Glencore shares down thanks to Russia sanctions as US squeezes Western investment

Key Points
  • American commodities giant Glencore is down more than 4 percent following news of U.S. sanctions on major Russian companies, thanks to its stake in one of them.
  • The U.S. Treasury has issues its strongest sanctions yet on select Russian individuals and companies, with notable targets close to Putin.
  • On Monday, the ruble was down and Moscow-traded stocks suffered their biggest drop in four years.
An employee walks past coal washing flotation cells, manufactured by Jameson Cells, a unit of Glencore Xstrata
Brent Lewin I Bloomberg via Getty Images

Commodities giant Glencore saw its share price drop nearly 2 percent on Friday's news that the Treasury Department was sanctioning seven Russian oligarchs and their businesses, as well as 17 Russian government officials. The slide then continued into Monday as it traded more than 4 percent lower.

This is because Glencore, the largest mining company in the world, owns an 8.75 percent stake in major Russian aluminum producer Rusal, named in the Treasury's latest sanctions list. The instance represents one initial impact of the punitive measures, meant to scare away Western investment in the Russian Federation. On Monday, the ruble was down and Moscow-traded stocks suffered their biggest drop in four years.

"Russian-Western relations continue to deteriorate, with little sign of de-escalation," Timothy Ash, senior emerging markets portfolio manager at BlueBay Asset Management, said in a note Monday, describing the sanctions as the most significant yet. "This is not even a Cold War, it's actually gone beyond that into a Hybrid War."

Glencore is headquartered in Switzerland and trades in London.

The sanctions, which put the select people and entities under a Specifically Designated Nationals (SDN) list, are a part of CAATSA (the Countering America's Adversaries Through Sanctions Act), which was passed by Congress in August 2017 in response to Russia's interference in the 2016 U.S. election and its military actions in Ukraine and Syria. The SDN label freezes a person or company's U.S. assets and forbids Americans from doing business with them.

Until Friday, however, such targeted and harsh measures had not been enacted, largely seen as a result of Donald Trump's apparent reluctance to punish Russian President Vladimir Putin's government.

The new sanctions up the ante in threatening Western investments in Russia: U.S. stockholders now have 30 days to dispose of their shares in major Russian firms Rusal, En+ and GAZ, the last of which is Russia's largest bus company. The first two are owned by Russian billionaire and aluminum magnate Oleg Deripaska, a close ally of Putin. Those companies will also be cut off from Western financial markets.

No one is safe

This represents a "tactical escalation" of the U.S. sanctions program, said Max Hess, political risk analyst at AKE Group. Russia has derided the measures as a hostile act, and is currently formulating a response, according to the country's Foreign Ministry.

Shares of aluminum-producing giant Rusal tanked 50 percent in Hong Kong trading amid fears over the company's future trading abilities. The measures aim to make it as hard as possible for Deripaska, and other select oligarchs with extensive involvement in global capital markets, to do business internationally.

Deripaska, who was accused in the Treasury's statement of being involved in Russia's "malign" activities, called the claims "groundless" and "absurd."

Deripaska's $11 billion holding company En+, which owns a majority stake in Rusal, was down 17 percent in Monday morning trading. It issued a statement saying that "it is highly likely" that the sanctions' impact "may be materially adverse to the business and prospects of the group."

The shockwaves reverberating across Russia's oligarch community as its stock market contracts is evidence of the U.S. Treasury's aim to "introduce a degree of unpredictability to the sanctions regime going forward," according to Ash. And he recommends expecting more sanctions to come, not less. Essentially, the message being sent by Washington is that no one is safe.

Investors are wary, therefore, wary of who to do business with — because you never know who will be sanctioned next. In this particular case, many of the oligarchs in question are central conduits of Western money into Russia. The result will be squeezed financing around Russia, which certainly won't help the country's already slow growth.

Glencore is the biggest buyer of Rusal's metal; now questions abound as to the fate of the companies' relations going forward. The firm had previously planned to swap its Rusal shares for a stake in EN+, but that deal may no longer be feasible, according to AKE's Hess.

Glencore had no comment on the matter at time of writing.

However Russia chooses to respond, it is clear the sanctions have had a palpable effect on the elite circle controlling many of Russia's business entities central to Putin and his allies' hold on power.

"The U.S. Treasury has now introduced the element of unpredictability in dealing with Russia," Ash said, "which could ultimately prove to be its secret weapon."

Correction: This story has been updated to accurately indicate where Glencore is based.