For years, a river of American wealth has flowed into Russia — money from virtually every corner of the U.S. financial world. Public pensions, hedge funds, banks, insurers, university endowments, mutual funds and wealthy investors have collectively showered billions of dollars on Vladimir Putin’s regime and supported companies closely connected to it.
Teachers, firefighters, police officers and state employees from New York to California might be surprised to learn that their retirement dollars are invested in shares of sanctioned Russian companies.
The nation’s two biggest public pension funds — the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) — together hold stock in sanctioned Russian companies worth nearly $715 million, according to their most recent annual filings. These include Gazprom, the Russian gas giant that has functioned as a bottomless expense account for Moscow and Rosneft, which acts as a foreign policy arm of the Russian state.
Daniel Fried, a former U.S. ambassador to Poland, was stunned to learn of the scale of pension fund investments in companies he helped sanction as State Department coordinator for sanctions policy in the Obama administration. “Are you kidding me?” Fried tells Rolling Stone. “Those are companies I would not want to have any American’s pension money tied up with.” (CalSTRS says it carefully monitors these stocks for risks and has restricted its money managers from buying new shares of Gazprom. CalPERS did not respond to repeated requests for comment.)
California isn’t alone. The state of Florida’s public pension fund has invested $160 million in sanctioned Russian companies, including a handful of holdings on the state’s own list of “scrutinized companies,” because of their ties to Iran, according to Politico. The New York State Common Retirement Fund, the nation’s No. 3 public pension fund, holds nearly $30 million worth of shares in sanctioned Russian firms.
The importance of these financial channels was underscored Wednesday when President Trump signed an executive order aimed at stopping future Russian interference in U.S. elections. Trump’s executive order was seen as an attempt to head off a far stricter measure with broad support by Senators Chris Van Hollen (D-MD) and Marco Rubio (R-FL) that would have explicitly cut off the flow of U.S. dollars to Russia if it interferes in future elections.
“The fact that we introduced this bill has led the Trump administration to begin to fashion an executive order,” Van Hollen tells Rolling Stone. “The problem with an executive order is that it will give the Trump administration maximum discretion. The view Senator Rubio and I have is that in order for it to be credible, we need to put it in law and we need to spell out in law what the bright lines are and what penalties would be automatically imposed.”
Trump’s executive order, which comes amid warnings from the U.S. intelligence community that the upcoming midterm elections are a a Russian target, includes more of the same sort of penalties that have failed to deter Russian bad behavior in the past. By contrast, the Defending Elections from Threats by Establishing Redlines, or DETER Act, introduced in January by Senators Van Hollen and Rubio, goes much further. It includes tough penalties on Russian banks and energy companies and the so-called “nuclear option” of barring Americans from buying new issues of Russian sovereign debt. “We did want to discourage investments that prop up Putin and the Russian regime,” Van Hollen tells Rolling Stone.
The bill hits the main sources of money for Putin’s regime. Russian sovereign bonds, which are basically loans to Putin’s regime, are, along with taxes, one of the two main ways that governments have to pay bills. Russia has a third option: It owns some or most of the banks and energy companies targeted by the DETER Act.
Thanks to the enduring popularity of Russian bonds, the Kremlin is a big beneficiary of American financial largesse. Exactly how much of the $153 billion of Russia’s sovereign debt is held in the United States is a Kremlin secret — perhaps because it’s such a big number. Last month, ACRA, a Moscow-based credit reporting agency, estimated that American investors hold 8 percent of Russia’s foreign debt or $12.24 billion. Other analysts tell Rolling Stone that the true number could be even higher.
The biggest holder of ruble debt, according to public filings compiled by Bloomberg, is the giant New York asset manager, BlackRock Inc., headed by Larry Fink, a Democrat and member of Trump’s now-disbanded business council. The two biggest U.S. public pension funds, both based in California, together hold nearly half a billion dollars of Russian debt, and many other public pensions hold smaller amounts. “I can think of no credible reason why U.S. public pension funds and savings vehicles should fund a government that is actively violating our sovereignty,” Daleep Singh, a former assistant U.S. Treasury official who helped draft sanctions on Russia, testified Wednesday before the Senate.
