Trade restrictions against the metallurgical sector of the Russian economy are a classic example of a sanctions process continuously developing according to certain rules. Non-ferrous metals market overview 2023-2024.
April 2024
I would like to remind you once again that in order to understand the truth, it is necessary to clearly understand that sanctions are not an instant event, but a continuous process that will continue for many years, and most likely, decades.
Sanctions go through several stages before they work in full force, so at first it seems, for example, that they do not work or will not work. Then, at a certain stage, it seems that everything is lost and the sanctioned companies are inevitably facing collapse. And only after some time does a real and objective picture of what is happening emerge.
Briefly, the stages of the sanctions process can be characterized as follows:
- process of discussion and adoption of sanctions
- process of imposing sanctions
- process of clarifying sanctions
- process of monitoring compliance with sanctions
From this above point of view, trade restrictions against the metallurgical sector of the Russian economy represent a classic example of a continuous sanctions process, developing according to certain rules.
So, let's start unwinding the situation from the end, namely, let's start from April 12, 2024.
On April 12, 2024, the US Treasury, in coordination with the UK Treasury, introduced two new restrictions aimed at eroding the revenue that Russia receives from exports of aluminum, copper and nickel. The new restrictions effectively ban the import of Russian-origin aluminum, copper and nickel into the United States and limit the use of Russian-origin aluminum, copper and nickel on global metals exchanges and in over-the-counter derivatives trading. The importation and entry into the United States of aluminum, copper and nickel of Russian origin, except in special cases provided for by law or specified by separate licenses, is prohibited. The sanctions also prohibit the export, re-export, sale or provision to any person or entity located in the Russian Federation of guarantee services for transactions in metals on global commodity exchanges (metals exchanges) for metals produced on or after April 13, 2024. It is also prohibited to provide services for the acquisition of metals produced on or after April 13, 2024, as part of the physical settlement of derivative contracts. As a result of this final US and UK collective action, metal exchanges such as the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) will be prohibited from accepting new aluminum, copper and nickel produced in Russia after April 13, 2024. The restrictions do not affect metals from the Russian Federation that were produced before April 13, 2024.
Everything that we observe in the actions of the United States and Great Britain in April 2024 described above is nothing more than one of the final chords of the sanctions process directed against the Russian non-ferrous metallurgy sector. The restrictive actions strengthen the implementation by the US Treasury Department and the UK Treasury Department of the decision of the G7 leaders to reduce Russia's income from global metals trade. Regulation and control are vested in the Office of Foreign Assets Control (OFAC) of the US Treasury Department, as well as the Trade and Business Control Departments of the Treasury Department and the UK Department of Commerce. Russian aluminum, copper and nickel are becoming completely cut off from Western trading floors. The US and UK banned their supply to the warehouses of the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME), as well as direct imports. However, the April ban on the import of Russian aluminum, copper and nickel to the US and exchange restrictions on their trade, in reality, only fix the established state of affairs and finally and clearly specify the current situation, and also place all participants in this market under strict control (“the process of monitoring compliance with sanctions”).
The discussion of these sanctions, which led to today's ban on trade in Russian aluminum, copper and nickel, has been ongoing for the past two years, almost from the very beginning of the well-known events in Ukraine. However, it immediately became clear that, in contrast to the products of Russian ferrous metallurgy, the products of Russian non-ferrous metallurgy are built into global production chains much more critically, and drastic actions in the direction of various restrictions for the Russian non-ferrous metallurgy could critically undermine production processes in many Western countries, including USA, and also destabilize the supply of aluminum, copper and nickel in large regions. The painful stage of “discussion and adoption of sanctions” has begun.
Already by mid-2022, reports began to appear in the industry press that the London Metal Exchange (LME) had called trade in Russian copper undesirable, and at the same time, aluminum supplies from Russia partially (especially for the Asian region) moved to the Shanghai Exchange, as market participants began be wary of trading Russian products due to potential sanctions. Simultaneously with these comments in the press, Western countries, and especially the United States, began to take practical steps to reduce the critical dependence of the American market and American manufacturers on the supply of Russian non-ferrous metals (the “sanctions process”). These practical steps, for example, the United States introducing 200 percent duties on the import of Russian aluminum, led to a sharp reduction in the supply of non-ferrous metals from Russia to the American market. According to US statistics, in the current year 2024, the country imported aluminum from Russia for only $105 thousand, and for the entire 2023, supplies of aluminum amounted to $44 million, nickel - $26 million, copper - $53 million, although still for 2021 Imports to the United States of copper amounted to $100 million, nickel - $158 million, aluminum - $612 million. As they say, comments are unnecessary here.
