The Russian Railways Company (RZD) has been unable since April 5 to repay a debt of 605 million dollars (557 million euros) subscribed by one of its subsidiaries in Ireland, RZD Capital. The Russian business daily Kommersant explains that“due to the sanctions, the accounts of RZD Capital have been frozen by the paying agent, the London branch of Bank of New York Mellon”.
RZD tries to pay in rubles
Russian Finance Minister Anton Siluanov lamented that the group “was not authorized to fulfill its obligations” and indicated that he therefore planned to pay this sum in rubles. But there is little chance that this solution will suit the creditors. Beyond a grace period provided for in the contract (generally 10 to 30 days), they can therefore decide to declare the Russian Railways Company in default of payment.
→ ANALYSIS. War in Ukraine: the noose of sanctions tightens around the Russian economy
The RZD is not the first Russian company to encounter difficulties since the triggering of Western sanctions against Russia: the steel giant Severstal, the bank Sovcombank, or the Chelyabinsk tube factory have also missed deadlines reimbursement. But the railway company is certainly the biggest company in this situation.
85,000 km of railways
The RZD is a giant that plays a strategic role in Russia, both to allow the inhabitants to move, but also for the transport of goods and for military logistics. It alone weighs 3.5% of GDP, employs more than a million people and consumes 6% of the electricity produced in Russia. It manages a network of 85,000 km of track, on which it runs more than 25,000 passenger cars for long distances and 650,000 freight cars.
The company was run until 2015 by Vladimir Yakunin, a close friend of Vladimir Putin. It is now headed by Oleg Belozerov, a civil servant loyal to the regime, and is still 100% owned by the Russian state.
The company was placed under sanctions on March 24 by the United Kingdom. In France, more than 3,000 employees of Gefco, a logistics company, can breathe a sigh of relief. The RZD had indeed been a 75% shareholder in their company since 2012. But the management of Gefco succeeded in extremis in organizing a takeover by CMA CGM, with the discreet support of Bercy.
Seizure risk
The case of RZD perfectly illustrates how the sanctions work, little by little, to paralyze the economic activity of Russia. On March 25, the Russian Railway Company was already due to settle a payment of 30 million pounds sterling. But the sum was frozen by the paying agent, the British subsidiary of Deutsche Bank. The RZD immediately applied to the UK Treasury for a license to allow the payment. However, she’s not sure she’ll get it, which means she’s headed for default.
This will not prevent Russian trains from running in Russia. On the other hand, the company will no longer be able to borrow outside Russia to finance itself, making any investment difficult for it. In addition, all assets of the RZD abroad will face the risk of seizure, in order to repay the debt. The whole reputation of the company will be damaged, so even when this page is turned, it will always be more expensive for it to borrow, because its credit rating will keep track of this accident.