In early October, the Council of the European Union approved the European Union’s eighth package of sanctions on Russia for its war against Ukraine. The eighth package sanctions prohibit the provision of maritime transport services and the provision of technical assistance, brokering services, financing, or financial assistance related to the maritime transportation of crude oil (from December 2022) or petroleum products (from February 2023) originating in or exported from Russia to third countries. The provision of transport and the abovementioned services will be allowed if the crude oil or petroleum products are purchased at or below a price cap that the European Union plans to establish.

The eighth package of sanctions also bans all transactions with the Russian Maritime Shipping Register by adding it to the list of state-owned entities that are subject to a transaction ban.

In addition, the sanctions include a ban on the export of coal to the Russian Federation, particularly coking coal (which is used in Russian industrial enterprises), certain electronic components, technical products used in the aviation industry, etc. It also prohibits the import of steel products into the European Union not only from the Russian Federation, but also from third countries if steel products originating in Russia are used in their production. Cast-iron pipes and sections, as well as certain types of steel products from Russia, are also banned; the package also sets quotas for the import of slabs and square blanks.

But the several packages of sanctions that Western countries adopted in the previous six months are already working and should have a significant impact on the Russian economy, but they do not have the expected effect. For example, the cargo turnover of Russian ports practically did not change in the first eight months of this year, compared with the pre-war year 2021. Therefore, it is appropriate to ask: “Are the restrictions imposed having any effect on the export logistics of the Russian mining and metals industry?”

The steel industry goes into the shadows

It is difficult to assess the impact of the sanctions on the Russian steel industry accurately because the Russian Federation stopped publishing production statistics in June 2022. We know that steel production in the country reduced by 2.3% to 31 million tons in the first five months of this year. According to the World Steel Association’s estimate, steel production in Russia reduced by 7% to 41.4 million tons in January-July, compared with the previous year.

An indirect sign that the situation in the Russian steel industry has deteriorated is the fact that Metalloinvest, which is the largest producer of iron ore in Russia, has been forced to revise its capacity development strategy, postponing the construction of two new hot-briquetted iron production plants.

Meanwhile, the Severstal company produced 7.967 million tons of steel in the first nine months of 2022, which is 8% less than the quantity it produced in the corresponding period of 2021. The company has said that it will not publish its financial statements for January-September 2022 "because of the ongoing business restructuring." We understand that this restructuring was not necessitated by a positive development.

However, it is obvious that a 7-8% drop in production is not the outcome that should be expected from the sanctions.

However, it is worth noting that the sanctions that Western countries imposed did not apply to the long-term contracts that were already in force at the time of imposition of the sanctions. Therefore, products continued to be delivered under such contracts in subsequent months. For example, deliveries of ferrous metals from the Russian Federation to the United States sharply decreased to USD 0.6 million in July from USD 201 million in June. According to steel industry experts, the available data shows that steel imports from Russia into the United States had almost stopped as of September, although imports were still continuing in the first six months of the year. This means that the long-term contracts have ended and the sanctions that were imposed in the spring have really started taking effect. However, the European Union continues to increase imports against this backdrop.

Steel but not ore

The European Union first imposed sanctions on steel products from the Russian Federation back in April and on Russian rolled steel and pipes in July 2022. However, it left the door open for iron ore. Cargo flows were reoriented to Turkey and Asian countries, but those products that are not prohibited continue to be delivered to the European Union.

"The sanctions that were imposed on semi-finished steel products (from April) are essentially not sanctions... Cast iron was not even touched and the issue of imposing sanctions on ore was not raised. It was not even included in the preliminary list for discussions," said Stanyslav Zinchenko, the head of the Committee for Industrial Ecology and Sustainable Development at the European Business Association (EBA).

According to the Russians themselves, the problems involving deliveries of iron ore and iron-ore concentrates to the European Union are due not so much to the restrictions imposed because the sanctions do not prohibit their delivery but due to the disruption of the established logistics routes, which, among other things, passed through Ukraine. For items such as hot-briquetted iron and pellets, Russian exporters had not experienced a reduction in volumes as of August.

