Russian stocks and bonds sell off heavily after new US sanctions imposed on oligarchs

Russian stocks and bonds sell off heavily after new US sanctions imposed on oligarchs
Russian stocks and bonds sell off heavily after new US sanctions imposed on oligarchs. Oligarch Oleg Deripaska was in the front line / Kremlin.ru
By Ben Aris in Berlin April 10, 2018

Russian stocks and bonds sold off on April 9 as heavily as they did when Russia annexed the Crimea in 2014, after investors started reacting to the new sanctions imposed by the US last week on some of Russia’s biggest tycoons and members of Russian President Vladimir Putin’s inner circle. The seven businessmen listed in the new sanctions collectively saw $12bn of their wealth evaporate in a day as a result of the selling.

Most of Russia’s blue chips were caught up in the slow-building maelstrom, which gathered momentum after the Easter holiday break, but companies belonging to metals magnate Oleg Deripaska were in the front line. Deripaska was singled out for special attention in the new Specially Designated Nationals And Blocked Persons List (SDN List). Eight out of the 15 companies listed are controlled by Deripaska.

Deripaska’s Hong Kong-listed Rusal warned investors on April 9 that the company might be forced into default on its obligations as a result of the new US sanctions, causing the share price to halve.

The affect of the SDN list has been far more dramatic than the controversial Kremlin List released in January by the US Treasury Department, which was shrugged off by the market at the time as a “one size fits all” document copy-pasted from the last Russian Forbes rich list that included everyone worth more than $1bn.

Markets sell off

The ruble-denominated Moscow Exchange index sustained its heaviest losses since the annexation of Crimea, dropping by 8.3% in the day to close at 2,090. Its sister index the dollar-denominated Russia Trading System (RTS) sold off even more, falling 11.4% in the day to close at 1,094 at the end of play on April 9.

Russian five-year credit-default swaps also climbed 15 basis points, while Russia’s 10-year ruble bonds fell for the second day in a row, lifting the yield 21 basis points to 7.285%, the highest since January, as trading volumes surged.

The ruble fell to a low last seen six months ago as the ruble traded above 60 to the dollar for the first time since November 2017 and briefly went over 75 to the euro. The falling value of the ruble came despite a surge in oil prices, which usually support the value of Russia’s national currency; Brent futures with a settlement date in June 2018 rose to $68.2 per barrel.

Rusal, EN+ worst hit

Deripaska’s Rusal saw the biggest fall, dropping 20.35% in the day, reports Tass, as aluminium-trading houses almost universally suspended operations with Rusal.

Under the stricter terms of the SDN list, US companies and individuals are barred from doing business with those named on the list and by extension with their companies. The sanctions can only be removed by an act of US Congress. US companies now have 30 days to unwind their positions and cancel their business deals with those included on the SDN list.

"Persons from the United States are now prohibited from dealing with persons who have been sanctioned by sanctions and companies, almost all transactions with them are banned," said Eric Ferrari, head of the Washington-based law firm Ferrari & Associates.

The conditions on Deripaska’s companies are even tougher than on the others named in the list: US investors must sell their shares and debts in his companies by May 7, though they are allowed to hold the company’s bonds, according to reports.

The effect of Deripaska’s inclusion in the list is to make all his companies toxic to investors and partners. Rusal's main shareholder En+, which successfully held a $1.5bn IPO in London last year, saw trading in its GDRs suspended on the London Stock Exchange (LSE) by the UK's Financial Conduct Authority for the session of April 9. Citi Treasury also blocked all operations with En+ GDRs. The capitalisation En+ dropped by 30% after the inclusion in the US Treasury’s list. In Moscow, the name lost 20% as of noon on April 9.

Oligarchs and stoligarchs

The other two prominent names on the SDN List were Viktor Vekselberg and senator Suleiman Kerimov, but it is not clear why they were included as they do not belong to Putin’s inner circle nor have they conspicuously benefited from help from the state.

The circle around Putin has closed considerably in the last few years, according to bne IntelliNews government sources, and a small group of stoligarchs, or state-sponsored oligarchs, have been the main beneficiaries.

VTB’s Andrei Kostin is a member of this group as is Gazprom CEO Alexei Miller, both of whom are on the new list. Igor Rotenberg is the son of Arkady Rotenberg who is a close personal friend of Putin’s and a key member of the stoligarchs, who are rumoured to meet regularly at Putin’s dacha outside of Moscow. Oddly Gennady Timchenko, who is the second big businessmen that is a core member of the stoligarchs and close to both Putin and Rotenberg, was not included on the list.

