New U.S. sanctions to halt South Korea's machine tool supply to Russian arms manufacturers

Hanwha Group, South Korea’s seventh-largest industrial conglomerate and parent company of Hanwha Defense, one of the nation's leading defense contractors, has been actively involved in the arms trade. Following Russia's annexation of Crimea in 2014, Hanwha expanded into the European arms market. As reported by the Financial Times last year, the company provides various military equipment, including self-propelled howitzers, to NATO member states. Hanwha Defense's current strategic priority, as outlined by its director Song Jae-il, is to establish itself as a “reliable partner for NATO.” As noted by the FT, this “sales diplomacy” aligns with the broader political goals of South Korean President Yun Seok-yol. Hanwha's influence also extends to the United States, which has significant interests in the country.

In a recent feature, The Wall Street Journal lauded Hanwha's Aerospace division for its achievements. Amid the backdrop of decades of peace in Europe, NATO countries face challenges in rapidly expanding their military capacities. South Korea, however, due to its proximity to North Korea, has maintained a robust conventional arms industry — especially when it comes to the production of 155mm howitzers. These weapons are now in demand by NATO states as replacements for those dispatched to Ukraine. According to the WSJ, owing to deliveries to Poland, Norway, and Estonia, Hanwha Aerospace was able to double its production of 155-millimeter howitzers last year. Choi Dong-bin, Hanwha Aerospace’s general manager, told the publication that the company plans to double production further this year.

It's worth noting that South Korea officially refrains from supplying weapons to Ukraine, confining its support to economic and humanitarian aid. While the country's president hinted at the possibility of providing lethal weapons in the spring, no such action has been taken to date. However, Poland did transfer 50 Korean-manufactured Krab howitzers to Ukraine — with the likely consent of the Korean authorities.

Hanwha was also successfully cooperating with Russia, even after the onset of the invasion of Ukraine. Between March 1, 2022, and February 28, 2023, data from the Import Genius system reveals that Hanwha-branded imports to Russia amounted to $22.3 million, with $9.5 million attributed to Hanwha Precision Machinery, a company specializing in precision metalworking tools.

On April 24, 2023, South Korea expanded its export restrictions to Russia. These restrictions, as reported by Kommersant, covered a range of goods, including microprocessors, semiconductor manufacturing equipment, and machinery used for lathes and other machine tools. Machine tool exports from South Korea continued through June 2023. According to the NBD system, Hanwha Precision Machinery's exports to Russia reached $13.7 million from March 1, 2022, to July 31, 2023. These shipments were made directly from Hanwha Precision Machinery to JSC IPK Finval — without the involvement of intermediaries, which has become a common practice among Russian businesses since February 2022.

Hanwha Precision Machinery has reached out to The Insider to comment on this as follows: «We believe The Insider might misunderstand the business mechanism between a wholesaler and sales agent with a direct business transaction. Unlike other export and import process, wholesales does not require to have an intermediary to make sales. It is a typical process in this type of international trade business when the transaction scale is relatively small. In fact, using intermediary companies in China or Hong Kong is often used when there is an issue with a direct business transaction - to go around the regulation. The fact that Hanwha Precision Machinery did not use an intermediary on the business transaction with Finval is another proof that there was no foul in the sales.»

According to the official documents published by the Strategic Materials Management Center (KOSTI), South Korea imposed restrictions on the export of 798 commodity items to Russia. However, only 111 of these items are explicitly prohibited based on HS-codes, which are part of an international system of customs classification. The remaining items are only prohibited if their specifications exceed certain thresholds, such as precision exceeding one micrometer. Decisions on the export of such goods are made by specialists within the licensing authority. The primary 6-digit HS-code under which Hanwha's metalworking machinery was exported is 845811. Officially, it falls outside the category of items unequivocally prohibited for export. This means that machine tools within this code are subject to export restrictions only when their precision exceeds a specified level.

After the initial version of this report was published, Hanwha Precision Machinery has stated that the shipments to JSC IPK Finval that took place after April 24th, 2023 had been contracted or declared prior to that date. Hanwha Precision Machinery says that all trade in machine tools with Russia was stopped due to the decision of the government of Republic of Korea.

According to the state purchase database, Finval has a reputation as a regular supplier of the Russian military. This is supported by evidence of Finval’s state orders dating back from 2015. A substantial portion of Finval's business revolves around government contracts. For example, machine tools from Finval have found their way to Titan-Barrikady, a company subject to U.S. sanctions, as well as the Marine Underwater Weapon — Hydropribor concern (part of the Tactical Missile Armament Corporation). Finval also received orders for lathes from FSB Military Unit 35533, adjacent to the sanctioned Central Research Institute of Chemistry and Mechanics (TsNIICHM), mentioned in The Insider’s investigation of Alexei Navalny's poisoning. In 2023, JSC IPK Finval supplied a machine tool worth 97 million roubles ($1.04 million) to a division of the Kurchatov Institute — an entity subject to Ukrainian sanctions.

As stated by Hanwha Precision Machinery «In order to ensure the final destination of the product, Hanwha Precision Machinery is mandated to include a document of ‘End User Statement’ in all contracts with our sales agents, which is a key requirement for any contract signing. Under this document, Hanwha Precision Machinery confirmed the final customer of our product was neither any military entity nor any defense manufacturers when the sales were made.»

Despite that, some of Hanwha tools imported into Russia by Finval ended up at military plants or enterprises that are contractors to the military. As follows from acknowledgement letters on Finval's official website, in Summer 2022, Finval installed a Hanwha XD32II lathe at the military plant JSC MPZ in Murom. Around the same time, Finval also installed a Hanwha XD16 tool at OOO ZTM Tekhnosila, which, as per local media, works, in particular, for the military. In 2023 Finval contracted and installed 6 Hanwha metal-working tools to JSC KEAZ in Kursk which, according to the database of government purchases, has been a contractor of Ministry of Defense and military plants. As commented on this evidence by Hanwha Precision Machinery, Finval must have delivered to military plants or their contractors «...without any knowledge of Hanwha Precision Machinery nor any notice to the Korean client company».