The meaning of Brexit for Russia and its relations with the West

In the run-up to the UK referendum on EU membership, some advocates of the ‘Remain’ campaign sought to strengthen their case by advancing the argument that the only leader to benefit from Brexit would be Russian President, Vladimir Putin, on the grounds that an EU weakened by the UK’s exit would be to Russia’s advantage. This zero-sum approach to the issue – the implication being that by voting to leave the EU you would be supporting Putin – was typical of the scaremongering tactics that were deployed by both ‘Remain’ and ‘Leave’ campaigners.

Now that the vote has happened, what are the implications of Brexit for Russia?

One of the most significant short-term results for Russia of the leave vote will be a weakening of the pro-sanctions camp within the EU. The UK’s political leaders have been consistently staunch advocates of the sanctions, even as UK businesses in sectors with close trading and financial links with Russia have disagreed with that position. Ahead of the UK vote it was already becoming increasingly difficult for the EU to maintain its consensus on extending the sanctions against Russia. With the UK no longer part of that process, pressure is likely to build within the EU for a gradual easing of the sanctions from January 2017. Their campaign will be helped by the likely negative impact of Brexit on growth in the Eurozone, where sectors such as agri-processing have been hard hit by the drop in trade resulting from Russia’s reciprocal sanctions.

Potentially offsetting this, however, will be the impact on Russia of the anticipated shock to global and regional economic growth arising from Brexit. There is a high risk that the UK vote will exacerbate existing weaknesses in the global economy, particularly against a backdrop of a sharp slowdown in growth in emerging markets and persistently weak growth in the US and Europe – the latter in particular has yet to emerge from the crisis of 2008-09. With emerging market debt already at historic highs, Brexit will force a reappraisal of political risk both in these markets and in Europe, potentially causing financial and currency volatility as positions are unwound. Importantly for Russia, any slowdown in global growth is likely to stall the recent rise in oil prices. Russia is likely to seek to consolidate its recent push towards China to counter the impact, whether through increased trade or new investment.

The anticipated erosion of the UK’s influential role as a global financial centre is also likely to have implications for Russia. The UK has long been one of the most attractive destinations for Russian capital, whether via the London Stock Exchange (LSE) or through the purchase of high-end London property. However, as some of the arrangements that have enabled the UK to dominate European financial markets are unwound, the relative attractiveness of the UK for Russian capital is likely to decrease, while other financial hubs in Europe – particularly Paris and Frankfurt - will seek to benefit. The UK decision has also cast doubt on the proposed merger of the LSE and the Deutsche Boerse, given the latter’s likely reluctance to share critical infrastructure with a non-EU entity.

Given the UK’s leading role as a strong proponent of NATO within the EU, how will the vote influence the West’s security relationship with Russia?

Although the US has lost one of its staunchest advocates within Europe for a solid trans-Atlantic partnership, this is unlikely dramatically to shift security dynamics within Europe, where NATO not the EU will remain the pre-eminent military body. Putative moves towards establishing a ‘European army’ – cited by ‘leave’ campaigners as another reason for the UK to quit the EU – are likely to remain just that, with limited enthusiasm among most EU member states to allocate spending to this goal. And even as many of the ‘old’ EU members remain reluctant to increase defence spending to the levels pushed for by the US, the newer EU members will continue to push for an enhanced role for NATO in the region to combat perceived Russian aggression.

With the UK’s political environment in a state of flux – such that Control Risks has increased the country’s political risk rating to Medium (the same as Russia) for the first time in 37 years – uncertainty over the implications of Brexit will persist in the coming months as relationships are unwound, treaties are renegotiated and new agreements are struck. Although Russia may hope to draw some short-term benefits from this situation, the longer-term implications for Russia of the UK’s decision, and particularly the impact on the EU’s economic and political outlook, are less clear. Russia’s longer-term interests lie in a dynamic, prosperous and integrated European market. Recent developments suggest that Brexit will struggle to deliver that.