Some of Russia’s largest companies are careening into default and Citigroup Inc – not an inability to pay off their debts – is a big reason why.
As the largest provider of payment agency services to Russian businesses, and in some cases the correspondent bank, Citigroup plays a crucial role in ensuring that bondholders get their money. It’s been subjecting the payments to intense screenings as it tries to comply with the tangled web of sanctions imposed by the US, UK and European Union on Russian entities and individuals, prompting compliance work to stretch on for days, according to people familiar with the matter.
In one case, Citigroup’s scrutiny prompted Russian steelmaker Severstal to run out of time to pay interest on a foreign-currency bond. The saga has triggered worries that other companies, including Russian fertiliser maker EuroChem and Chelyabinsk Pipe Plant, will get ensnared in Wall Street’s financial plumbing and also fall behind on their debt payments.
“A lot of these companies are going to be thrown into technical default in much the same way that Severstal has been,” said Damian Sassower, chief emerging market credit strategist for Bloomberg Intelligence. “It’s completely unprecedented. We’ve never been in a situation where literally the issuer has the capacity and the willingness to pay but literally can’t process the bonds because of sanctions.”
A spokesperson for Citigroup declined to comment. A spokesperson for Severstal said the company is committed to fulfilling its debt obligations. EuroChem’s investor relations declined to comment, while Chelyabinsk Pipe Plant’s press department didn’t respond to a request for comment.
When a Russian corporation readies interest payments, it deposits those funds into what’s known as a “nostro” account with its correspondent bank. After the correspondent bank performs its required checks, it passes the funds along to a sub-account controlled by the paying agent for the bond who must also check the funds for compliance and then distributes it to investors via clearing houses and custody banks. Normally, payments move quickly through that process. But after Russia’s invasion of Ukraine last month, the ensuing raft of sanctions brought the compliance process at many of the world’s largest banks to a crawl as risk managers tried to digest which clients and companies were ensnared in the new rules.
Citigroup is the payment agent for about four dozen bonds tied to Russian corporates and the government, according to data compiled by Bloomberg. Some of those companies – including MMC Norilsk Nickel PJSC and Gazprom PJSC – have successfully made coupon payments in recent weeks.
But in many cases it’s sought further assurances from clients and regulators that it is able and allowed to push payments through. Borrowers, finding themselves in uncharted territory, rushed to get their funds cleared, resorting to seeking out bondholders’ help or to filing requests with international authorities.
Take Severstal: Citigroup notified the Russian steelmaker that it would require sign off from the US Treasury’s Office of Foreign Assets Control before it would transmit a $12.6mn interest payment that Severstal owed to bondholders.
The move stunned investors. While the company’s majority shareholder Alexey Mordashov faces sanctions from the European Union and the UK, neither the firm nor Mordashov are sanctioned by the US. The hold-up meant Severstal missed a key deadline last week for making the payment, forcing the company to slip into a technical default. Before the end of the grace period, the issuer made a last-minute attempt to ask bondholders to get in touch with Citigroup and ask for the release of the cash. Severstal said on Tuesday that it applied for the permit.
“Mindful of the urgency of the matter we have requested that OFAC consider our application on an expedited basis,” the company said in a regulatory filing. “Severstal will keep all interested parties informed of the progress of the license applications with OFAC.” Bondholders have now set their sights on EuroChem and Chelyabinsk Pipe Plant, which have both seen interest payments delayed by Citigroup in recent weeks.
EuroChem, for its part, said it missed a $19.3mn interest payment that was due on March 13. That’s because Citigroup, the paying agent, blocked the transfer, according to a person familiar with the matter. The Russian company – whose founder Andrey Melnichenko is among the businessmen sanctioned in the European Union and UK – filed requests to the Central Bank of Ireland and the UK’s Office of Financial Sanctions Implementation to authorise the release of the funds, but the payment has yet to be processed.