Should I stay or should I go? German drill manufacturer announced withdrawal from Russia, but supplies of its production continued

High-precision drills and metal cutters are an important element of Russia’s military-industrial complex. But while international sanctions have made it more difficult for Russian weapons manufacturers to procure such capital, The Insider has discovered that supplies from the German company Gühring KG of high-precision metalworking machinery to Russian customers continued. The scheme involved shipping sanctioned products through Turkey via Gühring’s Russian subsidiary. The company claims that it has relinquished control over its Russian affiliate, and that its attempts to divest fully from the sanctioned country were blocked by Russian officials. However, Turkish middlemen continued to sell Gühring KG technology to the company’s “deconsolidated” subsidiary in Russia.

RU

• 1.Who values Guehring drills the most? What makes them different?
• 2.Deliveries after the start of the full-scale invasion
• 3.“Deconsolidation” in practice

In the fall of 2021, at a moment when Russian troops were beginning to encircle the Ukrainian border, when Russian opposition leader Alexei Navalny was already sitting in a prison colony, and when human rights activists and journalists were being forced out of Russia under the threat of criminal prosecution, the German-Russian Chamber of Commerce continued to engage in business as usual, organizing an event called “The Era of New Technologies in the Russian Economy.” Notably, a panel titled “The Development of Russia’s Metalworking Industry” featured a presentation by the director of the Russian company OOO Gyuring – then a full subsidiary of the German Gühring KG.

Gühring KG is a manufacturer of high-precision carbide, sintered powder metal, and diamond metalworking tools. The firm has annual revenues of more than €1 billion and a headcount of over 8,000 employees. A family-owned company, Gühring KG was founded in 1898 by Gottlieb Gühring before being passed to his son Oskar, grandson Jörg, and great-grandson Oliver.

In 2016, after Russia had come under sanctions for its illegal annexation of Crimea and its poorly-disguised “covert” support for the self-declared Luhansk and Donetsk “People’s Republics” in eastern Ukraine, the German manufacturer launched a metal-cutting tool manufacturing plant in the Russian city of Nizhny Novgorod. However, finding a host country supplier of hard alloys of the required quality proved impossible, and so the plant began importing German billets. Additionally, the direct delivery of ready-made German products to Russia continued even after the plant became operational. According to customs declarations, the main (and virtually the only) Russian importer of Gühring products was its subsidiary, OOO Gyuring.

At the time, such an arrangement did not constitute a violation of the sanctions regulations, which were significantly less severe prior to the start of Russia’s full-scale invasion of February 2022. As part of an interview published by a Russian trade journal in December 2015, the Russian subsidiary’s CEO Yuri Gulyaev stated:

“Our products are intended exclusively for the manufacturing of peaceful goods and provision of peaceful services, so they don't fall under sanctions. As far as I know, neither we nor our competitors are facing any major issues in this regard. Most of the sanctions apply to dual-use equipment.”

However, in direct contradiction to Gulyaеv’s words, the list of Gühring customers included defense enterprises — a fact the company had to have been aware of.

Who values Guehring drills the most? What makes them different?

Russian government procurement data demonstrate that Gühring products were in high demand in the Russian military industry — including by Federal Security Service entities and the aviation and space industry — even before the full-scale invasion began. The FSB Military Unit 35533 (Special Equipment Center) repeatedly bought metal-cutting tools from Russian OOO Gyuring.

Gühring products were in high demand in the Russian military industry, including by the Federal Security Service entities and the aviation and space industry

As experts on materials processing explained to The Insider, Gühring has its own carbide production, runs its own grinding machines, and designs the geometry and coating of its tools in-house — all of which gives its drills a competitive edge. Most importantly, the company offers the full range of diameters, drilling depths, and materials required by the military industry, and its drills are always in stock.

Other companies struggle to keep up. Chinese drills are cheaper but have a lower quality that sometimes becomes problematic even at low speeds. Europe, Japan, and South Korea make good drills, but hardly any manufacturer can offer a sufficient range of products. In order to make do without Gühring equipment, Russian companies would have to procure their machinery from multiple manufacturers and plan their purchases well in advance.

German media had already castigated Gühring for selling drills to Kalashnikov Group entities through a Russian intermediary, OOO PKF Technologiya, which came to light thanks to leaked Kalashnikov correspondence. However, when it comes to Gühring’s Russian subsidiary OOO Gyuring, even public data on its government contracts explicitly lists Russian defense enterprises among its key clients.

