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Why disentangling public pensions from Russian investments is easier said than done

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As U.S. officials broadly condemn Russia's invasion of Ukraine, calls are growing to divest public pension systems from Russian investment funds.

But getting that money out is easier said than done.

Officials in about half of states have proposed or passed policies calling for Russian divestments from public pensions. But as Emily Brock of the Government Finance Officers Association explains, a pledge to divest isn't the end of the story.

"One of the greatest misconceptions is that when you say you divest, then you divest," Brock said with a laugh. "The policy action was swift, but the action to actually divest may take some time."

For one thing, Moscow's stock exchange has been mostly closed since the war started, leaving sellers without a direct off-ramp. In Michigan, a state retirement board voted at the governor's urging to drop investments connected to Russia or Russian ally Belarus.

The resolution came with the caveat that the process would start as soon as practical once market conditions allow. Experts say finding buyers might be a significant challenge, and that likely means selling at a loss.

Before the invasion, less than a tenth of 1% of Michigan's $98 billion pension portfolio was tied to Russia. Now those holdings are likely worth even less after the value of Russia's ruble plummeted amid widespread sanctions.

North Carolina Treasurer Dale Folwell wants Congress to change federal law to allow states to seize Russian assets by suing over investment losses. He says, at this point, it wouldn't be practical for his state to offload millions of dollars in Russian holdings, in part because many of those assets are pooled with others in index funds.

"We're handcuffed," Folwell said. "Folks like myself don't pick and choose which stocks are in the index fund. The manager, the custodian of the index fund determines that."

Such calls for divestment are nothing new, said Keith Brainard, research director for the National Association of State Retirement Administrators.

Some governments pulled their money from South Africa in the 1980s to protest apartheid. Other states have policies prohibiting pension investments in Sudan or Iran. But Brainard says pension managers have to balance ethical goals with legal obligations to invest wisely.

"It does seem that that is the tack that public pension funds are taking, which is not to engage in a fire sale, but rather to systematically identify opportunities to sell their Russian holdings as opportunities develop," he said.

Still, Brainard notes Russian assets comprise a tiny fraction of the more than $5 trillion in local and statewide public pension systems across the country.

"A typical public pension retiree would likely never notice the effect of divesting Russian assets," Brainard said.

For Andriy Bodnaruk, a finance professor at the University of Illinois Chicago, calls to divest from Russia are personal. He's from Ukraine and also sits on the State Universities Retirement System board overseeing retirement savings for public university employees.

That board is weighing its options as it watches bills pending in the state legislature that would require Illinois pension systems to sever ties with Russia.

Illinois is one of at least nine states where legislation to divest pensions has been proposed or passed, according to a March 31 analysis from the Pew Charitable Trusts. Other states are pursuing action through executive orders or votes from investment boards.

Even though holdings in Russia are relatively small, Bodnaruk says public divestment sends a message.

Though he acknowledges those effects won't be immediate.

"We need to understand that it's not going to stop fighting on the ground today, tomorrow or in a week from now," Bodnaruk said.

He and others hope divestment, coupled with other financial penalties, will exert pressure on Russia in the longer term.

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