Russian Industrial Firm Defaults on Bond After Citigroup Blocks Payment

Business, Featured

Employee at Severstal | Image by Reuters

Russian-based steel and mining firm Severstal is feeling the pressures from sanctions imposed by the European Union and the UK.

On Wednesday, March 23, the firm defaulted on its $12.6 million bond when the American-based Citigroup Bank blocked its payment. This development makes Severstal the first major firm to fall into default since Moscow began its attack on Ukraine.

Severstal had already feared that Citigroup would try to block payments made by the organization. Last week, the firm attempted to test the theory and sent a 1% payment for their Eurobond coupon to see if it would process. Their fear was confirmed — the payment was blocked.

Alexey Mordashov, the company’s primary stakeholder, pleaded for the investors to contact Citigroup and ask for cooperation in obtaining the blocked payments. Citigroup Bank has declined to provide a comment at this time.

Russian Oligarch Alexey Mordashov is not being sanctioned by the United States, and Severstal is willing and able to pay its debt; however, Citigroup, the world’s prominent global bank, is blocking the funds from being distributed to bondholders.

Severstal has a U.S.-based distribution center in Miami. In 2018, Severstal sued the United States over the Trump administration’s 25% tariffs. The United States does not receive a large amount of product from Severstal.

As of March 2, Severstal halted shipments throughout Europe, stating that it did so “due to problems in interaction with European customers.” Europe accounts for about 25% of Severstal’s overall sales revenue.

It is unclear why the United States has chosen not to sanction Mordashov. Rather, the Biden administration has chosen instead to target other Russian elites.

Mordashov is noted as Russia’s richest man. However, he was not part of the EU’s original list of sanctioned individuals. He was added to the list during the wave of sanctions delivered by the EU on March 2.

The EU insists that Mordashov has close ties to the Kremlin. They feel that his investments in “pro-Russia media outlets” and personal banks of the Russian elite solidify the decision to impose such sanctions.

However, Mordashov vehemently denies any connection to Russian politics and states that sanctions upon him will not help the geopolitical conflict in Ukraine.

The general director of Severstal, Alexander Shevelyov, as well as Mordashov himself, have stated that they intend to apply for an OFAC (Office of Foreign Assets Control) license, for which they would go through the United States treasury and apply for funds to be unblocked by financial institutions.

Shevelyov likened the payment blocks to injustice on behalf of the Citibank group. If Severstal cannot obtain an OFAC license, the only remaining option is the process of filing for a formal default.

Though Severstal feels the impact of the sanctions imposed upon it, the firm is still in good financial standing. Overall, they have maintained a low debt-to-income ratio. However, it is unknown how long sanctions will remain imposed and how severe the impact will ultimately be.

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