Oligarch Companies Want to Pay Their Debts. But Sanctions Stand in the Way.

Severstal paid the $12.6 million interest payment to a unit of Citigroup, C 0.91% Inc., which collects the payments for bondholders, according to a person familiar with the matter. That money was transferred to the bank’s U.S. accounts, but hasn’t yet ended up with the bondholders. Severstal could announce early Wednesday that Citigroup has told the company that it won’t pay that money, the person said. This would place it in default by the end of Wednesday.

In a statement last week, Severstal said that it believed Citigroup may not process the payment. It said it sent a test payment worth 1% of its coupon to see if it would go through.

A spokesperson for Citigroup declined to comment.

The U.S., European Union and other Western allies enacted sanctions on individuals and put measures in place to restrict Russia’s central bank. The measures have disrupted the ability of Russia’s most prominent companies to access global financial markets. Western banks are reluctant to touch Russian money without strong assurances that what they are doing is legal, leading to delays and confusion.

Severstal is based in Cherepovets, north of Moscow, and is one of Russia’s largest steelmakers. It is majority-owned by Alexey Mordashov, one of the country’s richest men with an estimated fortune of $29 billion. Mr. Mordashov was included in the EU’s sanctions list and Italian police seized a complex of residential buildings on the Mediterranean island of Sardinia he owns last week.

It is possible that Severstal’s default may still be avoided if the payment is allowed through at the last minute. Russia’s government was able to make a transfer of dollars to foreign bondholders last week, avoiding default, because of exceptions written into the sanctions to allow some debt payments. Moscow also backed down from an order from President Vladimir Putin that Russia’s debt payments should be made in rubles, even for bonds denominated in other currencies.

A Severstal default would be the first major Russian company default in six years, according to S&P Global. The last was Far-Eastern Shipping Company PLC, a Russian transportation company, which restructured its debt in 2016.

Another steelmaker, Evraz EVR -12.59% PLC, which counts Roman Abramovich as a major shareholder, said on Monday that an $18.9 million coupon payment on a bond was blocked by Société Générale. It was due on March 21.

A spokesperson for Société Générale declined to comment.

Evraz said in a statement that the payment blocking had its roots in the U.K. Treasury’s decision to include Mr. Abramovich on its extended sanctions list. Mr. Abramovich is sanctioned by both the U.K. and the EU, including an asset freeze and a travel ban.

Severstal and Evraz have both said that they have the funds and are ready to make their payments and meet their obligations.

“Apart from malfunction of financial infrastructure, there are no reasons for a potential event of default,” the Evraz statement said.

Russia’s companies have about $98 billion of hard-currency debt outstanding and are due to make around $17 billion of payments this year on that debt, according to JPMorgan Chase & Co. International investors hold about $21 billion of Russian corporate bonds, or 22% of the total stock, a March 2 report by the bank said.

Investors have been reluctant to buy the bonds, even though they trade at a deep discount and despite the companies saying they want to pay.

Severstal’s $800 million bond, due in 2024, was trading at around 15 cents on the dollar on Monday, according to AdvantageData. Evraz’s note was priced at 64 cents on the dollar.

“We are concerned the ability and willingness of Russian companies to pay may decrease, as we may not see the removal of the sanctions for a while,” said Tatjana Greil Castro, a credit portfolio manager at Muzinich & Co.

Bonds issued by Russian firms including Gazprom PJSC, Severstal and Evraz are in a popular JPMorgan emerging-market corporate bond index known as the CEMBI. The bank said on March 7 that it would exclude Russian sovereign and corporate debt from its indexes, effective at the end of the month.

Other prominent Russian companies have been able to make good on their interest and principal payments since the invasion began. Energy major Gazprom paid investors on time when a $1.3 billion bond matured on March 14. Rosneft sent $2 billion to investors that week for a bond that matured on March 13. The payment was about two days late, but ultimately arrived within its grace period, according to bond investors.

Both Gazprom and Rosneft’s top bosses are on the U.S. and the U.K.’s sanctions list, but the companies are primarily owned by the Russian government.

Write to Anna Hirtenstein at [email protected] and Alistair MacDonald at [email protected]