UK and Russia Will Both Lose if Relations Continue to Sour

UK and Russia Will Both Lose if Relations Continue to Sour

The relationship between Russia and the West is very rocky over the situation in Ukraine and the fact that Moscow annexed Crimea. But the United Kingdom and Russia have a lot to lose if their unique relationship sours more.

The European Union (EU) and US imposed sanctions against Russian President Vladimir Putin’s inner circle and Bank Rossiya, his preferred bank, in St. Petersburg. The bank is not allowed to do business in dollars.

According to The Times, British Petroleum (BP) owns 20 percent of Russia state owned gas company Rosneft and companies Diageo, Kingfisher and Rolls-Royce have investments in Russia. Unfortunately, they cannot pay suppliers if the chosen bank is Bank Rossiya.

At the same time, rich Russians invested at least £27 billion in London, especially Roman Abramovich, owner of the Chelsea football club. Many firms opened branches in London, such as Lenta and Megafon. Alisher Usmanov wants to buy the Arsenal football club. However, while this might seem like a lot, experts said it is only 0.5 percent of European assets in London. This means in a trade war Russia has a lot more to lose.

Russia’s financial system is hugely dependent on foreign loans, with $263bn borrowed by companies and individuals, according to the Bank for International Settlements. About $180bn of that is owed to European banks, with Credit Suisse, UBS and Deutsche Bank among those thought to have the largest exposures.

If all that cash was suddenly withdrawn, Russia would be pitched into a severe recession. As things stand, western banks are not yet cutting credit to Russia in a significant way.

Unfortunately for the West, Putin is not concerned about the economy and the sanctions, even though they hit those closest to Putin, might not make much of a difference.

“No,” said Andrew Kuchins, an expert on Russian politics at the Center for Strategic and International Studies (CSIS), a think tank in Washington. “To base your policy on that assumption and only that assumption — which appears to be what the Obama administration is doing — is not going to work.

“The Russians showed in the last Cold War that they were willing to endure much greater economic hardship than their American and European adversaries, so why are we assuming that something is different now or that the oligarchs around Putin are going to rebel against him? It’s just ridiculous. Obama so badly understands Putin that it is increasing the risk of very very disastrous consequences. I really don’t think Obama has a clue who he is dealing with.”

A few days before President Obama passed the sanctions, Press Secretary Jay Carney told people not to invest in Russian stock. The Russian markets did crash after the sanctions were passed, but they quickly picked back up. Russian stocks are now some of the cheapest in the world. Experts and financial analysts are frustrated there has not been consistent evidence if the sanctions work or not.

“On February 28, [Obama] said there would be costs if Russia took Crimea,” said Kuchins at the CSIS. “Here we are, a month later, the Russians took Crimea and there have been no costs. Now we’re trying to tell Putin, ‘OK, we gave you that one, but next time there are going to be real costs.’ The steps we have taken are so feeble that Putin feels he is in a very permissive environment.”