In Support of Ukraine, U.S. Governors Cut Economic Ties with Russia

By: - March 3, 2022 12:00 am

Pro-Ukraine demonstrators carry signs and Ukrainian flags in New York City’s Times Square to protest Russia’s invasion of Ukraine. New York Gov. Kathy Hochul, a Democrat, and officials across the country want state entities to cut ties with Russian businesses. Seth Wenig/The Associated Press

Outraged by the Russian invasion of Ukraine, governors and state lawmakers from both parties are seeking to impose economic sanctions of their own. 

Governors in at least 11 states—Arkansas, California, Colorado, Georgia, Illinois, Indiana, Massachusetts, North Carolina, North Dakota, New York and Virginia—are pushing state entities to review or cut financial ties with Russian companies.

Lawmakers in at least seven states—California, Illinois, Pennsylvania, New Jersey, New York, South Carolina and West Virginia—have proposed divestment bills. Some state agencies have announced plans to cut ties with Russian businesses. And the governors of at least a dozen states have issued executive orders or sent letters to liquor regulators and state-run stores to stop sales of Russian vodka and other spirits.

Illinois state Rep. Jim Durkin, a Republican and the House minority leader, said he wants his divestment bill to move through the legislature as quickly as possible. He hopes other states take similar action.

“Let’s make this a national movement,” he said.

The wave of state sanctions likely will be more symbolic than substantive, experts say. State pension funds and state agencies aren’t deeply dependent on Russian companies. Russian goods aren’t a major presence on U.S. store shelves. 

Some of the sanction proposals also could raise legal questions. The federal government has authority over foreign policy, so state sanctions that conflict with federal sanctions could be unconstitutional, said Salar Ghahramani, an associate professor of business law and international law and policy at Pennsylvania State University, Abington.

State bans on Russian-made goods could violate the U.S. Constitution or international law if they run afoul of trade agreements, he said. Or state sanctions could violate pension fiduciary duty standards if they end up lowering the value of pension funds.

But even as symbolism, the state sanctions have value, said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, a Washington, D.C.-based think tank.

Hufbauer said the surge of state-level activity demonstrates popular support for the sanctions imposed on Russia by the Biden administration. “What that symbolism does is reinforce what’s happening at the national level, with all the very heavy-duty economic sanctions of various kinds.”

Even though state action isn’t likely to materially affect the Russian economy, he said, “It does add moral weight. And that’s important.”

Courts have struck down state-level sanctions in the past, arguing that such laws are preempted by federal law. The Supreme Court in 2000 overturned sanctions Massachusetts imposed on Burma, and a federal court in 2007 ruled that Illinois’ sanctions on Sudan were unconstitutional.

But that hasn’t stopped governors and legislatures from trying to cut ties with companies doing business with governments whose actions they oppose, from apartheid-era South Africa to Iran and Cuba.

Sanctions are a family affair for Pennsylvania state Sen. Sharif Street, a Democrat. His father, John F. Street, pushed for Philadelphia to divest from apartheid-era South Africa while serving as a city council member in the 1980s.

The younger Street is now soliciting co-sponsors for a bill that would require Pennsylvania’s pension funds and state treasurer to drop investments in companies that do business with Russia. The bill has gained bipartisan and bicameral support, Street said, although the language hasn’t been finalized yet.

In New York, Democratic state Sen. Elijah Reichlin-Melnick plans to file a bill that would require the state to block contracts with and eliminate investments in companies that do business in Russia. He also cited apartheid-era sanctions as an inspiration.

“To me, this is the same general idea,” Reichlin-Melnick said. “We use the power that we have economically, and we make a company make a choice.”

The Illinois bill and proposed New York and Pennsylvania legislation overlap with divestment steps the governors of their states—or, in Pennsylvania’s case, the state treasurer—already have taken. The lawmakers are pressing ahead, however.

