CS Credit Suisse Group

By Max Colchester and Margot Patrick 

Six months ago, Russian power-to-aluminum company En+ Group PLC listed on the London Stock Exchange, cheered on by a former U.K. government minister and a cluster of big name banks.

Today, many of those banks are racing to disentangle themselves from En+ as the effects of the latest wave of U.S. sanctions sweeps across the global finance industry.

EN+, its aluminum-producing unit United Co. Rusal and their owner Oleg Deripaska were placed on a list sanctioning dozens of Russian individuals and entities last Friday.

Banks including Citigroup Inc. and Credit Suisse Group AG are now shedding ties to the group, according to people familiar with the matter. Other financial services companies are rushing to distance themselves, with ratings firms Moody's Investors Service and Fitch Ratings removing their ratings for Rusal and the London Metal Exchange saying it won't stock its metal.

The flurry of activity points to the deep reach of this round of sanctions and the potential ramifications for both U.S. and non-U.S. financial firms that do business with those on the list.

"This is uncharted territory," said Tom Cummins, a partner in London at law firm Ashurst.

Never before have individuals been targeted that are so "integrated into commodities, global markets and international trade," he added.

The sanctions don't just entangle U.S. banks.

Non-U.S. banks or companies can face sanctions if they undertake "significant transactions" involving those named on the list. Many say they will err on the side of caution by following the strictest version of the rules across their businesses, to avoid the risk of losing access to the U.S. financial system.

Compliance teams are scouring their client lists to work out exposure to subsidiaries and affiliates of the sanctioned groups, bankers say, some of which have local operations in countries such as Switzerland and Italy. Several European lenders gave Rusal credit lines and upfront funding for metal sales.

The sanctions also have sparked wider caution about dealing with or owning the assets of any individual or company with ties to the Kremlin, for fear that Washington could expand the list. That fear has roiled markets, leading to a selloff of the ruble, Russian debt and many of the country's biggest companies.

Banks have two deadlines, in May and June, to wind down existing business with the sanctioned entities. U.S. officials are touring Europe to warn banks not to flout the sanctions and to cut ties to Russian individuals and entities if they want continued access to U.S. banks.

"There of course would be consequences for U.K. financial institutions and any activity that is going through the U.S.," Sigal Mandelker, U.S. Under Secretary of the Treasury for Terrorism and Financial Intelligence, told reporters in a briefing.

The new sanctions regime particularly could hurt London, where rich Russians are deeply embedded, basing businesses, snapping up stakes in soccer teams and buying up swaths of the capital's most costly real estate. Demand for property in the capital's Mayfair district already has cooled and is expected to continue to fall, estate agents said.

Global banks, often from London, have helped Russian companies list, issue bonds and have lent them money. Last year, for instance, Russian companies raised $14.6 billion in syndicated loans, according to data from Thomson Reuters LPC. They have raised $1.7 billion so far this year. Such loans are made from banks to companies and then parceled out to other banks and investors.

The U.S. has long used its economic sway and control over dollar clearing to squeeze adversaries. In the last decade, U.S. authorities slapped foreign banks with multibillion-dollar fines for failing to comply with U.S. sanctions, a move that triggered those banks to exit swaths of the Middle East and South America while shedding thousands of clients they considered too risky.

The action against Russian entities turns the heat up further, experts say. Some say that banks and investors have yet to truly realize how disruptive these sanctions could be. They effectively place some major industrial companies on the same legal status as Iranian entities involved in weapons proliferation, or with drug traffickers.

For a bank, not dealing with Iran is easier than avoiding a global aluminum business or other major Russian commodities player. Commodities are almost all priced in dollars, while banks also lend to big buyers of oil and metals.

En+ is a case in point. The group listed on the London Stock Exchange in November 2017, raising $1.5 billion, with Citigroup, Credit Suisse and France's Société Générale SA among the western banks taking lead roles. The listing was cheered as a symbol of thawing investor sentiment to Russian companies after the European Union and U.S. filed sanctions against Moscow in 2014.

The former British climate change minister Gregory Barker -- who now sits in the House of Lords -- was brought in to chair the company. The board later expanded with Dominique Fraisse, head of natural resources at French bank Natixis, among those joining. In January, En+ announced corporate brokers Citigroup and Credit Suisse would work with its new enlarged shareholder base. That same month, Rusal issued a $500 million bond, assisted by the two banks and others including JPMorgan.

A spokesman for Société Générale said the bank strictly complies with international sanctions.

Mr. Barker and En+ didn't return calls for comment. A spokeswoman for Natixis didn't respond to a request for comment. A JPMorgan spokeswoman declined to comment.

Now investors have until May 7 to sell or transfer debt, equity, or other holdings in En+.

The impact has been swift. Clearing house LCH Ltd. said this week it will no longer clear shares of Rusal or EN+ Group, and index provider FTSE Russell said Rusal and EN+ Group would be removed from FTSE indexes on Friday. The holding company is hemorrhaging board members, with Mr. Fraisse exiting. Citi and Credit Suisse have quit as corporate brokers, according to people familiar with the matter. En+ Group global depository receipts in London lost half their value before being suspended from trading Monday.

Other sanctioned companies looking to raise money in Europe have had to change plans. This week, Citigroup and Goldman Sachs Group Inc. stopped working on a planned initial public offering for Italian data services company Octo Telematics, people familiar with the transaction said. The company's indirect controlling shareholder, Viktor Vekselberg, is on the sanctions list.

Write to Max Colchester at max.colchester@wsj.com and Margot Patrick at margot.patrick@wsj.com

(END) Dow Jones Newswires

April 12, 2018 14:15 ET (18:15 GMT)

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