How are Western sanctions affecting Russian steel trade?

• US sanctions provide for minimal bans, but American avoiding Russian steel
  
  
• EU leaves trade in raw materials out of sanctions ambit
  
  
• Newer sanctions to further affect global trade
  
  

Morning Brief: In the 11 months since the start of the war in Ukraine, a number of sanctions have been imposed against the Russian steel sector, which makes it difficult for steel producers to export from the Russian Federation. However, the approach to the sanctions varied with each of the major western economies. "The approaches to restrictions on the part of large economies - the EU, the US, the UK - differ," said a report in Ukraine-based GMK Center. For instance, the US sanctions provide for minimal bans, but American buyers avoid products of Russian origin. The European Union (EU) left out trade opportunities for raw materials from the Russian Federation but postponed restrictions on semi-finished products. The UK followed the path of introducing import duties.

EU: The European Union introduced broad sanctions against Russian steel. However, the Europeans left opportunities for pig iron and iron ore trade out of the sanctions ambit.

Restrictions on Russian steel industry are provided by the 3rd, 4th and 8th sanctions packages introduced in February, March and October, 2022 respectively. The EU banned the import and trade of finished steel products of Russian origin and semi-finished products under HS codes 72-73, with the exception of pig iron, ferro alloys, scrap, and iron ore.

From October 2022, the EU also banned the import from third countries of ferrous metal products made from Russian iron and steel under the codes indicated above.

According to the plan of the European legislators, this measure will eliminate the imbalance in the competitiveness of imported products from countries that have not joined the sanctions against Russia. But market players still do not understand how this mechanism will work, in particular in terms of control.

At the same time, the EU deferred the ban on the import of semi-finished products - until April 1, 2024 for square billets, and until October 1, 2024, for slabs. The European Union also established quotas for the transition period, in particular, for slabs it were left at the level of imports in 2021 - 3.7 million tonnes.

The decision on semi-finished products is soft and does not encourage European buyers to look for other sources of supply. Even before the introduction of the ban on the import of slabs, European rolling mills came forward, claiming that Russian supply of slabs was without alternative, and the European Commission, to which they appealed, accepted this argument.

The Russian supply of slabs became irreplaceable since Ukrainian slabs, which comprised 35% of the supply to the EU, disappeared from the market. In fact, this happened due to the destruction of Mariupol plants. In other words, Russian steelmakers profited commercially from the destruction inflicted by the Russian army on Ukraine.

At the same time, the possibility of importing Russian slabs harms European steelmakers. Unlike the Russian, they faced challenges of energy prices.

Approximately, 80% of slab imports from Russia to the EU are currently supplied within the NLMK group, which owns rolling mills in Belgium, Denmark and Italy. According to sources, supply of slabs to the free market of Italy as of end-2022 was about 25,000-35,000 tonnes per month.

In addition, there are no restrictions against NLMK. The group's European assets continue to operate and import slabs from the Russian Federation.

As for sanctions on individual mills, the EU introduced them against the main shareholders of four of the top 5 Russian steel producers: Aleksei Mordashov (Severstal), Viktor Rashnikov (MMK), Roman Abramovich (Evraz), Alisher Usmanov (Metalloinvest) , as well as Dmytro Pumpyanskyi (TMK).

Individual sanctions also apply to associated companies and payments to them, which blocked trade transactions with the three largest Russian steel companies. Due to its formal ownership structure, Metalloinvest has avoided sanctions imposed on its largest shareholder, Alisher Usmanov, and continues to export hot briquetted iron and iron ore pellets to the EU. Other Russian steel companies were allowed to trade on the EU market subject to trade sanctions.

The US: The US policy does not commit to a widespread rejection of Russian steel. The country introduced import duties of 35% on a number of iron and steel products of a rather narrow range, but including slabs. In normal mode, it was possible to trade a wide range of finished steel products and pig iron from Russia.

The most imported Russian steel sector product to the United States was pig iron. In 2021, the volume of its imports amounted to 1.8 million tonnes. However, from May 2022, supply of pig iron to the United States stopped, which indicates the buyers were avoiding Russian goods, despite the wide possibilities of their imports.

The United States imposed sanctions against only two of the five largest Russian steel producers - Severstal and MMK (including the Turkish MMK Metalurji). At the same time, the American subsidiaries of NLMK and Evraz continue their work. Metalloinvest avoided the restrictions because the under-sanctioned shareholder Alisher Usmanov owns only 49% of the company's shares. Also, operations with affiliates of Usmanov were allowed later under a special license from the US Treasury Department (OFAC).

The UK: Sanctions from the UK focus on trade restrictions. In March 2022, the country introduced additional tariffs of 35% on imports of goods originating in Russia and Belarus, including iron and steel, products thereof, iron ore and concentrates. The UK has also banned the import of finished steel products, which are included in a wide list of HS codes.

The UK was not a large importer of steel from the Russian Federation. In 2021, its share in the total Russian export of rolled products was 0.4%. In 2022, imports from Russia were insignificant, and in June supplies stopped completely. At the same time, British producers point to loopholes that allow the indirect import of Russian steel. Thus, the UK Steel Association noted that the UK can import finished steel products made from Russian semi-finished products in other countries, including Germany, Belgium, and France. The processing of any semi-finished product in a third country changes the origin of the steel and actually allows you to bypass sanctions. The association proposed expanding sanctions on Russian steel processed in third countries, following the example of the 8th package of European Union's sanctions.

Personal UK's sanctions are in effect against six people affiliated with Russian steelmakers, they do not actually apply to the activities of the companies. Only Evraz, whose assets were frozen, came under direct sanctions.

Logistics and trade operations
Sanctions against Russian steel, introduced by the European Union and individual countries, also involve complications in logistics and supplies to the Russian Federation. The ban on the entry of Russian ships into local ports is in effect in the US, the UK, and Canada.

In addition, restrictions also apply to trade transactions. For example, UK residents cannot provide technical assistance, financial or brokerage services for sourcing finished steel products and pipes from the Russian Federation, even if these products are supplied to third countries.

The implementation of the 4th package of EU sanctions by Switzerland, which consistently joins the EU restrictions, also provides for a ban on financing and insurance of trade transactions with Russian products under HS codes 72-73 (with the exception of 7201-7205), even if the parties to the agreement are other countries.

Conclusion
In general, the opportunities for importing iron and steel from Russia remain quite wide, although the sanctions have narrowed this field. At the same time, this differs from the position of strict restrictions on the import of Russian energy resources. The war in Ukraine and the record rise in the cost of energy have seriously hit European steel industry and the global steel market. Therefore, in this situation, the increase in the import of energy-intensive products from the Russian Federation, in particular iron and steel, is not logical, since in fact it is an indirect import of coal, gas and oil from the aggressor country.

Outlook
However, the sanctions pressure will continue. Thus, already in February 2023, the EU may introduce the 10th package of sanctions against the Russian Federation. In addition, the European Union is planning new sanctions against Belarus for its role in supporting the Russian invasion. It is planned that they will include restrictions on steel products from this country.

The new sanctions will further affect global trade and world markets. It is quite possible that they will force the EU to look for alternative sources of steel products supply, as was the case with oil and gas.