(BBG) The most punitive U.S. sanctions yet to descend on Russian companies and oligarchs are battering the nation’s assets as the Kremlin scrambles to contain the damage.
In the first trading day since dozens of Russian tycoons and companies were slapped with penalties, Moscow-traded stocks headed for the biggest drop in four years, the currency slid the most in the world and the nation’s credit risk soared.
Among those named by sanctions were Oleg Deripaska, who owns aluminum giant United Co. Rusal. Revealing the potential ripple effect of being cut off from its western clients, Rusal said on Monday it was highly likely to default on debt. Its shares tumbled 28 percent in Moscow.
“We haven’t seen such a united, mass retreat from Russian assets for a long time,” Kirill Tremasov, director of the analysis department at investment company Loko-Invest in Moscow. “The situation is ever more reminiscent of 2014,” he said, referring to a market crash that year following President Vladimir Putin’s annexation of Crimea and subsequent slump in oil.
While Russian companies have faced a slew of sanctions since the conflict with Ukraine sparked the worst standoff with the U.S. and Europe since the Cold War, the latest penalties are markedly more devastating. For the first time, major publicly traded Russian companies with global clients are on the black list.
Even the Kremlin’s attempt to assuage concerns by promising to protect billionaires couldn’t slow the investor flight. The benchmark MOEX Russia Index sank 8.6 percent, the most since March 2014 at the height of the Crimea conflict. The ruble weakened 3.1 percent by 4:26 p.m. in Moscow, crossing 60 per dollar for the first time since November.
The tables have turned against Russia quickly in the past few weeks since the U.K., accused the country of poisoning an ex-spy on British soil. In retaliation, the U.K. and its allies have announced a slew of measures — including coordinated expulsions of more than 150 Russian diplomats last month.
The new sanctions also coincide with a worsening of tensions between Russia and the U.S. over the war in Syria after an alleged chemical attack outside Damascus April 7. U.S. President Donald Trump warned of a “big price to pay,” pointing the finger at Putin and Iran as being “responsible for backing Animal Assad.”
“Investors finally realized how badly things are turning out for Russia,” said Vadim Bit-Avragim, a money manager at Kapital Asset Management LLC in Moscow, who’s selling Russian shares today. “Investors are afraid that now any Russian company is at risk of sanctions. Traders are closing limits on Russian shares because they’re seen as toxic assets.”
In addition to Deripaska, billionaire Viktor Vekselberg was named under American sanctions. Vekselberg is the chairman of an investment group called Renova that owns a stake in Rusal. He also holds a majority interest in Swiss industrial pump manufacturer Sulzer AG, which Renova said on Monday would be lowered to insulate the company from the penalties.
Prime Minister Dmitry Medvedev ordered his cabinet to come up with ways to assist the affected companies and draft possible retaliatory measures, but provided no details.
The Kremlin needs time to assess “the scale of the real damage” from the new sanctions and formulate a response, spokesman Dmitry Peskov said. “These sanctions are a rather new phenomenon,” he said.
The reaction of investment banks was swift. Morgan Stanley, for one, closed its long ruble recommendation, citing the likelihood of of foreign investors fleeing the country.
Rusal led the declines among all but one shares in Moscow. The company asked its customers to stop payments as it investigates the consequences of the sanctions.
Deripaska’s energy holding En+ Group Plc, meanwhile, fell as much as 23 percent. The company had about $13 billion gross debt at the end of 2017, including Rusal’s — with Russian lender Sberbank PJSC among its biggest creditors.
More than half of Rusal’s debt is dollar denominated, making default on its bonds “the most likely scenario,” according to analysts at Raiffeisen Capital. They expect a halt on dollar settlements and disruptions in aluminum sales.
Part of the worry is that Putin’s hands will be tied on how much he can help out targeted companies. Even 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. for fear of repercussions.
Russian five-year credit-default swaps — contracts that insure against potential default — climbed 15 basis points, or 12 percent, on Monday, the most since December 2014 when Russia was facing a currency crisis.
“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,” said Kirill Chuyko, chief of research in BCS Global Markets. “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.”