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The soft spot in the EU’s steel sanctions

The soft spot in the EU’s steel sanctions

by host

Ukrainian officials are demanding that the EU crack down on sanctions loopholes. A gaping one still allows Europeans to trade steel worth billions that enriches some of Russian President Vladimir Putin’s closest allies. 

But European countries with steel industries, like Italy and Belgium, are pushing back, fearing tens of thousands of job losses if they cut ties with Moscow.

This week, the EU is expected to pass another raft of sanction measures in response to Russia’s escalation of its war in Ukraine. Steel is under the spotlight, as it continues to generates billions in revenue for Russia.

Kyiv is livid at how Brussels has been designing its sanctions. Loopholes “are being built in to soften the blow for the European economy,” said Alexander Rodnyansky, an economic adviser to Ukrainian President Volodymyr Zelenskyy. “[We] obviously argue [for] having sanctions policy being completely bulletproof.” Another presidential adviser, Oleg Ustenko, described trade with Russia as “blood money.” 

The EU first imposed sanctions on steel in March, but some types of steel continued to flow into Europe, sending close to €3 billion back to Moscow that directly or indirectly supports Putin’s war. 

There are more than 3,500 different types of steel products used in manufacturing, construction and the car industry. The EU banned Russian finished steel products, but Russian semi-finished steel products, known as “semis,” are not on the sanctions list.

“The sanctions are heading in the right direction but lacking clarity, as we have already seen with the previous sanctions. One single product code in or out can make the difference,” a European steel industry player said.

A handful of European companies, in particular those in the “re-rolling business” rely heavily on Russian imports. 

Russian discount

These days, European companies are buying Russian steel semis about 30 percent cheaper than the same product made in the EU, according to the industry player, in large part because of energy prices skyrocketing within the bloc since Russia invaded Ukraine.

Novolipetsk Steel — aka NLMK — is one of the four largest steel companies in Russia. It continues to operate in Europe via its subsidiary in Belgium. Russian oligarch Vladimir Lisin, the company’s owner, is under sanctions in Australia, but not in the U.S. or in the EU.

Maria Simonova, NLMK Group spokeswoman, told POLITICO the company fully complies with EU regulations.

“Semi-finished steel products and raw materials that include steel slabs are not included in the sanctions list,” she said.

Sanctions exceptions are often by design. Maria Shagina, a sanctions expert at the International Institute for Strategic Studies, said that loopholes are created to protect countries’ core economic interests.

David Le Clercq, spokesperson for Sogepa — an investment fund that partly owns NLMK Belgium — said steel sanctions could lead to job losses in the EU.

“We hope that they [sanctions] will not have an impact on NLMK which, let’s remember, is not a Russian company in the strict sense of the term, since NLMK Europe is based in Belgium,” he said.

Steel is big business for particular regions of Europe. In October 2019, NLMK Belgium and its 49 percent partner Sogepa announced that they would invest €200 million as part of a three-year plan for their three Belgian sites.

Similarly in Italy, steel company Danieli has an ongoing decade-long partnership with Russia.

In November 2021, Danieli signed a five-year MOU with Magnitogorsk Iron and Steel Works, or MMK. MMK’s owner is EU and U.S. sanctioned oligarch Viktor Rashnikov. Prior to this, in 2015, Danieli promoted their work with KUMZ — a manufacturer of specific parts for Russian aircraft. KUMZ belongs to oligarch Viktor Vekselberg, who is also under sanctions.

A spokesman for Danieli confirmed they work with Russia but did not respond to POLITICO’s questions.  

Privileged access

Russia’s largest mining and steel company Severstal stopped shipments to Europe due to sanctions on its owner, oligarch Alexey Mordashov | Anatoly Medved/Host Photo Agency via Getty Images

George Voloshin, from the Association of Certified Anti-Money Laundering Specialists, told POLITICO there are always companies finding ways to exploit sanctions’ soft spots.

“European member states have definitely put forward requests for more flexibility in terms of what their companies … will suffer in terms of economic damage, in a way trying to shield them from the damage,” he said.

In March, Russia’s largest mining and steel company Severstal stopped shipments to Europe due to EU sanctions on its owner, oligarch Alexey Mordashov. But if the owner of a steel company isn’t sanctioned, as in the case of NLMK, trade in semi-finished steel remains legal.

The EU has also sanctioned oligarch Roman Abramovich due to his “privileged access” to Putin. Abramovich is best known as the former owner of Chelsea football club, less so as a major shareholder of Russian steel group Evraz.

The U.K. government slapped sanctions on Evraz as it is of “strategic significance” to the Russian government, in particular as it produces 28 percent of all Russian railway wheels and 97 percent of rail tracks that move “key military supplies and troops to the frontline in Ukraine,” London stated.

Despite sanctions on Abramovich, and Evraz in the U.K., Evraz’s subsidiaries throughout Europe, in Cyprus but also in Switzerland, the Netherlands and the Czech Republic, continue to operate. A spokesman said Evraz did not sell Russian steel to Europe.

“The group has several subsidiaries in Europe which continue operations in full compliance with the EU sanctions regulations,” he said.

Victor Jack and Jacopo Barigazzi contributed reporting.

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