Ukraine Crisis - Page 367

Visa Inc. and MasterCard Inc. said on Friday they would stop servicing Bank Rossiya and three other Russian banks because of U.S. Treasury sanctions. The moves were part of a series of measures targeting Russian politicians and some of the financial pillars underpinning President Vladimir Putin's inner circle. The European Union followed on Friday with a similar list of Russian officials it is targeting with sanctions.

Executives at Gunvor Group, one of the world's largest independent energy-trading outfits, spent Friday reassuring customers and its bankers that U.S. sanctions against a co-founder wouldn't disrupt its trading operations. The U.S. Treasury said Mr. Putin was an investor in the firm. The company said Mr. Putin has never been an investor.

Washington on Thursday also slapped sanctions on Gennady Timchenko, who until recently owned 43% of the firm. Hours later, Gunvor said he had already sold his share of the company on Wednesday to Gunvor's other co-founder, Chief Executive Torbjorn Tornqvist.

The sanctions triggered a "crisis" in the "early hours of the morning," Mr. Tornqvist said in an interview. He said the U.S. sanctions surprised the company, but that executives had reached out to traders, bankers and other counterparties over the last 24 hours to reassure them. "Now, we have U.S. banks saying it's business as usual," he said.

There was less certainty on many trading floors. Gunvor conducts billions of dollars in energy contracts with other international traders and producers. A North Sea oil trader said early Friday that questions about Gunvor were "the elephant in the room." American and European companies "will be looking very closely at [their] business with Gunvor," said another oil trader.

Some of the world's biggest publicly traded energy companies deal with Gunvor regularly, and executives at some of them were studying the implications of the sanctions Friday, according to people familiar with the situation.

Total has a 16% stake in Russian oil producer OAO Novatek in which Mr. Timchenko also holds a large stake, with 23%. A Total representative referred to comments earlier this month by the company's chief executive that it was a "long-term investor" in Russia.

BP BP.LN +0.11% PLC owns just under 20% of Russian state-controlled behemoth OAO Rosneft, which has, in the past, sold oil to Gunvor. BP spokesman Toby Odone declined to comment on whether the sanctions against Mr. Timchenko presented a challenge.

"We are committed to our businesses in Russia. We are, of course, monitoring the situation. If sanctions were to involve us, we would comply with them," said Mr. Odone.

One question still hanging over Gunvor on Friday was the terms of the sale of Mr. Timchenko's stake. The value of the whole company was recently estimated by Paul Gait, an analyst at Sanford C. Bernstein, at about $3 billion. Counterparties may seek assurances the deal was done at a fair price to insulate them from any legal repercussions if they continue trading with Gunvor.

Mr. Tornqvist didn't disclose a price, but he said the sale was done at market value and contained no conditions that would allow Mr. Timchenko to buy his stake back.

"We didn't want to leave any ambiguity" over the sale, Mr. Tornqvist said.

Gunvor has had relationships with top banks including Goldman Sachs Group Inc. and Credit Suisse AG. Those two banks, as well as Société Générale, were underwriters on a bond deal in May 2013, according to data provided by Dealogic.

Goldman Sachs did a routine bond financing for Gunvor, nothing more, said a person familiar with the matter. Spokesmen for Goldman, Credit Suisse and Société Générale declined to comment on whether they would continue their relationships with the firm.

Outside the energy patch, domestic and foreign investors alike fled the Russian market, or sought to assess their exposure. Russian shares tumbled, with the Moscow Stock Exchange Index losing close to 13% on Friday.

"Before the whole issue escalated we roughly halved the exposure" to Russia, said Michele Gesualdi, chief investment officer at Kairos Investment Management, which has about $7 billion in assets under management. "A lot of the industry, if they were long [Russian investment] they have scaled back. But they haven't exited, because these can be good buying opportunities."

Banks and other financial players were trying to make sure they were complying with the new U.S. and European sanctions.

"Russia represents a small part of the business I am responsible for," said the head of Europe, Middle East and Africa for a large global bank, but "it is taking up a disproportionate amount of my time at the moment."

Russian holders of Visa and MasterCard payment cards issued by four Russian banks—Bank Rossiya, Sobinbank, SMP Bank and InvestCapitalBank—couldn't pay for goods and services with their cards starting on Friday morning. The two U.S. firms said they were obliged by the U.S. sanctions to cut the banks off from access to their network. Cardholders were still able to withdraw funds from ATMs. Sobinbank is a subsidiary of Bank Rossiya. SMP is owned by two associates of Vladimir Putin named on the U.S. Treasury sanctions list. InvestCapitalBank is a subsidiary of SMP.

Banks that have relationships with Bank Rossiya are expected to follow the sanctions' instructions to terminate those relationships. Bank Rossiya has correspondent accounts with Bank of New York Mellon Corp. J.P. Morgan Chase & Co. and a U.S. unit of Deutsche Bank AG , according to a website run by Clearing House Payments Co.

As a result of the sanctions the U.S. placed on Bank Rossiya, any "correspondent-banking relationships" with U.S. financial institutions will be terminated, U.S. officials said. Correspondent banks process transactions and clear dollar payments for their counterparts.

A spokesman for BNY Mellon declined to comment on specific clients, but said the bank would comply with the government's sanctions. A person familiar with J.P. Morgan said the bank is complying with the sanctions. A Deutsche Bank spokeswoman said in a statement that "we are following developments and are applying sanctions as appropriate and as directed by the relevant authorities."

Amid the threat of further sanctions, Western executives have tried to reassure investors that they are managing their exposure to Russia.

"We're trying to understand what kind of scenarios there could be," Peter Cedervall, president of rail-control solutions for Bombardier Inc., told analysts on a conference call Thursday. The Canadian maker of planes and trains had targeted Russia for new investments in railroad systems in the wake of the Sochi Olympic Games.

One additional risk for Western investors is the falling value of the Russian currency. That can hit the value of sales of goods paid for in rubles but converted back into a company's home currency. Mr. Cedervall said one option could be to "get paid offshore, not to see the currency, or the money passing Russian soil."

Other executives said there was uncertainty over what effect any fresh sanctions might have on exports and imports. Grain harvests have just wrapped up in Russia and Ukraine. "Now probably a lot of the noise is about being able to export" out of Black Sea ports, said Greg Peterson, director of investor relations for agricultural-equipment supplier AGCO Corp.

For some other Western companies, the unrest and uncertainty signals something else: opportunity. A more aggressive Russia could spur countries in the region to make "extraordinary outlays" in their defense budgets, Steven F. Gaffney, chief executive of Delta Tucker Holdings Inc., the parent of defense contractor DynCorp International Inc., said on an earnings call on March 14.
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