International Experience in the Transfer of Dual-Use Technologies and its Impact on the Development of the Civil Sector: Conclusions for Ukraine

INTERNATIONAL EXPERIENCE IN THE TRANSFER OF DUAL-USE TECHNOLOGIES AND ITS IMPACT ON THE DEVELOPMENT OF THE CIVIL SECTOR: CONCLUSIONS FOR UKRAINE

Author:

Ivan Kyrychevskyi, expert at the Defense Express Media & Consulting Company

The full-scale invasion by the Russian Federation has compelled Ukraine to reconsider the regulation of the circulation of dual-use technologies. However, this has only been partially achieved so far. Specifically, the Ukrainian government, through its decree No. 1378 dated December 9, 2022, did remove certain goods and technologies from the scope of state export control. Nevertheless, the most sensitive items on the necessary import list continue to be subject to bureaucratic regulation.

Our country declares a clear course toward accession to the European Union. However, concerning the regulatory framework for dual-use technologies, the amount of work completed in this segment is clearly insufficient. For instance, the Ukrainian law “On State Control over International Transfers of Military and Dual-Use Goods” does not fully align with the regulatory philosophy laid out in EU Regulation 2021/821, particularly regarding the control of the ultimate destination of the supply of goods and technologies, and the segmentation by countries of end-users.

Although improvements in control in these aspects would bring Ukraine closer to integration with the European Union, it would also align with the main goal of regulation outlined in legislation – protecting the economic, political, and military interests of our state.

Furthermore, attention should be paid to how Russia and China regulate the circulation of dual-use technologies. These two states collaborate to circumvent Western sanctions, and it is crucial to identify and close existing loopholes. At the same time, these two states actively work on developing their dual-use technologies segment, an experience worthy of separate consideration.

Problem Analysis and Situation Assessment

The ongoing full-scale invasion of Ukraine by the Russian Federation, which began in February 2022, has presented our country with a complex set of challenges that must be overcome for effective resistance against the enemy. One of these challenges is the development of “civilian” segments of industry to create a positive cumulative effect for the development of our defense industry. The fact that these challenges exist in such a context is demonstrated, for example, by the work of the Brave1 technology cluster in our country. Here, individuals from “civilian” high-tech sectors of the economy are collaborating on various types of unmanned weaponry and software for the Ukrainian Defense Forces, with certain forms of support from the government.

However, it is evident that the process needs to be scaled up. Therefore, it is necessary to talk not only about specific incentives but also about comprehensive impact using all possible instruments, including the transfer of dual-use technologies, which are essential for both the defense and civilian sectors.

In this context, it is relevant for Ukraine to study international experience in the transfer of dual-use technologies. This is necessary for regulating the regulatory framework and making practical decisions in the economic policy segment.

The normative framework of Ukraine in the segment of dual-use technologies

In the Law of Ukraine “On State Control over International Transfers of Military and Dual-Use Goods”, the term “dual-use goods” is defined as “certain types of products, equipment, materials, software, and technologies not specifically intended for military use, as well as related services (technical assistance), which, in addition to civilian purposes, may be used for military or terrorist purposes or for the development, production, and use of military goods”.[1]

The foundation for the entire civilized world, including Ukraine, is the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies.[2]

The essence of the agreement is that the participating countries will voluntarily exchange data on issued licenses and permits for the supply of goods and/or technologies of military or dual-use nature. In this regard, each participating country is responsible for independently deciding whether to issue or deny permits.

Based on this, each state independently determines how it defines the rules for the circulation of dual-use technologies within its jurisdiction. For Ukraine, the foundational document in this regard is the law “On State Control over International Transfers of Military Goods and Dual-Use Goods”, adopted in 2003. The action of this law regulates the circulation of technologies, especially in the establishment of production cooperation, scientific-technical cooperation, or intermediary activities. The same document anticipates that export control should also apply to the import of dual-use technologies into the territory of Ukraine. Consequently, this document directly influences how dual-use technologies can be applied in the civil or defense sectors of our industry.

