How Will Brexit Affect Russia?

Brexit will undoubtedly damage economically both the UK and the EU. Eventually it will affect Russia as well, making it modify its financial priorities and look for a safer haven for its money and investment.

A central item on the European agenda, Britain’s exit (Brexit) referendum in June is practically out of the limelight in Russian media, although in Britain itself Russia is described as one of the chief beneficiaries of Brexit. This is surprising because there is not a single statement by Russian politicians which could be interpreted as an assessment of Brexit’s importance for Russia. In part, this is due to the fact that Russia has yet to stop and think about the consequences of this step. While at the same time, Moscow has much to lose if Britain withdraws from the EU, and this is likely the main reason why it is in no hurry to offer estimates.

For Russia, a Brexit signals uncertainty, as it does for the rest of Europe. Referendum results are hard to predict, as is their impact on European politics and economies. Breaching the European status quo may have profound negative effects and pose questions no one is ready to answer. As a historical pessimist, Russia is not looking for the best possible way out. Rather, it is seeking to forestall the worst.

The thing is that, to a certain extent, Russia’s economic well-being and its strategic economic priorities hinge on the outcome of the British referendum. The Russian economy is closely integrated with the EU and Britain and will be automatically affected if the referendum results prove damaging to either.

For several decades, the EU has been Russia’s leading trade partner. In 2015, it accounted for 46% of Russian foreign trade ($249 billion). Britain’s share of this trade is insignificant and both nations have almost no joint industries. But a Brexit-induced European economic earthquake will imply both direct and indirect consequences for Moscow because it will primarily affect the Netherlands and Cyprus, Russia’s leading partners. According to some estimates, it is these two countries that are most closely linked with the UK economically and therefore will likely be hit the worst. It should be recalled that Cyprus’ financial problems forced Russia to lend it $2.5 billion on easy terms in 2010-2011 in order to protect Russian Cyprus-based offshore businesses.

Brexit could spark off a trade war between the UK and the EU, which will jeopardize Russian investments in Britain, the Netherlands and Cyprus. In early 2014, Russian direct cumulative investment in the UK amounted to $9.1 billion, with another $60.9 billion in BVI offshores. Russian investment in Cyprus comes up to $19.7 billion and in the Netherlands, to $19.1 billion.

A no less important a question is how Brexit will influence the safety of Russia’s third-largest gold and currency reserves, 80% of which is invested in foreign securities and deposited with foreign banks. The UK accounts for 9.4% of these securities and the EU as a whole for nearly 62%. On top of that, about 41.5% of Russian reserves are denominated in euros. Their current value is estimated at $360 billion but EU Brexit-related economic problems may cause the devaluation of these reserves.

London is unlikely to become a less popular financial center if indeed Brexit occurs, but a development of this sort could also be expected. The leading Russian companies – Gazprom, Rosneft, Lukoil, Sberbank, Tatneft, Megafon, Rusagro – started trading their stock on the London Stock Exchange in the late 1990s. Currently the share of CIS corporates on the LSE is 17%. Five Russian companies are in the LSE Top-20, with Gazprom having held the lead in terms of capitalization for several years. If London grows less attractive as the world’s financial capital, Russian companies may start offloading their stock. In recent years, Russian corporations were more willing to float their shares in Shanghai, Hong Kong and Singapore, with some of them actually delisting from the LSE.

While, however, Brexit’s economic consequences can yet be calculated, its political fallout is practically unfathomable.

The EU’s current fragmentation came as a “slow surprise” for Moscow. Russia was not ready for these developments and expected that the EU would eventually assert itself as an independent global player free of the US patronage. It would be easier for Moscow to trade with a united EU than to discuss trade and visas with 28 EU members simultaneously. It was this logic that inspired the initiative for creating a common space from Vancouver to Vladivostok, an endeavor which Moscow continues to support. In creating the Eurasian Economic Union, Russia intended to strengthen its negotiating positions for an “integration of integrations”, prospectively merging the EAEU and the EU. Now this priority is in question.

Brexit is certain to create a new balance in the Council of Europe. How will the German-French rivalry fare without the UK which used to allay the differences in the past? Will Paris and Berlin drift apart or close their ranks? It is not unlikely either that Europe will face a stronger Germany which will turn the EU into its own project by introducing common fiscal regulation and egging weaker economies like Greece to leave the organization altogether. In this case, the EU will cease to be a 27-country alliance and will become a bloc dominated by Germany and its allies. Is this good or something to dread for Russia? It’s an open question but clearly not the best of scenarios for Moscow.

A no less important a question is what role the UK will choose after Brexit? Few people in Russia believe that it will seek to become an independent global player. To remain influential and avoid problems with territorial integrity, London can focus on a closer alliance with the United States. The new bloc could also be joined by pro-US regimes in Eastern Europe. There is no doubt that its emphasis on anti-Russian sanctions will scare away Russian money. This will end up in a new Anglo-Saxon alliance emerging in Europe, one which will build a “Polish-Baltic wall” on its border with Russia. On the other hand, the main EU countries – Germany, France, Italy and others – will consolidate a bloc that will seek normal relations with Russia. A generation later, we may face two different Europes, both competing with and challenging each other. We could hardly wish a future of this sort.

Brexit will undoubtedly damage economically both the UK and the EU. Eventually it will affect Russia as well, making it modify its financial priorities and look for a safer haven for its money and investment. An indirect consequence of this is likely to be Russia’s stronger “pivot to the East” as a result of its dwindling presence on European financial markets and reorientation to Asian stock exchanges.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.