Vekselberg and Kerimov are not intimate with Putin. Both are successful businessmen although Vekselberg made his money the hard way and did not participate in the notorious loans-for-shares privatisations in the mid-90s, nor has he owned a bank – the two routes many of the other oligarchs took to fortune – but he is a 90s vintage oligarch. Kerimov, on the other hand, has clearly used his position as a Federation Council senator to help his career along; he is one of the wealthiest politicians in Russia.

Vekselberg has probably been the least affected by being included in the sanctions list, as his businesses are not listed apart from three investments into Swiss companies. Kerimov on the other hand controls the Polyus Gold company that is listed and has sold off like the other companies with direct links to those on the SDN list. 

Renova owns stakes in three Switzerland-based equipment manufacturers, Sulzer AGOC Oerlikon Corp. and Schmolz + Bickenbach AG, as well as a holding in Rusal. Shares in the companies tumbled even as Vekselberg took steps to lower his stake in Sulzer to below a majority in a bid to insulate the company, reports Bloomberg. 

Andrey Akimov, the head of Gazprombank, is also not a stoligarch or even an oligarch, but as the head of the state-owned financial arm of Gazprom he is a natural candidate for inclusion in the list. As is the reclusive owner of privately owned oil company Surgutneftegas Vladimir Bogdanov.

While not a stoligarch, Bogdanov is supposed to be very close to Putin and it is alleged that Putin secretly owns a significant part of the oil company worth billions of dollars. Activist fund manager turned Kremlin foe Bill Browder told bne IntelliNews that his Russian visa was revoked at the behest of Surgut after he carried out an investigation into the oil company’s Byzantine shareholder structure.

Collateral damage

Market boards were splashed with red as innocent bystanders got caught up in the panic selling, not just the companies belonging to the listed businessmen.

The second worst performer after Rusal was Kerimov’s Polyus Gold, which lost 18.31% in the day’s trading.

VTB shares took a 9.03% hit, which was relatively mild, as the state-owned bank’s chairman Kostin was also named on the SDN list.

Steel plant Mechel was the worst performing from the stocks that were not linked to the SDN list. However, the troubled company announced on April 9 that its creditors had tightened credit terms after it broke conditions in its debt covenants in 2016 and 2017. Despite making a remarkable recovery in the last two years and announcing its first profit in five years in 2017 Mechel remains heavily indebted and is struggling to recover.

State-owned retail banking giant Sberbank was not named, nor was its chairman German Gref, but Sberbank ordinary and preferred stock fell 17.04% and 13.44% respectively even after the bank tried to play down the impact of sanctions on Russian business.

Sberbank’s fall will hurt international investors as much or even more than the Kremlin as Sberbank has become a “tourist” stock in the last few years: every investor that wants any exposure to the Russian market buys Sberbank shares first. Before the shock of the April 9 selloff Sberbank was the second most overweight stock in the emerging market universe and Russia the second most overweight market amongst the benchmark MSCI EM index. Despite the fraught political relations with the West, the average global emerging market fund's overweight in Russia has doubled in the past two years, as holdings have grown to 5.4% versus an MSCI EM weight for Russia of circa 3.5%.

Other stocks that took a beating include the ordinary shares of gold miner Polymetal (-12.66%), big three mobile phone company Megafon (-9.77%), pipemaker TMK (-9.15%) and Russia’s national airline Aeroflot (-8.46%).

Stocks are expected to bounce back as they did following the annexation of the Crimea and a very short list of companies will be directly affected by the prohibition on contact with US investors. However, the wider implications of the sanctions are not yet clear.

For example, Sberbank is not listed but it has an estimated $10bn exposure to the companies that are, and as a state-owned bank it is unlikely to unwind those positions, creating a new risk for US investors into its stock and bonds.

Removing Rusal from the international aluminium trade could also have a significant affect on the international trade. The company earns 79% of its revenue from exports and the US accounts for 14% of its business. Removing Rusal’s input from the international aluminium trade could change the nature of the market and send prices up as a result, say analysts. The price of aluminium surged the most in more than two years on the London Metal Exchange on Monday.

 

 

 

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