The first sanctions were placed on Russia following its invasion of Ukraine in late February, and since then Russia has become one of the most sanctioned countries, if not the most sanctioned, in the world. SteelOrbis has collected information about the effect of the Western sanctions on the Russian steel industry, the export flows of different Russian steel products, and how Russian producers are avoiding sanctions.
What are the sanctions?
The first sanctions imposed on Russian steel producers were individual sanctions of the owners of the producers. On the one hand, it is one of the most effective ways to put pressure on Russian business, though in the steel industry it in fact impacts only some companies. The Russian companies in which the sanctioned persons own more than fifty percent and have a direct managing position have been hit the most. In particular, in March this year, Alexey Mordashov was included in the EU sanctions, causing Severstal to exit the EU markets and European buyers to replace the usual ex-Russia volumes with alternative sources, while in June the US also imposed sanctions on Mordashov. In the middle of March, Victor Rashnikov, the main shareholder of MMK (holding almost 80 percent through its mother company LLC Altair) was also sanctioned by the EU in its fourth package of sanctions, which blocked MMK’s export shipments and caused the company to focus on local shipments or sales to its joint venture, while in addition it cut production.
Metalloinvest and Evraz both said that that the sanctions imposed on their shareholders Alisher Usmanov (owner of 49 percent in the parent company of Metalloinvest) and Boris Abramovich (who has 29 percent ownership in Evraz) will not affect them as the mentioned individuals do not own the main stakes in the companies and do not control the steel business of the groups. These companies had less impact on business.
NLMK is among a very few companies in Russia not directly under sanctions via its shareholders, as its main owner Vladimir Lisin (81 percent of shares) has not been targeted by the sanctions of the EU, the UK or the US.
Though these sanctions on individuals are playing an important role, for the steel business financial restrictions are even more important. In early March, seven Russian banks were cut off from the SWIFT payment system, cutting their access from international markets. Another three banks, including the largest Russian bank Sberbank, will be added to this list from June 15 in the new sixth package of sanctions of the EU.
The UK has frozen the assets of all Russian banks, cutting them off from its financial system[JF2] . Strict measures were also imposed by the US to limit Russian financial institutions’ business. Russian banks, including VTB, were added to the Specially Designated Nationals (SDN) list, banning them from trade with the US, freezing their US assets and reducing the possibility for them to use dollars in their operations.
Apart from all the sanctions above, there are also direct sanctions - a ban on Russian steel in the EU (excluding semis). Also, a number of European countries have forbidden Russian ships to enter their ports. Furthermore, the UK has sanctioned the Russian steelmaker Evraz directly.
Russian steel producers find ways to survive
Reputational risks and payment issues are the main factors for Russian suppliers. The reputational risks have already limited a number of customers and these risks are unlikely to increase further. Besides, payments issues have also been resolved in a few ways. Most major Russian mills are using alternative currencies instead of the US dollar and the euro, and are using banks in different countries. For instance, the Turkish lira was among the most popular currencies to pay for Russian steel. Russian producers have opened bank accounts in Turkey and are working through offices in the country. A similar scheme has been used by opening offices in Dubai and payments in UAE dirhams. According to sources in different markets, payments for Russian steel have already been done in the Indian rupee and Chinese yuan, though mills are not interested in establishing offices in China or India, being able to work without doing so.
The main payment methods have been cash against documents (CAD) or cash upon delivery (CUD) after the financial sanctions were implemented, and in some cases the supplier asks for partial prepayment of 10-15 percent. However, in some countries and with less sanctioned mills, customers can still open LCs to buy Russian products.
In fact, the financial issues can be resolved and this has already been done successfully by Russian steelmakers, but the uncertainty connected with possible secondary sanctions and new restrictions are holding back many large customers, even in Turkey and North Africa, from concluding business on a regular basis with Russia, just like before it started its war against Ukraine.
