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Special Briefing: The Brexit Vote’s Implications for Russia

Although Russia is not immune to the economic consequences of Brexit, the political ramifications are likely to be far more consequential

First, the UK’s decision 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. Moreover, it is widely supposed that the UK’s relatively hawkish stance towards Russia has been to a large degree moulded by its "special relationship" with the US. Indeed, 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 policymakers in the bloc is already likely to have diminished as a consequence of the referendum result. On the economic front, Brexit is unlikely to impact Russia’s growth trajectory in any significant way. While the rouble has retreated slightly as risk appetite has taken a hit following the referendum result and driven oil prices lower, its decline has been relatively limited.

Positive Implications

The UK has been one of the most hawkish EU countries towards Russia – a stance reinforced by its "special relationship" with the US. 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. The post-Brexit spike in the gold price has boosted the value of Russia’s gold reserves – which it has been building up in recent years to reduce reliance on the dollar.

Negative Implications

Any sustained decline in the oil price as a result of the global flight to safety triggered by the Brexit vote would be a very adverse development for Russia, which depends heavily on oil for export earnings and government revenue. As the EU is Russia’s main trading partner (accounting for almost half of its exports) any weakening in EU demand following the Brexit vote would be negative for Russia’s export sector – an important driver of growth.

Recommendations

Expect downward pressure on the rouble 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, defence 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 base case scenario.

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