Stealing for the Soviet Union: How the USSR deployed shadow trade and industrial espionage to circumvent Western sanctions

On July 14, U.S. President Donald Trump announced new «tough sanctions» against Russia. However, just how easily these sanctions can be evaded remains a key question. Even during the Soviet era, the Kremlin’s circumvention efforts posed a serious challenge for the West. In the 1970s, better U.S.–Soviet relations led to a more lenient approach toward export embargoes, which in turn sparked a boom in the shadow economy on both sides of the Iron Curtain. Thanks to the relaxed restrictions, KGB agents were able to set up a network of front companies that procured critical Western military technology, allowing Moscow to continue the arms race.

• 1.Détente and Its Causes
• 2.The Austrian connection
• 3.Help from Japan
• 4.A failure of Soviet intelligence
• 5.The counterstrike

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Détente and Its Causes

By the early 1970s, both the United States and the Soviet Union were grappling with economic difficulties. The USSR had already entered a period of stagnation. Reforms intended to democratize the economy were not effective. The technological gap between the Soviet Union and the Western countries continued to widen, and economic development was painfully slow. Against this backdrop, vast oil reserves were discovered in Siberia. Thanks to the surge in energy prices triggered by the 1973 Arab oil embargos, the Soviet Union received massive revenues that helped keep its economy afloat.

Oil Production in the USSR

The oil crisis, by contrast, struck the United States hard. In 1973, the country experienced a level of stagflation unprecedented in the postwar era.

The nation was simultaneously confronted with record-high inflation — the worst since World War II — and extremely high unemployment. This was in part provoked by America’s costly involvement in the Vietnam War, which had been dragging on since 1965.

Both the U.S. and the USSR were in need of a respite, and in Washington, policymakers began developing a strategy of international “détente.” The goal was to appease the main adversary and thereby free America's hands to address other pressing geopolitical challenges. Above all, détente with the Soviet Union, which was supplying North Vietnam with weaponry and expertise, offered the United States a much-desired way out of the war.

The architect of détente is considered to be Henry Kissinger, who at the time was serving as National Security Advisor to President Nixon. He proposed a highly pragmatic approach that called for finding a common ground with the Soviet Union.

Détente with the Soviet Union, which was supplying North Vietnam with weaponry and expertise, offered the United States a much-desired way out of the war.

Kissinger realized that Soviet expansionism was not going to disappear. For this reason, he framed the concept of détente as both an acceptance of the policy of containment and a step toward reducing global tensions. Initially, the latter was a greater priority. Even under President Lyndon Johnson, Nixon’s predecessor, the United States had already begun making significant concessions to the Soviet Union. Johnson, for example, publicly condemned the Soviet invasion of Czechoslovakia in words, but took no concrete action in response.

Kissinger and Brezhnev meet

At the same time, the Soviet Union interpreted the meaning of détente in a completely different manner. From an ideological standpoint, it was seen as a symptom of the decline of “imperialist powers” — a development to be exploited. At a party congress, Brezhnev declared that the USSR viewed peaceful coexistence with the West to be an element of the ongoing ideological struggle between socialism and capitalism. He maintained this rhetoric even during the peak years of détente.

Acting as a secret negotiator with the Soviet leadership, Kissinger orchestrated the first-ever visit of a U.S. president to the USSR. During that trip, Nixon and Brezhnev issued a joint statement declaring that nuclear war must never be fought and then they signed the Strategic Arms Limitation Treaty (SALT). Behind closed doors, they also discussed the Vietnam question — the USSR was expected to persuade its allies to withdraw their troops and cease hostilities.

Yet despite the apparent thaw in relations with the United States, the Soviet Union continued to pursue the arms race. Under the cover of détente, the USSR built an extensive network of shadow trade, which enabled it to acquire advanced military know-how and dual-use goods from the U.S. and Europe.

Under the cover of détente, the USSR built an extensive network of shadow trade

The system of restrictions established by the West — no less strict than today’s sanctions against modern Russia — proved to have numerous flaws. In the end, this led to a series of scandals involving the export of defense-related technology to Moscow.

The Austrian connection

In 1949, the Western side in the Cold War established the Coordinating Committee for Multilateral Export Controls (CoCom), an organization tasked with preventing the sale of advanced technologies to the USSR and other countries within the Eastern Bloc. At its peak, CoCom had 17 member states.

The driving force behind the organization was the United States. However, as U.S.-Soviet relations began to improve during the period of détente, some CoCom members started taking a more relaxed approach to the embargo. This significantly expanded opportunities for trade and re-export through third countries.

