Reuters: American company sold equipment to a weapons manufacturer in Russia in circumvention of sanctions

Since Russia annexed Crimea in 2014, U.S. companies have been barred from doing business with Moscow Machine-Building Plant (MMZ) Avangard, a state-owned firm that makes missiles for one of Russia’s most advanced weapons, the S-400 air defense system. But, as it turned out, one of the American companies still worked with MMZ. Writes about it Reuters.

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Due to Western concerns about the S-400, the United States excluded Turkey, a NATO member, from a joint fighter program in 2019 after Ankara received the Russian system.

But even as the US took action to blunt MMZ Avangard's business, the publicly traded American technology company Extreme Networks (EXTR.O) supplied MMZ Avangard with computer networking equipment for office IT systems, according to emails and other sources. obtained by Reuters, as well as interviews with people familiar with the matter.

Extreme stated that, based on the information, it believes the equipment "could" have been sold to MMZ Avangard through a surrogate buyer. Extreme is convinced that the equipment was sold without their knowledge. Without providing evidence, they say that the intermediary in Russia was "involved" in the supply of its products through a shell company to "intruders." Company officials say they will inform US authorities of their findings on these potential sales.

Between 2017 and 2021, MMZ Avangard purchased Extreme equipment for its systems for more than half a million dollars. It included high-speed switches, the most important structural element of corporate IT networks and software.

The records show, among other things, that the deals went through a seemingly harmless corporation in the suburbs, and although two Extreme representatives expressed concern, sales continued.

That the Russian military company, identified by Washington as a threat, continued to acquire American computer equipment is an example of how Western countries may have overestimated their ability to stifle the Russian economy with export bans and trade sanctions. It also highlights how dependent the Russian military machine is on American high-tech equipment.

In April, six weeks after Russia's invasion of Ukraine, an Extreme employee filed an internal complaint alleging that the company was selling products to various military manufacturers in Russia.

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“This equipment is used on Russian warships,” the complaint says. in communication systems.

Extreme said in a statement that the charges were brought by a disgruntled employee. An investigation by the firm found nothing to substantiate any claims until Reuters brought the company to the attention of "new facts" this month.

Extreme representatives said they terminated the company's operations in Russia in March, and subsequently launched the process of firing a disgruntled employee for poor performance. It is said that he had no sales records.

Extreme is a NASDAQ-listed company headquartered in Morrisville, North Carolina, with a solid reputation in the United States and an official partner of the National Football League (NFL).

A Reuters investigation in August found that while the US and its allies have banned technology exports to Russia to try to undermine its defense industry, and many tech companies have announced they will stop exporting to Russia, the flow of Western-branded computer parts to Russian customers has not stopped.

The account of how Extreme supplied MMZ Avangard and at least two other Russian military companies is based on interviews with three people familiar with the deliveries, as well as a Reuters review of documents going back five years to 2021. Documents include sales reports and email exchanges between Extreme employees, customers and distributors.

"Should have used cover"

Russian companies, including military-industrial ones, have practically no choice but to buy foreign equipment to build computer networks necessary for modern business. Russia has very limited local production of network equipment.

Extreme, founded in 1996, is a junior player in the computer networking industry. Its revenue was $1,1 billion last year, compared to $50 billion for Cisco Systems.

Still, the small company is a "significant competitor" according to Alex Henderson, a network and security analyst at Needham and Company in New York. The US military, as well as NASA, use Extreme equipment.

In Russia, Extreme also has prestigious clients such as the Ministry of Health, the Federal Pension Fund and Moscow State University. M.V. Lomonosov.

But, according to documents seen by Reuters, other buyers of Extreme equipment included not only MMZ Avangard, but also a large Russian military shipbuilding company and a manufacturer of high-tech defense electronics.

One document shows that Russian customers purchased $2016 million worth of equipment between 2020 and 41,5. Reuters was unable to determine the total sales of Extreme to companies under sanctions or to military firms because it is not known whether some transactions are registered under cover.

Extreme said it does not report country-specific revenue.

In Russia, according to two people familiar with the matter, Extreme has been in contact with its customers to help develop complex networks that will expand over time. Each client or potential buyer had their own account manager for the company, and he was listed in the internal sales records. However, the actual sales were made through authorized intermediaries.

Extreme said it has a "hard policy" not to work with sanctioned organizations, adding that they are not always notified of the end customer, especially when the company's products are sold through so-called "warehouse" distributors.

Extreme named one of these distributors as RRC and stated that it believed RRC was "involved" in the MMZ Avangard supply chain.

For Russian military companies, Extreme's equipment had a big advantage, according to three people familiar with the shipments: Unlike larger competitors, Extreme doesn't require a service subscription or frequent software updates. “It is completely autonomous,” one source said of the equipment. “It works without a license, and you don’t even need an internet connection.” This means, said another, that "you don't have to be afraid that your system will go down because someone in the US decides to shut you down."

