Leveraging the Presence of Russia in the U.S. Capital Markets

In a new report, titled “Lever­ag­ing the Pres­ence of Rus­sia in the U.S. Cap­i­tal Mar­kets,” RWR Advi­so­ry Group high­lights the ways that, despite the recent impo­si­tion of addi­tion­al sanc­tions by the Biden Admin­is­tra­tion, Rus­sia con­tin­ues to derive sig­nif­i­cant ben­e­fit from the U.S. finan­cial sec­tor, notably the U.S. cap­i­tal markets.

Although the lat­est round of penal­ties tar­get­ed the abil­i­ty of U.S. per­sons to par­tic­i­pate in the pri­ma­ry issuances of new sov­er­eign debt by the Krem­lin, these new mea­sures stopped short of tar­get­ing the exist­ing hold­ings of Russ­ian sov­er­eign debt held by U.S. per­sons and the trad­ing of that debt in the sec­ondary mar­kets. The same is true of U.S. per­sons hold­ing the stocks and bonds of cer­tain major U.S.-sanctioned Russ­ian com­pa­nies, which also con­tin­ues to be per­mit­ted under U.S. law (with some nuance here as it relates to dif­fer­ent class­es of sanc­tioned com­pa­nies and the dates that secu­ri­ties were first issued).

These omis­sions remove some of the sting of the recent­ly announced penal­ties and are a large part of the rea­son why these actions have had an under­whelm­ing effect: 1) on the mar­ket’s per­cep­tion of “Rus­sia risk;” 2) on the price of cap­i­tal like­ly to be paid by the Krem­lin in future debt issuances; and 3) on the return on invest­ment enjoyed by those that have long seen under­writ­ing the Russ­ian gov­ern­ment as a prof­itable endeav­or. Indeed, as a result, many U.S. indi­vid­ual and insti­tu­tion­al investors con­tin­ue to hold these stocks and bonds in their port­fo­lios (many unwittingly).

There is prece­dent, how­ev­er, for tak­ing tougher mea­sures. Exec­u­tive Order 13959 issued in Novem­ber 2020 pro­hib­it­ed U.S. per­sons glob­al­ly from hold­ing the stocks and bonds of com­pa­nies des­ig­nat­ed by the U.S. Depart­ment of Defense as “Com­mu­nist Chi­nese Mil­i­tary Com­pa­nies” (CCM­Cs), includ­ing via index-man­aged funds. It even man­dat­ed the divest­ment of such com­pa­nies, if they were already held in port­fo­lio. This prece­dent demon­strates what is pos­si­ble, includ­ing as it relates to Rus­sia, should ten­sions esca­late beyond what has been described as an “open­ing sal­vo” from the White House in response to Russ­ian provocations.