Russian steel giant on brink of debt default as sanctions hammer Moscow

Severstal is the third-largest steel producer in Europe

A major Russian steel company is on the verge of default after Citigroup froze its debt payment. 

Severstal, the third-largest steel producer in Europe, was unable to fulfill a $12.6 million bond payment within a five-day grace period – despite having the funds to do so. 

In a statement posted to the London Stock Exchange's website, Severstal said that Citigroup, acting as a correspondent bank of the loan issuer, has blocked the payment due to "regulatory investigations."  


Citigroup did not immediately respond to a FOX Business request for comment, but a person familiar with the matter told Bloomberg that the bank halted the payment so that it could get permission from the U.S. Office of Foreign Assets Control before remitting the cash. Neither the firm nor its controlling shareholder are sanctioned by the U.S.

The administrative offices of the Cherepovets Steel Mill, operated by Severstal PJSC, in Cherepovets, Russia, on Friday, Dec. 3, 2021.  (Andrey Rudakov/Bloomberg via Getty Images / Getty Images)

"This is an extraordinary situation for us," CEO Alexander Shevelev told Bloomberg News. "We continue consultations with partners and do our best to ensure that bondholders receive funds in accordance with the terms of the bond issue. I hope that this injustice will be resolved soon and the rights of bondholders will be respected."

But Alexey Mordashov, Russia's wealthiest man and largest shareholder of Severstal, was sanctioned by the European Union on Feb. 28 after the 28-member voting bloc identified him as the majority owner of what they described as the "personal bank" of senior Russian officials. The EU also said that Mordashov's media company, Severgroup, promotes Moscow's policy of destabilizing Ukraine.


"I have absolutely nothing to do with the emergence of the current geopolitical tension, and I do not understand why the EU has imposed sanctions on me," Mordashov said in a statement after the sanctions were announced. He called the fighting in Ukraine a "tragedy." 

Alexey Mordashov, chairman of the board of directors of Severstal, attends the St. Petersburg International Economic Forum (SPIEF) in Russia on June 7, 2019.  (Reuters/Maxim Shemetov / Reuters Photos)

Because Modashov is not included in any American sanctions, Severstal did not preemptively apply for an OFAC permit, a person familiar with the matter told Bloomberg.

The financial fallout from the myriad sanctions levied against Russia has prompted credit rating agencies to downgrade their long-term debt rating for the Russian government to "junk" status, with Fitch warning that international sanctions have brought a "huge shock to Russia's credit fundamentals." It noted additional sanctions remain a distinct possibility. 


Russia temporarily averted a historic debt default last week after it fulfilled a critical, $117 million interest rate payment on two dollar-denominated bonds. But there are fresh obstacles ahead for the Kremlin: Moscow could also default on a local-currency bond that was due for payment earlier this month but that foreign investors have not yet received. 

The Treasury Department has said that current U.S. sanctions do not prevent Russia from making debt payments.