Russian steel giant struggles to pay debts due to sanctions

On March 23, Severstal announced that their payments were frozen due to a “legal investigation”. The company is committed to meeting its debt obligations, is still in talks with Citigroup and will file all necessary paperwork to make payments.

Severstal is currently the third largest steel company in Europe and is mostly owned by billionaire Alexey Mordashov. He is currently on the European and UK sanctions lists. The company will pay interest on the bonds starting March 16 with a grace period of 5 working days.

The WSJ on March 22 reported that Citigroup had notified Severstal that it would not be making the above payments. Severstal paid $12.6 million in interest to Citigroup affiliates. This money has been transferred to US bank accounts, but has not yet reached bondholders.

Citigroup told Severstal that the company needed approval from the US Office of Foreign Assets Control. Currently, neither Severstal nor Mordashov is under US sanctions. Severstal said it was still looking at ways to pay bondholders, and encouraged them to contact Citigroup to ask the bank to work with the company.

If it can’t pay interest, Severstal could become the first major Russian company to miss payments since the country launched its military campaign in Ukraine. This problem arises because global investors are concerned that Russian-linked companies will have difficulty paying their foreign creditors, even if they are willing and able to pay.

On March 22, Evraz – a steel and mining company based in Russia, also announced that their bond interest payments were blocked by Société Générale (France) due to sanctions related to billionaire Roman Abramovich. He is one of Evraz’s largest shareholders.

“This may be just the beginning. Going forward, more payments may not be made. Sanctions are showing an impact,” said Tatjana Greil Castro, portfolio-credit manager at Muzinich.

Investors say that the real test of Russia’s ability and willingness to pay its debts will come on April 4, when the Russian government will pay off $2 billion in bonds maturing in US dollars. To date, Russia has paid full interest on bonds issued in foreign currency.

And Evraz said on March 22 that their payment had been processed by the Bank of New York Mellon. However, it is not clear whether this amount has reached investors or not. Abramovich was not sanctioned by the US.

Both Severstal and Evraz have the financial means to pay debts and are willing to pay debts. This attitude has kept their bond from depreciating sharply lately.

In recent weeks, several large Russian companies have been able to pay interest and principal to investors. Rosneft and Gazprom met their debt obligations on March 6 and March 7.

The difference may lie in the ownership structure, according to sanctions lawyers. EU sanctions target companies controlled by individuals or holding large shares. Meanwhile, Rosneft and Gazprom are mostly government-owned companies.

Russian President Vladimir Putin said yesterday that he wants European companies and countries to pay for Russian gas in rubles. This will worry many bond investors.

“If you are paid in dollars and euros, you can use the money to pay off foreign debt. But if you pay in your local currency and then pay interest in the foreign currency, you run foreign exchange rate risk,” Greil says. . “This could be a sign they are turning away from payments in foreign currency,” Castro explained.

Ha Kam (according to WSJ)

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