Since fresh sanctions on Russia were unveiled on April 6, investors have been quick to bemoan them, saying that they punish investors more than they do Russia.
Their first complaint is that forcing investors to dump the Rusal bonds hurts investors — many of which are from the US — much more than the company. Rusal, after all, still has the $500m it raised, while investors are the ones that have seen the value of their holdings fall close to zero.
This new focus of sanctions is a marked departure from the investor-friendly structure of previous sanctions, which cut sanctioned entities in Russia off from new financing.
Investors’ second complaint is the unpredictability of future sanctions. Now that the US has targeted a privately-owned company, rather than a state-owned one, anything seems fair game. Many buy side firms, from the US or with a US connection, also have to grapple with uncertainty over what happens in the next sanctions round — and are calling this round a US own goal.
GlobalCapital sees the situation differently.
Rusal's $500m bond, in the grand scheme of Russian debt issuance, is not huge.
It accounted for a weight of only 12bp and 15bp in the CEMBI Broad Diversified and CEMBI Diversified benchmark, according to one investor. A second said it was 4bp in the broader emerging market indices.
But the bond had a big name — well known oligarch Oleg Deripaska — and a big sector behind it, one which is reliant on its export business.
Yes, the US Treasury hurt investors, but it did so in a way that directly at least, is fairly limited.
What is has done is upped the ante. It has demonstrated the power that the US has at its disposal to wreak havoc on Russia financially. And investors’ fear that any company could be next adds to the power of the move. The fear is perhaps more destructive than the move itself.
The US Treasury had probably hoped that the sanctions it put in place in 2014 would be enough. But they were not.
Russia pretty much continued as it was in global politics and the capital markets rebounded – Russia pivoted east for financing and a lack of supply of Russian quasi-sovereign debt even became a selling point for some Russian bonds.
With several state owned companies already sanctioned, the US had already signalled its ongoing displeasure with Russia, but that had not been heeded. It could be said the US needed to do something more to stop investors continuing to buy debt from the country.
Indeed, GlobalCapital argued only earlier this year that talk of further sanctions was no longer enough to affect the markets, and that the US Treasury would need to make a move for its punishment of Russia to be taken seriously again.
The effect that the US Treasury has this month had on Russian bonds is enough to strike fear into the hearts of any bond investor in Russia. Seeing Rusal's cash price drop from 98 to nearly nothing is not something they can ignore.
And the power of the US Treasury’s chatter around sanctions has once again increased — as was seen this week, markets are again moving on comments about more sanctions, or the rolling back of such comments.
The power of that talk should give some comfort to investors though. The US does not want to hurt its own investors. Of course it doesn’t. But its control of the global financial system, particularly the dollar-based emerging markets, is still a crucial weapon that it can wield in its diplomacy.
That's a shame for Rusal's bondholders — but the US's targeted move means that talk about sanctions is no longer cheap. Having demonstrated its power, it will surely hesitate before meting out the same punishment to other firms.