According to CIA reports, an extensive network of KGB and GRU operatives emerged across the U.S. and Western Europe. Operating through front companies, they managed to procure not only dual-use goods but also military and even nuclear technologies.

The confrontation between CoCom and Soviet intelligence services periodically made headlines. In 1983, a shipment containing 50 tons of components for a cutting-edge American computer was intercepted in Hamburg. Just ten days later, customs officials in Helsingborg, Sweden, seized another 100 tons. The components had been purchased legally in the West and shipped to South Africa, addressed to a private firm. The article mentioned the involvement of a KGB agent, though many of the details around the scheme remained murky.

Front men established companies with Western registration — most often in Austria.

According to intelligence reports, there was a well-established chain that helped to move computers, processors, and CNC (computer numerical control) machines to the Soviet Union. These CNC machines were widely used for military purposes, particularly in the precision manufacturing of missile and aircraft components.

Front men established companies with Western registration — most often in Austria. These firms legally purchased equipment from IBM, HP, Siemens, and other manufacturers. Sometimes, they posed as service centers or research institutions formally registered in Yugoslavia. In reality, instead of being shipped to Yugoslavia, the components were redirected to East Germany, Poland, or sometimes directly to the USSR. In Austria alone, there were an estimated hundred such companies in operation.

In the end, the United States was forced to apply pressure. The Heritage Foundation, a strategic research institute, openly accused Vienna of abetting industrial espionage. In response, Austria tightened its export controls and began scrutinizing end-users more carefully. Nevertheless, loopholes remained.

All of this unfolded in the early 1980s — at the tail end of détente. By then, a series of exposures had revealed that in the years since Kissinger’s policy proposals were adopted, the technological gap between the USSR and the West had significantly narrowed.

Eventually, years of covert export manipulation resulted in the Toshiba–Kongsberg scandal, which exposed CoCom’s inability to effectively enforce its controls. This time, it wasn’t neutral Austria at the center of the scheme, but two full members of the organization: Japan and Norway.

Help from Japan

As early as the 1970s, Soviet spy John Walker informed the KGB that advanced American systems made it easy for the West to track Soviet nuclear submarines. In response, the USSR launched a project to develop quieter submarines. However, building them required access to the aforementioned Western CNC machines.

These machines were manufactured by Toshiba Machine, while the controllers used to operate them came from Norway’s Kongsberg Vaapenfabrikk. Both companies agreed to supply the equipment to the Soviet Union, despite the embargo. They were fully aware of where their products were headed and deliberately engaged in deception. A third-party firm was used as a legal front for the shipments. To bypass export restrictions, the documentation was falsified — listing a civilian plant as the final recipient.

Soviet Submarine Outfitted with Japanese Equipment

The shipment made its way successfully through Hamburg and Vienna to Riga and Leningrad before being delivered to secret defense factories. As a result, Soviet nuclear submarines were equipped with low-noise propellers, thereby gaining the ability to evade American radars. In effect, the West lost one of its key military advantages.

In 1987, the story broke into the open, triggering an unprecedented scandal. Never before had such large corporations and such strategically vital equipment been involved in Soviet procurement schemes. U.S. estimates put the damage at over $10 billion, while other assessments placed the figure as high as $30 billion. As for the deal itself, Toshiba and Kongsberg earned just $17 million and $10 million respectively.

The United States accused Japan of undermining NATO’s security and threatened a total ban on Toshiba equipment imports. In response, Japanese authorities imposed the maximum allowable fine on the company — $100 million — and suspended all exports to socialist countries for a year. Despite these measures, the scandal led to a serious crisis in U.S.-Japan relations.

Japanese authorities imposed the maximum allowable $100 million fine on Toshiba

Trust in Norway was also severely damaged, as its government had failed to control a state-owned company. As a result, Kongsberg was divided, with a significant share sold off to private investors. Only its military division remained under state ownership.

More importantly, the Norwegians conducted a thorough investigation, which revealed that Japanese and European companies had been supplying sanctioned equipment to the USSR since the mid-1970s. Although several managers involved in falsifying documents were held accountable, it proved impossible to identify all those connected to the criminal networks. The necessary level of secrecy had been maintained by the KGB’s scientific and technical intelligence division, known to the CIA as Line X.

A failure of Soviet intelligence

At embassies worldwide, a network of Soviet intelligence officers were registered as military attachés and technical experts, while across Europe and America an extensive network of agents focused on industrial espionage, attending conferences where they photographed everything, including advertising leaflets.