In response to an inquiry from ZDF, the German manufacturer insisted that “it goes without saying that the company complies with all economic sanctions against Russian companies.”

Deliveries after the start of the full-scale invasion

On May 24, 2022, Gühring KG announced that it would no longer do business in Russia, presenting it as a hard choice in light of the company’s obligation to take care of its employees. Its Russian subsidiary, OOO Gyuring, took on the new name of OOO Instrumentalnaya Kompaniya Gut, and the parent company claimed that it had effectively “deconsolidated” that entity.

Nevertheless, according to the Russian commercial register, Instrumentalnaya Kompaniya Gut formally remains fully owned by the German-based Gühring KG. And since June 2022, Instrumentalnaya Kompaniya Gut has imported at least $20.98 million worth of equipment — including drills, milling cutters, sintered powder metals, and tapping tools — most of which were produced by Gühring.

Types of products imported by the Russian OOO Gyuring (aka OOO Instrumentalnaya Kompaniya Gut) since June 2022, mln USD

Although information on Russian military sector contracts is now largely classified, the public procurement system lists include an executed contract for Gühring products signed on October 11, 2022. The buyer was a Roscosmos structure, the Chemical Automatics Design Bureau, which produces liquid propellant engines.

Up until October 2022 — before the German manufacturer discovered the convenient trade routevia Turkey — direct shipments to Russia from Gühring KG continued to arrive. It can be assumed that these shipments may have been sent out before the imposition of the sanctions. At that point, sanctions on such trade had been in place for more than six months.

The largest intermediaries used by OOO Gyuring/OOO Instrumentalnaya Kompaniya Gut to import Gühring KG products into Russia (import volumes in mln. USD)

“Deconsolidation” in practice

Gühring KG nevertheless continues to profess its innocence. As a spokesperson for the company explained things to The Insider, the German manufacturer had wanted to sell its Russian business but had not received the necessary permit to do so from a Russian government commission. To obtain such authorization, a foreign company needs an application to be filed on its behalf by the Russian Ministry of Industry and Trade, but the ministry declined Gühring KG’s request. According to German office representatives, all they could ever accomplish was to rebrand the Russian subsidiary to “OOO Instrumentalnaya Kompaniya Gut,” severing the connection with the German brand at least in name, and to “deconsolidate” its business by removing the Russian entity from the accounts of the group.

In German economic law, as explained by Gühring KG, “deconsolidation” means that a company that was previously part of a group is no longer reflected on its balance sheet. Gühring KG assured The Insider that, following the deconsolidation, it ceased to influence the policies of its “former” Russian subsidiary, and that it no longer receives updates on its activities. Also according to the German company’s spokesperson, the connection between Gühring KG and OOO Instrumentalnaya Kompaniya Gut remains purely “formal,” and Gühring KG has not abandoned its intention to fully divest itself of its Russian entity by selling it. Be that as it may, Instrumentalnaya Kompaniya Gut has found itself in a strange limbo, with its founder ceasing to fulfil its functions and no replacement in sight. The Russian company’s management did not respond to The Insider's inquiry.

Gühring KG also forwarded the following comment to The Insider:

“Gühring KG has strict compliance procedures in place. If there is a reasonable suspicion that a customer is in violation of national or international sanctions, Gühring KG will immediately terminate business relations with them. This will apply to the companies you mentioned. Gühring KG complies strictly and without exception with applicable laws and all sanctions imposed by individual states and the European Union. Finally, we do not supply even non-sanctioned products to Russia, whether directly or indirectly. It is the foundation of all of our business relationships worldwide.”

This response, however, raises some more questions. How could the management of Gühring KG have failed to notice a spike in demand for its products in Turkey right after its attempted withdrawal from Russia? Was it just an amazing coincidence that the drills supplied to Turkish companies were immediately resold to Gühring’s Russian subsidiary (a fully autonomous entity, according to the German auditors)? How could the German managers have been so uninterested in the fate of Gühring products as to ignore their destination for a year and a half, despite transactions surfacing in export-import databases just a few months after the sales occurred?

On the plus side, Gühring KG’s reaction suggests that the company is aware of the problem, and that it intends to end its arrangement with the Turkish companies involved in transshipment of its products to Russia. The Insider will be watching to see if the drill manufacturer keeps its promise.