Streetwise Professor

April 10, 2018

What SDN Hath Wrought: How Trump Rocked Not Just Rusal, But Most of Russia

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 8:42 pm

I clearly underestimated the impact that the sanctions imposed on Deripaska, Rusal, and others would have.  The initial reaction Monday by many was to puke everything Russian.  Everything.  The ruble. The overall Russian stock market.  Russian debt.  Every major Russian company.  They all crashed. The carnage was widespread and indiscriminate and extended far beyond those directly targeted.

Rusal was the biggest loser, and extended its losses today.  Overall, its stock price is down almost 55 percent.  Ivan Glasenberg resigned from the board, and just now two Russian non-executive directors also resigned.  The company is clearly toxic/radioactive.  I don’t see it surviving without massive state support, and perhaps nationalization.   But even then . . . who outside of Russia and China will buy its aluminum?  (Note China is already suffering an overcapacity problem in the metal, which US trade restrictions would only make worse.)

I thought I might have misjudged seriously that Potanin would gain at Deripaska’s expense: on Monday Norilsk Nickel was down almost 20 percent, and Potanin was the biggest absolute loser.  Norilsk has since bounced back, and recovered much of its loss: it is now down about 7.5 percent from Friday.  But the “shootout” auction will still be between two gunmen who have been grievously wounded by fire from an unexpected direction.

Many other Russian companies that were pounded yesterday have also bounced back.  Severstal is actually trading above the pre-sanctions-news price.  Rosneft and Novatek have also recovered most of their losses.

Sberbank remains down–down more than 16 percent.  The bank disingenuously stated that the selloff was overdone because its exposure to sanctioned companies represented only 2.5 percent of its assets.  Well, since it is leveraged about 12-to-1, that represents 30 percent of its shareholder equity, which would justify a pretty big selloff.

The ruble remains down.  Indeed, it extended its loss today, and actually experienced a greater percentage decline today (almost 5 percent) than it did Monday (around 3 percent).  Perhaps this reflects the central bank’s statement that it would not intervene in support.  But it does indicate that this is perceived as a Russia-wide shock, and not one limited to a few billionaires and their companies.

The broader selloff, somewhat overdone as it was (as reflected by today’s recovery in many names) suggests a widespread estimation that other shoes will drop, and that billionaires that escaped the first round are still at risk for the Oleg treatment.

This raises the question of how the targets were chosen. Leonid Bershidsky argues that Deripaska and Rusal were targeted because taking Rusal’s aluminum off the market (as is happening, with the LME saying it will not warrant Rusal metal not already in warehouses) would be a much more effective way of supporting the US aluminum industry than selective tariffs.  This does have a certain logic, but if that is the logic, it would speak very poorly of the the US government, for it would imply the masking of a protectionist measure behind an allegedly principled reaction to Russian turpitude. It also doesn’t explain the other targets.

Nor does it explain the non-targets.  Novatek and Timchenko are much more tightly connected to Putin than Deripaska and Rusal. And Novatek LNG competes with US LNG, so there would be a protectionist rationale for hitting it.  Yet Novatek was not subject to SDN treatment, and as noted earlier its stock price has largely rebounded.  Perhaps a journalist friend in Moscow is right that Total’s big investment in it and its Yamal project has given it some immunity.

Similarly, Rosneft and Sechin are much more in the inner sanctum than Deripaska/Rusal.  Yet it too has escaped SDN.  Perhaps the risk of creating an oil shock is too great.

The “perhapses” indicate, however, that the rhyme and reason of the administration’s actions is not obvious.  And perhaps (there’s that word again) that’s what really has the market–and many rich Russians–spooked.  Given the capriciousness of the list, everyone is at risk.

Russia’s official reaction was of course negative, but one voice has been missing: Putin’s.  It’s not quite akin to Stalin, 22 June-3 July, 1941 (when he remained out of sight after the shock of Barbarossa), but it does suggest uncertainty as to how to respond.  Not a B’rer Rabbit reaction, at least not yet.

