Explainer – How Russian Tycoon Deripaska Might Try to Navigate Sanctions

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President of En+ Group, Oleg Deripaska attends an agreement signing ceremony with the Krasnoyarsk region's government, in Moscow
President of En+ Group, Oleg Deripaska attends an agreement signing ceremony with the Krasnoyarsk region's government, in Moscow, Russia December 12, 2017. REUTERS/Sergei Karpukhin/File Photo
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By Polina Devitt, Anastasia Lyrchikova and Oksana Kobzeva
MOSCOW (Reuters)

Businesses controlled by Russian metals tycoon Oleg Deripaska are scrambling to find ways to keep trading after they were added to a U.S. sanctions blacklist

The sanctions – imposed by Washington in response to what it called “malign activities” by Russia – will in effect choke off access for Deripaska’s businesses to the international financial system, forcing them to make major re-adjustments.

Among individuals and entities named on Friday’s sanctions list was Deripaska and a number of his companies, including Rusal and En+ Group, which manages his assets and owns his 48 percent stake in Rusal.

The biggest asset in Deripaska’s portfolio is Rusal, one of the world’s biggest aluminium producers. It will likely feel the impact of the sanctions in two main areas: its sales on world markets, and its borrowing.

 

 

Rusal and En+ declined to comment. Rusal has said that the sanctions may result in technical defaults in relation to some of its credit obligations but it intends to continue to fulfil its existing commitments in accordance with legal and regulatory requirements.

Here is a look at what is at stake and what some of the options Deripaska has to mitigate the sanctions impact.

 

SALES

What’s at stake?

Rusal is the world’s second-largest aluminium producer after China’s Hongqiao, accounting for 5.8 percent of world production of the metal last year, according to the Russian company.

The United States was Rusal’s third biggest foreign customer last year by revenues, bringing in $1.4 billion, the company’s financial report showed.

Large scale end-customers of Rusal include Glencore, Alcoa’s Samara Metallurgical Plant in Russia, Toyota, Mechem SA and Rio Tinto Alcan, the company said in a bond prospectus earlier this year.

 

 

What effect are the sanctions having?

While some customers have said they are looking at what steps to take, it is too early to determine what the full impact of sanctions will be.

The sanctions on dealing in goods with Rusal do not come fully into force until just after midnight eastern daylight time on June 5.

Once they do take effect, U.S. customers will be prohibited from buying aluminium from Rusal because the sanctions prohibit U.S. companies and individuals from doing business with a sanctioned entity.

Non-U.S. customers could also have difficulties buying the aluminium. Their lawyers may advise them they risk being targeted for so-called “secondary sanctions” for helping a sanctioned entity.

Also, the transaction is likely to be in dollars, which means passing through correspondent accounts in the United States, and U.S. banks could refuse to handle the transaction because the beneficiary is under sanctions.

Swiss-based mining company Glencore, which is both a customer of and a stake owner in Rusal, has said it is committed to complying with sanctions and is taking steps “to mitigate any risks” to its business. It added that includes the risks from secondary sanctions, which could be imposed on firms if they are deemed to be facilitating Rusal’s business.

 

“Glencore is still evaluating the position under its contracts with Rusal, but notes that these contracts are not financially material to Glencore,” it said in a statement

What might Deripaska do?

Rusal will likely divert a greater proportion of its sales to Asia, according to traders and metals market analysts.

 

 

“Supplies will be re-directed to other markets,” said Maxim Khudalov, an analyst with Russian ratings agency AKRA. “The re-focusing will be mostly to Asia and China.”

Rusal has already planned for such a scenario. When the U.S. government earlier this year raised the prospect of tariffs on some metal imports, En+ told investors Rusal had other options. In light of a “global aluminium market deficit,” Rusal “would be able to redirect volumes to other regions as may be required,” En+ said in a March presentation.

However, sending cargos to Asia would likely mean that Rusal’s margins are squeezed, according to analysts.

Rusal has activated a contingency plan asking customers to pay in euros instead of dollars to try to skirt U.S. sanctions, a source close to the matter said.

 

Keep reading …

 

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