Russian Sanctions Are a Creeping Problem for Everyone in
(Bloomberg Gadfly) -- American sanctions against Russia introduced on Friday include a twist. They contain not only a list of individuals and companies connected to the regime of Vladimir Putin, but also restrictions on trading in securities connected to either. The U.S. government says it will levy sanctions on anyone for "knowingly facilitating significant transactions for or on behalf of" people or organizations that are targeted by the latest penalties.
This creates a global problem that the Russian government may not be able to stop landing on the doorstep of its companies.
A wide range of transactions involving Russia are now incredibly tricky for global economies and markets. The motto for all becomes "if in doubt, don't touch." Aluminum producer United Co. Rusal is an example.
The company has already said it may face technical default from a failure to make coupon payments on its foreign-currency bonds -- the crunch date looks to be May 3, when it must make a $13.3 million payment on its $500 million 5.3 percent bond due in 2023. Though there is normally a 30-day grace period for companies to make good in these situations and avoid a genuine default, the problem here isn't that Rusal won't pay. It looks like it can't -- it physically won't be able to transfer the funds.
Clearstream, a unit of Deutsche Boerse AG, said it will not process any deals involving securities of Russian companies hit by the U.S. sanctions. Euroclear Bank SA says it will allow transactions that comply with American restrictions, but this only works for exiting holdings.
It is very difficult -- though not impossible -- for Rusal to make a coupon payment in dollars if the world's two main clearinghouses for dollar-denominated debt won't deal with it.
But this is just where the problems start. All U.S. holders of Rusal securities now have to sell. Though Euroclear looks like their most likely channel it's still not going to be an easy ride.
Furthermore, investors are well within their rights to sense that this need not be the end of sanctions, so there's no point taking risks by getting involved with any securities related to Russia. Better to avoid the prospect of getting trapped in a Russian asset that gets swept up in another round of U.S. penalties.
And Russia may not be able to help its targeted companies get around the sanctions by getting state banks to provide financial help, something officials did in previous rounds of penalties. For a start, this could mean that the Russian banks might themselves face penalties. What's fresh in everyone's minds are the billions of dollars in penalties BNP Paribas SA had to pay for violating sanctions against nations including Sudan and Iran -- it wasn't even dealing with the named countries in dollars.
In addition, any firm that operates in America, or would like to, will be at great pains to show that it did not interact with a bank or other company operating on behalf of Rusal. The safest course of action for these firms may be to avoid dealing with any Russian financial entity, for fear that somewhere down the road the U.S. Treasury will rule that due diligence to comply with the latest sanctions wasn't good enough.
So when Prime Minister Dmitry Medvedev orders his cabinet to devise a plan to help affected companies, it's hard to see what can be done. Such is the power the U.S. Treasury has in controlling worldwide payments in dollars.
A spokesman for Medvedev said Monday that officials need more time to assess the situation. They're not the only ones, but still, it's not a big help that American officials may be in no rush to ease the situation for anyone. Until then, more than the sanctioned Russian entities are caught in a vice.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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