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Within a week of Russia’s invasion of Ukraine, the London Stock Exchange suspended the trading of 27 Russian-linked companies.
This included Russia’s largest lender, Sberbank, as well as energy giants Gazprom and Lukoil. London’s move was an important step toward widening sanctions on the Putin regime for invading a sovereign nation.
However, in the U.S., the capital markets issue has been inexplicably neglected. As a result, major Russian companies are still trading on U.S. stock markets. It’s an egregious situation, and Congress must take prompt action to remedy this shortcoming.
The London Stock Exchange’s move was merely one part of an initial response by western financial institutions to shut down funding to Moscow. The United States had already taken a number of steps to isolate Russia from the global financial system, including sanctions that expand on Washington’s previous efforts to punish Russia for its annexation of Crimea in 2014.
Immediately following the invasion, Washington froze the U.S. assets of Russia’s Central Bank (CBR) and blacklisted a major Russian sovereign wealth fund. The U.S. Treasury Department also imposed sanctions on two key Russian banks and widened restrictions on purchasing Russian debt.
Unwitting participants
But now, as a new sanctions package heads to the House floor, it’s time to impose explicit sanctions on Russian companies that trade or raise funds in U.S. financial markets. This is doubly clear when one considers that eight of Moscow’s largest companies — all sanctioned by Washington for the 2014 invasion of Crimea — still remain in the investment portfolios of tens of millions of unwitting American retail investors through passive investment products and actively managed accounts.
Some fund managers and index providers have already taken voluntary steps to remove Russian companies. But not all have.
Russian companies — particularly those traded in the over-the-counter (OTC) market — must be deregistered and removed from U.S. capital markets. Moreover, Congress should bar U.S. investors from holding securities, including stocks and bonds, of Russian companies.
While legislation currently under consideration in the House would widen the responsibilities of U.S. financial institutions to comply with existing sanctions, the bill fails to include either mandatory divestment or the delisting and deregistering of Russian companies. This needs to change.
U.S. loophole
Essentially, the capital markets issue allows for a major loophole in current U.S. sanctions against Russia. The White House has already barred purchases of Sberbank bonds — and has banned the purchase of Russian oil and gas. Thus, it makes no sense to allow American pension funds and other institutional investors the ability to purchase shares in these same companies.
Current U.S. sanctions are important. But they must be matched by an all-out ban on investment in Russian enterprises, particularly those in the OTC market as well as ETF funds.
Noting the brutality of Russia’s Ukraine invasion, there’s little reason for Congress to take only half-measures. At present, however, removing Russian securities from indices such as the MSCI and FTSE-Russell remains a voluntary matter. And so, bad-actor Russian companies can again be included in these indices and associated ETFs at any time. Congress must act decisively so that these exclusions remain in place until U.S. policy changes.
The answer is for the House to expand the legislation currently under consideration, and include language that mirrors President Biden’s Executive Order 14032. Doing so would ensure that capital markets sanctions apply to U.S. persons investing in companies domiciled in Russia, or owned and controlled by Russian officials or oligarchs.
By voting to remove the PNTR status of Russia, the House has taken a smart first step to isolate the Putin regime. Now, Congress should expand its work by promptly removing Russian companies from U.S. capital markets. There’s no legitimate reason for state-controlled Russian companies to retain access to U.S. financial markets, or to raise funds from unwitting U.S. investors.
Congress can rectify this by holding both Russia and Belarus accountable for their invasion of Ukraine — and halt the exploitation of America’s retail investors to fund a barbaric war.
Robby Stephany Smith is national security advisor at the Coalition for a Prosperous America.
