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How Goldman Sachs profits from war in Ukraine, loophole in sanctions

The Wall Street firm has told the public it is “winding down” its business in Russia, portraying its actions as supportive of U.S. efforts to stop Russian President Vladimir Putin.
Soldiers arrive to reinforce one of the final checkpoints before the frontlines where Ukrainian forces are battling invading Russian forces near Brovary, Ukraine, on March 8, 2022.
Soldiers arrive to reinforce one of the final checkpoints before the frontlines where Ukrainian forces are battling invading Russian forces near Brovary, Ukraine, on March 8, 2022.Marcus Yam / Los Angeles Times via Getty Images

Goldman Sachs, the giant New York investment bank, is cashing in on the war in Ukraine by selling Russian debt to U.S. hedge funds — and using a legal loophole in the Biden administration’s sanctions to do it.

As the Western world scrambles to defend Ukraine by locking down Russian money, the company is acting as a broker between Moscow’s creditors and U.S. investors, pitching clients on the opportunity to take advantage of Russia’s war-crippled economy by buying its debt securities low now and selling them high later, according to four financial world sources familiar with the strategy. 

An investor who declined a Goldman trader’s offer to add Russian debt to his hedge fund’s portfolio — because of the war — said the trader suggested he could “just put it in your personal account” to avoid scrutiny.

That does not violate the U.S. sanctions regime, but it is very different from the public face Goldman is putting on its relationship with Russia. In an emailed statement, Goldman is telling the public that it is “winding down” its business in Russia, portraying its actions as supportive of America’s effort to stop Russian President Vladimir Putin.

There is nothing illegal about brokering Russian debt trades. In fact, the Biden administration gave investment firms a green light to trade in Russian assets.

A spokesperson for Goldman Sachs said in an email Thursday: “Winding down our operations in Russia and supporting our clients around the globe in managing and closing out their market obligations are not mutually exclusive. We have robust systems and controls throughout our organization to ensure we are not trading with sanctioned counterparties.”

When U.S. officials sanctioned Russian banks this month, it became illegal for U.S. companies to do business directly with major Russian financial institutions. But the Treasury Department’s Office of Foreign Assets Control, or OFAC, issued a memo affirming the legal legitimacy of trading Russian assets in “secondary markets” — those not directly involving the Russian banks. That’s why Goldman can act as a broker.

The sanctions action “does not prohibit trading in the secondary markets for debt or equity” of the Russian central bank, the Russian national wealth fund or the Russian Finance Ministry, as long as those institutions aren’t parties to the trades and the debts were issued before March 1, OFAC wrote.

In interviews with a dozen investors, current and former U.S. government officials and financial analysts, a recurring theme emerged: The Biden administration’s concern for U.S. investors, including major companies that broker deals for a buck, has stopped it from cracking down harder on Russia and left open the possibility that unsanctioned Putin cronies could gain access to cash by selling debt through Goldman Sachs.

“They’re in a damned-if-you-do, damned-if-you-don’t position,” a former U.S. sanctions official said. “If they shut down trading completely, there will be collateral consequences. The targets are so large — it’s not like you’re shutting down a small bank in Iran. But if you do a calibrated approach, they get yelled at for perceived loopholes.”

Goldman’s effort to profit from the war highlights the complexities the Biden administration faces in trying to punish Russia without harming Wall Street and the economies of the U.S. and its allies. And it is a stark reminder that no asset is too toxic to be traded when there are willing buyers, sellers and brokers.

“Russian sovereign debt is awash throughout our economy,” said a senior administration official who spoke on the condition of anonymity to explain the administration’s reluctance to ban the trading of Russian debt. “It’s just infused into our economy. It’s so pervasive.”

Most of the sovereign debt in question is in Russian bonds issued through government channels, including the Russian central bank. Government bonds are tools for countries to raise money from investors. While the crumbling Russian economy has made Russian debt of little current value, some investors believe it will rebound at some point in the future, allowing them to turn a profit.

The official said blocking all Russian debt trades could mess — the official used a different four-letter word — with financial markets in the U.S. and other countries in unintended ways.

“We can sanction new sovereign debt,” the official said, pointing to the recent ban on trading assets created after March 1. “We have not gotten into the game — and the Hill is looking into this — of how you could sanction debt that’s already in the marketplace.”

Rep. Brad Sherman, D-Calif., a senior member of the Financial Services Committee, said he is working on legislation that would prohibit foreign subsidiaries of U.S. companies from trading in Russian debt issued after March 1. But he said there are scenarios in which he might favor locking down the old debt.

“The goal here is not to punish people who invested in this debt in February and in prior years,” Sherman said in a telephone interview. “The purpose is to make it harder for Putin to issue new debt. I’d be inclined to say that we should be banning investment in pre-March 1 debt if it would help in the purpose of depressing the value of debt issued in the future.”

The sanctions against Russia are more lenient than those the Trump administration imposed on Venezuela, which included a broad ban on trading government debt — with exemptions to allow for divestment — according to investors and former U.S. officials familiar with the policy.

That leaves room for the U.S. to turn up the heat on Russia.

“If you think about sanctions like a vise grip, you can keep tightening to apply, and there are still some clicks left in those sanctions to impose,” said Dan Tannebaum, a former OFAC official who is now a partner at the management consulting firm Oliver Wyman.

It is illegal for U.S. companies to engage in trades involving Russians who have been sanctioned, but determining the sources of Russian wealth can be a game of whack-a-mole, according to sanctions experts. The loophole in the Russia sanctions leaves open a route for cash-strapped Russian investors to secure money in exchange for their government’s bonds, these sources said.

The spokesperson for Goldman Sachs said the company is “not engaging in any new bond trades with Russian onshore entities.”

For any Russian who is not sanctioned, there is no obstacle to buying through an intermediary, such as Goldman Sachs. One of the difficulties the U.S. government faces in imposing sanctions on individuals is that it is not always clear whether they have proxies making financial transactions, sanctions experts said.

The Goldman Sachs spokesperson said the company is sophisticated enough to avoid dealing with Putin allies, even if they are not sanctioned.

“We have confidence in our financial crime compliance program, which is designed to detect and prevent exposure to sanctioned parties or other unlawful activity, regardless of whether that activity is direct or indirect,” the spokesperson said.

As for trading the old debt of sanctioned companies — which is legal — the spokesperson said, “All of our trading is and will be consistent with the sanctions announced by the U.S. and other governments.”

But a current U.S. official and a former U.S. official said an all-out ban could hurt U.S. investors — including major pension funds — that bought sovereign debt before the invasion of Ukraine.

Most investors have shied away from the obvious public relations risk of profiting from Russia’s war, but Goldman Sachs, JPMorgan Chase and many hedge funds have gotten in on the action. In most cases, the buyers do not know the identities of the sellers, and no regulation requires brokers to disclose the identities publicly.

That means the public may never know whether profits are derived by pumping money into the pockets of Putin’s cronies when Russia faces a cash crunch. In other words, it is more clear that U.S. investors — and middlemen like Goldman Sachs — are profiting from the cheap cost of Russian debt and less clear who is benefiting from the sales.

While Goldman is dealing mostly in Russian government debts, JPMorgan Chase has brokered deals for the debt of private Russian companies as a “recovery play,” Bloomberg News reported.

JPMorgan announced late Thursday that it is also “winding down” its business in Russia while acknowledging that it has been assisting clients in Russia-related trades. On March 4, as Russia was attacking Ukraine, the investment bank’s research team issued a report recommending that clients buy Russian corporate bonds.