This uncertainty is no doubt fed by the realization of the vulnerability of the Russian economy to US policy.  I’ve written before that the US could crush Russia like an overripe grape by, for instance, cutting it off from SWIFT or the dollar system altogether.  This shows that it can wreak havoc with far more limited measures.

It’s also interesting that Xi made rather conciliatory remarks yesterday.  A coincidence? Perhaps (again). But Friday’s sanction action shows that Trump can act unpredictably and punishingly.  That likely concentrates minds in Beijing as well as in Moscow.

Whatever the logic of Friday’s thunderbolt, it should put paid to the Trump-is-Putin’s-pawn and Putin-has-something-on-Trump theories.  Indeed, a desire to terminate with prejudice those narratives is as good an explanation for the administration’s action as anything.  Not that reality will interfere with the conspiratorial ravings of those in the Democratic Party and the media and the neocon NeverTrumpers.  They are just too invested and obsessed, and nothing short of a preemptive nuclear strike on Moscow is likely to change that–and even then . . . . And with Trump threatening to attack Syria despite Russian warnings against it, maybe we’ll soon put that theory to the test as well.

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  1. “This does have a certain logic, but if that is the logic, it would speak very poorly of the the US government”

    which is basically what the Russian propaganda machine is pushing 24/7. A pure coincidence, I am sure. Alternatively, it might be time to rename Bloombergsky to Business Sputnik or smth.

    Comment by Ivan — April 10, 2018 @ 11:06 pm

  2. “a desire to terminate with prejudice those narratives is as good an explanation for the administration’s action as anything”

    Agree. In fact, the desire might be so strong that Putin’s agents in the administration would risk a mild disturbance like the one currently observed. Perhaps here is how it went down:

    – Vladimir, we need to sacrifice a pawn to save the game. Here, take your pick from the list. Yes, the peasants in the market might panick a bit, but don’t worry: after our summit they will realize it’s business as usual and it will all bounce back. Look at it as a nice buying opportunity.

    Comment by Ivan — April 11, 2018 @ 1:42 am

  3. Some Russians are getting incredibly rich from this. 1 month for US holders to complete divestiture of exposure. So massive forced selling of loans/bonds of Russian corps with very limited set of buyers. If the owners of these companies can put together the right front companies then they get to buy back their debts at 50c on the dollar (Rusal been quoted there). Mostly commodity producers so they will sell to the anyone who is happy to ignore the US (hello China) and we just reshuffle which commodity producers trade with which bits of the world. As a bonus Putin’s control over all Russian industry just went up as financing is now even more political and thus his cut will go up.

    Comment by isp001 — April 11, 2018 @ 2:33 am

  4. I think the initial list did have some thought in it. Targeting those closer to Putin would be the equivalent of firing your best shot first. Picking out a few random/vulnerable animals in the herd increases uncertainty and risk premium across the board and still leaves bigger threats on the table.

    All that said, I am sure Vlad is looking forward to the end of the Mueller saga almost as much as PDT. He may have lost the game already now that the out-of-control narrative puts PDT into a “you or me” choice for political survival.

    Comment by Derek Holmes — April 11, 2018 @ 4:35 am

  5. @Derek–I think you are right. Sort of like a kidnapper killing a servant as a warning to the family what could happen to them if they don’t cooperate.

    I’m pretty sure Putin’s silence reflects that he is thinking this through very carefully.

    And yes, Trump is now in a position where his best political move is to smack Putin. Putin also needs to reflect that (per your logic) that Trump has escalation dominance. He’s just proven he can crush every company in Russia, and Russian state finances to boot. He’s also demonstrated that he has the will. Putin has no counter. Unless he wants to go nuclear–literally. Anything short of that the US can do ten-fold.

    The ProfessorComment by The Professor — April 11, 2018 @ 5:57 pm

  6. Perhaps a journalist friend in Moscow is right that Total’s big investment in it and its Yamal project has given it some immunity.

    Ah, ethics. Every company should have ‘em.

    Comment by Tim Newman — April 14, 2018 @ 12:08 am

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