Salisbury savers unwittingly hold stake in Putin’s Russia
The quaint city of Salisbury, known for its medieval streets, picturesque cathedral and bus tours to Stonehenge, has found itself on the map of international intrigue after a former Russian spy and his daughter were found poisoned on a park bench.
Yet there’s a link with Russia that predates the sinister events that unfolded this month. It places Salisbury at the intersection of espionage and finance and exposes the scale of the challenge the UK faces if it wants to land a serious blow on a freshly re-elected Vladimir Putin, whom it accuses of orchestrating the nerve agent attack.
In Wiltshire, its public sector workers contribute to the region’s pension fund. Just over 10 per cent of that pool of money, or about £259m, is invested in emerging markets via a fund run by Investec Asset Management. That fund held Russian bonds and shares in state-owned Sberbank PJSC as of last month. Police, firefighters and teachers saving for their retirement won’t be alone in unwittingly holding a stake in the economic wellbeing of Putin’s Russia, but connecting the dots shows how deeply woven the country is into financial markets.
As Theresa May revealed her plans to hit back at Russia last week, investment funds were clamouring to get a piece of a $4bn (£2.9bn) eurobond sale. UK-based institutional investors accounted for half of the buyers of one of the bonds on offer.
“It raises a broader question about what investment funds do with their money,” says Richard Connolly, a lecturer at the University of Birmingham focusing on Russian political economy. “If the yield is good, the money will find its way there. It’s such a difficult question for anyone to address legislatively.”
The dilemma for pension fund managers is that Russia’s relations with the West have deteriorated in recent years while the case for investing in its bond and currency markets has improved. Two money managers at Aberdeen Standard Investments, which oversees some UK pension money, said before the bond sale that they weren’t put off by the diplomatic tensions. One of them, Kieran Curtis, called it “business as usual”. They declined to comment last week on whether they purchased the securities.
Grant Webster, who helps oversee about $18bn in emerging-market debt at Investec, says it’s inevitable that funds will invest in Russia given the size of the economy. Investors can also help pressure governments to change, he says.
“Russia is a major part of emerging-market benchmarks and I’m sure that most institutional clients are well aware of that,” Webster says. He declines to comment on specific holdings in the fund or clients. “We should to the extent that we can be pressuring all governments into trying to change. We don’t treat Russia any differently.”
Russia has denied all allegations of involvement in the Salisbury poisoning of Sergei and Yulia Skripal, who remain in critical condition. It also said it destroyed the last of its nerve agents in 2017. May said the Kremlin’s response to the accusation has been one of sarcasm and contempt. Pension money managers have little choice but to venture away from the safest assets if they want to generate a return, and most emerging-market investors will end up holding a chunk of their portfolios in Russia. It’s the fourth-biggest country holding in the Bloomberg Barclays emerging-market dollar bond index.
The Investec fund’s biggest fixed-income investment was Russia’s 7.7 per cent bonds maturing in March 2033, according to data compiled by Bloomberg and the fund’s February fact sheet. Sberbank was among the largest equity holdings after mainly Chinese companies.
Sanctions imposed on Russian state-owned companies by the US and European Union after the country’s 2014 annexation of Crimea have reduced the country’s debt and forced policymakers to adopt conservative measures to keep the economy and markets stable. A report published by the US treasury this year concluded that preventing American investors from buying Russian sovereign debt would hinder the competitiveness of asset managers.
The Wiltshire County Council pension fund had 10.6 per cent of its money in the Investec emergingmarkets product as of January. The mix of investments is part of a long-term strategy to spread risk and reduce the pension fund’s deficit over time, a spokesman said.
“Our committee has very strong ethics and governance policies that set out our responsibilities of how and where we invest. We will wait with interest on any decisions the Government make on this matter,” the Wiltshire fund said. “We use a third-party fund manager to oversee the investments based on the direction
of our strategy and their professional judgement.”