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States Move to Divest from Russia

March 17, 2022

A growing number of states have joined the U.S. government and a host of allied nations around the world in imposing sweeping sanctions on Russia over its invasion of Ukraine.

Several states, including California, New Jersey, Pennsylvania, Connecticut, Colorado, New York, and Illinois have announced plans to have their public employee pension funds either divest their holdings from Russian-controlled investment vehicles or cease any new investments into those entities.

Governors in Ohio and Iowa have ordered Russian-made items to be pulled from store shelves, while North Carolina Gov. Roy Cooper (D) issued an executive order directing Tar Heel State government agencies and departments to review all existing contracts and operations and to terminate any agreements or operations that directly benefit Russian entities.

California Takes Multi-Step Sanctions Approach

A few weeks ago, California Gov. Gavin Newsom (D) followed Cooper’s lead by issuing Executive Order N-6-22, which requires state agencies and departments under the governor’s control to review and terminate any contracts or agreements that benefit Russian entities.

Newsom’s order came days after he sent a letter to the heads of the California Public Employee Retirement System (CalPERS), the California State Teachers Retirement System (CalSTRS), and the University of California Retirement System urging them to determine how to best offload their holdings in Russian assets.

The three systems collectively have about $1.5 billion invested in Russian holdings, large compared to the Russian holdings of any other state but a very small part of the systems’ overall value of approximately $970 billion.

Golden State lawmakers are also getting into the act. State Sens. Mike McGuire and Dave Cortese, both Democrats, have introduced a bill (SB 1328) that would legally require CalPERS and CalSTRS – the two largest pension funds in the nation – to divest from Russian holdings and to block state contracts from being awarded to any private company doing business with Russian entities.

Newsom has signaled his support for that measure, which has drawn a bipartisan mix of 57 Senate co-authors.

New pressure is being applied to California insurance companies as well, as state Insurance Commissioner Ricardo Lara (D) sent a letter last week to Golden State insurers directing them to review their fiscal holdings and to immediately divest from any direct investments in Russian companies...or else. 

“As the nation’s largest insurance market and the fourth largest insurance market in the world, we must not tolerate California consumers’ insurance premiums funding an authoritarian regime that invades a sovereign government, terrorizes its population, and is an enemy of free expression, speech, assembly, press, and equality for LGBTQ+ people, women, and ethnic and religious minorities,” Lara wrote. “Insurance companies must send a loud and clear message of solidarity with the people of Ukraine and the global community by withdrawing any financial support for the Russian regime.” 

Lara cited a recent AM Best commentary that indicated “U.S.-based insurers’ direct investments exposed to Ukraine and Russia include nearly $2 billion in bonds while indirect investments in businesses that derive a share of earnings from Russia may be more substantial.”

He further emphasized his willingness to force insurers’ hand if they do not act voluntarily, saying he would “explore all remedies available under California insurance law to push the industry to demonstrate that they are aligning with the global community to hold Russia accountable. If insurance companies do not voluntarily act now to dispose of direct investments in Russia, I will explore all options to compel them to follow through.”

State Sanctions Not Always on Sure Legal Footing

Individual states have been imposing their own sanctions on foreign governments for years over issues like human rights and nuclear proliferation. But international trade advocates have argued for just as long that because international trade issues fall under the Constitution’s Supremacy and Foreign Commerce Clauses, they are out of their legal depth in doing so. 

Those forces have won major court decisions in the past, including a landmark Supreme Court decision in 2000 that nullified a Massachusetts law banning trade with Burma after justices determined it was preempted by federal law and thus unconstitutional.

That hasn’t stopped numerous states from imposing sanctions on the likes of Iran, Cuba, Syria, and North Korea since then, however. And as the last several weeks have shown, it hasn’t dampened the enthusiasm for sanctioning Russia now.

While trade bans present some legal challenges, University of California Berkeley assistant professor of finance Anastassia Fedyk, who is from Ukraine and still has family there, says states have other tools at their discretion.

“Individual states can decide to collect taxes on goods purchased out of state,” she says. “Perhaps selectively increasing taxation on those goods, which could potentially be even more impactful if that revenue goes toward aid to Ukraine.”

Corporate America’s Exit from Russian Market Grows

Governments have not been the only ones using the tools at their disposal to express condemnation of Russia’s actions.

According to the Yale School of Management, as of this writing over 400 private corporations have also opted to end, suspend or scale back their operations in Russia. Those who say they are ending their presence include corporate titans like Netflix, American Airlines, Exxon, and Moody’s. Companies opting out now but leaving the door open to a return at some point include American Express, Coca-Cola, McDonald’s, Starbucks, Visa, and Mastercard. Meanwhile, recognizable brands like Johnson & Johnson, Pepsi, General Mills, and Michelin have opted to scale back on a limited basis by either reducing operations or cutting off any new investment.

“These actions have the potential to have a very large impact, both directly as well as guiding government policy,” Fedyk says, noting that the growing number of companies taking action puts significant pressure on others to follow suit, especially those within their same industries.

But that pressure has not convinced everyone the same way. The Yale list notes at least 40 companies, including the likes of Haliburton, Subway, and Koch Industries, that have opted against leaving or reducing their activities in Russia.

In a statement, Koch Industries president and COO Dave Robertson referenced Russian President Vladimir Putin’s threat to nationalize the holdings of companies that pull out of the country as a reason for the Koch-owned company Guardian Industries to continue operations there.

“While Guardian’s business in Russia is a very small part of Koch, we will not walk away from our employees there or hand over these manufacturing facilities to the Russian government so it can operate and benefit from them...Doing so would only put our employees there at greater risk and do more harm than good,” Robertson said.

Are State Sanctions Mere Symbolism?

Some observers – and even some governors - have opined that all of these state-level actions are mostly symbolic and will have precious little impact on Russian aggression in Ukraine. But Fedyk says symbolism is still a powerful tool unto itself.

“There are two sides to this issue, the symbolic side and then the operational angle, and both can be quite meaningful,” she says. “Even if individual states do not have an immediate large effect, the more states that are adopting a certain policy, the more it signals broad support for that policy to the federal government, especially when they see it coming from both Democratic and Republican leaderships.”

Moreover, she says, even small or symbolic actions are better than doing nothing.

“It all depends on our reference point,” she says. “Relative to not taking any action at all, they are definitely helpful.”

--By RICH EHISEN 

Editor’s Note: You can hear my complete conversation with Professor Fedyk on the latest episode of the State Net Capitol Journal Legislative Deep Dive podcast, available via all major podcast platforms.

 

Governors, State Lawmakers Pushing for Russia Sanctions

In response to Russia’s invasion of Ukraine, the governors of at least 11 states have called for the cutting of state ties with Russian companies or reviews of those relationships, according to Stateline. Divestment legislation has also been proposed in at least 16 states, according to State Net’s legislative tracking system. In five of those states, Alaska, California, Illinois, New York and Virginia, the divestment push has come from both the executive and legislative branches.

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