Sanctions will have a major impact on Russia’s exports in terms of financing, payments and shipments, and currently market players are trying to evaluate if there are ways for Russian mills to continue supplies and in what ways the sanctions may be bypassed. Many are drawing parallels with Iran, which has been subject to similar sanctions, including disconnection from the SWIFT payment system.
Iran was operating with cash payments and letters of guarantee and all payments were going through one bank which was temporarily not under sanctions. Later, business was done through gold traders or some other intermediaries, and some barter schemes were also used. With regard to Russia, several banks are not under sanctions yet and in theory there is the possibility of working through them, also using alternative currencies instead of the US dollar and euro, even though this will be more costly. According to market information, some steel and raw material cargoes have been sold to Turkey already and the payments were done in Turkish liras. Another issue is that the US, the EU and the UK are getting ready to issue a regulation which imposes sanctions against those performing operations with gold from Russia’s central bank. “Today, every shipment has to be processed in terms of ship owner and insurance payment. Formally, there are only two problems. The Russian banks which are under sanctions are not available, the same applies to the banks which are in any way connected to the EU, Switzerland and payments in euro. However, no one knows who will be the next on the sanctions list, and so to pay MMK, NLMK and Evraz through the European banks is to take a risk of freezing the LC and losing the cargo,” a source commented.
While evaluating the financial threats, a lot of traders are also considering the huge reputational risks of working with Russia. In addition, new sanctions continue to be imposed and will in great probability result in even bigger problems in the near future. In addition, there is a possibility of secondary sanctions to be applied against the companies who have business ties with the US and Europe and who continue performing operations with Russia despite restrictions.
Shipping and logistics are also an issue for ex-Russia exports, SteelOrbis understands. Some ports in Europe, particularly in the UK, Belgium, the Netherlands, Lithuania and Germany, according to sources, refuse Russian vessels and Russian cargoes, but some privately-owned ports still accept them. Generally, there is a lot of information in the market that many ports will not allow the entry of vessels, “whose last or next port of call is in the Russian Federation, except in the case of necessary justified humanitarian reasons.” In this instance, once again, experience in relation to Iran may be instructive. Iranian mills have for some time resorted to so-called double handling, using intermediate ports to reload cargoes and to receive “clean” papers.
Also, there are some sanctions on Novorossiysk Commercial Sea Port company, which operates three large port terminals in Russia. The situation in the Black Sea is also complicated as vessels refuse to enter due to the obvious risks. Some companies still have their insurance policies but clauses relating to war and military strikes on shipping are on hold for the Black Sea, though it is possible to cover these eventualities too but with premiums 20 times higher, as traders report. Currently, Russian vessels are available in the Black Sea and are anchored around Novorossiysk and/or eastern Kerch waiting to find cargoes.
In addition, there has been an impact on freight rates. Since the EU and the US are on track to refuse hydrocarbon imports from Russia, fuel prices are expected to increase at least in the short run. In Europe, Turkey and North Africa, the anticipated higher freight rates may be offset somewhat by the increased availability of vessels, while in Asia the cost of shipping for some products, billet in particular, has already increased, but so far it is not yet clear if the new rates will stick.
As for the geography of sales, it seems the sellers of Russian materials will be redirecting their attention to the non-European and non-US markets. For now, it seems Asian destinations are somewhat relaxed in terms of working with Russia, and particularly for billet transactions are seen. Russia-based MMK is expected to offer up to 300,000 mt of HRC for exports shortly and most of this volume is expected to be sold to Asian buyers, Vietnam in particular. However, still there are the problems with some port entities and shippers refusing to deal with Russian vessels and cargoes. “Not all Asian banks are ready to accept [LCs for] Russian material… mostly Singapore or Hong Kong banks seem rejecting any document mentioning Russia or Russian goods,” a source told SteelOrbis. Turkey, as was mentioned earlier, seems to be still an option for ex-Russia sales, despite all the risks, specifically for steel slabs and pig iron, since it is hard to find a substitution.
Another option, that market players see, is that some steel products from Russia will be sold to China and then redirected to other markets, including the MENA region and Turkey. In addition, the GCC-based buyers believe Russian steel goods can be sold through Iranian ports, maybe even as Iranian origin, according to documents.