Sovereign wealth funds are turning their back on Russian investments following the invasion of Ukraine, with some pledging to divest assets and others considering doing so. But there is a problem with this noble intention: nobody can actually sell.
The direction of travel is clear, and it was set in motion by the Norwegians, who run the biggest sovereign wealth fund in the world – one with a track record of trying to make a social conscience part of its investment approach.
On Monday, February 28, Norwegian prime minister Jonas Gahr Støre said the $1.3 trillion fund, officially known as Government Pension Fund Global and managed by Norges Bank Investment Management, would divest all of its Russian assets.
Given the fund’s sheer size, the assets in question are considerable: worth $2.83 billion equivalent when last disclosed at the end of 2021, including shares in 47 companies and in a range of government bonds.
The same day, Australia’s Future Fund confirmed that it was implementing all sanctions imposed by Australia, the US and the European Union.
“The fund holds around 0.1% of the fund, or around A$200 million ($146 million), in companies listed on the Russian stock exchange,” the fund said in a statement, adding that it had no holdings in Russian sovereign debt or other fixed income.
“We will be winding down the remaining exposure (which is not currently subject to divestment sanctions) as market conditions permit.”
Those four last words are vital. Because, right now, market conditions don’t permit, and they are unlikely to do so for some time.
If you say you are going to divest your assets, who are you going to sell them to?
For one thing, sanctions prohibit many foreign enterprises from dealing with Russia at all in any financial transaction for the foreseeable future. For another, there are capital controls in Russia now that prohibit the sale of local securities by foreign investors. For a third, the Russian stock exchange is closed anyway until further notice.
Then there are other practical considerations.
“If you say you are going to divest your assets, who are you going to sell them to?” says a source at a leading sovereign wealth fund. “Can you trade title in the assets? You can’t trade at all, you can’t convert from the rouble, and you can’t repatriate assets even if you can sell.
“No potential buyer is allowed to participate. Maybe you can find some Russian entity that is willing to take it, when that is legally allowed, but they’ve got no cash either.
“The only thing you can do is regard it as a distressed asset and impair it to zero.”
The short-term answer appears to be a freeze while making a plan.
Line Aaltvedt, manager of communications and external relations at NBIM, tells Euromoney: “We will implement the decisions made by the Norwegian Government and now freeze the fund’s investments in Russia, meaning we will neither buy nor sell shares.
“Together with the ministry of finance, we will prepare a plan to divest from the Russian market,” she says.
Australia’s Future Fund declined to comment beyond its initial statement.
More to come
Others are likely to find themselves in a similar predicament, and potentially with more at stake.
Singapore’s GIC, for example, is known to have exposure to Russia. While the Russia Direct Investment Fund (RDIF)’s previous descriptions of GIC as a partner or co-investor are understood to be somewhat wide of the mark, GIC has previously disclosed investments in property and several public market investments. The fund declined to comment to Euromoney about either its level of exposure – RDIF has previously said GIC has deployed $6 billion in Russia – nor about any intention to divest.
But given GIC’s specific relationship with the funds it manages, in which its government is the client and the instructing party, it is likely that GIC is waiting to see if Singapore itself tells it to divest. And it might not be waiting long.
Foreign minister Vivian Balakrishnan told parliament on Monday, February 28, that Singapore would impose “appropriate sanctions and restrictions” on Russia, which will include banking and financial measures.
This is unprecedented for Singapore, which hasn’t imposed unilateral sanctions for more than 40 years, since the Vietnamese invasion of Kampuchea (now Cambodia) in 1978. Normally, it only imposes sanctions that are legally binding from the UN Security Council, and this rare step illustrates just how dramatically world opinion has moved against Russia.
But if Singapore does instruct its sovereign wealth fund to abandon Russia, GIC is going to be faced with the same problem: how? Even if it can sell its public investments, it is not going to get much back for them: benchmarks on the Moscow exchange already fell 53% between February 16 and 25, before the exchange was closed.
South Korea’s Korea Investment Corporation (KIC), which launched a Russian-Korean investment platform with the RDIF in 2013, may find itself in a similar position. On Monday the foreign ministry in Seoul said it would join other countries in blocking some Russian banks from Swift, among other things, which might yet lead (explicitly or in effect) to a requirement that KIC get out of Russia.
“How to do this for listed stakes when the market is closed is difficult to assess,” says Javier Capapé Aguilar, director of sovereign wealth research at IE University. “Moreover, how to sell those joint-venture stakes will be interesting to see: both valuation and the buyer list.
“This could be a good indication of who still wants to play a role in a ‘closed Russia’ after this massive round of sanctions.”
In the Middle East, sovereigns are unlikely to step in and tell their sovereign funds to pull out. There are some large Russian holdings here: the Qatar Investment Authority owns 19% of Rosneft, for a start, and Qatar sees Russia as a key relationship.
So does the UAE, which was one of the few states that abstained on the UN’s resolution condemning Russia’s invasion of Ukraine. The country’s two main sovereign funds, Adia and Mubadala, both declined to comment to Euromoney, but both will have Russian exposure.
Adia’s will mainly be through equity and debt portfolio holdings (it is one of the world’s largest institutional investors and, like the Norwegians, is likely to be represented in Russia just because it is everywhere), while Mubadala has a long track record of partnership with RDIF and is thought to have about $3 billion of exposures to Russia, much of it in illiquid co-investments in real assets. Euromoney understands Mubadala is evaluating its positions.
“We have tracked at least $1.3 billion deal value in Russia using the Russia-China Investment Fund or the RDIF Mubadala Co-Investment Fund since January 2020,” says Capapé.
Nobody is expecting the Chinese to divest.
Uncomfortable
In the background of all of this is an uncomfortable prospect. If sovereign funds do divest, and find themselves with a legal mechanism to do so, are they going to be effectively giving assets back to Russia at bargain prices, and in doing so, actually benefiting the Russian state?
This has been a troubling undercurrent to BP’s apparently principled decision to abandon its 19.75% stake in Rosneft. BP isn’t saying it is giving the stake away, but it will clearly get very little, if anything, for it; in which case, who benefits? A Russian oil major that gets its equity back for nothing or below its long-term value? The Russian state that is supposed to be being penalized?
Along with the RDIF there is another Russian sovereign vehicle too, called the National Wellbeing Fund.
“The NWF is dedicated to support the pension system and, more interestingly, to guarantee long-term sound functioning of the system,” says Capapé.
It absorbed Russia’s reserve fund in late 2017, and was worth $183 billion by January 2022.
We’ve been bearish on Russia for years. It’s not a place we want to do business
On Tuesday, March 1, Russia's prime minister Mikhail Mishustin announced that it would deploy up to $10 billion from NWF to buy up local stocks, according to Bloomberg. More galling still, state-run development bank VEB, which is subject to sanctions, is reported to be the bank that may be hired to help the fund do the buying.
So, the unintended consequence of sanctions may be that good owners are replaced by worse ones, and that Russia gains a long-term financial reward from the whole situation.
Some sovereign funds have been giving Russia a wide berth for some time anyway. Temasek has only a nominal legacy exposure to some third-party funds in Russia, has no active investment activity in Russia or Ukraine, and believes that even if its portfolio companies may have holdings in the region, “we understand these are not material in value. So our underlying exposure to Russia and Ukraine is insignificant,” according to a spokesman.
It is also notable that NBIM’s Russian holdings at the end of 2021 were noticeably lower than they were at the end of 2020, though it is possible some of that may reflect changed valuations rather than divestments.
“We’ve been bearish on Russia for years,” one sovereign fund executive tells Euromoney. “It’s not a place we want to do business.”
