(Bloomberg) -- Russian markets tumbled after a new wave of U.S. 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 U.S. slapped new sanctions on billionaires. Targets include aluminum king and close Putin associate Oleg Deripaska, who saw the value of his biggest company plunge as much as 50 percent.
The Russian government has tried to provide reassurance that it will protect them. But even its stable of well-capitalized 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. Friday.
Moscow is focusing its efforts on 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 U.S. 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 Monday. If Rusal can be hit, “any Russian company can be included” in the future, he added.
Shares in aluminum producer United Co. Rusal and holding company En+ Group Plc, which were both sanctioned along with Deripaska, extended their declines. En+ was down 17 percent in Moscow after the U.K.’s financial regulator suspended trading.
Rusal fell 50 percent in Hong Kong as the company warned that the sanctions could trigger technical defaults on its loans.
The company asked aluminum 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.
Aluminum prices jumped as much as 4 percent on fears that limits could prevent many foreign buyers from dealing with Rusal.
Sulzer AG, a Swiss-based industrial company owned by 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 percent and thus escape the impact.
But 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 Deripaska’s hands also wouldn’t necessarily solve the problem, since they were specifically sanctioned by the U.S., according to 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. Deripaska has stakes in some of his companies pledged to state banks, but in most cases they aren’t big enough to convey control.
En+, Deripaska’s main company had about $13 billion gross debt at the end of 2017, including Rusal’s. About 90 percent of the aluminum company’s $8.5 billion 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.
Chuyko of BCS said the government would likely have to turn to banks with no U.S. exposure, such as sanctioned lender Vnesheconombank or banks operating in Crimea, which is also subject to U.S. restrictions. “They have nothing to lose,” he said.
The conversion of Promsvyazbank, a leading private lender that is being nationalized, into a bank for the defense industry could be a template on how to avoid violating sanctions. Sberbank is transferring its defense assets to Promsvyazbank to protect against a U.S. law that mandates measures against companies doing “significant” business with the military.
One source of funding that’s likely to remain for Deripaska is the dividend flow from Rusal’s 28 percent stake in MMC Norilsk Nickel PJSC, which is paid in rubles through a Russian depository. But the sanctions are likely to mean the end of Deripaska’s latest bid to challenge rival oligarch Vladimir Potanin’s control over Norislk.
The press services of Deripaska, Vekselberg, and Sberbank didn’t respond to messages seeking comment. VTB declined to comment.
Deripaska and 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, adding that some measures had already been discussed in advance.
--With assistance from Natasha Doff Jake Rudnitsky and Ilya Arkhipov
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