Let’s be clearer about who loses from divestment from Russia

Australian super funds are “strongly expected” to follow the lead of the Future Fund and dump their Russian-linked investments, the government insisted last week, despite the lack of actual sanctions imposed by Australia on investments in that country or in partnership with Russian firms.

Fair enough — although, if we start letting basic decency determine our investments, where will that end? And the government is being a tad selective in its Russia outrage — aluminium giant Rusal continues to own 20% of Queensland Alumina Limited, untouched by sanctions. Wouldn’t want to jeopardise the half-billion dollars we make sending alumina to Russia every year, eh?

Some funds didn’t need the encouragement — Australian Super was among a large group of investors around the world, from pension companies, to hedge funds, to managers of sovereign wealth, who began dumping their holdings of Russian assets, which across Western fund managers around the world were worth almost $US170 billion at the end of 2021.

Many of those investments have little or no value now, and even if the holders decide to hang on to try and recover value over time, that will be impossible as Russia will remain a global pariah as long as Putin remains in power. Moscow’s equity markets remain suspended, and Russian bonds are almost impossible to trade. That leaves asset managers facing the prospect of deep losses or writing their Russian assets down to zero. Which in turn means Australian superannuation members will suffer losses — and those losses will be greater if funds dump their assets immediately.

Which is all a little ironic given that the Coalition has long been waging a propaganda campaign against industry super funds for what they allege is the wasting of members’ money. Payments to advertise funds made to unions (although not similar payments to employer organisations), media advertising, sports sponsorships and lobbying activities have all been singled out by the government and their media shills as industry funds blowing members’ hard-earned retirement savings.

The fact that retail funds continue, even now, to underperform industry funds never gets a mention.

The government even dressed up its recent Your Future, Your Super reforms as being all about forcing super funds to curtail their misuse of members’ money. So how, suddenly, can super funds voluntarily inflict losses on themselves by dumping their Russian stocks?

Intriguingly, prudential regulator APRA snuck out a short statement on Wednesday.

The Australian Prudential Regulation Authority (APRA) has noted the Government’s statement confirming its strong expectation that Australian superannuation funds will review their investment portfolios and take steps to divest any holdings in Russian assets. Data provided to APRA indicates that superannuation fund holdings of Russian assets are a very small proportion of the $3.5 trillion superannuation asset pool. APRA will not be taking any action against trustees who seek to divest Russian assets in this context where trustees have considered such divestments in accordance with their duties.

What an interesting precedent — just because a government “strongly expects” that funds will dump a certain class of assets, APRA will in effect suspend the overarching requirement for funds to operate in the best interests of their members.

To repeat — all in good cause, and in many cases these Russian assets are worth little anyway. The more we smash the Russian economy, the better. But what other “strong expectations” can we look forward to in the future? How about a “strong expectation” that super funds will not invest in China? What if a powerful political donor like the fossil fuel industry pays the government to “strongly expect” that funds would invest in coal and gas?

Will APRA genially nod and say, “Yep, don’t worry about losing members’ money, go ahead?”

And who will pay the cost of these sales and any losses funds generate? Members and policyholders look like they will bear the cost of any one-off losses from the Great Russia Firesale. Then again, maybe they won’t notice — many funds will attempt to bury these losses in the overall weak performance expected for the three months prior to March because of the sell-off in markets since mid January.

Australians have gotten used to surging super growth — usually at double-digit levels — even during the pandemic, but they’re about to discover that, courtesy of inflation and Vladimir Putin, super assets can shrink as well as grow rapidly.

Maybe APRA’s advice to trustees should also contain further advice on how to handle and report the losses (one off and non-cash, or directly to the profit and loss account), so that members and policyholders can see clearly what the government’s “strong expectations” cost them. It may not be much — but that’s all the more reason for transparency.

But APRA, typically, was worried more about the reassuring trustees of super funds and not Australian superannuants and workers — especially the tens of thousands of people who will change jobs in coming months and crystallise those losses if they move super funds at the end of the quarter.