However, the problem lies in the fact that in the Ukrainian law “On State Control over International Transfers of Military Goods and Dual-Use Goods”, the principles of regulation are outlined only in general terms and in the following sequence:

the necessity to protect political, military, and economic interests;
the obligation to fulfill international commitments;
legality;
and most importantly, the implementation of export control only to the extent necessary to achieve its goals (but the law itself lacks a clear definition of the goals of export control).

To obtain permission for the export or import of dual-use technologies, it is necessary to submit data on the final use of goods and original documents of guarantees confirming the use of goods exclusively for the declared purposes to the State Export Control Service as the relevant authority.

At the same time, a structural distortion can be observed: the State Export Control Service is effectively subordinate to the Ministry of Economic Development, while the issue of the circulation of dual-use technologies as a matter of industrial policy (including in the field of the defense industry) is not addressed in our regulatory framework. This gap is clearly a hindrance, including for the development of defense production in the conditions of full-scale aggression from the Russian Federation. This was acknowledged by the Government of Ukraine itself when, on December 9, 2022, it was forced to adopt Resolution No. 1378 “On the list of goods for international transfers (imports) to which the Law of Ukraine ‘On State Control over International Transfers of Military Goods and Dual-Use Goods’ does not apply during the state of war on the territory of Ukraine”.[3] If we analyze the text of Resolution No. 1378, we can see that according to this document[4], the scope of export control does not extend to such dual-use goods and technologies as software, communication tools and navigation systems, unmanned aerial vehicles, chemical elements, construction equipment, containers, and dual-use generators.

At the same time, if we analyze the text of the “Unified List of Dual-Use Goods” established by Cabinet Resolution No. 1 dated January 11, 2018[5], we can see that export control should continue to apply to goods in Section 2, “Processing of Materials” (industrial equipment), Section 3, “Electronics”, and Section 4, “Computers”. Although these goods are also crucial for our industry and defense production in the face of full-scale aggression from the Russian Federation, there is no justification in open access as to why the Cabinet did not employ the “regulatory guillotine” for these types of goods.

Attempts were made by the state structures of Ukraine to stimulate the transfer and development of dual-use technologies, relying solely on the efforts of the private sector, without significant changes in the philosophy of state regulation. As an example, the state Ukrainian Start-up Fund[6] can be mentioned, which promised potential participants grants for the promotion of developments in the amount of up to $35,000. However, the work of such a fund did not yield noticeable results, and currently, the acceptance of grant applications has been suspended.

Regulation of the dual-use technology turnover in the EU

The foundational document regulating the transfer of dual-use technologies for European Union countries is Regulation 2021/821[7]. This Regulation defines a fairly broad list of dual-use goods and technologies subject to export control, including: 1) nuclear installations and materials; 2) special materials and related equipment; 3) equipment for material processing; 4) electronics; 5) computers; 6) sensors and lasers; 7) navigation systems and aviation equipment components; 8) telecommunications equipment and secure communication means; 9) units and components for maritime transport; 10) aviation engines and other aerospace equipment. In such a list, the logic is traced that, in regulating the turnover of dual-use goods and technologies, EU countries consider, among other things, the potential buyer country’s final product, particularly the type of military technology it may obtain.

Clearly, this motivation results in the segmentation of types of permits for the transfer of goods and technologies, as envisaged by Regulation 2021/821: 1) EU general export authorizations – for exports, in particular, to the United Kingdom, the United States, and Australia; 2) national general export authorizations; 3) individual and global authorizations issued by the national governments of European Union countries for a period of 2 years for supplies outside the EU; 4) authorization for major projects – individual permits for one or more specific companies requiring approval for the transfer of dual-use technologies for projects outside the EU.

Regulation 2021/821 also defines in detail the list of data that a potential exporter of dual-use goods and technologies must provide. This includes: 1) the country and end user; 2) the ultimate purpose for which the supply is taking place; 3) a breakdown of export shipments made in the last 5 years, including a clear record of who acquired and how previously supplied dual-use goods and technologies are being used.

