All is fair in steel and war: Italian equipment used in making military armor continues to be supplied to Russia

RU

Iron for war

Heavy metal is crucial for the Kremlin. Exports of iron and steel — which totaled $20 billion in 2022 — help fund the state budget, and domestically, these products are used to make weapons and military vehicles.

Alexey Mordashov's steel company Severstal has proudly presented “innovative armor steel grades” that can withstand a direct hit from a bullet fired by a sniper rifle. For the production of multiple rocket launchers, Severstal metallurgists advertise “hot-rolled pickled rolled steel of special-purpose grade.”

For the Navy, they are happy to offer “special ship steels for submarine hulls.” As the investigative outlet Proekt found, armored steels produced by Severstal are used in armored personnel carriers, launchers of anti-aircraft missile systems, and other military equipment. The European Iron and Steel Company (EMK) also boasts of its armored steel for armored vehicles.

In the overall price of a tank, the cost of armor can reach 15%, so the production of cost-effective special steels is both a matter of survival on the battlefield and a key aim of industrial concerns.

Italians to the rescue

Importantly, cutting-edge steelmaking in Russia is critically dependent on Western equipment. As the metallurgists themselves admit, their own armor steel technologies are outdated and are lagging far behind Western samples.

Before the war, one of the key facilitators for Russian metallurgists seeking to obtain state-of-the-art equipment was the Italian company Danieli. Among its Russian clients are Severstal and MMK — the Magnitogorsk Iron and Steel Works. Up to 30% of Danieli's pre-war revenue came from Russia.

Not only did the Italian company supply Russia with ready-to-use products from abroad, it also ran a fully localized equipment production facility in Dzerzhinsk, Nizhny Novgorod Region. In 2020, the then-director of the company, Antonello Colussi, who had previously spent 10 years working in China, expressed his pride in the company’s relationship with Russia.

Danieli technology is indispensable in many applications. Thus, the Taganrog Metallurgical Plant uses the Danieli out-of-furnace steel treatment unit to produce pipes with increased cold and corrosion resistance. Danieli rolling mills form the core of long product rolling at Magnitogorsk Iron and Steel Works, where the Italians overhauled this production line in the mid-2000s. Just before the full-scale war began, Danieli undertook to build four heating furnaces for the rolling mill at the Magnitogorsk steelworks. The contract was signed in the presence of an Italian diplomat.

In 2018, a “key shareholder” of the Red October Factory in Volgograd noted in an open letter that Danieli, as a strategic partner, was responsible for the technological modernization of his facility’s production — and at the same time drew attention to the fact that Red October controlled up to two-thirds of Russia's special steel and alloy production for armaments (including armored steels).

The United Metallurgical Company (OMK) also proudly reported in 2020 on the construction of an entire electrometallurgical complex with direct reduced iron technology. Italian diplomats took part in the inauguration ceremony as well.

A lucrative war

One would think that the outbreak of a full-scale war would be reason enough to impose serious sanctions and restrictions on iron and steel production, as the output forms the basis for the manufacturing of armored vehicles. But Danieli continued to supply equipment as if nothing had happened. As the Kyiv Independent and Follow the Money revealed in a 2023 investigation, in August 2022 Danieli supplied Severstal with cooling equipment for a smelting furnace through its Dutch subsidiaries. At that point, the owner of Severstal, Mordashov, was already under sanctions.

Danieli's announcement of its intention to exit the Russian market came only in the spring of 2023. Company employee Giovanni Siri told The Insider that “the Russian market is currently dormant for Danieli.” However, Danieli's financial documents say otherwise.

In 2023, the company's Russian subsidiary, OOO Danieli Volga, increased its revenue only by a factor of 2.6, according to Spark-Interfax. However, the overall net balance of its financial flows increased by 36 times, from $789,000 to $28.4 million.

At the end of 2023, Danieli Volga had 155 employees, and judging from its ads on the recruiting portal HeadHunter, the business is far from dying out. In the parent Italian company's 2023 financial report, dated Mar. 7, 2024, Danieli Volga continues to be listed among Danieli's “production centers.” On page 17 of the report, the Russian company is said to have received some form of advances for future projects.

