Russian markets tumbled after a new wave of US sanctions left the Kremlin scrambling to find ways to help its tycoons.
Moscow-traded stocks headed for their biggest drop in four years and the ruble slumped the most in the world after the US slapped new sanctions on billionaires. Targets include aluminium king and close Vladimir Putin associate Oleg Deripaska, who saw the value of his biggest company plunge as much as 50 per cent.
The Russian government has tried to provide reassurance that it will protect them. But even its stable of well-capitalised state-controlled banks may not be willing to take the risk of continuing to do business with the industrial giants targeted by the US on Friday.
Moscow is focusing its efforts on Mr Deripaska and fellow billionaire Viktor Vekselberg, but hasn’t settled on what form aid will take, according to a senior official involved in the process.
The latest US 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.
“A precedent has been set,” Citigroup analyst Barry Ehrlich said in a note on Monday. If Rusal can be hit, “any Russian company can be included” in the future, he said.
Shares in aluminium producer Rusal and holding company En+, which were both sanctioned along with Mr Deripaska, extended their declines. En+ was down 17 per cent in Moscow after the UK's financial regulator suspended trading.
Rusal fell 50 per cent in Hong Kong as the company warned that the sanctions could trigger technical defaults on its loans.
_______________
Read more:
[ US sanctions 24 Russian oligarchs and government officials ]
[ Russia promises 'tough response' to US sanctions ]
[ MI6 ‘concerned’ at Russian oligarch’s £1bn flotation in London ]
[ Gold lives up to its safe-haven reputation amid trade war fears ]
_______________
The company asked aluminium customers to stop payments and said it was investigating the consequences of the sanctions, according to a copy of a letter dated April 6 and signed by Rusal’s head of marketing.
Aluminium prices jumped as much as 4 per cent on fears that limits could prevent many foreign buyers from dealing with Rusal.
Sulzer AG, a Swiss-based industrial company owned by Mr Vekselberg, moved quickly to insulate itself, buying back enough shares to reduce the stake held by the tycoon’s sanctioned holding company to below 50 per cent and thus escape the impact.
But Mr 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 Mr Deripaska’s hands also wouldn’t necessarily solve the problem, since they were specifically sanctioned by the US, according to Mr Chuyko.
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.
En+, Mr Deripaska’s main company, had about $13 billion gross debt at the end of 2017, including Rusal’s. About 90 per cent of the aluminium company’s $8.5bn 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.
Mr Chuyko of BCS said the government would likely have to turn to banks with no US exposure, such as sanctioned lender Vnesheconombank or banks operating in Crimea, which is also subject to US restrictions. “They have nothing to lose,” he said.
The conversion of Promsvyazbank, a leading private lender that is being nationalised, into a bank for the defence industry could be a template on how to avoid violating sanctions. Sberbank is transferring its defence assets to Promsvyazbank to protect against a US law that mandates measures against companies doing “significant” business with the military.
One source of funding that's likely to remain for Mr Deripaska is the dividend flow from Rusal's 28 per cent stake in MMC Norilsk Nickel, which is paid in rubles through a Russian depository. But the sanctions are likely to mean the end of Mr Deripaska's latest bid to challenge rival oligarch Vladimir Potanin's control over Norislk.
The press services of Mr Deripaska, Mr Vekselberg and Sberbank did not respond to messages seeking comment. VTB declined to comment.
Mr Deripaska and Mr 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. Some measures had already been discussed in advance, he said.