Global investors who thought they understood US president Donald Trump's strategy for sanctions against Russia are still reeling from the latest round of penalties announced on April 6. The White House rolled out new and sweeping sanctions, targeting seven powerful oligarchs and 12 of their businesses, as well as 17 senior government officials.
These were much tougher than previous Russian sanctions that were imposed in a series of rounds since 2014. The new ones differed from those that came before in many ways: in military terms they would be seen as "asymmetrical" or "disproportionate".
They were prompted not by a specific act of aggression on Russia's part, but by what the US government described as "malign activity" around the globe, from meddling in Western elections and Syria, to an alleged attempt to assassinate a former Russian intelligence officer on British soil.
The investors got a shock because the new sanctions were precision strikes that targeted individuals not corporates. They hit prominent oligarchs, including aluminium tycoon Oleg Deripaska, Suleiman Kerimov, a senator whose family controls Polyus, Russia's largest gold producer, and Viktor Vekselberg, owner of Switzerland-based engineering group Sulzer. Also, on the new hit list was Alexei Miller, chief executive of Gazprom, which delivers more than a third of the EU's gas, and Andrei Kostin, head of state-owned VTB.
The new restrictions left their targets reeling and in shock. But no one felt the pain more than Deripaska, an aggressive dealmaker who was personally targeted along with the eight industrial companies that comprise his fortune.
Shares in Rusal, his Hong Kong-listed aluminium producer, collapsed, losing more than 50% of their value in the next trading session. Shares in En+, the London listed energy firm that Deripaska controls, and which owned nearly two-thirds of Rusal, fell nearly 60% over the next three weeks.
Rusal's pain was also amplified by what it does. A leading global producer of aluminium, the US is one of its largest markets, accounting for around 10% of sales in 2017. When Trump imposed separate tariffs of 25% on imports of steel and aluminium goods on March 8, it was one of the firms hit hardest by the measures.
Mark Bodon, a portfolio manager in the emerging markets debt team at First State Investments, says sanctions "hit Rusal especially hard because it operates in an international commodity market and transacts in US dollars".
So, what happens now? There is a short view at work here, as well as a series of long-term consequences, none of which is likely to be palatable, either to the Russian government or to its leading globally-facing corporates.
As GlobalMarkets went to press, the near-term ramifications were still being assessed. Oligarchs targeted by the sanctions typically reacted with cold, commercial rationality, by ceding outright control over their most valuable and visible assets. Vekselberg, who amassed his fortune during the controversial privatisation schemes of the 1990s, cut his stake in Sulzer to 48.83%, by selling 5 million shares controlled by his holding company Renova, to the engineering group. Deripaska's reaction to the news - disappointed but restrained - led him to announce, on April 28, that he would in principle reduce his stake in En+ to less than 50%.
But there are longer-term implications here that are likely to play out over a period of years, and which could deal a shattering blow to the ability of Russian corporates to raise capital in the international markets, harm the country's economic prospects, and even loosen president Vladimir Putin's grip on power.
The new sanctions hurt in part because they are so vague. Analysts struggled to join the dots between the oligarchs targeted by the new sanctions. Some, like Alexei Dyumin, a former bodyguard of Putin, who oversaw the annexation of Crimea and was rewarded with the governorship of Tula, a region in western Russia, boast strong Kremlin links. Others, like Vekselberg and, it can be argued, Deripaska, are not part of the Russian president's inner circle.
Yet they all have one thing in common: they have profited, and continue to profit, from what US Treasury Secretary Steven Mnuchin described as Russia's inherently "corrupt system". Drawing a line between Russia's actions in Crimea and Syria, and its interference in Western elections, the US Treasury secretary said: "Russian oligarchs and elites… will no longer be insulated from the consequences of their government's destabilising activities."
It also raises the issue of what - or who - comes next. Deripaska and the other oligarchs may for now have weathered the worst of the storm, by ceding control of some of their main assets. Rusal is, in the near term at least, unlikely to suffer the indignity of being nationalised. But what happens if, or likely when, more sanctions are drawn up that target the many other oligarchs or elites with strong Kremlin links, and with assets that rely on dollar financing?
First State Investments' Bodon says: "Any entity whose business is US dollar-based and which relies on US dollar funding and international payment systems would be equally at risk under similar sanctions".
Traders have struggled since the sanctions were introduced to find accurate pricing for Rusal and for other Russian corporate debt. Some banks refused to trade Rusal given the uncertainty that surrounds their ability to clear it.
First State Investments' Bodon says the sanctions "shocked investors and caused a significant re-pricing of risk. Since then the market has been re-assessing risks of sanctions across all Russian companies and banks. Credit spreads… remain elevated, [which] makes refinancing costs much higher."
But the lasting change is likely to be felt when Russian firms return to international capital markets in search of funding. The question is whether how investors will welcome them - if at all.
Investors believe deals are there to be made - but that they are likely to be far more fraught with uncertainty than before. "While Rusal's sanctions are fresh in investors' minds, access to international debt markets will be narrow and pricing difficult," says Bodon. "The market should expect a permanent risk premium for Russian bonds. The market will open for new debt issuance but there will be more differentiation between issuers based on sanction risks."
Looking ahead, life for Russia's leading corporates has now probably changed for good. Karen Vartapetov, global ratings director at Standard & Poor's, says international sanctions on Russia would "remain in place in the coming years". She says that the new sanctions merely create "additional barriers to their removal," adding: "This means that Russia's access to international capital markets will continue to be restricted."
This will not bring the country's biggest firms, particularly those whose focus remains predominantly domestic, to their knees. "From Russia's perspective, limited access to international capital markets is not a big issue - at least in the short term… because Russia is not overly dependent on external financing," says S&P global ratings senior director Tatiana Lysenko. Indeed, for now at least, with oil prices edging higher, Russia's economy is likely to continue to slowly improve, with its current account surplus likely to continue to widen.
But that will be cold comfort to Rusal and to the handful of global-facing Russian corporates in industries from mining to energy to telecoms, many with equity listed in the likes of London and New York, and debt held by myriad global investors.