Article / 05 May 2015 at 12:31 GMT

#Election2015: Russia really doesn't care who wins

Russia oil and gas expert
United Kingdom
  • Labour government would likely take a harder line on Ukraine
  • Moscow views UK foreign policy as dictated by Washington
  • Oligarchs more likely to have firm interest in outcome
  • Russian capital could be leaving London as regulations change

By Nadia Kazakova

By Friday, the UK will have a new Parliament and possibly a new (or rather a newish) government. The polls point to a very tight election that will likely produce a coalition government – possibly a Lib-Con 2.0 in some shape or form. 

There are other (yet to be tested and therefore less predictable) options such as a Conservative minority government, a Labour minority government or any number of patchwork coalitions. Yet the electorate could be forgiven for sticking with the devil they know and putting the Tories back into office, despite all the reservations. 

David Cameron

Better the devil you know. Photo: iStock

Then again, the last-minute show of support from comedian and activist Russell Brand might just be enough to swing it in Labour's favour. 

Foreign affairs (let alone relations with individual countries) have not been high on the agenda in this election campaign. Commentators, in fact, have variously called foreign policy "almost entirely peripheral in the run up to the polling day" or "the dog who spectacularly failed to bark". 

In the Economist's opinion, foreign policy does not sway voters unless the country is actually at war. According to the august London-based publication, the spectacle of Ed Miliband talking foreign policy a couple of weeks before the election "might seem eccentric". 

On certain key issues – including the Russia/Ukraine situation – there appears to be few essential differences between the main parties. Labour in opposition has taken a tougher line on Russia and if it leads the new government it might seek a more active role in conflict resolution (most likely within the European Union framework). This could be troublesome for Moscow.

The current Liberal-Conservative government has been criticised for initially taking a backseat in the Ukrainian crisis, despite the UK being one of four signatories of the Budapest memorandum (the others being the US, Russia and Ukraine) that guaranteed the territorial integrity of Ukraine. 

According to a report published by the House of Lords in February 2015, the government has not been as active or as visible on this issue as it could have been”. The UK let Germany and France lead talks on Ukraine, providing some flank support through sanctions and, occasionally, tough talking. 

Labour has taken a somewhat tougher line on Russia. Miliband, in his foreign policy speech on April 24, used the example of Ukraine as a symbol of the UK's isolation and its waning influence in Europe. He called for “Western unity and resolve in the face of Russian aggression in Ukraine. NATO needs to send signals of deterrence to prevent the line of confrontation being moved further west".

In reality, there might be little change in the UK's policies towards Russia, whatever form the new government takes. Domestic issues will likely continue to dominate the political agenda. 

The UK might engage with the Ukrainian crisis to a greater degree under a Labour-led government or remain on the sidelines under the Conservatives. In any case, Russian diplomats seem to consider the UK government as lacking an independent foreign policy and would rather talk to Washington directly.

According to the House of Lords' report, “positions taken by the UK were seen in Moscow as being in the shadow of the US, and therefore if they want to hear the hard Western line they will go to Washington rather than come to London”.

US Capitol

Is this where Britain's foreign policy is truly decided? Photo: iStock

Economically, Russia remains of peripheral importance to the UK, especially as the oil price remains low and the EU/US sanctions prevent Russian companies from gaining full access to UK financial markets. 

From a trade prospective, the UK accounted for about 4% of Russian exports ($16.4 billion) and 3% of Russian imports ($8.1 billion) in 2013. The UK's foreign trade with Russia (exports plus imports) was only a third of that of Germany in 2013. 

There are over 600 British companies that have a physical presence in Russia compared to more than 6,000 German ones. This could explain why Germany is much more politically engaged with Russia.

The total stock of Russian investments in the UK was estimated (again by the House of Lords report) at £30 billion. The total stock of UK investments in Russia stood at £48 billion, which is under 1% of the total UK investment in Europe (which includes Russia). 

In 2013, Russia accounted for around 1% of total UK exports of financial services and only 34 Russian companies (out of 2,467, or 1.4%) were listed on the London Stock Exchange. 

All these official statistics might have overlooked the real presence of Russian capital in the UK (which according to Deutsche Bank estimates could be as much as 40% of a monthly £1 billion in “hidden” inflows into the UK since 2010), and the headline-grabbing extravagance of the resident Russian oligarchs. 

Wealthy Russians may therefore be a bit more nervous than Russian politicians about the coming election. 

Labour promised to change the non-domicile tax rules (which currently allow resident expats to pay zero tax on their non-UK earnings), and to introduce a "mansions' tax" (an annual property tax on residential properties worth over £2 million). 

A certain amount of Russian capital may also have already decamped, and this could be due to more than simple pre-election jitters. There have been changes in banking regulations both in Russia (the need to report transactions for foreign accounts, capital amnesty) and in the UK (additional immigration status checks for bank account holders from December 2014) that might have led to an outflow of capital from the UK. 

There are reports that $68 billion has left the UK since the start of this year, in fact, and much of it could be Russian money. 

Exotic cars
The parking attendants of Knightsbridge and Mayfair will be disappointed. Photo: iStock 

— Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector. Read more of her views on social trading leader Saxo Bank's content platform, TradingFloor.com

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