The terms ‘collateral damage’ and ‘friendly fire’ became news par­lance when the US invaded, and ultimately destroyed, Iraq in 2003. It meant that bystanders, civilians or even allies could be acceptable casualties when rockets fly and bombs are dropped indiscriminately, and that those victims don’t count for much so long as the good cause of war is furthered.

When the US Treasury on April 6 announced yet more embargo measures against Russian business, the financial destruction it ensued spared neither foe nor friend. It rattled bond and stock markets in Europe and Asia, causing steep losses for savers, pension funds and corporations, no matter how removed from the enemy target, Vladimir Putin, and his circle of friends.

Admittedly, I have never quite understood the rationale of embargoes. In most cases they are successfully circumvented. Serbia, UN sanctioned in 1992, was readily supplied by Greece; North Korea was for years if reluctantly supported by China; Iraq’s Food for Oil programme soon became a racket, and when Russia occupied the Crimean peninsula and was punished by western embargoes it seemed to even profit from it.

Imposed in an effective manner though, an embargo becomes the economic equivalent of carpet bombing. It makes civilians suffer and bolsters the regime one wishes to fight. It feeds regime insiders and engenders rabid nationalism. Even regime critics are turned into patriots, rallying for the cause of their homeland.

The ultimate achievement of a total embargo is total destruction. In this sense it is war-like. If successful, it will destroy not only a regime but society in its entirety. In its wake follows anarchy, famine and loss of human life in large numbers.

An effective embargo against Russia, for instance, aiming at its implosion, has to make a calculation of what would happen next. A country with a highly educated population of 140 million, inhabiting the larger part of the Eurasian landmass and ruling over 12 time zones, would descend into utter chaos (think Afghanistan, Iraq or Libya). Only pea-sized brains can accept this as a desired outcome – or ‘stable geniuses’.

A case in point is the latest round of sanctions against Russia, picking almost randomly not only government officials and State companies but 12 privately owned businesses and seven billionaires without regard for their closeness or remoteness to Putin. The US attack was harsh, unexpected and hugely disruptive.

Those targeted saw all their US assets – outlets, goods and cash – seized and excluded from any current and future business. Existing arrangements, shares and bonds traded in the markets, for instance, had to be terminated. All US subjects were given a statutory period until May 7 “to divest or transfer debt, equity or other holdings” to non-US entities. These US sanctions will also apply to non-US citizens who “knowingly facilitate signifi­cant transactions, including deceptive or structured transactions, for or on behalf of any person subject to US sanctions”. Which could mean: to all of us willing to do business with Russia in one way or the other. Every bank, lawyer, auditor, trader, customer or investor is possibly tainted. Malta’s troubles with Pilatus Bank look like kid’s play in comparison.

Imposed in an effective manner, an embargo becomes the economic equivalent of carpet bombing

The epicentre of the tsunami hitting the markets was oligarch Oleg Deripaska and his companies EN+ and Rusal, listed respectively on the London and Hong Kong stock exchanges.

Rusal is the biggest aluminium producer outside China, delivering seven per cent of the world’s aluminium, a large part of it to the US. Within a few days its market value halved, $7.6 billion worth of bonds were at risk, as was $8.4 billion of bank debt. Rusal’s US customers were instructed to withhold payment for goods already received. Share trading in both companies came to a standstill.

EN+ was delisted from London’s equity index; Rusal’s bonds were excluded from the JP Morgan CEMBI index. Prominent western members of the companies’ board of directors, like Ivan Glasenberg, CEO of commodity trader Glencore, stepped down with immediate effect. Deripaska’s aluminium stored in warehouses of the London Metal Exchange had to clear out at short notice. Who would dare to take it?

It did not stop there. The Russian rouble was in free fall, and so were all Russian companies, even those not targeted by the embargo. Sberbank dropped 20 per cent in one day alone, and so did Norilsk Nickel.

The ripples then reached the Austrian markets. Raiffeisen Bank International, doing a substantial part of its business in Russia, and the oil company OMV, invested in oil exploration in Russia and its largest natural gas customer, both lost billions of its market caps. Businesses of Russian oligarchs abroad, like the Austrian construction company Strabag (Deripaska), or Swiss engineering company Sulzer, owned by Viktor Vekselberg (for many years BP joint venture partner and another embargo victim) were dumped by investors in panic.

What these upheavals have done to the investment portfolios of fund managers, insurance companies and pension funds is already hard to estimate.  What will further happen even more so.

What will weigh on investor sentiment is not only the broad, ambiguous wording of the sanctions programme but the fact that the targets seem so random – not based on intelligence but copied and pasted from Forbes’s Rich List.

Vekselberg is admittedly very rich, but twice removed from the Putin circle. If guys like him are targets, or Suleiman Kerimov (accused of money laundering in France, not for schmoozing up to Putin or Marie Le Pen), then any potato farmer on Lake Baikal could be next. It is destruction in progress.

The next step – and there will be a next step, without warning – could be yet more companies, yet more businessmen. Or even the nuclear option, excluding Russia from the international payment system SWIFT, making trade and any economic communication with the rest of the world impossible.

There’s no way for us to know beforehand. This is why retail investors like you and I should be deeply worried. Even if one passes on Russian investments, there’s nowhere to hide.

Fear of contagion is already verging on panic. Take Polyus Gold, listed on both Moscow and London stock exchanges. It is owned by the son of Suleiman Kerimov, Said Kerimov. Neither he nor the company was included in the latest embargo round. Polyus is one of the world’s top 10 gold miners and probably one of the best-run companies in Russia: western managers, western disclosure standards and highly profitable. No Putin connection. Yet its shares plummeted, and its bonds, which used to trade well above par, dropped 20 per cent – theoretically, as these were indicative prices suggested by market makers. No trade actually took place. No one sold, no one could buy. Everyone was afraid to get annihilated by the US.

US aluminium producers like Alcoa or Century Aluminium will rejoice. First rewarded by Trump’s import tariffs and now by the administration’s move to take seven per cent of foreign supplies out of the market, they will make profits like never before. American beer drinkers, who will have to pay more for their six-packs, will not be pleased.

For us retail investors it is too late now to invest in Alcoa or Century. Lucky those who did.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, poli­tics and finance. The purpose of his column is to broaden readers’ general financial know­ledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

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