War and sanctions impact steel traders in Lugano

(MENAFN- Swissinfo)

The headquarters of Severstal Export, a company that exports and trades iron and steel products are located in a nondescript office building, in Manno, just outside Lugano.

It is wholly owned by Severstal, a Russian steel conglomerate belonging to Alexey Mordashov, a powerful oligarch who became the company's chief financial officer in 1992, at the age of 26.

Today he heads an empire with interests in mining, banking and television. In 2021, Forbes named him the richest man in Russia. This March, Mordashov found himself on the European sanctions list later adopted by Switzerland. He is accused of“benefiting from his links with Russian decision-makers,” according to a European Union official documentExternal link .

In Ticino, Severstal declined to comment, but its situation is potentially a difficult one: Switzerland has adopted all the European Union sanctions. According to the Swiss State Secretariat for Economic Affairs (Seco), all funds and economic assets owned or controlled by individuals, companies or groups on this blacklist must be frozen.

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This content was published on Feb 28, 2022 Feb 28, 2022 Switzerland has decided to adopt the full range of sanctions imposed by the European Union against Russia.

The war in Ukraine and the sanctions imposed on Russia are sending shockwaves through this usually low-profile marketplace for raw materials in southern Switzerland. Especially affected are the many businesspeople who specialise in trading iron and steel products with the two parties engaged in the war.

Less well-known than Geneva and Zug, Ticino is actually the third trading hub in Switzerland. The Lugano hub has specialised in trading steel. Of 123 companies trading in raw materials on the books in Ticino, 51 specialise in the trade in minerals and metals. These companies employ 575 people out of the thousand or so working for the sector in Ticino, according to the latest Swiss statistics.

“February 24, 2022 is a date that will go down in history... For most of those here in Lugano who trade in steel with Russia and Ukraine this means total paralysis,” the CEO of a steel trade company, who prefers to remain anonymous, told SWI swissinfo.ch.

A similar view is taken by Marco Passalia, secretary of the Lugano Commodities Trading Association (LCTA). His group brings together traders in raw materials and he speaks of“ships stuck, frozen lines of credit and companies teetering on the edge of bankruptcy”.

Steel is a strategic raw material. In Russia it means power. Some of the topmost oligarchs control the major steelworks, which has enabled them to accumulate colossal fortunes.

On March 15, Europe decided to ban exports of Russian iron and steel products. Shortly after that in Lugano, there were crisis talks among members of the trading community. The situation was considered dramatic.

“There was a feeling of panic for several days and we didn't know what to do. On the one hand, there were no clear guidelines from the Swiss government, and on the other, many people ran the risk of contracts no longer being honoured. It's not hard to imagine what that could mean,” recalled Passalia, who organised the meeting.

Passalia, himself CEO of a power trading company, said there are three crucial points to consider, of which restrictions on bank credits was the first.“Many banking institutions had already blocked the financing of many Russian commodities, with the exception of gas and petroleum, before the war,” he said. Second and third were sanctions, and the ensuing checks, which add on a lot of work, and the logistical problems arising from the war.

In Ukraine, for example, most of the factories are in the eastern part of the country and are either cut off or have restructured their production. In addition, ports are closed and not a single ship can leave the hard-hit city of Mariupol.

Furthermore, anyone trading with Russia has to keep a constant eye on the sanctions as new names are being added to the list every week.

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On March 15, the European (and Swiss) blacklist also included Viktor Rashnikov, owner of the iron and steel giant MMK, considered by the EUExternal link and Switzerland as providing“a substantial source of revenue to the Government of the Russian Federation”.

This had immediate consequences in Ticino where the trading arm MMK Steel Trading has been located since 2002. When contacted, the company declined to comment. Potentially sanctions could lead to the freezing of assets controlled by people on the blacklist through companies. This means that MMK's accounts could be targeted and frozen by Swiss banks.

The problem is not just impacting people who have been sanctioned. There are other companies here that trade in steel (but also coal, nickel and petroleum) and which, although not controlled by people affected by sanctions, deal in raw materials of Russian origin or have Russian citizens as shareholders.

One example is the trading arm of NLMK, an iron and steel giant owned by the low-profile oligarch Vladimir Lisin. Established in Ticino since 2007, NLMK Trading exports more than 30% of Russian steel.

That there are wider implications is confirmed by Marco Micciché, CEO of Eusider Trading, a company that trades in steel and raw materials for iron and steel production.“Even people who are not directly affected by the sanctions but have business with Russia are in big trouble now because banks have imposed just about a total embargo,” he said.“We deal with other countries, and we no longer deal with anything that involves Russia. The risk of non-compliance is just too high.”

Micciché said that the current situation had created a spike in demand in steel from companies like his, especially because supply was blocked from the parties involved in the war.“European industry always needs new steel, and that's why prices have skyrocketed,” he said. 

Steel in Lugano is a growing sector. Industry insiders estimate that it makes up 2% of the canton's Gross Domestic Product (GDP) and generates a tax revenue of CHF 70 million ($76 million) a year. So it is no wonder that the current situation is causing concern to those in the business.“At least 15 companies closely linked both to Russia and Ukraine are now at a standstill, and I am very worried about job losses,” explained Passalia.

Duferco, one of the main steel traders in the world today, was in part behind the development of Lugano as a trading hub. It has been operating in the city since the 1980s.

Today Duferco, owned by the holding company DITH in Luxembourg, is controlled by the Chinese conglomerate Hesteel, which is the third largest producer of steel in the world. In 2021, DITH generated profits of $255 million, a good part of them in Lugano where it trades 13.5 million tonnes of steel and ferrous metals a year. That is about the annual production of a country like France.

A minority share (21.5%) of DITH's capital is still held by the old Italian owners led by founder Bruno Bolfo. This businessman, who now controls other companies in the Lugano area, was one of the first to enter eastern European countries. Following the collapse of the Soviet Union, Bolfo established links in Russia and in Ukraine, where he was for many years the exclusive reseller for products coming from the Industrial Union of Donbass, an iron and steel giant in the eastern Ukrainian city of Donetsk.

This is how Lugano became“the place to be” for Eastern Europe's steel bosses. Ukrainian oligarchs in turn set up trading offices in Ticino – such as Interpipe, owned by Viktor Pinchuk, one of the richest and most influential men in Ukraine. A world leader in the production of steel pipes and railway wheels, Interpipe controls two companies in Paradiso, just outside the city.

Other Ukrainian industry experts have also settled in Lugano, among them Sergiy Dynchev. He came to Ticino after working in Geneva for several years for Metinvest, the biggest Ukrainian steel producer. Today he heads Ivancore, a company specialising in iron and steel trading.

“Lugano is less attractive from a tax point of view than other Swiss centres,” he explained.“But it is favoured by Eastern Europeans for the climate, the lifestyle and its nearness to Italy.”

Dynchev says the sector is also facing another problem.“Banks, in addition to freezing funds linked to Russia, are asking for bigger securities on loans due to the sudden changes in commodity prices. Several traders are having to take on more debt and are looking for money,” he said.

In practice traders risk becoming insolvent when faced with unexpected variations in prices. After Russia's invasion of Ukraine, the price of a tonne of laminated steel coils rose from $600 to $1,400, and heavy plate from $650 to almost $2,000 a tonne.

But the Ivancore CEO's main worries are closer to home:“My family are in Mariupol and we are going through a bad time. I try to contact them every day to see if they are all right. It's a really dreadful situation,” Dynchev said. His native city has become a symbol of the war that is sending shockwaves across Europe – and all the way to Lugano.

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Translated by Terence MacNamee

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