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Russia and China trade new copper disguised as scrap to avoid taxes and sanctions

(Reuters) – Russian Copper Company (RCC) and Chinese companies have been dodging taxes and sidestepping the impact of Western sanctions by trading new wire rod disguised as scrap, three sources familiar with the matter told Reuters.

Copper wire rod was shredded in the remote Uighur region of Xinjiang by a middleman to make it difficult to distinguish from scrap, the sources said, allowing both exporters and importers to take advantage of differences in tariffs applied to scrap and new metal, the sources said.

Russia’s export tax on copper rod was 7% in December, lower than the 10% levy on scrap. Imports of copper rod into China are taxed at 4%, and there is no duty on imports of Russian scrap.

The sale of new metal disguised as scrap, which began in December, is reflected in a discrepancy between Chinese and Russian data.

Chinese customs data showed that China has bought significantly more copper scrap from Russia since December, while Russian figures obtained by Reuters from a commercial data provider show that the amount of scrap exported to the country’s largest trading partner is negligible.

Responding to a Reuters inquiry into the discrepancy, Russian customs said: “Federal Customs is temporarily not providing data on foreign trade.” The country stopped publishing trade data in April 2022, shortly after Russia’s invasion of Ukraine. Since then, the market has been dependent on commercial providers.

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Asked about copper bar trade with Chinese companies, RCC, which is subject to Western sanctions, said it only supplies products to Russian companies. It made no further comment.

Chinese customs in Xinjiang, which borders Russia, did not respond to an email query and a phone call.

China has become a key destination for Russian companies looking to export their raw materials after the United States imposed sanctions on Russia over its invasion of Ukraine in February 2022.

The United States and the European Union have imposed sanctions on Chinese companies for supporting Russia’s war effort in Ukraine.

DISGUISE

Shredding newly manufactured wire rod is an effective way to disguise new material that looks very different from scrap.

The new, long, thin, high-purity copper bars, used primarily for making power cables, are typically coiled for ease of transportation.

Copper scrap, on the other hand, is a mix of wires, pipes and pipes that have already been used. For transport they are chopped into grain size or rolled and pressed, like packets of noodles.

The fragmentation had escaped notice because China has restricted access to the Xinjiang region in response to international condemnation of Uighur oppression, the sources said.

Aside from the financial incentive to avoid taxes, the shredded metal is harder to identify and trace, making it easier to sell to Chinese manufacturers.

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Theoretically, there are no legal obstacles preventing China from buying metal from Russian companies under Western sanctions, but manufacturers may still be wary of losing export business to buyers who try to avoid providing money to Russia.

Sanctions can also cause problems with processing payments and borrowing money. The sources said some Chinese companies have set up new teams to deal with Russia-related matters.

‘DE FACTO COPPER ROD’

According to a commercial data provider, Chinese companies purchased a total of five products labeled “copper rod” from RCC’s factory in the Urals last December. The purchases made by a United Arab Emirates-based entity called Modern Commodity Trading DMCC generated revenue of about $65 million, according to the commercial data provider.

The UAE-based company could not be reached for comment.

Russia has never been a major seller of copper scrap to China.

However, from December last year, China’s imports of copper scrap from Russia increased significantly, customs data show.

The bulk of that, 97% or 6,434 tons, came through Xinjiang’s Alashankou border in December.

Russian data showed a mismatch, indicating that the country sold only 73 tons of copper scrap to China in the same month.

In 2021 and 2022, an average of 95.3 tons and 125 tons of Russian copper scrap were sold to China each month.

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Volumes have risen sharply in recent months, with monthly imports reaching 11,599 tonnes in February 2024.

Customs data on Chinese imports of copper wire rod is not publicly available.

“This scrap from Russia is de facto copper rod, but is not declared as rod. I cannot reveal further details,” said a Chinese manufacturing source who spoke on condition of anonymity. The source added that the material can be directly consumed by copper manufacturers in Jiangsu and Zhejiang provinces.

While Russian data showed minimal scrap exports, a sudden increase in wire rod exports occurred in December.

According to the data, “Kyshtym Copper Electrolyte Plant JSC”, a factory run by RCC, supplied 8,041 tons of copper wire rod to China via Alashankou in Xinjiang in December, compared to only 1,618 tons in November.

“As of today, Kyshtym Copper Electrolyte Plant sells its products only to domestic companies,” the Kyshtym plant said in response to Reuters questions about sales to China.

“We have not followed the further fate of the products, so I have nothing to add to what has already been said.”

(This story has been refiled to correct spelling in paragraphs 2 and 14 from ‘Uyghur’ to ‘Uyghur’)

(Reporting by Reuters reporters; Editing by Veronica Brown and Barbara Lewis)

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