It was no secret in Russia that Avangard MMZ uses Extreme equipment. In late 2019, the missile manufacturer launched a tender through a Russian online government procurement platform, saying it needed spare parts for its Extreme computer networks.

A few months earlier, in the summer of 2019, Extreme's office in Russia was approached by an intermediary asking for advice on upgrading the network for the rocket company, the documents show.

“We are working on a solution for a customer, MMZ Avangard,” wrote an employee of the intermediary in an email to the Extreme system engineer dated June 28, 2019. “I was told that I could ask you for help.”

As soon as the equipment arrived in Moscow, Extreme sent a full-time engineer to the offices of MMZ Avangard to provide installation, said a person with knowledge of the matter.

Extreme claims that it has no record of an Extreme employee installing equipment at Avangard MMZ.

When it came to processing orders for MMZ Avangard, the name of the missile manufacturer did not appear on Extreme's books. Instead, according to emails and sales records, Extreme employees in Moscow recorded that orders were placed by DEMZ.

“The front had to be used because the Russian company is blacklisted in the US,” said one person familiar with the shipments. It has been illegal for US companies to do business with MMZ Avangard since July 2014, when the US Treasury Department placed its parent company, Almaz-Antey, on the list of “blocked” entities.

MMZ Avangard began purchasing products from Extreme in December 2017 and has been referred to as DEMZ in Extreme's business records since that date, according to emails and other documents. The most recent transaction using DEMZ was in September 2021. In total, records show that during this period, Extreme shipped about $645 worth of goods in this way.

Extreme now believes its equipment may have been acquired through a "front company". Extreme has confirmed that the DEMZ account lists approximately $645 in grocery purchases.

DEMZ is a small firm based in Dmitrov, 50 miles (80,5 km) north of Moscow. Russian corporate records list Vladimir Markov as CEO. By phone, Markov said that DEMZ, which made railcar maintenance tools, ceased all operations in 2016. The executive assured that he had never heard of Extreme or that DEMZ was buying Extreme equipment.

The alleged DEMZ executives listed in Extreme's customer records were actually employees of the rocket manufacturer who provided their email addresses to MMZ Avangard. They even provided Vanguard email addresses when they applied for access to the Extreme customer service portal. Some documents also mention mmza.ru, the domain name of MMZ Avangard, as the alleged DEMZ web address.

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In 2019, when a DEMZ order was going through Extreme's approval system, an Extreme sales manager based in North Carolina sent an email to RRC, a Russian distributor, asking about the domain name: "Can you tell me what the relationship is between DEMZ and mmza .ru?” The distributor's employee replied that mmza.ru is the "customer's" domain. The employee did not elaborate. The subsequent message indicates that the sale has taken place.

Nearly a year later, while dealing with another set of DEMZ orders, an Internal Compliance Officer at Extreme in Ireland spotted the mmza.ru domain in sales documents and looked into it.

“This link leads directly to https://mmzavangard.ru/, which is a defense contractor that appears to specialize in surface-to-air missile systems. We need to do further review before we can make a decision,” the employee said in an email dated November 11, 2020.

red flags

An Extreme Compliance employee instructed the Russian office to have DEMZ, the proposed buyer, fill out a form confirming that there is no military end user, that the equipment will not be resold for any military purpose, and that it will not be given to any sanctioned company.

As a result, a two-page letter was received confirming that the end user was not subject to sanctions and will not use the Extreme equipment in a manner prohibited by US law. According to one person familiar with the matter, a document with an illegible signature and blue DEMZ stamp was sent to Extreme.

The DEMZ business, according to the self-declaration, had nothing to do with complex missiles. Most likely, these were “metalworking parts”. According to former CEO Markov, DEMZ has never made such components and has ceased operations at the time of writing.

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US export control officials have reported that self-declaration can be helpful in determining if a customer is legitimate. However, when faced with a red flag, “you stop or delay the transaction,” said James Fuller, a former US Department of Commerce special agent. “You are not offering the opportunity to provide more false information or suggest some workaround.”

Extreme confirmed that its internal control officer requested and received the self-declaration, and then clarified that it has “other red flag check processes.”

Shipbuilding

In Russia, Extreme has supplied IT equipment to other military companies, according to business documents seen by Reuters.

One of them was the United Shipbuilding Corporation. The company is headquartered in St. Petersburg and operates a host of Russian shipyards producing everything from frigates to submarines and minesweepers. Like MMZ Avangard, United Shipbuilding has been under US sanctions since July 2014.

Another was the Morinformsystem-Agat concern, a manufacturer of radars and other military electronics systems. Agat relied on Extreme equipment for some of its systems, which were then installed on United Shipbuilding's warships.

Extreme said they have no record of selling United Shipbuilding or Agat products.

United Shipbuilding is clearly described in the email correspondence as an Extreme client.

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