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.