However, despite the careful consideration of the above norms, there is a weak point in the regulatory system itself. It lies in the fact that monitoring the implementation of Regulation 2021/821 is primarily the responsibility of the national governments of EU countries. These governments, in turn, provide data to the European Commission as the main regulatory body, including in the regulation of the circulation of dual-use technologies. The norms of Regulation 2021/821 provide the possibility of sanctioning companies that violate the export regime for dual-use technologies but do not include instruments to influence national governments that have not fulfilled their obligations in the field of export control. However, it is not enough to just point out the shortcomings embedded in the regulatory framework. It is necessary to discuss the shortcomings in implementation caused by a lack of political will. For example, on July 31, 2014, the European Commission, through its decision 2014/512/CFSP[8], prohibited the supply of goods and technologies of dual-use to Russia that could be used in the production of military equipment and weapons. If this decision had been properly implemented, the aggressor country would have been cut off from the supply of sensitive technologies from the West nine years ago[9].

However, as practice shows, Russians, when it comes to importing electronics and other necessary materials, essentially take advantage of the fact that the governments of European Union countries simply do not comply with the provisions of Regulation 2021/821. Specifically, they do not require documents regarding the activities of purchasing companies for the last 5 years. If national governments were to demand such documents before approving permits for the purchase of dual-use goods, agents of the aggressor country would essentially be unable to use “shell companies” as a working tool to bypass sanctions. In reality, only by the end of 2022, Russia managed to acquire dual-use goods worth at least $1 billion, including components for aviation equipment and turbines, circumventing sanctions.[10]

Regulation of the circulation of dual-use technologies in Russia

The aggressor country actively uses dual-use technologies to circumvent Western sanctions and scale up the production of weapons used on the battlefield against the Armed Forces of Ukraine.

As an example, one can mention a propaganda video from the facilities of the Zala concern, which suggests that, for the production of kamikaze drones called “Lancet”, Russians acquired metalworking machines from South Korean production and industrial robotic manipulators from Japan. Sanction regulations did not apply to this dual-use industrial production.[11]

Furthermore, it is worth noting that in the Russian Federation, privately-owned industrial clusters are also developing, specializing in the use of dual-use technologies. As an example, the “Kingisepp Machine-Building Plant” (or KMZ[12]) can be mentioned. This plant specializes simultaneously in equipment for the nuclear industry and small boats for Russian security forces. KMZ has received orders from the Russian Ministry of Defense for the production of unmanned boats for naval warfare.

In this context, it is important to analyze the regulatory framework of the Russian Federation in the field of dual-use technologies, which can serve as a kind of “roadmap” for the actions of Russian state structures. In this regard, we will see the following. The Russian law “On Export Control”[13] describes the general purpose of regulation as the “protection of the interests” of the aggressor country and provides a fairly detailed list of goods and dual-use technologies that fall under regulation. At the same time, the text of this law stipulates that the powers in the field of export control of dual-use technologies are held simultaneously by the President and the government of the Russian Federation, the Interdepartmental Commission on Export Control (which includes representatives of state corporations such as “Rostec”, “Rosatom”, and “Roscosmos”), and the Federal Service for Export Control. From this, it follows the logic that the aggressor state, in regulating the circulation of dual-use technologies, especially in the interests of its own weapons production, relies on 1) the broad involvement of all state management bodies in the process and 2) taking into account the interests primarily of entities in the Russian military-industrial complex.

Separately, it is worth noting the existence of the so-called Federal Center for Dual-Use Technology “Soyuz”[14] in the Russian Federation as a military-industrial complex enterprise. Its main task is the development of dual-use technologies upon the orders of the Ministry of Defense and the Ministry of Economic Development of the aggressor country. Sanctions against the Federal Center for Dual-Use Technology “Soyuz” were imposed by the US government in April 2022, by the EU in July of the same year, and in October 2022, by the Ukrainian government.

