The Russian government has few good options as it races to come up with measures to assist tycoons hit by a new wave of U.S. sanctions.
With Washington’s move to blacklist some of the country’s biggest companies roiling financial and metals markets, the Russian government has tried to provide reassurance that it will protect them. But even its stable of well-capitalized state-controlled banks may not be willing to take the risk of continuing to do business with the industrial giants targeted by the U.S. Friday.
The government is focusing its efforts on billionaires Oleg Deripaska and Viktor Vekselberg but hasn’t settled on what form aid will take, according to a senior official involved in the process.
The latest U.S. moves marked the first time that major publicly traded Russian companies with global reach were hit with the restrictions, aimed at punishing Russia for aggressive policies from Ukraine to Syria. They helped drive the MOEX Russia Index of stocks down the most since March 2014, as investors worried that spiraling tensions between Moscow and Washington could fuel even wider limits in the future.
“A precedent has been set,” Citigroup analyst Barry Ehrlich said in a note Monday. If Rusal can be hit, “any Russian company can be included” in the future, he added.
Shares Drop
Shares in aluminum producer United Co. Rusal and holding company En+ Group Plc, which were both sanctioned along with Deripaska, extended their declines. En+ was down 17 percent in Moscow after the U.K.’s financial regulator suspended trading. Rusal fell 25 percent in Moscow as the company warned that the sanctions could trigger technical defaults on its loans. Aluminum prices jumped as much as 4 percent on fears that that limits could prevent many foreign buyers from dealing with Rusal.
Sulzer AG, a Swiss-based industrial company owned by Vekselberg, moved quickly to insulate itself, buying back enough shares to reduce the state held by the tycoon’s sanctioned holding company to below 50 percent and thus escape the impact.
But Deripaska’s sprawling and heavily indebted industrial empire — key components of which were singled out for sanctions — will be harder to protect, according to bankers and lawyers.
“The Kremlin will apply the ‘we do not give up our guys’ rule in response to American sanctions and will try to help Deripaska’s business to survive,” Kirill Chuyko, chief of research in BCS Global Markets said by phone. “But that will be difficult to do as even state banks can’t really help Rusal or En+ or they may be sanctioned in return.”
A sale that took the companies out of Deripaska’s hands also wouldn’t necessarily solve the problem, since they were specifically sanctioned by the U.S., according to Chuyko.
Default Fears
Rusal and En+ could default even on debt held from domestic banks as well as on it debt on bonds and pre-export financing. “Rusal can’t pay interests in dollars as such operations go through American banks and will be blocked,” Egor Fedorov, analyst at ING Bank in Moscow said by phone. Deripaska has stakes in some of his companies pledged to state banks, but in most cases they big enough to convey control.
En+, Deripaska’s main company had about $13 billion gross debt at the end of 2017, including Rusal’s. About 90 percent of the aluminum company’s $8.5 billion debt is dollar denominated. Sberbank, VTB and Gazprombank are among its biggest lenders, while it also debuted with yuan Eurobond issues last year and has a pre-export financing facility from a group of international banks that is also serviced in dollars.
Chuyko of BCS said the government would likely have to turn to banks with no U.S. exposure, such as sanctioned lender Vnesheconombank or banks operating in Crimea, which is also subject to U.S. restrictions. “They have nothing to lose,” he said.
The conversion of Promsvyazbank, a leading private lender that is being nationalized, into a bank for the defense industry could be a template on how to avoid violating sanctions. Sberbank is transferring its defense assets to Promsvyazbank to protect against a U.S. law that mandates measures against companies doing “significant” business with the military.
One source of funding that’s likely to remain for Deripaska is the dividend flow from Rusal’s 28 percent stake in MMC Norilsk Nickel PJSC, which is paid in rubles through a Russian depository. But the sanctions are likely to mean the end of Deripaska’s latest bid to challenge rival oligarch Vladimir Potanin’s control over Norislk.
The press services of Deripaska, Vekselberg, VTB and Sberbank didn’t respond to messages seeking comment.
Deripaska and Vekselberg are likely to meet with government officials once they have a clearer sense of the impact of the limits on their businesses, people close to them said.
“We’re very attentive to our leading companies, they have thousands of workers, very important jobs for our country,” Deputy Prime Minister Arkady Dvorkovich said, adding that some measures had already been discussed in advance.
This article was provided by Bloomberg News.
