Simply put, as an industry, western markets have financed Russia directly and indirectly for years. We integrated Russia into our economies on a naive neo-liberal notion of capitalism = peace = profit. It has allowed Putin to manipulate capitalism towards his militarised and economic position today. With it Putin’s ability to impose upon, misstep NATO and to destabilise the region and beyond becomes possible.
These events do not happen randomly, they occur over time. In this case, broadly since after the Long-Term Capital Management crash of 1998 and Putin’s succession to presidency in 1999. It is all too easy to condemn the consequences but to ignore the causality.
The current scenario has led to some welcome, but at times vacuous, statements coming out from asset managers. It is hard to tell at times if they are earnest or just keen to provide soundbites to clients.
Committees and boards are facing an ESG dilemma of how to position themselves ethically and how to manage and mitigate the effects on markets. In both respects it is very early days. A mix of ESG aspects needs to be tabled, and is being tabled, but fund managers also need to look at hedging the risk that is arising.
We should also take a moment to have a very serious conversation around energy resilience, access to markets and investing in armaments, in other words war and defence, on behalf of clients, not just now but for the long term.
Indeed, on investment committees, our time will be divided into strategic and tactical allocation. Strategically if, when and how to exit capitalising Russian companies. Tactically how do we manage the impact on markets such as oil prices?
The first action is highly emotive; the second very calculating. There are also some real operational challenges to contend with. Asset management is rarely an ethical light switch. It is cumbersome and unwieldy and we have to contend with the complexity of direct, indirect and secondary subsidiary exposures that makes strategic allocation more difficult.
Firms can opt for a total exclusion policy, apply a 10% restriction of earnings or choose to retain and rely on engagement.
Unlike countries such as China, most Russian companies are not state controlled on paper but there is an undeniable commingling of foreign, Russian private and Kremlin assets.
Likewise, if UK boards applied that same rationale of unbundling Russian investments then how would it impact the London property market? Setting a red line is subjectively and operationally challenging.
We should also not fall into the assumption that investments exist purely through a UK lens. They do not. Funds that focus on Russian assets will have a very different view. A European-domiciled fund based in Germany can have a different access and view towards Russian assets. The flow of capital occurs across several countries and through global markets. They follow trade deals and fund the flow of capital through our city and fund our pensions.
Over the past two decades, UK allocators have pursued overseas investment to promote diversification, access new markets and expand their capital. In an ever inflationary market, the trend to underweight the UK may now be at its apex.
More recently, politics and ESG have increasingly focused on the environmental challenges and the Net Zero drive towards carbon reduction. We can see that in our board papers. A tilt here, a divestment there, some green infrastructure added. Lots of greenwash. Some of these efforts could be commingling with Russian money and projects. This has also made our energy supply less resilient to war.
Arguably the success of the COP26 agenda has done so at the sake of wider responsible policies, specifically those relating to war, weapons, money laundering, tax evasion and human rights.
What if a similar event was to happen in China/Taiwan considering the numerous joint ventures already undertaken by western management groups? Again, opening up China was done on a neo-liberal philosophy to drive peace. It did. So far. Yet it did not result in capitalist democracy as hoped. Again, we have seen regime change in China and a return to more imperial rhetoric.
However, the price has been the inseparable interconnectedness of western economies with China and Russia. While many asset managers will note the size of the Russian stockmarket is small, this underplays the reality.
Economically Russia benefits greatly from investments held indirectly through nominee accounts and platforms. Gas and oil comes out, western money goes in.
We have to accept that positions held are a legacy from a time when they were legally permitted, yet at times our industry exists too comfortably inside a morale vacuum, happy so long as the investment is compliant.
Fund boards and committees have a fiduciary responsibility to maximise shareholder returns. Hence boards have not been the arbiters of morale or political whim and most lack the ESG maturity to handle such big issues.
This will be a learning experience for many of us.
JB Beckett is an iNED and author of #newfundorder
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