Daily Update: Machine Tools: The New Focus of Russian Sanctions

Today is Monday, August 19, 2024, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global.?Subscribe?to be notified of each new?Daily?Update.?

Machine tools are fundamental to modern industry. There is scarcely an area of manufacturing that does not depend on computer numerical control (CNC) machine tools to shape metal according to the tighter tolerances required in modern industrial and military applications. It is therefore not surprising that sanctions focused on undermining Russia’s military and energy sectors would restrict access to machine tools. Nor is it surprising that Russian customers would attempt to circumvent sanctions by buying CNC machine tools through third parties.

At the end of February 2024, the Group of Seven and the Global Export Controls Coalition added CNC machine tools and components to a list of common high-priority goods that are subject to trade restrictions with Russia. While integrated circuits and chips were previously the focus of sanctions efforts, machine tools were added since they can easily be repurposed from industrial applications to armaments manufacturing.

The international market for high-end machine tools has historically been dominated by manufacturers in Japan and Germany, although China has become a bigger player. Trade from Europe to Russia fell off sharply following Russia’s invasion of Ukraine. For example, Germany exported $107 million of machine tools to Russia in 2021, but only $4 million in 2023. By May 2024, the total trade value was $1,000.

While it appears that sanctions have been effective, a majority of Chinese, Turkish and Indian machine tool exports went to Russia, and increased machine tool exports to countries such as Vietnam, Kazakhstan and Mexico may indicate transshipment, or the shipment of goods through an intermediate destination, to Russia. For example, in January 2024, Kazakhstan imported $4.1 million of machine tools and exported $3.3 million, 99% of which went to Russia.

South Korea, Germany, Japan and Taiwan are the world’s biggest manufacturers and exporters of sophisticated machine tools. All four markets have advised their corporations to respect and maintain Russian trade sanctions. Even countries such as China, India and Turkey, which have not committed to the new sanctions regime, are shipping machine tools to Russia in lower quantities.

Today is Monday, August 19, 2024, and here is today’s essential intelligence.

Written by Nathan Hunt.

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