Sep 9

Sep 9 IMTS Protest

Normally, Chicago’s Ukrainian Community stages its demonstration in Ukrainian Village, somewhere along Michigan Avenue, or in Daley Plaza. Today, six or seven members of the community headed to McCormick Square outside the sprawling McCormick Place Convention Center, hoping to send a message to those attending the International Manufacturing Technology Show (“IMTS”). Over 86,000 people registered for what is the largest manufacturing technology show in the Western Hemisphere, attracting over 1,600 exhibitors, and visitors from more than 110 countries.

The Ukrainians hoped to shame several companies that they believe are supplying Russia’s military industrial complex with vital equipment used to manufacture weapons that maim and kill Ukrainians. Although the companies in question may not be supplying the equipment directly to Russia, the Ukrainians allege that the named companies are doing so so indirectly through Chinese and other intermediaries, or by other means. Those singled out included Amada, DMG Mori, Fanuc, HAAS, Heidenhain, Makino, Mazak, OKUMA, and Siemens AG.

Ascertaining the Merits of the Ukrainian Allegations. Whether the identified companies are intentionally violating U.S., G7, or European Union sanctions imposed on doing business with Russia is difficult to ascertain. A May 19, 2023 Press Release from the U.S. Department of Treasury acknowledges Russia’s efforts to evade the sanctions, stating:

Today, the United States, in coordination with the G7 and other international partners, is strengthening the unprecedented global sanctions and other restrictive economic measures to further degrade the Russian Federation’s capacity to wage war against Ukraine. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is implementing new commitments made at the G7 Leaders’ Summit to hold Russia accountable for its war. . . .

OFAC’s sanctions on 22 individuals and 104 entities, with touchpoints in more than 20 countries or jurisdictions, target those attempting to circumvent or evade sanctions and other economic measures against Russia, the channels Russia uses to acquire critical technology, its future energy extraction capabilities, and Russia’s financial services sector. Additionally, OFAC is expanding sanctions authorities to target new sectors of Russia’s economy and sever Russia’s access to new categories of services. The U.S. Department of State also designated or identified as blocked property almost 200 individuals, entities, vessels, and aircraft. The U.S. Department of Commerce is significantly expanding the territorial reach and categories covered by its export controls and adding 71 entities to its Entity List to prevent Russia from accessing goods it needs for the battlefield.

The Press Release specifically notes the Treasury’s efforts to target covert procurement networks used to supply Russia with “sensitive technologies and equipment for Russia’s intelligence services and military.” The Treasury points to companies associated with Armenia, China, Estonia, Finland, India, Liechtenstein, Netherlands, Poland, Türkiye, and Uzbekistan as involved in or facilitating the procurement of items for the Russian defense industry. At one point, the Press Release describes a common method for circumventing the sanctions, stating:

One of the most common tactics, detailed in the March 2023 Compliance Note, is the use of third-party intermediaries or transshipment points to circumvent restrictions, disguising the involvement of persons on the SDN List or entities on the Department of Commerce’s Entity List in transactions, and obscuring the true identities of Russian end-users.

The Press Release does not name any of the companies that the Ukrainians singled out today. I also searched OFAC’s database for each of the companies that the demonstrators identified. My search criteria included each company’s name and two programs that were designated Russia-EO14024 and Russia-EO14065. My search returned no results for any of the named companies.

Equipment and materials manufactured by the identified companies may be ending up in Russian hands, but that does not mean that those companies are supplying intermediaries, whether on the OFAC sanctions list or not, with goods and materials knowing that the Russian defense industry is the intended recipient.

Tellingly, the PBS News Hour ran a story on March 14, 2023 alleging that HAAS sold equipment to Abamet, which then resold the equipment to Russian-sanctioned entities. Abamet was in the database of Specially Designated Nationals and Blocked Persons when I searched that database today. In the News Hour story, Denys Hutyk said,

Legal experts believe that the company is aware or should have been aware of its equipment being used by Russian military plants.

If our organization is able to trace the links between the Abamet and the Russian-sanctioned military plants, then it is surely possible for such a big company, such a corporation as Haas Automation.

The story’s author, Simon Ostrovsky, reported that,

Haas vice president Peter Zierhut denied the company was still doing business in Russia.

In a written statement, he told "NewsHour" that Haas had cut ties with its Russian distributor on March 3 of last year, just a week after Russia's full-scale invasion of Ukraine began.

On March 16, 2023, the Associated Press published a story entitled, Haas Dismisses A Report Alleging It Broke Russian Sanctions. In it, Haas responded to the News Hour story, stating,

That story is simply false, both in its overall impression and in many of its particular statements, . . . The 18 machines referenced in the story left the Haas Automation factory prior to the Russian invasion of Ukraine.”

Haas told the AP that it terminated its relation with Abamet on March 3, 2022, shortly after Russia’s invasion of Ukraine.

I have seen no other reports implicating any of the other companies as violators of the OFAC sanctions; although my search effort was not comprehensive or intended to be.

Of course, companies and their legal counsel are often adept at structuring around restrictions and other laws, be they trade, employment, or tax-related, so the Ukrainian claims might hold up, but to date, there is a lack of widely available, independently verified evidence. It is possible that third parties unrelated to the companies singled out by the Ukrainians are using shell companies, purchases through secondary markets, and resellers to procure the equipment produced by the manufacturers without their knowledge.

