Goldman Sachs is a giant New York investment bank that is profiting from the conflict in Ukraine. It sells Russian debt to U.S.-based hedge funds and uses a loophole in the Biden government’s sanctions.
According to four sources, the company acts as a broker between Moscow’s creditors and U.S investors. It pitches clients the chance to profit from Russia’s war-crippled economic system by purchasing its debt securities at a low price now and then selling them high later.
An investor refused a Goldman trader’s offer to add Russian bonds to his hedge fund portfolio because of the war. The trader suggested that he could “just place it in your personal accounts” to avoid scrutiny.
This does not violate U.S. sanctions, but it is quite different from what Goldman is telling the public about its relationship to Russia. In an email statement, Goldman tells the public it is ” closing down” its Russian business. This is in support of America’s efforts to stop Vladimir Putin.
Brokering Russian debt trades is not illegal. Investment firms were granted permission by the Biden administration to trade in Russian assets.
In an email, a spokesperson for Goldman Sachs stated that “Winding down operations in Russia and supporting clients around the world in managing and closing their market obligations are not mutually exclusive.” To ensure that we don’t trade with sanctioned counterparties, our company has robust controls and systems.
It became illegal for U.S. companies and financial institutions to do business with Russian banks after U.S. officials sanctioned them. The Office of Foreign Assets Control (Treasury Department) issued a memo affirming that trading Russian assets on “secondary markets”, which are not directly related to Russian banks, was legal. This is why Goldman can be a broker.
The sanctions “doesn’t prohibit trading in secondary markets for equity or debt” of Russia’s central bank, Russian national wealth fund, or Russian Finance Ministry as long as they aren’t parties to trades and the debts weren’t issued prior to March 1, OFAC wrote.
Interviews with 12 investors, former U.S. officials, and financial analysts revealed a consistent theme: The concern of the Biden administration for U.S. investment, including major companies that broker deals, has prevented it from cracking back on Russia. It also left open the possibility for unsanctioned Putin cronies to gain cash through Goldman Sachs.
A former U.S. sanction official stated that “they’re in an damned if you-do, damned if-you don’t position.” There will be collateral consequences if they stop trading. These targets are so big that it’s not as if you were closing down an Iranian bank. They will be yelled at if they don’t follow a measured approach.
The biden administration’s inability to make a profit from the war highlights how complex it is to try to punish Russia while not affecting Wall Street or the economies of its allies. It is also a stark reminder of the fact that any asset can be traded if there are willing sellers, buyers, and brokers.
A senior administration official spoke under anonymity to describe the administration’s refusal to ban trading in Russian sovereign debt. It’s been infused into our economy. It is so widespread.
The majority of the sovereign debt is held in Russian bonds, which were issued through government channels including the Russian central banking. Government bonds allow countries to raise funds from investors. Although Russian debt is now worth very little due to the collapse of the Russian economy, investors believe that it will recover in the future and allow them to make a profit.
Official said that blocking Russian debt trades could cause chaos — the official used a four-letter term — with financial markets in the U.S.A and other countries in unintended directions.
The official stated that “we can sanction new sovereign bonds,” pointing out the recent ban on trading assets after March 1. “We haven’t gotten in the game — the Hill is investigating this — of how to sanction debt that’s already on the market.
Rep. Brad Sherman (D-Calif.), a senior member on the Financial Services Committee, stated that he is currently working on legislation to prohibit foreign subsidiaries from U.S. companies trading in Russian debt issued after march 1. He said that there are situations in which he would favor the locking down of old debt.
Sherman stated that the goal is not to punish those who have invested in this debt since February or in previous years. Putin will find it more difficult to issue new debt. If we want to depress the future value of debt, I think it’d be a good idea to ban investment in debt before March 1.
According to former U.S. officials and investors familiar with the policy, the sanctions against Russia are less severe than those imposed by Trump on Venezuela. These sanctions included a ban on trading in government debt. However, there were exemptions to allow for divestment.
This leaves the U.S. with the opportunity to escalate their pressure on Russia.
“If you see sanctions as a vise grip you can tighten to apply and there are still some clicks in those sanctions you need to impose,” Dan Tannebaum, an ex-ofAC official, said. He is now a partner at Oliver Wyman, a management consulting firm.
U.S. companies cannot engage in trades with Russians sanctioned by the United States. However, experts say it can be difficult to determine where Russian wealth comes from. These sources claimed that the Russia sanctions loophole allows cash-strapped Russian investors access to money in return for their government’s bonds.
Goldman Sachs spokesperson stated that the company was “not engaging any new bond trades avec Russian onshore entities.”
Any Russian not under sanctioned can buy through an intermediary such as Goldman Sachs. Experts in sanctions said that one of the problems the U.S. government has when imposing sanctions on individuals, is that it’s not always easy to determine whether they have proxies who make financial transactions.
Goldman Sachs spokesperson stated that the company was sophisticated enough to avoid dealings with Putin allies, even though they aren’t sanctioned.
The spokesperson stated that they have confidence in their financial crime compliance program. It is designed to detect illegal activity and prevent exposure to sanctioned persons.
The spokesperson stated that trading old debt from sanctioned companies is legal and that all of their trading was and would be in compliance with the U.S. sanctions.
However, a U.S. official and an ex-official said that an outright ban could harm U.S. investors. This includes major pension funds.
While most investors aren’t willing to take on the public relations risks of profiting from Russia’s war, Goldman Sachs and JPMorgan Chase, as well as many other hedge funds, have joined the fray. Most buyers don’t know the identities and brokers are not required to reveal them publicly.
This means that the public might never be able to determine if profits are made by putting money in the pockets of Putin’s cronies during Russia’s cash crisis. It is clear, therefore, that U.S. investors and middlemen such as Goldman Sachs are benefiting from Russian debt’s low cost and it is less clear who is profiting.
Goldman deals mainly in Russian government debts. JPMorgan Chase, however, has helped to broker deals for private Russian companies’ debts as a “recovery game,” Bloomberg News reported.
JPMorgan announced that it was also ” closing down its Russian business. It acknowledged that it had been helping clients with Russia-related trades. The research team at JPMorgan recommended that clients purchase Russian corporate bonds on March 4, when Russia attacked Ukraine.