments in October shrank 0.3% from a year earlier, a sharp turnaround from a 5.7% gain in September, official data showed on Monday, and well below analysts’ expectations for a 4.3% increase. It was the worst performance since May 2020.

The data suggests demand remains frail overall, heaping more pressure on the country’s manufacturing sector and threatening any meaningful economic revival in the face of persistent COVID-19 curbs, protracted property weakness and global recession risks.

Chinese exporters weren’t even able to capitalize on a further weakening in the yuan currency and the key year-end shopping season, underlining the broadening strains for consumers and businesses worldwide.

“The weak export growth likely reflects both poor external demand as well as the supply disruptions due to COVID outbreaks,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, citing COVID disruptions at the Foxconn factory, a major Apple supplier, in Zhengzhou as one example.

Apple

(AAPL) said it expects lower-than-anticipated shipments of high-end iPhone 14 models following a key production cut at a virus-blighted plant in China.

“Looking forward, we think exports will fall further over the coming quarters. The shift in global consumption patterns that pushed up demand for consumer goods during the pandemic will probably continue to unwind,” said Zichun Huang, economist at Capital Economics.

“We think that aggressive financial tightening and the drag on real incomes from high inflation will push the global economy into a recession next year.”

Almost three years into the pandemic, China has stuck to a strict COVID-19 containment policy that has exacted a heavy economic toll and caused widespread frustration and fatigue.

Feeble October factory and trade figures suggested the world’s second-biggest economy is struggling to get out of the mire in the last quarter of 2022, after it reported a faster-than-anticipated rebound in the third quarter.

Chinese policymakers pledged last week to prioritize economic growth and press on with reforms, easing fears that ideology could take precedence as President Xi Jinping began a new leadership term and disruptive lockdowns continued with no clear exit strategy in sight.

Tepid domestic demand, weighed down by fresh COVID curbs and lockdowns in October as well as the cooling property market, hurt imports too.

Inbound shipments declined 0.7% from a 0.3% gain in September, below a forecast 0.1% increase — the weakest outcome since August 2020.

China’s imports of soybeans fell and coal imports slipped, as the strict pandemic measures and a property slump disrupted domestic output.

The overall trade figures resulted in a slightly wider trade surplus of $85.15 billion, compared with $84.74 billion in September, missing a forecast of $95.95 billion.

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Business

Janet Yellen: Treasury secretary says she’s not seeing signs of a recession in the US economy

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CNN
 — 

Treasury Secretary Janet Yellen said Thursday in an exclusive interview with CNN that she did not see signs of a recession in the near term as the US economy rebounded from six months of contraction.

During a one-on-one interview in Ohio that aired on CNN’s “Erin Burnett OutFront,” Yellen said the third quarter GDP data released Thursday underscored the strength of the US economy as policy makers urgently move to cool off pervasive and soaring inflation that has had a sharp effect on American views of the economy – and endangered the Democratic majorities on Capitol Hill less than two weeks from the midterm elections.

“Look, what we’re seeing right now is solid growth this quarter. Growth has obviously slowed following a very rapid recovery from high unemployment,” Yellen said when asked about whether the latest GDP data assuaged any recession concerns. “We’re at a full employment economy. It’s very natural that growth would slow. And it has over the first three quarters of this year, but it continues to be OK. We have a very strong labor market. I don’t see signs of a recession in this economy at this point.”

Yellen’s optimism comes amid growing concern from economists and finance officials that a recession is likely at some point in the next year, but was based in part on elements of the latest data that showed signs a necessary slowdown in key areas of the economy leaves open a pathway to a “soft landing” as the Federal Reserve prepares to continue its rapid pace of rate increases.

Gross domestic product — the broadest measure of economic activity — rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. That’s a turnaround from a decline of 1.6% in the first quarter of the year and negative 0.6% in the second.

But Yellen’s view also underscored the complex balancing act President Joe Biden and his top economic officials have attempted over the course of this year, as they seek to highlight a rapid economic recovery and major legislative victories while also pledging to tackle soaring prices.

“Inflation is very high – it’s unacceptably high and Americans feel that every day,” Yellen said when asked how the administration squared its view of the US economy with soaring discontent among voters. Yellen acknowledged that the prices would take time to recede, saying the efforts to bring it back down to levels “that people are more accustomed to” will likely cover “the next couple of years.”

It’s a reality that has undercut efforts by the administrationto take advantage of what officials view as a robust record. Biden, asked about the economy last week, told reporters it’s “strong as hell,” drawing criticism from Republicans.

But Yellen agreed with the President’s assessment that the economy remains strong, standing out in comparison to how other economies around the world are fairing.

“If you look around the world, there are a lot of economies that are really suffering not only from high inflation but very weak economic performance, and the United States stands out. We have unemployment at a 50-year low. … We saw in this morning’s report – consumer spending and investment spending continued to grow. We have solid household finances, business finances, banks that are well capitalized,” she said.

She added, “This is not an economy that’s in recession and we continue to do well.”

Yellen also acknowledged frustration inside the administration that the efforts to pull the US economy out of crisis haven’t received the credit officials believe is merited.

“There were several problems that we could have had, and difficulties many families American families could have faced,” Yellen said. “These are problems we don’t have, because of what the Biden administration has done. So, often one doesn’t get credit for problems that don’t exist.”

Yellen traveled to Cleveland as part of an administration push to highlight the major legislative wins – and the tens of billions of dollars in private sector investment those policies have driven toward manufacturing around the country.

It’s a critical piece of an economic strategy designed to address many of the vulnerabilities and failings laid bare as Covid-19 ravaged the world, with significant federal investments in infrastructure and shoring up – or creating from scratch – key pieces of critical supply chains.

Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.

Yellen pledged that those efforts would be felt as they course through the economy in the months and years ahead. Asked if the administration’s general message to Americans was one of patience, Yellen said: “Yes.”

“But you’re beginning to see repaired bridges come online – not in every community, but pretty soon. Many communities are going to see roads improved, bridges repaired that have been falling apart. We’re seeing money flow into research and development, which is really an important source of long term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.

Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.

“The President and I agree that America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on US Treasuries, which are the bedrock of global financial markets,” Yellen said.

But Yellen, who has long highlighted the “destructive” nature of the showdowns, has also backed doing away with the debt limit altogether through legislation. A group of House Democrats wrote to Democratic leaders to request that action in the lame duck session of Congress, but Biden rejected the idea this week.

Asked about the split, Yellen said only that she and Biden agreed that it’s “really up to Congress to raise the debt ceiling.”

“It’s utterly essential that it be done, and I’d like to see it occur in the way that it can occur,” Yellen added.

As the administration moves toward a time period that traditionally leads top officials to leave an administration, she made clear she did not plan to be one of them. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”

“I feel very excited by the program that we talked about,” Yellen said. “And I see in it great strengthening of economic growth and addressing climate change and strengthening American households. And I want to be part of that.”

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