Effect on local market in Russia
The construction sector, which is the key consumer of longs but also flat products in Russia, has been suffering from sanctions as well. Access to import building materials is almost zero, which has triggered price rises for local products, and, therefore, the cost of the construction, according to various sources, has increased by around 20-35 percent over the past couple of months. The absence of access to the engineering equipment used in commercial and residential buildings is an even bigger problem for Russian construction companies, since such goods have not only increased in price tremendously, but have also become unavailable, as the number of analogues locally is close to zero. “We see the largest deficit in cooling and pumping equipment, and in electrical and automation product supplies. All of this was sourced from European suppliers and most of the stocks available in Russia are sold out. What is left has become much more expensive due to issues of currency, logistics and deficits,” a construction company representative said. Other contractors report that there are big issues with finding replacements for sanctioned supplies of all HVAC equipment, industrial and residential elevators, pipe fittings, electrical instruments, and cable products. The prices for the mentioned product groups increased from 40 percent to 55-57 percent in the March-early April period. As for steel, sources estimate that in the past two months the decline of the Russian construction sector’s steel consumption reached 15-20 percent.
The increasing cost of construction will be reflected in higher prices for the private sector, although contractors will also face decreases in their margins. Some of the companies estimate a halving of the earlier planned profits for projects started in 2021. The project timelines will also be hit by delays in supplies and by financial issues, while some of the projects will be frozen temporarily. In the meantime, the number of new projects due to be announced is expected to see a drastic fall this year.
The automotive sector, which is another sizable buyer of flat steel in Russia, saw a 78.5 percent fall in sales in April, while in May, according to the preliminary estimations, the decrease was as high as 83.5 percent. The disastrous lack of spare parts and the absence of access to most of the required technologies is one reason, while the drastic increase in car prices versus the decline in peoples’ buying capability is another reason. Some of the sources report that light vehicle production has almost stopped as assembly lines are not working due to lack of car parts. Some of the mills in Russia estimate the decline of demand for coated and CRC in the local market at around 30 percent.
Steel production curbs
Considering the situation in the key consuming sectors, the high level of steel stocks in the local market and difficulties in exports, some of the Russian steel mills decided to decrease production. According to sources, Severstal decreased flats output (the entire chain from coated to hot rolled) by 100,000 mt and may decrease it by 150,000-200,000 mt in June, partly owing to scheduled maintenance. MMK is expected to cut its June production by around 30-35 percent, since the mill has a large local market, which has been weakening, while the company's exports are troubled due to direct sanctions against its main shareholder. NLMK, according to sources, has decreased output by only around 10 percent for now, as, not being under sanctions, the mill is more easily able to export. Moreover, NLMK increased its HRC export allocation to 70,000-100,000 mt of HRC per month, versus the usual figure of around 30,000 mt.
In the rebar segment, according to the steel producers, demand from the construction sector dropped by around 15-20 percent, given the impact of sanctions. In this situation when longs exports from Russia are almost nonexistent and local supply has increased due to the volumes coming from Ukraine’s Donbass-based mills, domestic rebar producers in Russia have had to cut their own output by around 20-25 percent depending on the producer and the region.
Metalloinvest, according to sources, did not cut production and still had a billet export allocation of around 200,000 mt of billets per month. In early March, Metalloinvest said that Alisher Usmanov, sanctioned by the European Union on February 28, owns less than 50 percent of USM Group’s parent company and does not control the group's enterprises.
There have been no confirmed reports about production cuts at Evraz and its overall export allocation has not been lowered visibly. “I believe there could be some reduction, but not large, like 10-15 percent,” an Asian trader said.
Smaller EAF producers in Russia, such as Novorossmetal and Abinsk Iron and Steel, have decreased output significantly as market sources reported they have cut scrap purchases to a minimum or even stopped them since long steel exports from Russia have shrunk to a minimum, and local demand is weak, while billet exports are facing challenges.
The article “Effect and effectiveness of Western sanctions on Russian steel sector” will be published by SteelOrbis in two parts. The second part will be focused on the sanctions’ impact on exports of different kinds of products from Russia.