Severstal said in a statement that sales of semi-finished steel products increased by 20% to 1.28 million tons in the first nine months of this year despite a reduction in steel output during the same period.

According to Pavel Polyakov, a representative of the Russian Association of Commercial Seaports, the volume of transshipment of ferrous metals in Russian seaports reduced by 6% but the volume of transshipment of iron ore increased by 16% in the first half of the year. Essentially, Russian producers of iron ore are using the blockade of Ukrainian seaports as an opportunity to expand their sales markets in Asia as much as possible, and they are actively lobbying for the construction of deep-water terminals for shipping iron ore to China on large-tonnage bulk carriers.


Reorientation of exports

Although the impact of sanctions is slow, they are having an impact. In addition, even the permitted export items could be banned. For example, if cast iron can be imported into the European Union but sanctions are imposed on the producing company or its owner, then the Russians will have difficulties. Therefore, a reorientation of the exports of the Russian mining and metals industry’s products is taking place.

According to data provided by the GMK Center publication, the export of flat rolled products from the Russian Federation to the European Union reduced by 57% in the first half of 2022 while their export to Kyrgyzstan increased three-fold. The export of rolled products to the European Union reduced by 14% but their export to Turkey increased by 27% and their export to Kyrgyzstan by 38%. These are items that have come under the European Union’s sanctions.

As stated earlier, iron ore and semi-finished steel products are not affected by the European restrictions. Russia's export of cast iron to the European Union increased by 106% and its export of semi-finished steel products by 21%. According to the GMK Center, the import of cast iron from Russia into the European Union increased 2.5-fold year-on-year and the import of semi-finished steel products by 2% in the second quarter of 2022. Almost 88% of the cast iron from Russia was exported to Italy, which previously bought cast iron from Ukraine.

As for Turkey, the export of semi-finished steel products and cast iron for steel production from Russia to the country has significantly increased over the past six months. In August, the Istanbul Ferrous and Non-Ferrous Metals Exporters’ Association (IDDMIB) announced that it planned to sell steel products originating from the Russian Federation to the countries in the European Union and that it had already held meetings with 17 federations. However, even before that, Turkey somehow increased its steel exports by one-third in the first half of 2022 (mainly to Germany, Italy, and the United States). It is possible that the continuing "flow" of Russian steel onto the European market is through third countries.

However, restrictions may arise when one country prohibits the transit of even EU-approved Russian cargoes through its territory.

Back in March, the above-mentioned Metalloinvest encountered a situation in which the Lithuanian-based LTG Cargo company refused to transport Russian steel cargoes to the port of Klaipeda. This was one of the factors that influenced the revision of the strategic plans of Metalloinvest, for which the European market is key. Yuri Gavrilov, director of strategy at Metalloinvest, has stated that the problem involving the transit of cargoes through Lithuania has not yet been resolved fully. The holding company is hoping that the Russian Railways will help redirect its cargo flows to the Eastern Polygon (of the Baikal–Amur Mainline and Trans-Siberian railway lines) to ensure uninterrupted exports to China and Southeast Asia. However, these hopes may turn out to be completely unjustified because we know that the Russian Railways has been forced to postpone the electrification of sections of the Eastern Polygon for at least nine months because of sanctions. In addition, other cargoes are also being sent there because the Baikal–Amur Mainline has begun playing a key role for the Russian Federation due to sanctions, with freight flows from the west being redirected to it and the Trans-Siberian rail line. Therefore, Russia’s largest producer of iron ore is working on a Plan B: the company owns a share in the Universal transshipment complex in Novorossiysk, which will probably be able to receive Capesize and Panamax vessels in the coming years. The holding company needs a deep-water terminal specifically for shipping products to China to avoid the problems and costs associated with the railway.

