What does Brexit mean for Russia?
No direct or immediate implications for Russia. The UK’s decisions to leave the EU will have no direct impact on the Russian economy over the short term. However, the uncertainty created by the decision will unsettle global markets for years and that will have indirect consequences for all developing economies.
Relatively insulated from any negative contagion. After two years of adjusting to sanctions and the lower oil price, the Russian economy and the ruble are relatively well insulated from further weakness even if growth in the UK and or the EU slides on the back of the UK exiting the union and the uncertainty that created.
Oil price not vulnerable to EU weakness. The price of oil is not particularly vulnerable to economic weakness in the EU – the bigger factors driving the oil price include Chinese and Asian growth, the trend in the supply from North American shale projects and from Iran plus the risk of further outages in Nigeria or the Middle East. EU oil usage has fallen by an average of 1.7 million barrels per day since 2007, while usage in China and other Asian countries has risen by almost 7 million barrels per day in the same period.
CBR will limit currency volatility. The ruble fell as a result of the vote but only in line with the shift in investor sentiment to all EM currencies and in line with the oil price dip. The Central Bank of Russia (CBR) should be easily able to contain any volatility given the low level of investor involvement in Russia’s capital markets.
Weak sterling opens opportunities for UK businesses to compete in Russia. Sterling’s weakness against the euro (down 20% over the past six months) creates opportunities for UK exporters to take market share in Russia from EU competitors. While the Kremlin’s priority is to push localization as a new growth driver, there are clear opportunities in such areas as e-commerce, equipment supply, and services.
Brexit may weaken sanctions resolve in the EU. There is no basis to assume that Brexit will have any near-term impact on sanctions. But the UK has been a strong supporter of tough sanctions and that resolve may now weaken as, a) London becomes distracted by the unwinding process, b) it will have new leadership with different priorities, and c) the UK looks for new export markets to develop.
EU will renew sectoral sanctions for another 6 months. It is expected that the sectoral sanctions will be fully renewed in July but only for six months. The next renewal will then take place during the interval between the US presidential election and inauguration day. Given that the decision on US sanctions is under the remit the president and not Congress and that the White House consistently reminds that the sanctions are scalable, there is now a growing hope for some easing of financial sector sanctions in early 2017.
Sanctions dissatisfaction is growing in any event. In any event, Chancellor Merkel is facing growing pressure from within her coalition government, from German industry and from other EU countries, most notably Italy, to agree to the start of a process to unwind sectoral sanctions.
No macro forecast changes. We see no reason to adjust our medium-term macro forecast models as a result of Brexit or the expected contagion from the vote. We remain confident of our Base Case assumptions.