Although Illinois Democratic Gov. J.B. Pritzker has asked state pension systems to explore dropping investments in Russian companies and assets, Durkin said legislation on the issue would ensure divestment was codified in state law.

New York Democratic Gov. Kathy Hochul has ordered state agencies and public-benefit corporations to cut ties with companies headquartered in Russia or aiding the invasion. Reichlin-Melnick’s office said in a statement that his legislation would go beyond Hochul’s order by targeting companies with any business ties to the Russian government.

“The goal of the Senator’s bill is to treat Russia the same way Iran and North Korea are treated, as international pariahs,” wrote Evan Menist, deputy chief of staff and director of communications. 

In Alaska, lawmakers are urging the Alaska Permanent Fund Corp., which manages the state’s oil revenues on behalf of residents, to divest from Russia. While fund officials said earlier this week that they weren’t planning to divest, they said they would “mitigate any issues associated with sanctions.” 

The economic effect state sanctions have—and the legal issues they raise—may depend on how broadly they’re written and how many companies they blacklist, experts say. 

So far, the impact has been small. 

In Colorado, for example, Democratic Gov. Jared Polis asked the state pension fund and treasurer’s office to drop investments in Russian-owned companies and ordered state agencies to cancel contracts with Russian-owned businesses. But the treasurer’s office has announced that it holds no Russian-owned assets. Colorado has no ongoing contracts with Russian state-owned businesses, Conor Cahill, press secretary for the governor, said in an email to Stateline.

The Colorado Public Employees Retirement Association has identified some million invested in Russian state-owned companies, spokesperson Patrick von Keyserling said in an email to Stateline. But that’s about 0.01% of the pension fund’s overall holdings.

Polis’ request to drop such assets is “consistent” with sanctions imposed by the U.S. Treasury, von Keyserling added. The Treasury has frozen the assets of certain Russian banks, and blocked Russian banks and companies affiliated with the Russian government from issuing debt or raising capital in the United States. 

In New York, state Comptroller Tom DiNapoli said in a news release that New York’s retirement fund for state employees has “minimal exposure to the Russian economy.” The fund has an estimated .8 million invested in Russian companies, the release said. That’s about 0.04% of its overall holdings. 

State agencies that have been asked to drop Russian vodka have said that such liquor comprises a small share of spirit sales. The Pennsylvania Liquor Control Board told The Philadelphia Inquirer, for instance, that Russian vodka comprised about 0.06% of total spirit sales in the state over the past year.

Although many vodka brands have Russian names, only a few are genuinely Russian, said Mark Schrad, an associate political science professor at Villanova University who’s written a book on vodka politics.

“Everybody kind of focuses in on the ones that sound Russian, like Smirnoff and Stolichnaya,” he said of vodka brands. But Smirnoff, for instance, is run by a London-based beverage giant and made in 11 countries (not including Russia). And Stolichnaya, though marketed as Russian vodka, is made in Latvia. “[Smirnoff] has nothing to do with Russia, except for the Russian name,” Schrad said.

Overall, the U.S. and Russia engaged in about .9 billion in trade in 2019, according to the office of the United States Trade Representative, the federal agency that conducts trade policy. The top imports from Russia that year were fossil fuels, precious metals and stones, iron and steel, fertilizers and inorganic chemicals, according to the agency. 

In contrast, hundreds of billions of dollars in goods and services moved between the U.S. and each of its top trading partners—Canada, Mexico and China—that year.

Schrad said that although boycotts of Russian booze are largely symbolic, enough actions—from social media posts to planting a Ukrainian flag in the backyard—still can add up to a powerful message of opposition to the Russian invasion and support for Ukraine.

“Having enough symbolic actions really drives home the point that this is not just a small thing, this is not a small gesture,” he said. “This is sort of a worldwide response.” 

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Sophie Quinton

Sophie Quinton writes about fiscal and economic policy for Stateline. Previously, she wrote for National Journal.