Despite the increasing uncertainty with regards to the financial hit to industries, Russell Group have modelled the exposure for companies and countries. In the first of these articles, we take a look at the impact on shipping.
The economic impacts of the current UK-Russia political conflict
21 April 2018 | Blog Post
The recent political conflicts involving the UK and Russia highlight how interconnected the world is. Hundreds of years ago, an armed response was a common response to any political misunderstanding, however, the current scenario today, in which economic and political interests are highly valued almost as highly as human lives, has taken risk management to another level. As the Prussian General Clausewitz's said "war is a continuation of politics by other means.
Theresa May’s assertion that it is highly likely the Russian state has allegedly committed an act of aggression by poisoning the double agent Sergei Skripal plunges Anglo-Russian relations into their worst state since the cruise missile crisis in the 1980s. The geopolitical sphere, in the context of Brexit and Donald Trump’s ambivalence towards Putin, sets a diplomatic challenge for the Foreign Office; the UK has long been the anti-Russian outrider in Europe, and Johnson’s meeting with Russian foreign minister, Sergei Lavrov, in Moscow in December achieved little. So the poisoning of a Russian double agent in a British cathedral city makes fascinating reading for European nations, but many Western politicians will be guided by bigger strategic choices including relations over Syria, Iran, Ukraine and, most importantly, commerce.
When dealing with the Kremlin, with the potential reaction of any action taken into account, there are three measures on the extremities of the spectrum of options available to Downing Street. First, the UK could designate Russia as a state sponsor of terror; secondly, it could also recommend Russian banks are cut off from Swift, the system behind international financial transactions (some Russian banks linked to Iran have already been cut off from the system, for instance). This, therefore, might weaken Russia’s ability to trade internationally, though Russian banks have switched to a Russian payment system called SPFS, set up with larger non-G7 countries. Thirdly, among Mrs May’s other options to hit back, introducing the so-called Magnitsky legislation, similar to that in the US, would enable the UK government to freeze assets and withhold visas from Russians accused of rights abuses.
In Europe, however, despite immediate support from France, Germany seems to be more cautious. The German chancellor, Angela Merkel, was attacked by the far-right AfD, the biggest opposition party, over Berlin’s decision to expel four Russian diplomats. Alexander Gauland, the co-leader of the party, said: “Germany has nothing to win and much to lose if it lets itself be drawn into a new cold war by rabble-rousers and if it wilfully blocks diplomatic channels.” This response, therefore, highlights the geopolitical impacts of any responses leaders might have. In an ever-increasing connected world, from an economic point of view, hurting relations with Russia at this point might not be in the best interest – especially for the UK, having recently voted out of the EU.
The economic scenario, thus, looks equally delicate. A standoff over a poison gas attack on a rebel-held suburb of Damascus, in the last weeks, has since spiralled into the most dangerous confrontation between the USA and Russia, driven by Vladimir Putin’s uncompromising backing for the Assad regime in Damascus and the volatility of the US president. Reinforcing her strong disapproval of chemical weapons, May was quick in letting Trump know he has full support from the UK in this cause. Though this was evidently expected, it clearly deepens, even more, the current sour relations with the Russians.
For instance, it wasn’t long ago that Russia’s Gazprom had one of the biggest energy trading teams in the City. But soon the gas giant will announce plans to pull out of the West, in a gesture loaded with menace. Freezing Siberian storms and even frostier relations with the Kremlin have left Europe pondering its co-dependent relationship with Russia in which both are bound by an economic addiction to fossil fuels. Russia supplies a third of Europe’s gas, and the flexing of energy market muscle is a consistent tactic in the country’s geopolitical playbook, and this could prove to be an even more important card that Putin could play potentially in the light of recent events. Furthermore, concerns are mounting that new EU rules to limit the amount of toxin in fertilisers will also give Russia an “effective monopoly” over the market and power over European food supply.
Therefore, despite of the risk of a war thanks to the recent incidents regarding the poisoning of the Russian agent, later intensified by the UK’s support to the USA in Damascus, the economic impacts we are likely to experience should not be underestimated. In an interconnected world, in which every decision has an even bigger consequence (a butterfly effect), risk management has never been so relevant. After all, the UK’s response to Skripal, paired with Trump’s approach to the Syrian situation, might reshape the market in Europe and in the world.
To conclude, even though it is still uncertain as to what the next chapters will bring, an economic response looks more likely than a physical one – and the market should be aware of that. If the Kremlin decides to play with their gas prices or make use of its monopoly of fertilisers as weapons in this conflict, this could bring about impacts much bigger than the political scenarios, which are currently receiving more attention from the press. After all, interfering directly in the buying power of the UK citizens could deepen even more the post-Brexit economic scenario, affecting not only the local market but also ordinary people’s day-to-day lives.
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