Russia’s divestment promises by US states largely unfulfilled

Driven by moral outrage over Russia’s invasion of Ukraine earlier this year, US governors and other top officials made it clear they wanted to cut their financial ties with Russia.

A few states soon followed. Idaho sold $300,000 worth of bonds from a Russian oil company in early March. A day before the invasion, the Kentucky Teachers Retirement System sold its shares in the Russian bank Sberbank.

But those examples are outliers. Six months after a war that killed thousands of Ukrainians and displaced more than 12 million more people, most pledges to halt Russian investment — some made with fanfare at press conferences — have gone unfulfilled, according to an Associated Press review. state pension managers and companies that invest state funds.

A rapid global response has cut off much of the Russian economy from the rest of the world. That has made it nearly impossible for divestment by state pension funds, college endowments and other government holding companies — as well as private investments like those in 401(k) accounts.

“These pension funds want out, but it’s just not realistic to sell everything in the current environment,” said Keith Brainard, director of research at the National Association of State Retirement Administrators.

Benjamin Smith, a spokesman for the Rhode Island Treasury, said the factors making it difficult to divest also show that a global effort to isolate Russian President Vladimir Putin is working.

“This is good news because it means pressure from investors around the world, including Rhode Island, is succeeding in taking a toll on the Russian economy, making it harder for Putin to operate his military operation, state-owned enterprises and corrupt network of oligarchs,” he said in an email, noting that Russia’s Rhode Island pension plan exposure never exceeded 0.3% of its assets.

All pre-war investments in Russia are now worthless, or nearly so. That raises the question among some officials and fund managers whether divestment is even necessary.

In Hawaii, one of the few states where top officials pledged not to divest, Governor David Ige said at a May 5 news conference that the state’s pension system had invested “very little to next to nothing” in Russia.

“The few remaining investments are quite small, so I didn’t feel compelled to make a statement that we would divest for political reasons alone,” he said.

Before the Russian invasion in late February, many government-controlled investments had only small stakes — a fraction of 1% in each reported case — in Russian investments. But even that can add up to millions of dollars.

The largest US public sector pension fund, California’s CalPERS, said only 17 cents of every $100 of its portfolio was in Russian investments when the war broke out. Still, that translated into $765 million in stocks, real estate and private equity.

By the end of June, the value had dwindled to $194 million. The whole loss was because the companies fell in value; none were sold.

There is no way of knowing how many state government agencies in the US have invested in Russia or companies based there, but together they were worth billions of dollars before the war. Much of the money was invested in Russian government bonds, oil and coal companies as part of emerging market index funds.

Quick to condemn the invasion, state officials said they could pressure Putin by dumping their Russian investments.

“Our moral duty for these atrocities demands that you act to address Russia’s aggression and immediately restrict Russian access to California’s capital and investment,” California Governor Gavin Newsom wrote in a letter to the Feb. boards that oversee the huge pension funds that serve teachers. , state and local government and university employees.

Governors and other top officials across the country made similar statements.

Just after the invasion began, New York government Kathy Hochul signed an executive order calling for divestment “to the extent possible,” while the Arizona Council of Regency voted to end all Russian investment.

The treasurers of 36 states plus the District of Columbia and the US Virgin Islands signed a joint letter in March advocating divestment of government-controlled funds from Russia. They gave a financial reason for this: “The current crisis also poses a substantial risk to the investments of states and our economic security.”

Much of Russia’s government holdings are in the form of index funds that investors use to mimic the overall performance of the stock market. Russian stocks were usually part of funds specializing in emerging markets. MCSI and other companies deciding which stocks should be in the funds quickly dropped Russian securities.

But the companies selling investment products based on those indices have failed, still leaving chunks of Russian stocks in their investors’ portfolios.

As part of the sanctions, stock markets in the US and elsewhere have halted trading in Russian stocks. And the Moscow stock exchange was closed for nearly a month and reopened with tight controls that prevented US investors from selling.

The assets fell in value during the invasion, although the exact value is not always clear.

Maryland said $197 million of its state pension and pension system funds had been invested in Russian assets as of early February. A month later, the state estimated that the value had fallen and was only $32 million. The state has not been able to discharge its investments.

For the handful of states where top executives have not approved divestments, such value erosion is a major reason.

Shortly after the invasion, South Carolina Governor Henry McMaster said the amount of state investment in Russia was “minimal” and noted that the value was about to “shrink to almost nothing as the Russian economy is virtually shut down from the world.”

In Florida, Lamar Taylor, the interim director of the agency that oversees pension fund investments, said at a cabinet meeting that some investment managers could try to unload Russian assets as quickly as possible, while others could wait in case they are. worth more later.

Speaking at the meeting, Governor Ron DeSantis said the state board has a legal responsibility to try to make money for the pension system.

“That would violate your fiduciary duty, if you liquidated at huge losses for political reasons rather than in the interest of the beneficiaries,” he said.

But DeSantis said there was a way to make it easier: lawmakers pass a bill banning investment in Russia.

“If the legislator could speak clearly, that would be something we would welcome here, just to make sure we don’t promote investment in parts of the world that don’t reflect our interests or values,” he said.

Hank Kim, executive director of the National Conference on Public Employee Retirement Systems, said he has told pension fund participants that taking steps to divest is important, even if it can’t be completed right away.

“The public has a right to know that it has been debated in a serious way,” he said.

——— Mulvihill reported from Cherry Hill, New Jersey. Associated Press writers Kimberly Chandler in Montgomery, Alabama; Amy B. Hanson in Helena, Montana; Kimberlee Kruesi in Nashville, Tennessee; and Audrey McAvoy in Honolulu contributed to this report.