The latest US sanctions announced against a number of Russian companies, individuals and a bank on 6 April 2018 are likely to have a severe effect on these companies’ operations and financial profiles by curtailing their ability to trade and service their US dollar-denominated debt, says Fitch Ratings. These sanctions are the most significant affecting Russian corporates since the initial introduction of US sanctions in 2014.
The 12 companies subject to the latest sanctions include leading industry entities Rusal, EN+, EuroSibEnergo, Russian Machines, GAZ and Renova Group, which are owned or controlled by Russian oligarchs, one state-owned weapon-trading company, Rosoboroneksport, and its subsidiary bank, along with a number of individuals. All US assets of the designated companies and persons are frozen. US persons are prohibited from doing business with the designated companies, and non-US persons may become subject to sanctions themselves, if they facilitate any significant transaction with a designated company.
The sanctions are likely to have a profound effect on the designated companies, which would be unable to transact in US dollars – the standard denomination currency in commodities trading and the main currency in counterparty transactions in international trading. For instance, around 80% of Rusal’s total revenues in 2017 came from sales outside of Russia, including 10% directly to US customers. The number of counterparties that will be able and willing to provide procurement, marketing, funding or treasury services to those companies is likely to be significantly reduced.
The affected Russian companies’ business and financial profiles are likely to suffer as a result due to their reduced trading activity. Furthermore, some designated companies have debt denominated and payable in US dollars that they may be unable to service. Rusal has said that its legal counsel is assessing whether these sanctions may result in technical defaults in relation to certain credit obligations of the group. On Wednesday, Fitch revised its Rating Watch on Rusal’s ‘BB-‘ rating to Negative from Evolving and withdrew the rating, and it has also withdrawn EN+ Group’s rating, which was ‘BB-‘/Rating Watch Negative. Following these rating actions, Fitch does not rate any entity on the 6 April list.
The Russian equity and corporate bond markets recorded significant losses following the US announcement, which also affected companies and entities that are not subject to the sanctions. This could indicate market concerns that the US could extend the list of sanctioned entities, for example by targeting other companies and institutions that transact with the already designated companies and individuals.
The Russian Finance Minister has said that the government could provide short-term liquidity resources to the affected companies using Promsvyazbank, which is being re-capitalised, or other forms of support; the likelihood of this support materialising, its mechanisms and longevity are currently unclear, however.
The previous sanctions imposed by the US on Russian entities are more limited in scope and target certain types of transactions with US persons, including the raising of new long-term debt and equity, and restrictions on the supply and export of certain military and oil and gas equipment and services. The affected entities have been able to cope with those sanctions but we believe that the blanket prohibition on any transactions by a US person and the threat of sanctions for a significant transaction by a non-US person will have a greater impact on the designated entities.
A strong external balance sheet means the Russian sovereign (BBB-/Positive) is well positioned to meet forex needs from other parts of the economy, and exchange-rate flexibility provides a shock absorber that was not available in 2014. However, uncertainty stemming from the sanctions and their possible extension could deter investment and thereby undermine potential economic growth. Growth performance and potential are a weakness compared to rating peers.