According to open sources, it is currently challenging to determine the specific role that the Russian Federal Center for Dual-Use Technology “Soyuz” may play, whether it involves the direct import of necessary components for the Russian military-industrial complex or if the enterprise merely issues methodological guidelines to Russian defense enterprises on the types of electronics and industrial equipment that can be used in the production of various military technologies. However, it is noteworthy that the system of state control over the turnover of dual-use technologies in the Russian Federation also includes a state enterprise with a special status, “Soyuz”, which can act both as a center for technological development and as a manufacturing enterprise. Nevertheless, it should be noted that a significant portion of goods and dual-use technologies for waging war against Ukraine by the Russian Federation was acquired to a large extent not through its own efforts but through the accumulation of external assistance from China.

For example, according to the calculations of the Atlantic Council analysts[15], from October 2022 to April 2023, China increased its deliveries to Russia to 2,000 excavators per month, raised loader shipments to over 2,000 units per month, trucks from 2 to 6 thousand units per month, and tractors from 2 to 8 thousand per month. Russians used this equipment, among other things, for building fortifications in Southern Ukraine, thereby limiting the success of the Ukrainian Armed Forces’ counteroffensive in 2023. It is worth noting separately that open sources confirm the fact of the Russian army using Chinese all-terrain vehicles Desertcross 1000-3. The appearance of such vehicles in the hands of the occupiers became known only in November of this year.

Additionally, in 2022, China facilitated illicit shipments of electronics for the Russian military-industrial complex, with an estimated supply volume of $570 million[16]. At the same time, according to the Atlantic Council’s calculations, Chinese companies in the same year supplied Russia with their own-produced electronics amounting to $175 million.

The experience of China in the transfer of dual-use technologies

The experience of China in this segment is worth analyzing precisely due to the specific methods of stimulation employed by the authorities of this country. Even a general analysis will reveal the systematic approach of the PRC in this segment. China’s policy in the field of dual-use technologies took on a systematic character only in 2017 when the stimulation of the development of dual-use technologies, particularly in “civilian” segments of the economy, was declared one of the goals of the Chinese government. The Communist Party of China also established a separate committee to oversee this issue.[17]

Until then, the use of dual-use technologies was more of a “byproduct” of the activities of enterprises and research institutions under the Ministry of Defense of China. However, the Chinese government is considering creating incentives for the use of dual-use technologies in civil sectors of the economy to achieve two equivalent goals – seizing global leadership in relevant sectors of the global economy and advancing the technological development of the Chinese People’s Liberation Army.

Segments of dual-use technologies on which China has decided to focus appear particularly indicative here – industrial production automation and related equipment, including robotics; developments in artificial intelligence and the development of the so-called “Internet of Things”, which can be used both to enhance the operation of “traditional” transportation and to create “unmanned transportation,” as well as for better coordination of military equipment on the battlefield. Technological progress in this direction in China is constantly restricted by sanctions from the United States, which prohibit the supply of certain types of semiconductors, electronics, or critical materials to China. However, China seeks to offset its potential technological lag through organizational efforts instead.[18]

Particularly, in the documents of China’s government planning for 5-year development periods, the advancement of dual-use technologies has clearly defined targets. The promotion of dual-use technology development occurs both through defense research institutions under the Ministry of Defense of China and through “civilian” scientific institutions. Simultaneously, to incentivize “civilian” sector enterprises, especially private ones, to engage in their own developments in the field of dual-use technologies, the Chinese government employs standard methods of industrial protectionism. This includes targeted tax incentives for developers and manufacturers in the dual-use technologies segment, prohibition on the use of imported goods and technologies if there are domestic equivalents, and direct financial subsidies from the central government and provincial administrations.[19]

But for the sake of fairness, it should be noted that China can still benefit from the inconsistency of the European Union, which adheres to the embargo imposed in 1989 on the supply of military equipment and weapons, but has not introduced any restrictions on the supply of dual-use goods and technologies.

Forecasts and Perspectives

Overall, two vectors of questions regarding the transfer of dual-use technologies can be identified – “internal” and “external”.

