Russian Markets Recoil on Sanctions -- WSJ

By James Marson and 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 10, 2018).

MOSCOW -- Russian markets convulsed in the wake of new U.S. sanctions, as the ruble tumbled and domestic and foreign investors dumped Russian stocks.

Shares in United Co. Rusal PLC, the giant Russian aluminum maker, lost half of their value on Monday, after the U.S. hit the company and its main owner, Oleg Deripaska, with sanctions on Friday. The damage spread across a broad range of Russian assets, leaving the country's main MICEX stock index down more than 8% and the ruble off 4% against the U.S. dollar, amid uncertainty over which other companies could be hit by potential further sanctions.

"Now, no one in the top 100 list [of wealthiest Russians] can be sure they won't be subject to sanctions," said Timothy Ash, an analyst at BlueBay Asset Management in London.

The Russian government scrambled to respond Monday, with Prime Minister Dmitry Medvedev ordering ministers at a government meeting to work out measures to support companies that have been targeted by sanctions, without giving details. He called the sanctions inadmissible and illegitimate.

The measures could hit Russian economic growth, already forecast to be weak this year, as banks will be even more cautious about lending to Russian companies, Mr. Ash said. However, analysts from Renaissance Capital said the impact on growth should be limited by the fact that many companies have reduced external debt in recent years.

Many investors were surprised by the severity of the sanctions, which targeted senior Russian government officials as well as some of President Vladimir Putin's closest business allies and the companies they own.

The measures have also coincided with harsher rhetoric from U.S. President Donald Trump toward Russia, after a suspected chemical-weapons attack by Syrian President Bashar al-Assad, a Moscow ally, killed dozens of civilians in the Middle Eastern country.

"The thinking was that Trump would do as little as possible on Russia," said Elina Ribakova, head of EMEA research at Deutsche Bank in London.

Now, the perception is that the recent actions have been coordinated with European allies, in the wake of a nerve-agent attack against a former Russian spy in England that the U.K. government blames on Russia. "Things could be ratcheted up further," Ms. Ribakova said.

Hardest hit Monday was Rusal. Its shares finished down 50% in Hong Kong, its main listing, after it said in a filing Monday that U.S. sanctions "may result in technical defaults in relation to certain credit obligations" and that it was evaluating the impact of any such defaults on the company's financial position.

The specter of disruptions hit global aluminum markets, which jumped 4.8% in London trading. London commodities broker SP Angel estimates Rusal's primary aluminum output last year accounted for about 6% of global production and 14% of production excluding China.

Rusal was one of 12 companies, owned by seven Russian tycoons, that the U.S. government sanctioned Friday over what Treasury Secretary Steven Mnuchin called Russia's "malign activity" around the world, including military interventions in Ukraine and Syria and cyberattacks. A Kremlin spokesman on Monday called the measures unlawful and said that the government was analyzing them and preparing a response.

Mr. Deripaska, Rusal's main owner, was also specifically named in U.S. sanctions Friday. Mr. Deripaska on Friday called the measures against him "baseless, ridiculous and absurd," a representative told Russian news agencies.

En+ Group PLC, a London-listed company that is majority owned by Mr. Derispaska and holds a 48% stake in Rusal, as well as power companies in Russia, said it was "highly likely" that the sanctions would hurt its business. En+ shares fell 42% on Monday after a brief trading suspension.

Western firms that have partnered with Russian firms now on the sanctions list were also assessing new risks. Swiss engineer Sulzer AG said it had agreed to buy shares from its main owner, Renova Holdings, which appeared on the sanctions list along with its chairman Viktor Vekselberg, in order to comply with the sanctions. Sulzer shares fell 16% in Swiss trading.

Swiss-based mining and trading giant Glencore PLC holds a nearly 9% stake in Rusal. Glencore Chief Executive Ivan Glasenberg has been a Rusal board member since 2007. It is unclear if the sanctions directly affect that shareholding. Glencore declined to comment. The company's shares fell 3.4% in London trading.

The new U.S. restrictions make it all but impossible for Rusal and other sanctions firms to do business in dollars, analysts said, raising questions about their banking and trading relations.

The U.S. government said that non-U.S. citizens may face sanctions for "facilitating significant transactions" for sanctioned individuals or entities. That could make activities as simple as exchanging currencies more expensive for Rusal, given the international scope of its operations and the fact that sales are priced in U.S. dollars, said Edward Sterck, an analyst at BMO Capital Markets.

Ira Iosebashvili contributed to this article.

Write to James Marson at [email protected] and Scott Patterson at [email protected]