TELECOMS: US Offers Surprise Sanctions Relief to Contrite ZTE

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Bottom line: ZTE’s temporary relief from sanctions for illegally selling US products to Iran is probably contingent on its assistance in a broader probe of the matter, and could result in more arrests and sanctions against others in the case.

ZTE assisting in US probe

In a move that surprised me, Washington is indicating it might reduce the stiff punishment it previously announced for telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063) for illegally selling US-made equipment to Iran. In the past, Washington has shown little tolerance for Chinese companies that break the rules, even though Beijing often protests such inflexibility.

But this time is slightly different from the past, since it involves a single company rather than an entire industry. Still, this kind of temporary relief does seem a bit unusual for Washington. Accordingly, I suspect that ZTE is quietly cooperating behind the scenes with an investigation that could ultimately incriminate many other companies and individuals that helped it to circumvent Washington’s rules prohibiting the sale of US-made networking equipment to Iran.

According to the latest headlines, Washington plans to temporarily lift curbs that it placed on ZTE just 2 weeks ago. (English article; Chinese article) Washington opened its investigation into ZTE 4 years ago, after suspecting the company was using backdoor channels to sell US telecoms networking equipment to Iran.

Such sales violated US restrictions designed to punish Iran for its nuclear development program, and ZTE crosstown rival Huawei was also suspected of similar violations. As a result of the guilty finding 2 weeks ago, Washington had ordered that all US companies must obtain special licenses before exporting any equipment to ZTE, whose US suppliers include the likes of Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL). It added that such applications would generally be denied.

The move prompted ZTE to request a halt to trading of its Hong Kong-listed stock, and to delay the release of its annual results that had been set for March 23. The latest reports don’t indicate when ZTE shares might resume trading, and the company might still want to wait several more weeks when its situation becomes more definitive.

ZTE had previously said it was communicating with Washington on the matter, and the latest reports quote an unnamed senior official at the US Commerce Department saying it has been in “active, constructive discussions” over the past week. Based on commitments ZTE has made during those discussions, the official said, the Commerce Department expects to provide relief from some licensing requirements this week.

Relief Temporary, Conditional

The official said the relief would be temporary and conditioned on ZTE adhering to its commitments made to the US government. Details of those conditions are expected to be published later this week in the US Federal Register, the official added.

Now that we’ve reviewed the major new developments, it’s time to try to figure out why Washington is having this unusual change of heart from its more typical hard-line stance in such trade matters. I previously said that perhaps Washington would moderate its punishment due to ZTE’s improved performance in recent years.

The reality is that many Chinese companies engage in similar types of behavior, and ZTE is one of the few that has tried to become more western in its business practices as it becomes more international. But in this case, I really do suspect the change of heart is directly linked to ZTE’s assistance in helping Washington to understand exactly how the company circumvented US sanctions and who helped in the subversion.

This kind of plea bargaining is quite common in the US, and in the end could result in the implication of many others who routinely flout trade policies of not only Washington but also other western countries. If that’s the case, we could possibly see the current case result in the arrest of or sanctions against others that assisted ZTE.  It’s also possible we could see Washington level sanctions against Huawei, which was also reportedly under investigation 4 years ago for similar violations.

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