Regarding the Black Sea, market participants in Russia said in the spring that Russia’s Black Sea ports were continuing to handle steel products and iron ore, albeit at a somewhat slower pace.

For example, according to data obtained by the CFTS portal, the Meraklis bulk carrier delivered 44,000 tons of ore pellets produced by Metalloinvest from Novorossiysk to Croatia (Bakar) in mid-June and the Maraki ship transported 25,000 tons of cast iron produced by the Ural Steel company from the same Russian port to the Italian port of Marghera in August. These are only isolated examples that confirm the systematic nature of the process.

"They (Black Sea ports) continue to operate. The only thing is that the speed of customs and other procedures has slowed because cargoes are being checked to determine whether they are sanctioned or not. Cargoes are being pushed through with great difficulty, but they are being pushed through nonetheless," a source told the Russian-based Interfax news agency.

A steel company said that about 60% of its export products continued to go through Novorossiysk and 30% through the port of St. Petersburg.

Irreversible logistics

According to Russian experts, in most cases, iron ore continues to arrive in the European Union from Russia via the established logistical routes. There are certain complications that can affect the speed of transportation, but shipments to European customers are continuing.

As for the prohibited items, there is an opinion in the market that the volume of export of sanctioned rolled steel and pipes to the European Union is much higher than official statistics reflect because of the use of intermediary companies. For example, we know that the NLMK group (one of the largest steel producers in Russia) delivers its products to Europe through the Belgian subsidiary NLMK Belgium Holdings SA and the SOGEPA company. It uses only foreign vessels for their transportation. Presumably, European countries "turn a blind eye" to such schemes because the Russians offer steel at very competitive prices because the increase in energy prices does not affect them (unlike their European competitors).

According to Zinchenko, traders know many ways of selling raw materials in circumvention of sanctions (change of certificates, origin, etc.). In this context, he cited as an example the seizure of a train full of sanctioned products from Metalloinvest in Poland a few months ago, but the train had to be released because its cargo had already been re-registered to a Polish company and no action could formally be taken against it.

In general, the expert believes that there have been no global changes in the logistics of the Russian mining and metal products so far. On the one hand, this is because of the above-mentioned opportunities to bypass sanctions and, on the other hand, because, according to him, eight months is too short a period for restructuring production and logistics chains in the steel industry.

"Much more time is needed. In fact, it turns out that eight months is not enough to rebuild these chains... The phase in which long-term contracts end and the fourth and fifth packages of sanctions begin to really take effect is ending. By the way, these sanctions did not hit factories directly but seaports. In the next phase, Russian steel producers are expected to concentrate more on the domestic market and the products they are allowed to export – ore, cast iron, and semi-finished steel products – because they are doing great in these areas. The final rebuilding of the logistics chains will now begin," Zinchenko said.

However, the European Union should not expect a radical impact on Russian logistics, at least in the near future, because Europe itself and its transport system are not ready for this. European steelmakers need raw materials and semi-finished steel products, and their ties to Russian supplies will remain because Ukraine is currently unable to supply them in the pre-war volumes. This is reinforced by the overloading of the European railway network because of Ukrainian agricultural cargoes and the imbalance in the operations of the European Union’s seaports, with some of them overloaded and others not ready to receive raw materials for steel production from other countries such as India or Brazil.

In this context, it would not be out of place for European officials to consider the possibility of extending the Black Sea Grain Initiative (that established a humanitarian maritime corridor to allow ships to export grain and other agricultural products from Ukraine) to products of the Ukrainian mining and metals industry, an issue that has already been discussed more than once. On the one hand, this would allow the European Union to diversify its supply routes and, on the other hand, allow Ukraine to generate additional foreign-currency revenues in this time of crisis. Russian cast iron and iron ore are not unique and can easily be replaced by similar products from Ukraine or overseas. Even if it takes a little longer to adjust or rebuild the logistics routes, the European Union will not suffer globally. All that is needed here is the desire, the will, and the awareness by the Europeans to decide whether they wish to continue filling the coffers of the aggressor country.