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People and MarketsCommentGC View

Halting trades can make sanctions work better

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Euroclear’s refusal to continue settling Rusal trades when US sanctions were slapped on the company on April 6 may have saved many US bond investors from crystallising crippling losses. If the US plans further rounds of similar punishments, it should turn that happy accident into a permanent feature of the sanctions process.

If Euroclear had continued settling Rusal trades in the tumultuous weeks that followed the US sanctions in April, US funds’ compliance departments would almost certainly have insisted on portfolio managers dropping that paper, stacking up total losses on the paper of a few hundred million dollars.

And who would the buyers have been at these bargain basement levels? Probably mostly Russian investors who could continue holding the paper past the original sanctions deadline of May 7.

That means that when Oleg Deripaska started showing a willingness to bend and sell his shares in EN+, Rusal’s parent company, opening up a possible route for Rusal to escape the sanctions, it is those Russian investors that would have seen the benefit.

If this situation plays out as many EM investors and the US Treasury seems now to hope — a divestment of Deripaska’s shares and the eventual removal of such harsh restrictions on dealing with Rusal — Euroclear’s initial hesitancy will have saved many US investors from booking immediate losses.

Sanctions ought to drive change — if they don’t do that, what’s the point?

That suggests it’s reasonable to allow some time for Russian companies to respond to the measures before forcing investors to sell. That will help to make sure that sanctions hurt Russian oligarchs more than US investors.

Stopping market infrastructure providers executing trades is a blunt but effective way to make forced sales impossible. How long this pause needs to last has to be decided on a case by case basis.  

GlobalCapital usually prefers to argue for fair and open markets, but not at any cost. 

If the US plans to use its sanctions heft against more Russian companies, the US needs to work out how to protect its own funds. 

Forcing a debt and equity trading moratorium while the dust from its financial strikes settles seems a good place to start.