The “internal” questions relate to the regulatory framework of Ukraine. Despite the Ukrainian government starting to work on incentives for the use of dual-use technologies in defense production in the face of full-scale invasion, this process has not been reflected in the domestic regulatory framework. This not only preserves inconsistency in state policy but also fails to provide long-term incentives for the private sector to engage in dual-use technologies that could later be integrated into defense production.

Returning to Cabinet Resolution No. 1378 of December 9, 2022, we can observe a nuance that export control for certain groups of goods and dual-use technologies does not occur only if “the condition for the supply of such goods to Ukraine is the provision by the Ukrainian side of state guarantees or obligations regarding the use of imported goods for declared purposes”. The ambiguity of such a definition (as it is not specified which specific entities fall under the concept of the “Ukrainian side”) only adds inconsistency to the national regulatory framework for the circulation of dual-use technologies.

From the perspective of compliance with international obligations, this may not be critical, as Ukraine continues to uphold its commitments under the Wassenaar Arrangement. However, the existence of specific exceptions outlined in the Cabinet resolution, deviating from the export control stipulated by Ukrainian law, perpetuates the previously mentioned shortcomings and gaps in the dual-use technologies’ state regulatory system. Additionally, it may create a reputation of unreliability for Ukrainian counterparts who are importers of dual-use goods, especially in the interests of national defense production.

At the same time, we can already discuss longstanding problems in the segment of state regulation of dual-use technologies, even in the part related to the civil sectors of the economy. For example, in publications in specialized media, data can be found about attempts by agricultural producers, even before the full-scale invasion of Russia, to use drones for field cultivation or to order monitoring services from satellite observation of agricultural areas.

The “external” vector of questions on the transfer of dual-use technologies should focus on addressing regulatory and institutional issues within the EU in the dual-use technologies segment. If this is not done, Russia will continue to strengthen itself through the smuggling of necessary materials bypassing Western sanctions, as well as through direct supplies from China.

Conclusions

The conclusions for the state authorities from the above are as follows:

It is advisable to bring the legislation and regulatory framework on the circulation of dual-use technologies into compliance with the norms provided in the relevant Regulation of the European Union 2021/821.
The legislation and regulatory framework regarding dual-use technologies should also be aligned with the tasks of stimulating defense production and economic recovery of Ukraine in the conditions of full-scale aggression by the Russian Federation.
It is also necessary to introduce a systemic policy that would provide incentives for the use of dual-use technologies in the industry of Ukraine.
At the same time, questions should be raised with the EU countries not only about expanding the range of sanctions against the Russian Federation as an aggressor country but also about strengthening institutional control over the implementation of sanctions.

[1] https://zakon.rada.gov.ua/laws/show/549-15#Text

[2] https://zakon.rada.gov.ua/laws/show/998_177#Text

[3] https://zakon.rada.gov.ua/laws/show/1378-2022-%D0%BF#Text

[4] https://www.me.gov.ua/News/Detail?lang=uk-UA&id=2d384f2a-160d-4154-a073-f239bd5e0fb3&title=Dereguliatsiia-UriadSprostiv

[5] https://zakon.rada.gov.ua/laws/file/text/59/f139712n237.doc

[6] https://usf.com.ua/programa-grantovoi-pidtrimki-proiektiv-podvijnogo-priznachennya/

[7] https://eur-lex.europa.eu/EN/legal-content/summary/dual-use-export-controls.html#:~:text=Dual%2Duse%20goods%20and%20technology,security%20risks%20and%20emerging%20technologies

[8] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1529

[9] https://eu-solidarity-ukraine.ec.europa.eu/eu-sanctions-against-russia-following-invasion-ukraine/sanctions-dual-use-goods_ru

[10] https://www.ft.com/content/76fc91b2-3494-4022-83d0-9d6647b38e3d

[11] https://defence-ua.com/weapon_and_tech/rosijani_pokazali_scho_robljat_lantset_na_verstatah_z_japoniji_ta_pivdennoji_koreji-12419.html

[12] https://defence-ua.com/weapon_and_tech/rf_uzhe_v_2024_rotsi_otrimaje_serijni_kateri_kamikadze_pid_600_kg_vibuhivki_na_200_km-13632.html