Sanctions are decoupling the Russian steel giant Severstal from the western economy

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When the oligarchic owner of Severstal PAO was sanctioned by the European Union last month, the move immediately froze the steelmaker from a third of its sales and set the stage for what could be the first default by a major Russian company since the invasion of Ukraine.

Pallets of the company’s steel were stranded in warehouses across Europe, one of its overseas subsidiaries ran out of money to pay employees, and sales reps were desperate to find new customers. Years of relationships collapsed overnight, and Western gadgets — from computers to excavators — were suddenly taboo.

On Wednesday, Europe’s third largest steelmaker after Citigroup failed to pay off its debt despite having funds available inc

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Interest payments to investors in the company’s bonds are frozen. Citigroup declined to comment on the move. Severstal has not defaulted, nor have the bondholders or credit rating agencies.

Severstal owner Alexey Mordashov at an industry conference in December.


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Alexander Shcherbak/Zuma Press

Severstal’s experience shows how Western sanctions are rocking some of Russia’s largest and most internationally connected companies.

“Severstal was a respected company that was deeply embedded in the global trading system and now things have gone badly for them quickly,” said David Cachot, research director for steel and commodities at Wood Mackenzie.

The EU sanctioned Alexey Mordashov, who owns 77% of Severstal, on February 28, identifying him as the majority owner of what it described as the personal bank of senior Kremlin officials. Brussels also said Mr Mordashov’s media outlet actively supported Russia’s destabilization of Ukraine and he benefited from his deals in Crimea, which Russia annexed in 2014.

Severstal executives first learned about the sanctions from the media and briefed Mr. Mordashov, who was surprised by the EU’s move, according to a person familiar with the matter. After a late-night phone call with executives, Mr. Mordashov issued a statement saying he was not close to politics and describing the fighting in Ukraine as a tragedy.

“I have absolutely nothing to do with the emergence of the current geopolitical tensions and I do not understand why the EU imposed sanctions on me,” Mordashov said in his statement.

Even before the invasion, European customers had started avoiding Severstal as Russia built up its forces on the border with Ukraine, the person familiar with the matter said. With the sanctioning of Mr. Mordashov, cancellations began to pile up.

Severstal, Europe’s third largest steelmaker, is “deeply embedded in the global trading system,” said an analyst.


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Andrey Rudakov/Bloomberg News

A railway shipment of iron ore en route to Finland was stopped and turned around, the person added, while steel bound for customers was stuck at Severstal warehouses in various countries including Poland, the Netherlands and Germany.

On the night the sanctions were imposed, Severstal’s London-based PR firm Hudson Sandler LLP ended their 13-year relationship with an email, according to people familiar with the matter.

Soon after, industry consultants, technology providers and Western banks told Severstal they could no longer work with the north Moscow-based company. Severstal’s technology department decided to buy as many computers as possible, assuming that ordering new items would become more difficult if western companies stopped selling to Russia.

Four of the company’s expatriate directors resigned from the board, including one who had worked for Severstal for more than a decade as both a director and board member.

Severstal warned at the time that it would soon be unable to send money to a subsidiary in Latvia that custom-made steel. If this company runs out of money, its employees will not be paid.

The consequences of the tough economic sanctions against Russia are already being felt around the world. WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexander Hotz

The EU sanctions against Mr Mordashov – along with similar measures later imposed by the UK – made it difficult for banks to do business with businesses he owns, including Severstal.

The steelmaker faced a $12.6 million interest payment to holders of $800 million in bonds. For weeks, its custodian, Citigroup, would not say if it could pay out the money it holds in a US account for Severstal, a person familiar with the matter said.

Citigroup later told Severstal that the company needed permission from the US Office of Foreign Assets Control to make the payment, the source said. Severstal said it is committed to honoring its commitments and will apply for any licenses needed to make the payment.

The wages of Severstal employees in Russia also go through international hands. For example, the Austrian Raiffeisen Bank International Inc

, which has said she is considering leaving the country, handles some of the company’s payroll payments, a source said. Raiffeisen declined to comment.

The sanctions and their effects mark an abrupt fall from grace for Mr. Mordashov. Just a year earlier, Bloomberg TV had described him as Russia’s answer to Amazon.com inc

Founder Jeff Bezos. Severstal has also won several international awards, including recognition as a ‘Sustainability Champion’ by the World Steel Association trade body.

Recently, Italian authorities seized his multi-million dollar yacht and confiscated his homestead in Sardinia. Mr. Mordaschow has also resigned from the board of the German tourism group TUI Inc

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, of which he was the largest shareholder. German authorities have launched an investigation into his transfer of that stake to an offshore company, TUI said. A spokeswoman for Mr Mordashov declined to comment on the investigation.

At Severstal, which employs 52,000 workers, Mr. Mordashov has urged the workforce to remain calm. On March 3, he held an online town hall for around 900 employees, telling them they wouldn’t lose their jobs and would still get paid, according to a report of the meeting posted on the company’s Telegram account .

Severstal has a stable financial position with low production costs and debt, as well as strong domestic demand, Mr Mordashov told employees.

A cooling unit at Severstal’s Cherepovets plant. The company employs 52,000 people.


Photo:

Andrey Rudakov/Bloomberg News

“We all need to stick together, help each other, work effectively and I’m sure we will overcome any difficulties,” he said, according to the Telegram post.

But Severstal faces several challenges. While the company sells about 70% of its steel domestically, Russian officials have urged producers to keep prices low in the country. This production could be hampered by sanctions preventing Western manufacturers from supplying specialty equipment to the steel and mining sectors.

Exports could also become difficult for the company. Severstal has announced it will shift its exports away from Europe and towards Asia, South America and the Middle East.

Even sourcing steel from Russia has now become problematic, as some nations have blocked their shipping companies from carrying Russian goods and other companies have voluntarily avoided them.

The EU ban on all Russian steel also means Severstal is likely to face resistance from domestic competitors in any new markets. A spokeswoman said the low production costs give Severstal a competitive edge even in crowded markets like Asia.

In any case, given the overcapacity in the steel sector, it could be difficult to find new buyers, underscoring the problems that Russian companies will face when looking for new markets outside the West.

“Major Asian economies are net steel exporters, why would they take Russian steel?” said Mr. Cachot of Wood Mackenzie.

write to Alistair MacDonald at [email protected]

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