Pledges to divest from Russia by US states are largely unfulfilled

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

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

But these examples are outliers. Six months after the start of a war that has killed thousands of Ukrainians and displaced more than 12 million others, most promises to abandon Russian investments – some made to great fanfare at press conferences – n state pension administrators and companies that invest public funds have not been met, according to an Associated Press review.

The rapid global reaction has cut off much of Russia’s economy from the rest of the world. This has made it nearly impossible to divest from public pension funds, university endowments and other public sector equity – as well as private investments such as those in 401(k) accounts.

“These pension funds want to get 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, 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 that pressure from investors around the world, including Rhode Island, is succeeding in weighing heavily on the Russian economy, making it harder for Putin to finance his military operation, businesses public and corrupt network of oligarchs,” he said in an email, noting that Rhode Island’s pension plan exposure to Russia has never exceeded 0.3% of its assets.

All pre-war investments in Russia are now worthless, or nearly so. This raises questions from some fund officials and managers as to whether divestment is even necessary.

In Hawaii, one of the few states where top administration officials have not pledged to give in, Gov. David Ige said at a May 5 press conference that the employee retirement system State had “very little or almost nothing” invested in Russia.

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

Prior to Russia’s invasion in late February, many government-controlled investments held only small stakes – a fraction of 1% in each reported case – in Russian investments. But even that could be millions of dollars.

A sign at the California Public Employees’ Retirement System (CalPERS) headquarters in Sacramento, California.

Max Whittaker | Reuters

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

By the end of June, the value had fallen to $194 million. The entire loss was due to the assets losing value; none had been sold.

There is no way of knowing how many state government entities in the United States invested in Russia or companies based there, but collectively 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 imperative prior to these atrocities demands that you act to confront Russia’s aggression and immediately restrict Russia’s access to California capital and investment,” California Governor Gavin Newsom wrote in a letter on Tuesday. February 28 to the boards overseeing the huge pension funds that serve teachers, state and local government officials, and university employees.

Across the country, governors and other senior officials have made similar statements.

Just after the invasion began, New York Governor Kathy Hochul signed an executive order calling for divestment “where possible,” while Arizona’s Board of Regents voted to exit all Russian investment.

Treasurers from 36 states plus the District of Columbia and the US Virgin Islands signed a joint letter in March advocating the divestment of Russia’s publicly controlled funds. They noted a financial reason for doing so: “The current crisis also poses a substantial risk to state investments and our economic security.

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

But companies that sell investment products based on these indices have been left behind, still leaving shares of Russian stocks in their investors’ portfolios.

As part of the sanctions, stock markets in the United States and elsewhere have halted trading in Russian stocks. And the Moscow Stock Exchange has been closed for almost a month, reopened with strict controls preventing American investors from selling.

Assets lost value amid the invasion, although the precise value is not always clear.

Maryland said as of early February, $197 million of its state pension and retirement funds were invested in Russian assets. A month later, the state estimated the value had plummeted to just $32 million. The state was unable to unload its investments.

For the handful of states in which senior officials have not approved divestment, erosion of values ​​such as this is the main reason.

Shortly after the invasion, South Carolina Governor Henry McMaster said the number of public investments in Russia was “tiny” and noted that the value was about to “reduce to almost nothing because the Russian economy is practically cut off from the world”.

In Florida, Lamar Taylor, acting executive director of the agency that oversees pension fund investments, told a cabinet meeting that some investment managers may seek to offload Russian assets as soon as they see fit. might, while others might wait in case they are worth later.

At the meeting, Gov. Ron DeSantis said the state’s Board of Trustees had a legal responsibility to try to raise money for the retirement system.

“It would violate your fiduciary duty if you liquidated with massive losses for political reasons rather than in the interests of the beneficiaries,” he said.

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

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

Hank Kim, executive director of the National Conference on Public Employees Retirement Systems, said he told member pension funds that it was important to take steps to divest even if it cannot be completed. immediately.

“The public has a right to know that it was seriously debated,” he said.

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