Sanctions On Russia Squeeze Glencore -- WSJ

By Scott Patterson

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 11, 2018).

New U.S. sanctions are causing fresh economic pain for Moscow, but have also ensnarled a handful of Western firms with deep roots in Russia.

Glencore PLC said Chief Executive Ivan Glasenberg had resigned as a director of United Co. Rusal, which made Washington's sanctions list last week. Glencore owns a nearly 9% stake in the firm. The Swiss commodities giant said Tuesday it was committed to complying with sanctions and mitigating risks to its business from them.

Glencore also said it was halting a previously agreed plan to exchange Rusal shares for equity in London-listed En+ Group PLC.

Both Rusal and En+ are primarily owned by billionaire Oleg Deripaska. Mr. Deripaska and En+ were also named in Friday's sanctions list.

It isn't clear what Glencore will do with its Rusal stake, which was worth just shy of $1 billion at the end of 2017. On Monday, Rusal's Hong Kong-listed shares fells more than 50% amid investor worry about the effect of the sanctions on Rusal's contracts. Those shares were down a further 9% Tuesday.

The new sanctions have rocked Russian financial markets this week. The ruble and stock market fell sharply Monday, with the Russian currency extending losses Tuesday.

They have also sent some Western firms with Russian business ties scrambling to assess their exposure to any further scrutiny from Washington.

Years of U.S. and allied sanctions have already sharply curbed Western investment in Russia. However, Friday's measures took direct aim at a group of businesses and their owners that had long been viewed as relatively safe bets.

Take Mr. Deripaska: Viewed by outside observers as a close ally to Russian President Vladimir Putin, he has been a potential target for sanctions for years. However, he and his companies have exhibited a measure of global engagement and financial transparency, with an international shareholder and customer base that has helped western partners view them as relatively safe despite the sanctions risk -- until now.

A representative of Mr. Deripaska told Russian news agencies on Friday that his inclusion on the sanctions list was "baseless, ridiculous and absurd."

Another target of the new sanctions was Viktor Vekselberg, head of a large Russian conglomerate, Renova Group, which has deep business ties across Switzerland. Mr. Vekselberg isn't seen as particularly close to Mr. Putin, surprising some Russia watchers and underscoring the uncertainty over who might be next should Washington continue to target Moscow. Mr. Vekselberg wasn't reachable for comment.

Over the weekend, Swiss engineer Sulzer AG agreed to buy back shares from Renova Holdings, which also appeared on the sanctions list. The company said it had bought enough shares to bring Renova's ownership stake to under 50%.

Sulzer said it believed its stock purchase would "assuage" any concerns about the independence of the company in light of the sanctions. Nonetheless, shares in Sulzer have fallen by about 15% from Friday's close.

OC Oerlikon, another Swiss engineering firm, said Monday that Mr. Vekselberg's ownership stake in it was only 43% -- below the 50% threshold that it said would restrict U.S. citizens from investing in or doing business with it. Oerlikon shares have fallen by about 5% over the last two days.

Investors have fled other Russian firms that haven't been specifically targeted, partly because of the new uncertainty over whether they might end up in Washington's crosshairs. American depositary receipts in energy producers Gazprom PJSC and Lukoil PJSC both fell sharply this week.

Global depositary receipts in PAO Rosneft, Russia's biggest oil producer, were also down steeply this week. It hasn't been specifically targeted by sanctions, although the company's boss, Igor Sechin, a close Putin ally, has since 2014. That has restricted executives at BP PLC, which owns 19.8% of Rosneft, in how they interact with him. Chief Executive Bob Dudley remains a board member at Rosneft.

"The company ensures it complies with all applicable sanctions," a BP spokesman said.

Glencore, though, has been at the center of the financial storm stemming from the most recent U.S. sanctions. Mr. Glasenberg has been a board member of Rusal since 2007, soon after Glencore agreed to sell its alumina assets to Mr. Deripaska's company. That helped make the Russian firm the world's biggest producer of the metal at the time, topping U.S. giant Alcoa Corp. It has recently been usurped by a Chinese producer.

Mr. Glasenberg leveraged Glencore's ties to Rusal to become its biggest aluminum customer -- and one of the world's biggest traders of the metal. Glencore purchased $2.4 billion worth of the Russian company's metal in 2017, according to Rusal's corporate filings.

Glencore has a long history of doing business in Russia. Marc Rich, the financier who started the company that went on to become Glencore, bartered Russian oil for Cuban sugar in the early post-Soviet period. More recently, Glencore has been a central player in brokering the sale of a stake in Rosneft to a Chinese energy company.

Glencore said it was evaluating contracts with Rusal for the purchase of aluminum and alumina but said they aren't financially material to the company.

Analysts have noted Glencore enjoys some hedges against its Russian exposure. Its Rusal stake, for instance, isn't huge. If the stock-market value of the stake was entirely wiped out, it would account for just about 1.3% of Glencore's market value, according to Sanford C. Bernstein analyst Paul Gait.

Mr. Gait also points to Glencore's 47.5% stake in U.S. aluminum producer Century Aluminum Co., whose shares rose 12% Monday. Investors are betting it could benefit if it pulls customers away from Rusal in light of the sanctions.

James Marson

in Moscow and Brian Blackstone in Zurich contributed to this article.

Write to Scott Patterson at [email protected]