Moreover, they actively engaged in reverse engineering: dismantling equipment into parts and recreating the blueprints. Naturally, they also employed standard intelligence methods: bribery and recruitment of foreign experts.

There were even cases of KGB agents themselves being recruited. One of the most notorious espionage scandals of the 20th century was the story of Colonel Vladimir Vetrov. The information he passed on effectively led to the collapse of the entire Soviet intelligence network. Vetrov held the rank of colonel and worked abroad, specifically in Canada and France. He spoke French fluently and maintained a social lifestyle to support his cover. This allowed him to easily establish contacts. One of his new acquaintances was French trade representative Jacques Prévost — who was collaborating with French counterintelligence.

Colonel Vladimir Vetrov

It is believed that Vetrov defected to the French out of disillusionment with Soviet ideology. However, there were other reasons behind his decision. Within a short period, the colonel found himself in several compromising situations. While in France, he crashed an embassy car while intoxicated, and during his time in Canada, he was detained by the police. Both incidents were quietly covered up, but his superiors still recalled him to Moscow and barred him from traveling abroad.

The colonel, who had promising career prospects, was reassigned to a less prestigious position. He was entrusted with handling a massive amount of data related to the theft of Western technologies. Ultimately, Vetrov made contact with Prévost and arranged to pass information to French counterintelligence. In total, he handed over about 4,000 documents and the names of 200 Soviet agents.

In total, Vetrov handed over about 4,000 documents and the names of 200 Soviet agents.

It is unknown how much more information Vetrov might have passed on had it not been for a fatal twist of fate. He was arrested for attacking his lover — also a KGB officer — with a knife, and the investigation eventually uncovered his contacts with the French. Vetrov was sent to a Soviet labor camp and, some time later, was executed for treason.

Because of Vetrov’s activities, Line X suffered heavy losses, but the story of the organization did not end there.

The counterstrike

As a gesture of goodwill, the French handed over copies of Vetrov’s reports to Ronald Reagan. The era of détente had already come to an end with the onset of the Soviet invasion of Afghanistan in 1979. Still, Washington was stunned by the scale of the Soviet espionage network, and the president instructed the CIA to look into the matter. Gus Weiss — an advisor on technology, intelligence, and economic policy — was brought in to analyze the documents.

Throughout the decade of détente, Weiss had been gathering intelligence on Soviet espionage, but his superiors paid little attention to his findings. Due to the scale, some of his examples came off as unbelievable.For example, Weiss reported that Soviet experts would stick adhesive strips to the soles of their shoes in order to collect material samples during factory tours.

In Vetrov’s documents, Weiss found a list of technologies the USSR was actively seeking to acquire. He proposed that the CIA feed the Soviet agents fake and defective equipment — even if the deception was discovered, the spies would still waste valuable time double-checking the compromised technology.

Around the same time, President Reagan instructed the National Security Council to plan an operation against the Soviet economy. A newly constructed oil and gas pipeline in Siberia was set to link up with Europe’s gas network and begin supplying fuel to France, Italy, and West Germany, generating up to $30 billion in annual profits for Moscow.

President Reagan instructed the National Security Council to plan an operation against the Soviet economy.

To complete the pipeline construction, the USSR needed software to control its valve systems. Soviet spies were unable to acquire it openly on the U.S. market, so they were forced to look elsewhere. A solution was found through a small Canadian firm. Using this channel, the CIA managed to “feed” Line X agents corrupted software.

For several months, the program functioned normally, but then the pressure in the valves began to rise steadily. The result was a massive explosion on the pipeline — one powerful enough to be detected by satellites. At first, U.S. Aerospace Defense Command mistook it for a nuclear detonation.

This operation is considered one of the most successful in the history of cyber warfare, and it inflicted significant damage on the Soviet economy. The USSR never officially acknowledged the explosion, but years later, in the post-Soviet era, a former KGB agent confirmed the fact of the blast while dismissing the story of sabotaged software as “nonsense,” attributing the incident to ordinary negligence.

Whatever the case, Line X began losing its influence even before the collapse of the Soviet Union, as the value of industrial espionage declined. But its influence lived on: it was largely because of Line X that the USSR began to invest less in scientific development and instead focused its efforts on copying foreign technologies. Industrial espionage replaced homegrown innovation — a tactic that yielded short-term gains but ultimately resulted in a strategic defeat. This shift led to long-term dependence on imports, a burden that the Russian Federation has struggled to alleviate.