It cannot be said that these sanctions have been and will be painless for all market participants. Therefore, as a result of their phased introduction, certain compromises emerged between politicians, government regulators and participants in the international metals market (“the process of clarifying sanctions”). Thus, it can be noted that the April draconian restrictions do not apply to metals and products made from them manufactured before April 13, 2024. In addition, the US Treasury has admitted that in some cases the import of aluminum, copper and nickel may be permitted as an exception under separately issued licenses, and, as you know, there is nothing more permanent than temporary exceptions to the rules. At the same time, it became known that Russian palladium and platinum, which the United States continues to purchase in relatively large volumes from Norilsk Nickel ( “Nornickel” ), are not subject to the restrictions. Current sanctions do not apply to these metals. According to Norilsk Nickel’s reporting, its income from the sale of metals to North and South America amounted to 114 billion rubles in 2023, or 10% of the company’s total revenue. According to US statistics, the Russian Federation supplied $2 billion worth of palladium and platinum to the country in 2023.
By introducing sanctions gradually, regulators tried to test the market in some way and predict the possible consequences of the imposed restrictions. The British Prime Minister first announced his intention to take measures to ban Russian metals in May 2023. In December 2023, the UK finally passed legislation explicitly banning the import of Russian metals, including aluminum, copper and nickel. In addition, the United States has consistently introduced import duties on various Russian metals through 2023. At the same time, for the time being, restrictions introduced in the UK and the USA did not affect trade in Russian metals on the London Metal Exchange and the Chicago Mercantile Exchange. It should also be noted that the London Metal Exchange itself tried in every possible way to avoid introducing restrictions. Thus, in July 2023, the Norwegian aluminum producer Norsk Hydro proposed to the London Metal Exchange to reconsider the decision not to prohibit the storage of large volumes of Russian aluminum in the exchange’s warehouses, since large volumes of metal of Russian origin allegedly jeopardize the reference status of its aluminum contract. However, the London Metal Exchange refused, noting that aluminum from Russia continues to be consumed by many market segments. Starting in 2022, the American giant company Alcoa advocated Metal Exchanges restrictions for Russian metals. Its goal was to raise aluminum prices for the American market, which was choking on low prices, which led to a drop in Alcoa's capitalization by 47% in 2023. However, regulators showed some resistance in 2023, noting that Metals Exchanges play a central role in facilitating trade in industrial metals around the world. The London Metal Exchange and the Chicago Mercantile Exchange have warehouses around the world. Together they are the world's two largest Metals Exchanges and set global benchmark prices for trading base metals. In their April 2024 comments, UK and US regulators separately noted that the UK and US had gone a step further and included both Metals Exchanges in the scope of the restrictive measures, reinforcing a shared commitment to containing Russia and supporting Ukraine. Regulators say the restrictions follow solely dialogue between the two countries to maximize the impact of the policy, which is a technically complex measure that will require time to work out the details to ensure it is effective and minimize the risk of market disruption. Regulators also noted that the measures taken by both the UK and US will exempt existing stocks of Russian metal on two global Exchanges from sanctions so that they can still be sold and exported, and that this is done to minimize the risk of negative effects on market stability.
Following the imposition of sanctions in April, both Exchanges in the US and UK issued notices stating that they would not accept metal from Russia released after April 13, 2024 for inventory. However, the London Metal Exchange notified market participants that 400 thousand tons of Russian non-ferrous metal are stored in its warehouses (out of 1 million tons of total reserves). The main share of Russian reserves is in aluminum - 311 thousand tons, copper - 61 thousand tons, nickel - 25 thousand tons.
