U.S. Sanctions Turn Putin Tycoons Into International Pariahs

(Bloomberg) -- The U.S. is taking sanctions against Russia to a new level.

The U.S. Treasury on Friday turned away from past efforts like curbs on visas to unleash measures that will sever access to global financial markets, buyers and suppliers for several of Russia’s Kremlin-connected billionaires.

One of them, Oleg Deripaska, bears the brunt. And sanctions against him entangle some of the world’s biggest businesses and financial groups. Shares of his giant aluminum operation trade in London, Hong Kong and Moscow, and customers include Glencore Plc and Toyota Motor Corp.

Philip Lader, a former U.S. Ambassador to the U.K., and Ivan Glasenberg, chief executive officer of Glencore, are among board members of Deripaska’s United Co. Rusal, the biggest aluminum producer outside China. Its shareholders include Vanguard Group, JPMorgan Chase & Co. and Invesco Ltd., according to recent U.S. regulatory filings.

U.S. Versus Them

“You face a really simple question,” said Brian O’Toole, a former chief of staff at the Treasury’s Office of Foreign Assets Control, which draws up sanctions. “Are you going to continue to do business with Deripaska, or with the U.S.?"

Eight of the 12 oligarch-controlled companies listed for sanctions on Friday are owned by Deripaska, a frequent companion of President Vladimir Putin on the Russian leader’s trips abroad. One of them, En+ Group Plc, immediately lost a record fifth of its market value.

U.S. operations of sanctioned companies are now frozen and Americans mostly barred from dealing with them, while others outside the U.S. will be punished for carrying out significant transactions with the businesses.

The measures directly target oligarchs with companies that have wide-ranging involvement in international capital markets. Treasury Secretary Steven Mnuchin said in a statement on Friday that the Russian government disproportionately benefits oligarchs and elites, as well as occupying Crimea, instigating violence in Ukraine and attempting to subvert Western democracies.

Marrying the Elite

Previous rounds of sanctions have largely been aimed at political or military figures, or imposed specific restrictions on companies without entirely banning U.S. entities from dealing with them.

“This is a blocking action,” said O’Toole, now a senior fellow at the Atlantic Council. They’re telling Deripaska, “you’re finished when it comes to dollars,” he said.

While Deripaska made headlines in the U.S. last year for links to President Donald Trump’s former campaign manager Paul Manafort, he’s known in Russia as one of a coterie of Kremlin-connected billionaires that dominates the nation’s vast natural resources.

Deripaska, 50, built his fortune amid the bloody and gangster-ridden aluminum wars of the 1990s, scooping up shares that had been issued to metalworkers as the Soviet Union collapsed into chaos. He cemented his place among the elite by marrying into the late President Boris Yeltsin’s family in 2001, a year after Putin took over.

Major Blow

The billionaire, who’s pointed out that his business was flourishing long before Putin came to power and has repeatedly denied any wrongdoing, has other links to the president.

In 2017, Putin chose the headquarters of Deripaska’s automaker, GAZ Group, to announce plans to run for the presidency for a fourth time. Rusal was also among companies that Putin helped to rescue during the 2008-2009 financial crisis by allowing state banks to refinance foreign-held borrowings.

Deripaska called the reasons for the sanctions as “groundless, ridiculous and absurd,” in a statement, issued by his press service. “I am preparing to celebrate Russian Orthodox Easter on Sunday and will then analyze the emerging situation with our lawyers early next week and provide some comments.”

Debt remains a major issue for Deripaska’s business. En+, which controls Rusal, had a net $12.2 billion outstanding at the end of 2017, including from international banks and eurobonds.

“Deripaska has been handed a major blow,” Oleg Petropavlovskiy, a BCS Global Markets analyst, said by phone. “Sanctions will make it much more difficult for his companies to refinance this liability.”

Wider Titans

Rusal will lose the U.S. market that makes up about 10 percent of its sales of the metal, he said. The company’s shares fell 18 percent in Moscow trading.

Deripaska has a long-held connection with Glencore’s Glasenberg. Glencore owns 8.75 percent of Rusal and has agreed to swap its stake for shares in En+. Glencore wasn’t immediately able to comment when contacted by Bloomberg.

Viktor Vekselberg, Deripaska’s partner in Rusal, is also on the sanctions list along with his Renova Group. Vekselberg’s spokesman didn’t return calls and messages seeking comment.

“The U.S. has moved from going after Putin’s inner circle to some of the wider titans of industry,” said Maximilian Hess, senior political risk analyst at AKE International. “How Putin reacts, and if he effectively rewards them, will be one of the big questions next.”

--With assistance from Thomas Biesheuvel

To contact the reporters on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net, Tom Wilson in London at twilson128@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Tony Barrett, John McCluskey

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