(Bloomberg) -- An escalating war of words between Russia and the U.S. didn’t prevent a chunk of pensions that belong to Californian firefighters and police officers from finding its way into debt sold by President Vladimir Putin’s government.
The California Public Employees’ Retirement System, or Calpers, had about $460 million invested in Russian government bonds as of the end of June, up over 8 percent since last year, according to data provided to Bloomberg News. Based on publicly disclosed figures, that makes the state of California Russia’s 10th-largest foreign creditor, behind other top U.S. investors including BlackRock Inc. and Stone Harbor Investment Partners.
In the sanctions standoff between Russia and the U.S., the vulnerability goes both ways after two years of inflows from carry traders briefly turned Russian debt into an investor darling. The holdings in America’s largest pension expose a dilemma for lawmakers who are considering targeting Russia’s sovereign debt as part of new penalties being discussed to punish Putin’s government for alleged election meddling.
“It matters that pension funds are involved in Russian debt because they’re likely arguing against sanctions against sovereign bonds” to the Treasury’s Office of Foreign Assets Control, said Koon Chow, a senior strategist in London at Union Bancaire Privee. “It may not have much impact though, given the bipartisan U.S. support for punishing Russia further.”
Senator Chris Van Hollen, a Maryland Democrat and co-sponsor of one of the bipartisan bills under consideration, said last month that concerns over sanctions on government bonds are a major sticking point. At the end of summer, U.S. investors accounted for 6 percent of Russian sovereign debt, including Eurobonds and ruble securities known as OFZs, according to the domestic rating company ACRA.
“With all investment management decisions, Calpers follows federal and state laws, while also complying with any directive from the Calpers board as it relates to specific investment activities,” spokeswoman Megan White said by email.
Read more: DETER or ‘Bill From Hell’? Traders Unpick Russian Sanctions Web
Van Hollen’s bill would trigger new sanctions on energy and financial sectors if the director of national intelligence determines Russia is continuing to interfere. The sovereign debt measure has already been modified to apply sanctions only to new bond issues, he said.
A separate proposal in Senate, dubbed the “bill from hell” and sponsored by Lindsey Graham and Robert Menendez, would also target Russia’s debt and state banks, but the measures would take effect upon passage of the law. The legislature’s leadership has suggested this plan would be watered down if it were to come up for a vote.
Daleep Singh, a former Treasury official who helped write sanctions measures against Russia in 2014, came out in favor of curbs on sovereign debt in a hearing last month, arguing that there is “no credible reason why U.S. public pension funds and savings vehicles should fund the Russian government.”
Congress is unlikely to pass any new sanctions until after the November mid-term elections. Still the threat of the sanctions alone has led to redemptions from Russian sovereign bonds, with non-residents selling about $7.5 billion since April.
Russian 10-year bond yields have recovered to near 8.8 percent after surging to a two-year high last month due to concern over tougher U.S. curbs and a wider emerging-market sell-off. Policy makers in Moscow have said that there is enough local demand to mop up bonds offloaded by foreigners if the market is hit by sanctions.
After a string of disrupted debt sales, the government managed to drum up enough demand to reduce yields at an auction on Wednesday. Still, local-currency bonds have handed investors a loss of 13.9 percent this year, the fifth-worst performance in emerging markets.
The Russia investment hasn’t been a topic of public discussions for the board of Calpers, which has been a leader among U.S. pensions pushing for socially responsible investing.
A Calpers board member, Jason Perez, has said it shouldn’t focus on divesting to meet ethical investing goals. Calpers has around $360 billion in assets, with about a fifth of the total invested in fixed income, according to a September presentation.
(A previous version of this story was corrected because of an error in Perez’s title.)
(Updates with bond returns in 12th paragraph.)
--With assistance from Anna Andrianova.
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