U.S. sanctions on certain Russian oligarchs and firms are rippling across the economy, threatening to punish more than a dozen other Russian companies that need to refinance $22.8 billion in international bonds over the next 18 months.
Bond investors penalized some companies not explicitly mentioned in the most recent sanctions because they are connected through corporate or familial ties to targeted entities. They sold the debt of other firms out of fear the U.S. Treasury Department might target other individuals in Russian President Vladimir Putin’s inner circle, or even Russian government bonds, in the future.
The resulting leap in bond yields, which rise when prices fall, could cost Russian companies that borrow in international bond markets—including aluminum manufacturer United Co. Rusal and gold producer Polyus PJSC —hundreds of millions of dollars in additional financing costs
Yields of dollar-denominated Russian corporate bonds climbed to 7.1% on April 12 from 6.1% on April 6, when the sanctions were announced, according to an index of emerging-market bonds maintained by JPMorgan Chase & Co. In contrast, yields in other emerging markets remained little changed.
“The market is concerned about the potential severity of sanctions and whether other corporates with Russian oligarch ties will be implicated,” said Arif Joshi, co-head of emerging markets debt at Lazard Asset Management, which invests about $17 billion in emerging markets. The new measures ban bond funds from trading existing debt of designated corporations and hamper Russian corporations from conducting “normal business operations in U.S. dollars,” he said.
Bonds of Rusal were the hardest hit last week after the firm’s owner, billionaire Oleg Deripaska, was included on the list of sanctioned individuals because of his ties to Mr. Putin. The bid price of the firm’s bonds due 2022, which U.S. bondholders must divest before May 7, dropped to roughly 66 cents on the dollar from 99 cents a week earlier, and the yield of the bond nearly tripled to 19.3%, according to data from Markit.
Investors also started to sell debt of companies with more tenuous ties to entities added to the list, such as Norilsk Nickel Mining & Metallurgical Co. , which is 28% owned by Rusal, and Polyus, which is owned by the son of a sanctioned individual, Suleiman Kerimov. Yields on Norilsk and Polyus bonds jumped to 5.43% and 7.15%, respectively, according to Markit, from 3.75% and 4.7%.
Unlike previous sanctions, Treasury’s recent initiative was open ended in scope, sowing uncertainty about how broadly it will be applied, investors said.
“They want to keep Russia nervous and off guard,” said Tim Ash, emerging-markets strategist at London-based investment firm BlueBay Asset Management. “Treasury have finally figured out that the key weakness of sanctions so far has been that they were too easy for the market and Russians to read and game.”
Rising yields cost corporations by raising the interest rates investors charge when borrowers sell new bonds to repay maturing debt. Russian companies have $22.8 billion of bonds coming due this year and next, and their “access to capital markets may become strained,” Citigroup Inc. analysts said in an April 11 report. If Russian corporations used bonds to refinance all the debt coming due in the next two years, the average rise in yields last week implies a $228 million rise in interest expense.
Russian entities sanctioned by the U.S. aren’t solely dependent on U.S. markets to refinance their obligations. They can also tap Russian banks, non-U.S. investors and their own balance sheets. Polyus took advantage of a 16% drop since March in the price of its $250 million convertible bond due 2021 to launch a tender offer for $50 million of the debt on April 12.
Bond investors expect the Treasury Department to add new companies and individuals to the sanctions list in the coming months. Should such measures fail to elicit the desired response in Moscow, the U.S. could target Russian government bonds as well.
“We are still a couple of sanctions iterations from going after sovereign debt [but] I think with the April 6 action, the bar for such a response has dropped,” Mr. Ash said.
Write to Matt Wirz at matthieu.wirz@wsj.com
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