It must be said that Russian metallurgical companies, in some way, were preparing for such a final development of events, although they did not imagine that the closure of Western markets for Russian aluminum, copper and nickel would take such a total character. Back in 2023, RUSAL began using quotes from the Shanghai Commodity Exchange in trade with China. However, we must not forget about the logistical problems that resulted from the April imposition of sanctions. On the one hand, this can, of course, provoke a temporary rise in prices on Metal Exchanges however; on the other hand, this will lead to a large discount on over-the-counter transactions in Russian metal, which, in reality, will hit Russian companies very hard. Logistics disruptions due to the impossibility of delivering Russian metal to the warehouses of the London Metal Exchange located around the world will undoubtedly lead to a slowdown in business and overstocking of the warehouses of Russian metallurgical companies, and it is absolutely unknown whether these additional volumes will be able to be accommodated through Asian Exchange traders.
For example, as analysts note, 1.5 million tons of export supplies from RUSAL were at risk. The imposed US and UK sanctions on Russian aluminum threaten RUSAL's export supplies of 1.5 million tons, or, as noted in the press, about a third of the company's total exports. The imposed total sanctions ultimately create risks for RUSAL's production, which, perhaps, in a worst-case scenario, could fall to 2008 levels. The company's managers are concerned that many aluminum processors may completely abandon the use of Russian metal, so as not to risk falling under secondary sanctions. This is especially relevant since the sanctions were introduced by the US Treasury, and such sanctions are largely ex-territorial. The danger lies in the risk of self-sanctions on the part of RUSAL's main clients, which is aggravated by the inability of traders and financial institutions to conduct transactions with Russian metal in the London Metal Exchange system. In addition to all of the above, the US is actively pursuing aggressive attempts to force companies from third countries, such as Turkey and China, to sever ties with Russian manufacturers, which further complicates the situation. This poses a direct threat to RUSAL's supply chain, given the interconnected nature of global production processes. About a quarter of the aluminum produced by RUSAL is used to produce semi-finished products. RUSAL, according to managers, believes that sanctions may have an impact on the export of semi-finished products. The lack of a reliable mechanism for tracking metal in so-called derivative products may lead to processors completely abandoning purchases of Russian metal. In this case, RUSAL will be forced to redirect some of the aluminum to warehouses, which are already almost full after the overstocking of the London Metal Exchange warehouses. This, in turn, leads to the need to increase working capital and reduce the profitability of the company’s business as a whole. RUSAL officially announced on April 15 that the new restrictions will not affect the company’s supplies, access to the banking system, production or product quality. However, according to many experts familiar with the situation, the company seriously fears that the cumulative effect of the sanctions will lead to a reduction in production to levels close to the minimum possible business values. Therefore, the company expects to discuss with Russian government a number of measures to support the industry. Among them: the state purchases up to half of the export volume, permission to reduce production to a quarter of the current volume and the removal of aluminum from the export duty.
So, what do we have as a result: almost two years have passed from the moment of the first sanctions to the total sanctions pressure on the Russian metallurgy. As I noted earlier, the adoption of sanctions in the West is a very complex, painfully compromise and long process. But this should not mislead anyone into thinking that sanctions are being introduced half-heartedly. Quite the contrary. As can be seen from this example, the long development of sanctions, taking into account various compromises between the government, regulators and local players who are also affected by these sanctions, suggests that sanctions are a well-thought-out mechanism that is introduced for a very, very long period of time . Therefore, if we put aside the bravura declarations that have nothing to do with reality, it becomes obvious that for further confident development, companies will need long-term strategies for working in the sanctioned regime and specialists capable of implementing these strategies.
About the author.
Dmitry Belik, began his work and business career in the former USSR, built several successful businesses during the years of the cooperative movement and the beginning of perestroika, then worked for almost thirty years in various mid- and high-level managerial positions in Western companies, where he managed representative offices of corporations in Russia, countries of the former USSR and Eastern Europe. Among the places of work were such positions as deputy head of the representative office of Newbridge Networks (https://en.wikipedia.org/wiki/Newbridge_Networks), head of the representative office of Wesley Clover International (https://www.wesleyclover.com/), head of the representative office and CEO of the joint venture managing the Mitel Networks business in Russia, the countries of the former USSR and Eastern Europe (https://www.mitel.com/)