Russian Markets Not Immune to Brexit’s Political Risk

Russian politics is celebrating this week the prospect of weaker European foreign policy, with many Russian financial experts weighing on the likely impact on Russia. Alexei Kudrin, former Finance Minister, believes that Russia will not be affected by a Brexit: “We can be sorry about the British leaving the EU. But there will be no catastrophe, even though financial markets will go through a brief period of instability”. 

Russian Economic Development Minister Alexei Ulyukayev declared on Thursday: “I believe that the markets have already taken under consideration the possible volatility and all the risks are taken into account. So I do not see any more risks”.

This view was also supported by some Western analysts. Michael McFaul, former US ambassador in Moscow Tweeted Friday: “Shocked by Brexit vote! Losers: EU, UK, US those that believe in utility of a strong democratic Europe. Winners: Putin.’

While any immediate economic impact on Russia might be muted, there is a real risk that the medium term political impact could have severe consequence for the outlook of the Russian market. 

This risk begins with the process of Brexit decoupling. Though it is understood that a British exit will take at least two years, what no one can factor in is just how orderly this process will be. As reported in the Financial Times, Stephen Weatherill, professor of law at Oxford University said: ‘Leaving the EU is a daunting challenge with no clear precedent. Brexit would unwind economic relations of ‘incomparable complexity and depth’.

Add to this the uncertainty, and potential ‘domino effect’ effect the Brexit could cause within the European Union, and there will only be further volatility.

Unpopular immigration policies across Europe has seen a growing rise in anti-establishment parties. A June poll reported by the BBC and released by the Pew Research Centre, found that only 51% of respondents across 10 European states still favoured the EU. France and Greece had unfavourable responses of 61% and 71% respectively.  In the unlikely event that a large integrated economy like France left the EU, a multi-year downward pressure on commodity prices would be the least of the market’s concerns.

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