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Bringing Russia in from the Cold: Investment & Trade between Russia and the UK post-Brexit

Russia was widely hailed as one of the beneficiaries of the recent Brexit vote, but in reality, their position is much more nuanced, and the situation poses several advantages and disadvantages for the Russian economy.

Trade and investment, through bilateral and multilateral means, are crucial to a functioning economy. Firstly, let us make this point clear: until Article 50 is triggered and negotiations are complete, any changes in bilateral trade dynamics are likely to be merely perceptions rather than hard legalities. There is unlikely to be any major change in the UK-Russia trading environment for quite a while yet, perhaps two years or more, as Britain will remain subject to wider EU policies.

Over the last three years, negativity in the EU-Russia business climate has had a direct impact on SMEs keen to explore the Russian market. One such example is British dairy farmers, for whom restrictions on selling to Russia have led to frustration and lost revenue. Russian interests in the UK have also suffered, with banks in particular having to scale back on their operations in London. Key resource cooperation deals such as Shell’s have been put on hold, and BP’s profits fell due in part to lost business in Russia. There are many other examples. Overall, it is estimated that Russia-UK trade has suffered a loss of around $10 billion loss since 2014.

There are many arguments, both economic and political, for why the UK would want to change this business environment post-Brexit. For that reason, I believe that once a deal has been negotiated, in whatever form it may take, things will start to change. The UK needs strong trading partners. While Theresa May’s rhetoric has been very critical of Russia, this could easily be softened following a Brexit. In economic terms, any softening of anti-Russian sanctions would allow the United Kingdom to build upon its 2% share of Russia’ trade turnover.

Furthermore, amongst the major EU countries, the UK was one of the most ardent supporters of anti-Russian sanctions. The UK’s departure could allow other countries, such as Italy and France, to express their softer position, which in turn may lead the UK to change tack.

The UK’s choice to exit the EU will affect Russia through an increase in the volatility of world markets and the consequent reduction in medium term oil prices. Russia’s economy principally relies upon export raw fuel (84% in 2015). While this can be easily redirected to other markets, the adverse effect on cost will have some impact on Russia. It is more likely that Russia will be affected by a reduction in trade in services, as the UK’s share in Russia’s services turnover is about 6%.

Some commentators are of the opinion that Russian companies could delist their stocks from the London Stock Exchange (LSE). The value of these companies could fall by as much as 10%, according to German Gref, the head of Russia’s largest bank, Sberbank (Bloomberg). The Government may even decide to postpone the sale of 19% of shares in Rosneft as a result.

However, I do not believe that Russian companies will leave the LSE on a large scale. Russian business ties to the UK are too strong for this to be impacted significantly, and as I noted in an op-ed for Russia Beyond the Headlines last year, Russo-British business relations have weathered worse storms in the past. Brexit could be the catalyst for a lasting change, but it is up to the British and Russian Governments to negotiate a path of moderation over continued economic hostility.

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