US and British sanctions could force KiwiSaver funds to sell investments in Russian companies

Wednesday, 23 February 2022

Russian marines take their position during the Union Courage-2022 Russia-Belarus military drills at the Obuz-Lesnovsky training ground in Belarus.

EXPLAINER: In the wake of Russia ordering troops into Ukraine, KiwiSaver schemes could face “referred” sanctions forcing them to sell shares they hold in some Russian companies, experts say.

The full extent of sanctions against Russia and Russian companies by countries including the United States, Britain and Germany is yet to be revealed but global sharemarkets dipped following Russia’s moves to invade parts of Ukraine.

Sharemarket falls cause KiwiSaver fund values to drop, but KiwiSaver schemes could also face public concern that private retirement savings were invested in Russian companies with links to the Russian Government, said Barry Coates, chief executive of Mindful Money, a KiwiSaver ethical research company.

Some large KiwiSaver funds, including the ASB and Westpac growth funds, hold shares in Russian listed companies with close ties to the Kremlin, including Sberbank, as does the New Zealand Superannuation Fund.

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So far Britain has put sanctions on five Russian banks, not including Sberbank, but international media is reporting the US could impose wider sanctions on Russian banks, including banning them from doing transactions in US dollars, depending on the Kremlin’s next moves in Ukraine.

NZ Super Fund spokesman Conor Robert said if the US imposed sanctions on any of the dozen Russian companies the fund had stakes in, it was likely the fund would sell them.

The NZ Super Fund had just under $25 million invested in Russian companies at the end of June, with $9.3m in Sberbank, which was targeted with limited US sanctions following Russia’s 2014 annexation of the Crimean peninsula.

Roberts said none of the Russian companies the fund was invested in were on the wrong side of its responsible investing policies.

“To date, we have received no indication that companies we are exposed to are involved in gross human rights abuses or other issues in relation to Ukraine,” he said.

But US sanctions could force it to sell some of the Russian companies it held shares in.

“It is important to note, when our US-based index provider MSCI updates its index lists following any sanctions imposed by the US Government, it will result in those companies exiting our portfolio,” Roberts said.

Simplicity KiwiSaver chief executive Sam Stubbs said most KiwiSaver funds invested using international indexes, which set out how much of their money should be in individual countries and individual companies.

Demonstrators march near the Russian embassy in Berlin to protest against the escalation of the tension between Russia and Ukraine.

International index providers included the US companies Standard & Poor’s, FTSE Russell, S&P Dow Jones Indices, JPMorgan, and MSCI, and they would be highly sensitive to US sanctions, Stubbs said.

If some Russian companies were removed from those benchmarks, they would vanish from KiwiSaver portfolios, he said.

“Funds won't be able to invest in them.”

But Russia was a small part of those indexes, and many of the larger Russian companies were involved in oil and gas extraction, so the KiwiSaver funds which excluded investments in fossil fuel companies already avoided them, Stubbs said.

Some KiwiSaver schemes, including the Westpac KiwiSaver growth fund, had small exposure to bonds issued by the Russian Government.

Aaron Lloyd, a partner at MinterEllisonRuddWatts, said New Zealand did not have laws allowing it to impose unilateral sanctions on Russian companies but it would comply with any United Nations-imposed sanctions.

There was, however, no prospect of UN sanctions as Russia had a permanent seat on the UN Security Council with a veto on any proposals, he said.

But New Zealand companies, including banks, would have to cope with any US sanctions, which it would be a risk for them not to abide by, Lloyd said.

Sberbank was among the Russian companies the US was contemplating for sanctions, he said.

New Zealand banks would certainly cease processing US dollar transactions involving sanctioned banks and might cease dealing with them altogether on legal or risk management grounds, he said.

Even without sanctions with legal force in New Zealand, there could be pressure on KiwiSaver providers and the NZ Super Fund to sell out of some Russian companies.

“I would have thought one of the bigger issues is going to be public perception,” Coates said.

The fund’s mandate required it to avoid “prejudice to New Zealand’s reputation as a responsible member of the world community”.

Foreign Affairs Minister Nanaia Mahuta reprimanded Russia for sending troops into Ukraine on Tuesday as a violation of international law.

Roberts said the Government had stated it strongly supported Ukraine’s sovereignty and Russia’s actions violated international law.

“However, to date the UN and the New Zealand Government have not passed sanctions that would result in the fund exiting any bond holding we are exposed to in Russia,” Roberts said.

An ASB spokeswoman said the bank required its fund managers to ensure KiwiSaver funds observed all international sanction obligations.

A spokesman for BTNZ, which manages Westpac’s KiwiSaver scheme, said: “Although our exposure to investments in Russia make up less than 0.1 per cent of our holdings, we are taking the situation seriously and monitoring developments closely.

“BTNZ holds all assets directly which enables us to apply any exclusions we consider appropriate. A decision of this nature would typically be made in light of any international or New Zealand sanctions against Russia and/or any major human rights abuses, and at present we are considering the current international sanctions with our investment managers and research providers.”