The overall context is not lost on the authors of the report. An entire section on pages 24-25 deals with Russia's war in Ukraine. Danieli reports that the Russian production facility (obviously meaning Danieli Volga) has slowed down significantly and does business only with customers who are not subject to EU/U.S. sanctions. The report also states that the parent company is seeking to sell its Russian businesses to third parties and speaks of the “legal hurdles” that have resulted from the disruption of projects due to sanctions. The auditors are also worried about the prospects of debts of “certain Russian clients.”

In other words, the cautiously pessimistic Italian report does not quite match the Russian one.

Can Danieli sell its Russian assets?

There has been no shortage of cases in which a foreign company expresses a desire to withdraw capital from its Russian subsidiary but is not allowed to do so. The authorities can de facto nationalize a private business — in whole or in part — with the appearance of a legal procedure, or else by quite brazenly appointing their own “CEO.”

In the spring of 2024, Kommersant wrote that Danieli Volga could be taken over by Novorosmetall due to the parent company having lost a lawsuit in a Russian court. The legal action was initiated because of the European company’s failure — due to sanctions — to deliver a rolling mill. The plaintiff demanded a refund of the advance payment, but in a counterclaim, the Italian parent company Danieli demanded that Novorosmetall first repay its debt arising from an earlier delivery, along with the attendant penalties it had incurred. No record of such a foreclosure taking place could be found in the relevant registers or business press.

The Kommersant piece claims that it was the litigation that prevented the Italians from selling their Russian business, as the assets were seized. However, in August 2024, the judgment of the recovery of funds in favor of Novorosmetall was executed, and the advance payment was returned by Danieli Volga on behalf of the Italian parent company. After that, the seizure of the Italian company's assets was canceled.

In short, there is no indication in the court documents that the Russian subsidiary was taken away from the Italian parent company. Therefore, there appears to be no obstacle to Danieli selling its Russian plant.

Sanctions? China!

In 2023, according to Russian customs data, Danieli Volga imported into Russia $6.5 million worth of equipment parts and spares, including $3 million worth of parts produced by Danieli's facilities. The Italian company's Chinese subsidiary, Danieli Metallurgical Equipment and Service, tops the list of suppliers.

In 2024, Danieli Volga imported $4 million worth of equipment parts and spare parts, including $600,000 from Danieli Group companies, including the Austrian subsidiary Danieli Engineering and Services. A significant portion of the imported goods fall under the EU embargo — which is why they were imported via China. EU law, unlike U.S. law, does not have a “long arm,” resulting in a legal regime in which goods produced in China under the technology, license, and control of the Danieli Group are not subject to the embargo.

As a result, without formally violating European regulations, Danieli continues to profit from its cooperation with Russian metallurgists by using a Chinese company to help it circumvent sanctions.

Danieli does not seem to see this as a problem. Employee Paolo Messina told The Insider that the Russian business is supposedly unprofitable (even if financial statements suggest otherwise), that its operations have been reduced, that the partners of Danieli Volga are not subject to EU sanctions, and that the entity’s Russian operations “are not crucial for the military sector.”

Danieli's statement

Danieli provided an official response to The Insider’s request for comment. In the company’s words, written to us in English:

“The Russian market is currently dormant for Danieli caused by the effect of the huge sanction limitation and null financial support by the whole international banks.

Please consider that before starting the conflict we had huge contracts in place with Severstal and MMK which have been duly stopped and cancelled causing Millions of loss to Danieli.

The same Danieli Volga was managing certain local contracts with Russian steel producers which have been duly stopped and canceled causing several litigations in front of the Russian jurisdiction Court causing impacting financial damages to the company.

OOO Danieli Volga currently operates with a very limited cash flow and reported a loss in the last financial period 2023-24 and there is no expectation for a better result in the current period 2024-25. In comparison to the year 2021 the present Danieli Volga overall business have decreased dramatically with losses and no expectation to distribute any dividend since then.

The company is owned 100% by our Luxembourg Holding and operates (with its own local based management and personnel) under the respect of the group sanctions rules issued by our compliance department.

The two directors of Danieli Volga operate in the interest of Danieli Volga itself with the obligation to follow the sanction limitation as issued by UE then applicable to the Danieli Group.

Due to the stop of the project with Novoross Metal we entered in a Court litigation in Russia but finally the Court decision was against Danieli causing some financial damages and ancillary limitation to sell and/or dismiss the Danieli Volga assets: by now the case have been finally settled and such limitations will be released shortly.

Please consider that none of Danieli Volga customers are subject to UE sanction and/or are considered crucial for the military sectors in everywhere.”