California lawmakers turned to the state’s two giant pension systems to punish Russia when the country invaded Ukraine in February, urging the funds to sell off Russian holdings.
Four months later, the California Public Employees’ Retirement System still holds all of its public and private investments in Russia. Worth $765 million at the start of the invasion, they’re now valued at less than $195 million, according to figures the system provided last week.
Russia shut down its stock market Feb. 25, the day after it invaded, making it impossible for international investors to sell public equities there. It may be possible to sell private holdings, such as CalPERS’ stake a giant Moscow shopping mall, but the pension system has had a hard time finding buyers, CEO Marcie Frost said in an emailed statement.
“It’s been daunting, given that business activities are frozen and there aren’t buyers for assets that are rapidly losing their monetary value,” Frost said. “Even so, CalPERS will keep doing everything it can to stand in support of the Ukrainian people and to protect our members’ long-term interests.”
When Russia invaded, calls for CalPERS to divest resurfaced an old debate: Should the pension system use its $450 billion portfolio to take moral or political stands on world events, or should it focus strictly on investment returns?
The CalPERS Board of Administration didn’t take formal action to divest from Russia, and opposed a state Senate proposal that would have directed it to do so. But so far, it hasn’t mattered. Even if the system had agreed to divest, it’s doubtful the holdings could have been sold.
Nearly all of the 33 U.S. public pension systems that adopted formal divestment policies are now in the same situation as California’s main pension fund, said Anthony Randazzo, executive director of Equable Institute, a New York-based nonprofit that analyzes public pensions.
“All these systems with formal divestment policies haven’t been able to sell their stock any more than CalPERS has,” Randazzo said.
He said the only exception he knew of was the Kentucky Teachers’ Retirement System, which sold its shares of Russia’s Sberbank before the country halted transactions.
Value of Russian investments
Gov. Gavin Newsom called on CalPERS and CalSTRS to leverage California’s global investment portfolio to punish Russia in a letter dated Feb. 28, three days after Russia closed its stock markets.
By March 2, when CalPERS Board President Theresa Taylor responded to Newsom, CalPERS’ public and private investments in Russia were worth a total of about $765 million. That represents about a fifth of one percent of CalPERS’ investment fund.
The system’s public stocks were worth $420 million, Taylor said in the letter.
By June 30, the stocks had cratered to a value of $459,000, according to the figures provided by spokesman Joe DeAnda.
In March, CalPERS’ privately held investments in Russia were worth $345 million, according to Taylor’s letter.
Private investment values are reported on a lag, but the most recent figures put CalPERS’ private Russia holdings at about $193.6 million, according to the figures provided by DeAnda.
CalPERS’ large stake in the 850,000-square-foot Metropolis Mall, which was valued at $695 million as recently as fall 2021, was worth just $176 million by March 31, DeAnda said. CalPERS’ investment in the mall, made in 2013, is held through a fund managed by Houston-based developer Hines.
The pension system also owns an interest in a Russian private equity fund that, as of its most recent valuation at the end of December, was worth $17.6 million, DeAnda said. He said CalPERS recently tried to sell it, but couldn’t find a buyer.
To divest or not to divest?
Democratic state senators Dave Cortese, of San Jose, and Mike McGuire, of Healdsburg, introduced a proposal in February to try to get the state’s pension systems to divest from Russia.
The proposal called on the systems to sell their holdings in companies that do business in Russia and Belarus, while including a caveat that the bill wouldn’t supersede the systems’ fiduciary responsibilities.
The boards of both CalPERS and CalSTRS opposed the legislation. CalPERS’ Investment Office estimated the proposal, with its broad prohibition on investments in companies doing business in Russia or Belarus, would have affected $185 billion worth of its public holdings. The bill failed to advance in the Assembly last month.
CalPERS typically opposes divestment proposals, saying the fund’s sole focus should be paying retirement benefits for the 2.1 million retirees, beneficiaries and state and local employees it covers. The system makes more than $25 billion in pension benefit payments each year, and its long-term obligations have been growing faster than its assets.
Still, the system has been ordered to sell investments in Sudan, Iran, firearms and coal over the years. The CalPERS board elected to divest from tobacco in 2000.
Geopolitical issues, and connected questions of divestment, will only get thornier in the years to come, experts told the CalPERS board in a March discussion.
The pension system’s investments in a growing number of “emerging markets” around the world present opportunities to diversify the system’s portfolio — improving its chances of hitting its 6.8% annual investment return target — but also come with political complications, consultants told the board. As an example, they questioned what CalPERS would do if China invaded Taiwan.
Closer to home, CalPERS faces growing calls to divest from oil and gas. The system has opposed the idea, saying it is more effective to engage the companies as shareholders to promote environmentally responsible practices than to sell the shares to someone else.
But as far as Russian investments go, said Randazzo, the Equable Institute director, the global market effects of Russia’s war in Ukraine likely will hurt U.S. pension portfolios more than any decisions on what to do with investments in the country.
“The overall dollars nationally are small,” Randazzo said. “We do not see the Russian divestment or losses on direct investments in Russia as having a meaningful effect on state and local pension funds.”
The institute recently estimated that public pension systems in the U.S. logged an average loss of about 10% in the fiscal year that ended in June due to the global drop in stock prices. CalPERS reported a 6.1% loss, it’s first negative return since the Great Recession.