I would need to review what is a complex set of laws, regulations, and executive orders to determine what arrangements and relationships violate the sanctions; something I am not prepared to do. Presumably direct sales and sales through controlled subsidiaries are problematic. But what about unrestricted sales to distributors or resellers? Are companies required to include contractual language in their agreements to prevent resales to the Russian defense industry? How much due diligence is a company required to do to assure that there are not resales? Do the rules permit the Treasury to sanction transactions that in form comply with the rules, but that in substance and spirit violate them. Depending on the answers to those and other pertinent questions, the Ukrainian claims and allegations may have merit.

The ESCU Report. The Economic Security Council of Ukraine (“ESCU”) has published a 58-page report outlining China’s role in providing Russia with access to critical industrial equipment used in the Russian defense industry. On pages 16 and 17 of the report, the ESCU references several of the companies that the Ukrainian demonstrators called out today. The report states that each company has one or more Chinese subsidiaries operating as separate legal entities. After listing the total cost of deliveries to Russia by each subsidiary, the report states:

Each of these Chinese subsidiaries operates as a separate legal entity, and its unique name is indicated in the trade documents every time its product is exported. This feature makes it possible to trace whether the Russian Federation receives CNC machines manufactured by Western brands in China. . . . At the same time, most of the supplies referred to above do not come directly from Chinese subsidiaries of Western brands but are exported via Chinese interlocutors. The case of the American company Hardinge is described below to illustrate the typical supply chain of Western machine tools manufactured in China and exported to Russia.

Given that the U.S. Treasury took action in May 2024 [Update: and again, on September 10, 2024], I am puzzled why it did not address what might be a gaping hole in the sanctions architecture. Surely if the Ukrainians know about these transfers, OFAC also knows about them. Does the U.S Treasury’s failure to act mean that the authors of the ESCU Report incorrectly understand the corporate relationships or the transfer mechanisms? Or are there loopholes in the sanctions that the companies singled out by the Ukrainians are exploiting, meaning that the U.S. Treasury should be expanding the restrictions?

Failure to Educate. The Ukrainian demonstrators might have been on more solid ground had they simply called out the IMTF organizers for an apparent failure to address the sanctions as part of the convention’s programming. I reviewed the list of presentations and workshops, which numbered close to 400 over the show’s six-day run. Although several dealt with supply chains, none outwardly addressed OFAC compliance.

if I were planning the agenda for IMTS (and I have previously planned more than a few conference agendas, some of which included an ethics component), I would have incorporated at least one session on OFAC compliance. I find that oversight troubling. Is the industry intentionally operating in the dark—see no evil, hear no evil, speak no evil?

The Demonstration. Groups, no matter what the issue, make a strategic mistake in scheduling a demonstration when only a handful of demonstrators turn out. Those walking past six or seven demonstrators today could reasonably ask, “What’s the big deal if only six or seven people bothered to show up?” Sometimes it is better not to demonstrate.

I was not surprised by the low turnout. Mid-morning during the workweek is not exactly the best time for a demonstration. The Ukrainians should have been more strategic, either identifying the hotel where convention officials were staying or the location for an important dinner, banquet, or evening event. Any of those would have permitted a late afternoon or evening demonstration, with far more demonstrators present.

As an observer, however, I can make the case that there was some value in today’s effort. In all likelihood, most of the conventioneers reside outside of Chicago, so they may have never seen a Ukrainian demonstration. Some looked flummoxed as they passed the earnest demonstrators holding signs, several wrapped in blue and yellow flags. Just maybe some conventioneers gave a second thought to the Ukraine’s plight.

The decision to offer the conventioneers a handout was a good one. Typically, most passersby decline handouts. Today, I saw quite a few conventioneers take the handout—certainly not all, but a higher percentage than is typically the case.

There was one unfortunate exchange between a demonstrator and a nattily clad, but arrogant conventioneer. It occurred as the conventioneer was leaving McCormick Place. I heard someone use the phrase “Fuck Off.” According to the Ukrainian organizer, it was the conventioneer.

When the man then challenged the organizer, asking whether he was there to cause trouble, a security official approached the conventioneer, telling him that the group was on a public space, thereby entitled to demonstrate. The exchange reached an elevated temperature, causing me to position myself so as to capture a shove or other aggressive contact. Fortunately, there was no contact, although my images would have been far more dramatic had there been contact.

The security official diplomatically suggested that the man move on, which he did, but not before questioning whether the demonstrator had invested here—the implication being that the conventioneer’s status as an investor, somehow entitled him to question the Ukrainians’ motives. The organizer responded, telling the conventioneer that he in fact owned stock in several of the companies exhibiting at IMTP.

More poignantly, the organizer then told the conventioneer that his nephew had been killed in Ukraine by the Russians. Anyone with a modicum of decency would have extended their condolences at that point, but the conventioneer did not, instead stating, “You got it,” as he then crossed the street. The organizer responded, “i don’t have a nephew.”

While I am sympathetic to the organizer, he made a mistake: he engaged with the obviously hostile conventioneer. I reviewed my photographs and a video supplied to me by the Ukrainians. Unfortunately, the man was not wearing a nametag, so I don’t know his affiliation, but I would be curious whether he is an executive with one of the companies that the Ukrainians had identified.

[Click on an Image to Enlarge It. The Images Are Not Necessarily in Exact Chronological Order]