Russian assets are nuclear toxic waste again. On April 6 the US Treasury Department (USTD) released a new set of targeted sanctions aimed at some of Russia’s biggest businessmen and their companies, and unleashed chaos on the markets.

Russian assets were hot until the new sanctions, with foreign investors piling into Russia’s sovereign ruble-denominated debt as one of the best ways to make money in the global zero-interest world. But the sanctions have hit not just those companies on the new US list, but all of Russia’s companies. A sword of sanctions is now dangling over everyone as those announced so far were directed in such a way is it is impossible to guess where it will fall next. This uncertainty has done far more damage than the actual sanctions which applied to a very small number of names.

Sanctions are not new and the April 6 list followed the “Kremlin Report” in February that listed everyone on the Forbes Russian rich list (in fact it was just the Forbes list, the US government later admitted) but didn't actually impose any penalties on anyone.

Despite the fears of a harsh new regime in the run up to the release of the Kremlin Report, ordered by the Countering America’s Adversaries Through Sanctions Act (CAATSA) law passed by the US congress six months earlier, no punishments were inflicted. Markets immediately shrugged the list off. The USTD made it clear that the report was not a sanctions list and investors said that as a result it had no practical impact on the prices of assets.

Russian companies went back to business as usual. Credit Bank of Moscow (CBOM) issued a $500mn bond to high demand. Fertiliser giant Phosagro also got a $500mn bond away in February that was five-times oversubscribed.

PhosAgro CEO Andrey Guryev told bne IntelliNews at the time: “This placement represents a new benchmark for the company, enabling us to lower the average interest rate and significantly improve the structure of our debt portfolio. We saw strong demand from international investors during the deal, with over 90% of the orders coming from American and European investors. We were happy to see major international funds and banks participating in this placement.”

And in the midst of the scandal surrounding the poisoning of former spy Sergei Skripal in March, state-owned gas giant Gazprom issued a €750mn bond in London to strong demand at exactly the same time as on the other side of town Prime Minister Theresa May was announcing the expulsion of 23 Russian diplomats for spying. Russia’s finance ministry followed up a few days later with a $4bn Eurobond issue, also to a strong market.

But the latest sanctions were different. They hurt. All the previous sanctions imposed on Russian companies had only affected new securities – listings of new shares or bonds. Existing securities were unaffected.

Not now. The Specially Designated Nationals And Blocked Persons List (SDN List) released on April 6 not only sanctions those listed, it bans any investor with US exposure (European banks with US branches count) from doing any business with the sanctioned names. Investors were supposed sell all their stocks, bonds and debt within 30 days – i.e. before May 7.

Bond traders in London are pulling their hair out to comply, because the same rule that is forcing them to sell is stopping anyone else buying. One international institutional investor, who didn't want to be named, recounts a conversation he had with his compliance department a week after the sanctions were imposed.

Compliance: “Why do we still have that Rusal debt on our books? Don't you know it’s illegal to hold in three weeks time?”

Trader: “Well you try and sell it then. The problem is: don't you know its illegal to hold Rusal debt in three weeks time?”

“We went to the USTD. You can’t sell this stuff even at 20c on the dollar. They said “That’s your problem”,” the same investor recounts.

It seems that the USTD didn't think its sanctions through and was assuming that the pain would be restricted to Rusal and Russia.

“Politics is more important than business now and this is a change that will last for years. The people that make politics think that politics is more important than finance,” says Stefan Benedetti, portfolio manager at Pioneer Investment. “This is going to be the biggest change in our lifetime.”

Not selling the SDN listed assets is not an option. Otherwise innocent investors in sanctioned assets now face huge fines for simply being unable to own these assets. “Even eating the paperwork won’t help you,” one investor comments wryly.

There were clauses threatening bond holders with punishments in the CAASTA report issued in February too, but no one took them seriously.

“At first we ignored this clause as it was thought unlikely that it would be used. But people are not ignoring it now,” says David Stewart, a partner at the law firm Latham & Watkins. “We all use the same pipeline – Euroclear – and you can sell Rusal at 30c if you can find a buyer, and if the clearing houses will clear the deal, but none of that is a given,” says Stewart, who adds that the people on the SDN list are not being very helpful with trying to sort this mess out.

Even the settlement system Euroclear is in the crosshairs as the punishment doesn't just forbid holding the shares, it forbids doing any business with the assets at all. That means even if a trader finds a willing buyer in China, for example, they have no way of transferring the asset to its new owner.

Now the game has been changed again and the uncertainty of what will happen next means that compliance departments in the international capital markets just don't want to go there.

“In China [President] Xi [Jinping] has just been given unlimited rule. That means there is no political risk in China and he can concentrate on reforms. China could become the new Singapore. By taking the political risk off the table they have made the investment proposition simpler,” says van der Bok. “I don't want to stay up late worrying about headaches. I could buy non-sanctioned Russian bonds, but why bother? Buy Belarus and Ukraine instead. It’s simpler.”

Climbdown

Many investors hope that April 6 was the last round of escalation, and if tensions ease the market will recover much of its losses.

“We need to wait two to three months see if the tone of talks between Russia and the US improves – if it does the market will reopen. The previous sanctions have shown that if one company is sanctioned then others still appeal to investors after the dust has settled,” says Shota Zhvania, the director of debt capital markets at Raiffeisen International. “Bottom line is that Russian assets are financially much stronger than most of their EM peers.”

In a surprise move on April 23 – two weeks before the 30 day deadline was due to expire — the USTD did an about face and relaxed some of the sanctions on Rusal, going as far as suggesting that it would lift them completely if the company’s owner Deripaska sold his shares. The April 23 statement extended the deadline for companies to wind down dealings with Rusal by five months.

It seems that the message was getting through: these sanctions are as painful for US investors, maybe more so, as they are for Russia.

The climbdown will come as a relief for the market and is a big win for Putin, who has been arguing that Russia can’t be isolated as it is already too integrated into the global market. But the climbdown doesn't solve the basic problem: who will buy the sanctioned assets? One possible buyer is China as the US has little leverage on the mostly closed Chinese financial market.

“The pipe is open and we are all selling at 20c-30c on the dollar but people that are not impacted by the sanctions like the Chinese will buy these securities and it will be a good trade for them,” says Benedetti.

The market was already bouncing back before the USTD relaxed its sanctions on Rusal. Russia is much stronger than it was in 2014. Budget cuts and efficiency gains mean the budget breaks even at around $60 per barrel of oil, and oil has already touched $75 in the midst of the fracas. Russia Inc is back in profit. At the same time Russian corporates have massively deleveraged so they have relatively low exposure to the rest of the world. But the uncertainty remains.

“The big question now is whether this is a huge buying opportunity or the new norm? It depends on your perceptions over the question of if there will be more sanctions,” says Alexei Tchernitsev, head of fixed income trading at BSC Global Markets.