The executive order Trump signed Wednesday — “more of a press release than a change in policy,” Singh called it — doesn’t touch sales of Russian debt. That’s not surprising. Earlier this year, the Trump administration signaled that Russian debt was too popular to sanction. A memo issued in February by the Treasury Department warned that sanctioning Russian bonds could have “negative spillover effects” on global financial markets and businesses. After the memo was released, ruble debt became more popular with American and other foreign investors than ever.
The Russian Central Bank, through an opaque process that resembles a three-card Monte game with bonds, lends money that winds up in the accounts of financially-strapped, sanctioned Russian banks and companies. In 2016, the Obama administration tried to warn U.S. banks not to take part in a potentially lucrative Russian bond deal because it would undermine sanctions, according to The Wall Street Journal. “The Russians really know what they’re doing with bonds, far more so than any other sort of kleptocratic government,” Maximilian Hess, head of political risk advisory at AKE International who has been researching the Kremlin’s policies concerning bonds, tells Rolling Stone. The Kremlin, he says, has become adept at using bonds as a “geopolitical tool.”
What bothered the Kremlin wasn’t the the proposed ban on sales Russian debt; it was the strict sanctions that Congress was threatening to impose on Russian banks that rattled nerves in Moscow. If Russia interfered in future U.S. elections, Van Hollen and Rubio’s DETER Act would have frozen the assets of Russian banks in America, and banned anyone in the United States from doing business with them. News that Congress was considering such a step sent the ruble crashing and prompted Prime Minister Dmitry Medvedev to warn that a ban on banking operations would be considered an act of “economic war.” Russia would respond “economically, politically, or in any other way, if required,” Medvedev said. “Our American friends should make no mistake about it.”
Moscow, naturally, prefers the current sanctions, because they allow Russian banks and energy companies to continue to do business with — or in — the United States.
Take Sberbank, Russia’s biggest bank. Although sanctioned since 2014, Kremlin-controlled Sberbank runs an investment bank through its U.S. subsidiary in Manhattan, right next to the Russian Tea Room on 57th street — recently rebranded as “Billionaire’s Row.” In 2016, Sberbank’s U.S. subsidiary sought to ease sanctions by hiring lobbyist Tony Podesta, whose brother, John, ran Hillary Clinton’s campaign. (In a weird coincidence, three days after Tony registered as a lobbyist for Sberbank CIB, his brother John’s email was hacked by Russian intelligence officers in one of the pivotal moments in Russia’s 2016 election interference campaign.)
Sberbank shows up on the list of the 50 biggest international stocks held by the New York City Board of Education Retirement System, which serves retired New York City educators, as well as the retirement portfolios of teachers in Ohio, Illinois and Kentucky, to name but a few. Retail investors are also exposed to sanctioned Russian firms through emerging market funds offered by mutual fund giants like Vanguard.
Surprisingly, buying shares in sanctioned Russian banks and energy companies that fall on Treasury’s “sectoral sanctions” list isn’t illegal. The U.S. Treasury tried to strike a balance between punishing these powerful Russian companies without harming the pension funds and other big institutional investors that held major stakes in them. The result was a 2014 directive that barred transactions in most “new debt or new equity” of designated Russian companies. These so-called “sectoral” sanctions let pensions keep their “old” or preexisting positions in them. “It allowed us to sanction these powerful Russian companies in a way that did not unduly harm U.S. and third-party countries,” John E. Smith, former director of the Treasury’s Office of Foreign Assets Control and now co-head of the National Security Group at Morrison & Foerster, tells Rolling Stone. The DETER Act also threatened to force pension funds and other investors in sanctioned Russian banks and energy companies to divest.
Ultimately, it will take an act of Congress to halt the flows of dollars into Russia. A few savvy investors want nothing to do with Russia, such as David Swensen, the highly-regarded chief investment officer of Yale’s endowment.
“In Russia, you only own what Putin wants you to own,” Swensen tells Rolling Stone. Most money managers, however, don’t think this way and don’t know or don’t care what the Kremlin does with their dollars.
“All of these investors are basically entirely politically agnostic,” Bill Browder, a fierce critic of Putin’s regime and architect of the Magnitsky sanctions act who was once the biggest foreign investor in Russia, tells Rolling Stone. “They would buy North Korean shares if they thought they could make money and were listed on an exchange. They are totally driven by greed and fear.”
It must bring a smile to Putin’s face that his bills are being paid by the country known as the “main enemy” during his days in the KGB.
Seth Hettena is the author of Trump/Russia: A Definitive History, published by Melville House.