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Latest US Sanctions Send Ripples Far Beyond Russia – OZY

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The latest round of U.S. sanctions against Russian oligarchs and political officials has been designed to wound parts of the country’s economy. But the pain is also likely to be felt far away from Moscow.

Blanket sanctions against billionaire Oleg Deripaska’s aluminum empire look set to have an impact across the global commodity market, while restrictions on major figures in Russia’s energy and industrial sectors could also create widespread complications for Western partners. Friday’s salvo against 24 Russians and 14 companies bans U.S. citizens from doing business with them.

But it also for the first time extends that restriction to non-Americans who “knowingly facilitate significant transactions … for or on behalf of [them],” a proviso that means the sanctions’ impact on global trade will likely be deeper than previous curbs. It could make banks and commodity houses wary of conducting any U.S. dollar–denominated transactions with those linked to sanctioned entities, lawyers say, creating ripples across the wider commodity industry in which Russia plays an oversize role.

These sanctions are going to make it very difficult for any Western bank to deal with these companies or individuals.

Michael O’Kane, a partner at Peters & Peters, London

“These sanctions are going to make it very difficult for any Western bank to deal with these companies or individuals,” says Michael O’Kane, a partner at Peters & Peters in London. “The breadth of the sanctions also suggests they may restrict non-U.S. citizens from facilitating significant transactions with these companies, which may complicate trade.”

It will certainly complicate the aluminum market. Deripaska’s Rusal accounts for just under 6 percent of the metal’s global supply and is the largest producer of the metal outside China. Rusal is the second-biggest supplier of aluminum to the U.S. after Canada, and more than 10 percent of its output is sent to America, roughly $1 billion worth of metal that it now needs to sell elsewhere.

“They’re going to have to divert their metal to somewhere else — the most likely place is in Europe,” says Tom Price, an analyst at Macquarie.

But Rusal may struggle to find alternative customers. While the London Metal Exchange (LME) has said it will continue to trade Rusal aluminum, lawyers and market analysts say non-U.S. buyers may be wary of trading with the company for fear of falling foul of Washington.

“Even where U.S. jurisdiction technically doesn’t exist, non-U.S. businesses will increasingly find business with these sanctioned businesses and individuals foreclosed to them,” says Jason Hungerford, a partner at Norton Rose Fulbright in London.

The situation is “too complex,” says a person close to Deripaska. “All parties are consulting lawyers to get a better understanding.” Deripaska has dismissed the sanctions as “groundless, ridiculous and absurd.”

Rusal’s largest customer is Glencore, which also owns 8.75 percent of Rusal. Glencore’s chief executive, Ivan Glasenberg, sits on the Rusal board. Rusal says its customers also include Toyota, Volkswagen and Ford. “[In practical terms] you might see many companies and many individuals acting as if this applies to them, even if, as a regulatory matter, it doesn’t,” says Adam Smith, a former adviser to the U.S. Treasury’s sanctions office. “People don’t [want to] risk it anymore.”

U.S. companies, such as beverage can makers, may also end up paying more for their aluminum. They are already facing record domestic prices following the decision by the Trump administration to impose tariffs on imports of the metal from China.

“It’s a big distortion to trade flows in the aluminum market,” says Colin Hamilton, head of commodities research at BMO Capital Markets.

Aluminum prices on the LME rose 2 percent on Friday, while shares in Rusal fell 18 percent and shares in EN+, Deripaska’s holding company, fell 22 percent.

The impact could also stretch beyond aluminum. While state-owned gas giant Gazprom itself has not been sanctioned, its chief executive, Alexey Miller, has been targeted. This could complicate his involvement in future deals or contracts. Gazprom supplies more than a third of the EU’s gas, and the company has close relationships with Royal Dutch Shell, Eni, OMV, Engie and Uniper in Europe.

We consider the latest turn of the sanctions spiral incomprehensible and damaging.

Wolfgang Büchele, Committee on Eastern European Economic Relations chairman

Also sanctioned is Vladimir Bogdanov, head of oil company Surgutneftegas. While the company has been under sanctions since 2014, Bogdanov’s inclusion could impact its business.

Responsible for 11 percent of Russia’s oil output, or more than 1 million barrels a day, the company holds tenders for its crude oil and refined product sales in both the west and east of the country. Major commodity traders such as Gunvor, Glencore, Trafigura, Vitol and French oil major Total are regular buyers.

Also sanctioned was Deripaska’s automaker, GAZ, which has a joint venture with Volkswagen to assemble the German carmaker’s vehicles in Russia until at least 2025. Other oligarchs sanctioned include Viktor Vekselberg and his Renova Group holding company. Renova owns stakes in Swiss steel company Schmolz + Bickenbach and industrial engineering firm Sulzer.

The German Committee on Eastern European Economic Relations, the main trade association for German companies doing business with Russia, called on the German government and the EU to not follow Washington’s lead in imposing new sanctions.

“We consider the latest turn of the sanctions spiral incomprehensible and damaging,” said the group’s chairman, Wolfgang Büchele. “The sprawling catalog of sanctions is causing increasing uncertainty for all companies that do business with Russia and takes us even further away from a political solution to the conflict with Russia.”

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By Henry Foy and David Sheppard

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