After the UK voted to leave the European Union, policy makers and companies around the world began scrambling to limit the immediate fallout and assess the longer-term implications for the global economy and the financial markets. In Russia, however, while the Kremlin’s official reaction was one of restraint, a number of unofficial comments made by Russian politicians and journalists have revealed Moscow’s overall satisfaction with the result.
Indeed, although Russia is not immune to the economic consequences of Brexit, the political ramifications are likely to be positive and far more consequential. First, the UK’s decision June 23 to leave the EU implies the loss for the bloc of one of the most vocal critics of Russia’s incursions in Ukraine, and one of the strongest advocates of maintaining EU sanctions against Moscow.
In addition, it is widely supposed that the UK’s relatively hawkish stance towards Russia has been to a large degree molded by its “special relationship” with the US. For Moscow, the blunting of US influence on EU policy as a result of Brexit has likely been the main cause for celebration following the referendum result — a fact blithely encapsulated by Boris Titov (the Kremlin’s small-business ombudsman): “This is not the independence of Britain from Europe, but the independence of Europe from the USA.”
While the UK will not formally leave the EU for at least two years after the British government invokes Article 50, the influence wielded by British policy makers in the bloc is already likely to have diminished as a consequence of the referendum result. As such, Brexit has increased the likelihood that the EU’s economic sanctions against Russia (which were recently extended for a further six months) will begin to be rolled back at the beginning of next year.
On the economic front, Brexit is unlikely to impact Russia’s growth trajectory in any significant way. While the ruble retreated slightly as risk appetite took a hit following the referendum result and drove oil prices lower, its decline has been relatively limited. Although the currency could weaken further in the short term as investors continue to shift into safe-haven assets amid the wider environment of heightened uncertainty, Western sanctions have already sharply reduced investment in Russia and thus the impact of the global flight to safety on the ruble (and Russian assets in general) is likely to remain limited. Moreover, with the Brexit vote having put pressure on the US Federal Reserve to delay any future rate rises, the Fed’s dovish stance could actually lend support to the ruble (and emerging market assets more generally) going forward.
In terms of trade, Russia has very little exposure to a recession in the UK, which accounts for just 2% of Russian exports and imports. The EU, however, is Russia’s main trading partner (accounting for almost half of its exports), and, as such, any weakening in demand in the EU as a result of the Brexit vote would be a negative development for Russia’s export sector, an important driver of growth.
Overall, Dun & Bradstreet advises businesses and investors to continue to monitor Brexit-related developments closely, but to keep in mind that the UK will remain a full member of the EU until at least early 2019, in which time the legal framework governing the UK’s relations with the EU will remain unchanged. For firms and investors with strategic interests in Russia, we make the following recommendations:
- Expect downward pressure on the ruble to persist in the coming months as heightened uncertainty continues to drive the global flight to safety.
- Note that EU economic sanctions against Russia may now be rolled back sooner than previously expected, possibly at the beginning of next year, opening up a range of opportunities for exporters and investors interested in the Russian market — particularly those operating in the energy, defense, and financial sectors.
- Do not expect any change in the situation in eastern Ukraine as a result of Brexit. If anything, Russia is now likely to feel less pressure to move forward in meeting its Minsk obligations; as such, a frozen conflict remains our core scenario.
Jaspreet Sehmi is a Senior Economist in Dun & Bradstreet’s Macro Market Insight team. Based in Marlow/United Kingdom, she covers Eastern Europe and Central Asia. She has an MSc in Economics from University College London.