European importers face a potential sanctions headache from next month, when rules take effect requiring them to prove products imported from anywhere in the world do not contain any Russian-origin steel or iron.
After Russia’s invasion of Ukraine in February last year, the EU was quick to impose a ban on importing such products directly from Russia. However, September 30 sees a substantial expansion of those rules that could have far-reaching effects for importers.
The EU’s 11th package of sanctions against Russia requires importers to provide documentary evidence that goods purchased are completely free of Russian-origin steel and iron.
“When it’s a one-on-one relationship, it’s easier; you know your supplier, or it concerns a bilateral relationship between two countries. Whether you’re allowed to do it, it’s yes or no,” says Lionel Van Reet, a partner and customs lead at Baker McKenzie in Brussels.
“It’s when you add different stages of manufacturing, multiple countries, different entities, mixing different originating goods, you will still need to demonstrate there’s no Russian content. The more steps you add, the more difficult it gets.”
Jean-Guillaume Benoit, an advisor for customs and global trade at the same firm, says the requirement will be particularly difficult for companies importing finished products.
“To give a concrete example, say you as a company are importing an article of iron or steel that includes screws,” he tells GTR.
“You will now be required to confirm that those screws do not originate in Russia. Every piece listed in the annex to the regulation will have to be assessed, and this is extremely complex because you might not be aware that the particular product you’re importing incorporates those types of components.”
The restrictions do not apply to all products from September 30, with a transition period applying to inputs covered by certain customs codes. The deadline for certain semi-finished products is April 1, and October 1 next year for products rolled from Russian slab.
James Killick, a partner at White & Case and leader of its EU sanctions team, says the transition period is designed to address complexities in the supply chains for some goods.
“For example, if you’re a flat steel producer, you might have two months’ worth of slab lying in stock, which you need to use up,” he tells GTR.
“Then you need to find alternative sources of supply, sign the contracts, then wait many months for delivery and then qualify the slab for your process. That’s why you need a transition period.”
Adhering to the right timeframes could prove a further challenge. Companies will need to be vigilant on exactly where products fall in the tariff schedule, points out Sara Nordin, a partner at White & Case’s Brussels office and part of its international trade practice group.
“Mainly, it’s only people in the steel industry that will understand those specific differences between tariff codes and what they cover at product level,” she says.
Killick adds: “Even then it’s complicated. Many product types fall into multiple codes.”
The main responsibility of the reforms lies with the importers themselves. A European Commission Q&A published in July specifies that they will have to obtain mill test certificates showing the origin of steel and iron inputs.
For finished goods, certificates must show the name of the facility and country where the steel was melted or processed, as well as the relevant customs codes.
“The importer is responsible for the information provided… and submitted to the customs of the member state of importation,” the Q&A says, adding that customs authorities may demand additional evidence if there are suspicions of Russian involvement.
All certificates provided must be coherent with each other, it adds, and the importer “should apply due diligence to ensure the accuracy of the information provided”.
“This is an ongoing process, so you will need a trade strategy, you will need trade governance, to put something in place so you can gather and digest all the information about inputs,” says Baker McKenzie’s Van Reet.
“And the risk is not just in terms of fines and criminal sanctions; it’s also reputational risk on a global level. This matter draws attention from stakeholders all around the globe. If a company is found to be importing goods that use Russian steel in the production, that’s not exactly the type of publicity you would like to have.”
But for banks involved in financing steel transactions, the reforms are also likely to require a higher level of due diligence and documentation checks.
“The importers are accountable for this, and that’s where the game is changing,” says Van Reet. “But if you are a bank, you could be on the hook – particularly if the authorities start to see the same bank having a problem more than once – so you will need to ensure your operators have these processes in place.”
Benoit adds: “There is also a prohibition on providing financing or financial assistance in relation to these types of goods, so that would apply in relation to non-Russian products incorporating Russian-originating inputs.”
Banks may also lack the technical knowledge to assess information from trade documentation, so have to rely on the parties involved to provide the necessary details, points out White & Case’s Nordin.
“Where you are relying on documentation there is a risk of falsification and other potential compliance issues,” she says.
“That’s where you also need to make sure you’re doing the due diligence on the parties that you’re dealing with, including to ensure compliance with other sanctions measures, and that are issuing these certificates.”
Turkey is likely to be the exporting nation most affected by the reforms.
The country was the largest exporter of finished steel products to the EU in 2021, according to data from the European Steel Association, providing over 4.5 million metric tonnes – equivalent to around 15% of the bloc’s imports.
However, it also sources large volumes of steel from Russia, with Turkish Statistical Institute data showing the country’s hot-rolled coil steel imports from Russia increased 90% year on year in the first quarter of this year.
That does not necessarily mean Turkish exports are likely to be shunned by Europe, says Killick.
“It’s perfectly possible for Turkey to produce flat steel without Russian slab, as Turkey has significant blast furnace capacity of its own,” he says. “Flat steel producers there should always be able to provide mill test certificates to prove exactly where that steel was melted and poured.”
But looking ahead, the lawyer says there are fewer and fewer areas where the EU can impose fresh sanctions, and attention is likely to turn to whether existing measures are being implemented correctly.
“In the coming year, it is likely that there will be a greater focus on enforcement in the EU and on preventing circumvention,” he says. “I would expect to see importers being asked more questions, and probably banks as well.”
Source: Global Trade Review