Who loses from punishing Russia?

Government document

If trade and financial sanctions were imposed on Russia, the cost to the UK might well exceed the cost to Russia.

That is presumably why the Foreign Office wrote - in a document carelessly (or deliberately?) displayed yesterday for the lenses of photographers - that "the UK should not support for now trade sanctions or close London's financial centre to Russians".

Here's what the official figures show.

The UK had investments in Russia of more than £46bn in 2011 (the latest year for which data is available), rather more than Russian investments in the UK of £27bn.

On that basis, UK businesses and investors would have more to lose from asset freezes and seizures than their Russian counterparts.

Similarly, and this slightly surprised me, the UK has in recent years run a healthy current account surplus with Russia - which was £2.9bn in 2012, up from £2.1bn in 2011.

As you know (you do, you do) it is pretty unusual - and valuable - for the UK to be in surplus with a big economy like Russia, because we've been a deficit country in our economic relations with the rest of the world for more than 30 years.

And any cessation of trade and commerce with Russia would - apparently - make it even harder for the UK to start paying its way in the world once more, which is the burning ambition of this government, and would be necessary if the UK's debt burden was going to ever start lightening.

To be clear, it is the income from those investments in Russia that appears to be the big contributor to the healthy current account balance.

On trade in goods and services, the UK consistently runs a deficit with Russia - which was £1.8bn in 2012.

However the UK's assets in Russia generated £4.7bn more in income than was generated by Russia's UK assets.

And even if there is a trade deficit with Russia, it is a moderately important export market for the UK: UK exports to Russia were £7.6bn, a bit more than it sells to India, but less than sales to China.

Now quite a chunk of the UK's assets in Russia are BP's oil investments, which have been reconstructed since the release of latest data and have shrunk a bit. But they remain substantial.

As for which UK industries do well in Russia, as the snapped Foreign Office memo implies, the City is a winner: financial services trade with Russia was worth £889m in 2012.

Or to put it another way, it may be tempting to think that if trade and financial sanctions were imposed on Russia, the only losers would be a few Russian billionaire owners of expensive London townhouses and football clubs, but there would be potentially expensive costs for British business and investment interests.

And another thing.

There is some, but not massive, exposure of UK banks to Russia.

According to the Bank for International Settlements, UK banks have lent more than £19bn to the Russian public and private sectors, and have more than £42bn of contingent liabilities, most of it in the form of financial guarantees.

This doesn't represent a potentially devastating risk for UK banks, but is not trivial either.

What is more interesting about the BIS figures is they demonstrate that the US can afford to be much more aggressive in rattling economic sabres than Europe.

Of bank loans to Russia totalling £242bn, £184bn was provided by European banks - with the exposure being particularly big for French, Italian and German banks (in that order).

What this confirms - which won't be a shock - is that Europe is much more economically and financially connected to Russia than is America - and not only through European dependence on imports of Russian gas and oil (Russia supplies just under a third of gas consumed in Europe).

So European leaders will certainly take a deeper breath than America before announcing that Russia has become an economic leper that can't be touched.

By the way, none of this is to argue that it would be wrong to punish Russia by curbing the flow of goods, services and money to and from it. But it is just to point out - what may be obvious - that imposing sanctions would not be cheap or painless for the UK and Europe.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 44.

    Whilst Linsay Hilsum was reporting the drama of the Crimea on TV, there in the background, was a citizen of the Crimea walking his dog seemingly unpurterbed with reality. We've got a lot to lose from a kneejerk reaction of imposing economic sanctions. Lets remember we are no longer a world power. We should let things settle & clarify in the Ukraine before further reaction.

  • rate this

    Comment number 43.

    Amusing to see Kerry & Hague attempt the moral high ground. They must think we're idiots and have forgotten Iraq, Afghanistan and their pro-war push in Syria.

    When the fog of lies is cut through, it's usually just one form of legalised gangsters versus another.

    Still, Hague got a lovely shiney medal from Clinton last week. I wonder why.

  • rate this

    Comment number 42.


    What a monumentally niece comment. You clearly have absolutely no understanding of the history of Crimea.

    To compare the two is childish at beast, and is tantamount to the arguments put forward by those who are crying over Russia perfectly acceptable response to an EU, UK, US lead coup.

  • rate this

    Comment number 41.

    Did we really vote these people into power? What exactly were we thinking?

  • rate this

    Comment number 40.

    Seems to me that there is a lot or warmongering going on. Problem is inexperienced leaders in Ukraine playing silly political games with Russian military. US approach seems heavy handed and unhelpful. UK trying to calm things down - not helped by irresponsible reporting - leaking documents. Russia approach seems reasonable so far. Beware of Ukrainian nationalist fervor and US posturing.

  • rate this

    Comment number 39.

    35.Global Yawning

    "Congratulations" on your most banal comment ever...!!!!!!!

    By your own logic you'll have no complaints if Poland invades the UK to protect it's citizens here if any of them feel threatened (note there was NO threat to ethnic Russians) by racist Brits not letting have their cake & eat it.....!!!!!!!!


  • rate this

    Comment number 38.

    I don't think you need any sanctions ...... The Russian stock market plunged 10% yesterday & that alone is enough to make them think twice :-)

  • rate this

    Comment number 37.

    Ukraine had elections due in 12 months... They went against the EU towards Russia so the EU raised rhetoric, started sanctions and got their unelected leader in as they did in Cyprus, Greece, Italy and more.

    Our media is so biased in its reporting... Kerry has said you can't invade another country based on conjecture...

    The US said that!

    Iraq, afghan, Pakistan, Libya, Egypt, Syria - Ukraine?

  • rate this

    Comment number 36.

    So many are so quick to forget how US/EU (see Nuland gate) were visiting the useful idiots in Maidan for months and emboldening the Right Sector to be as violent as possible. Western support of extremists when it suits them is more dangerous than Russia intervening to restore order.

  • rate this

    Comment number 35.

    Isn't it funny that the Russian held Crimea is stable, and not a single shot has been fired; despite the BBC's claim of a 3:00GTM ultimatum, which was an out an out lie. Propaganda. Again. Yet the western influenced Kiev is/was a war zone.

    The Russians have acted who heartedly correctly in protecting those in Crimea who consider themselves Russian, and were under threat from the Nazis in Ukraine

  • rate this

    Comment number 34.

    No sanctions will be aplpied that in any way smidgeon or degree affect Conservative party donors

    Mentime they will ramp the *** out of fuel and food prices

    Trebles all round!

  • rate this

    Comment number 33.

    A lot depends on what Putin intends to do. Is he going to leave the troops there as an occupying force? Is he going to declare it part of Russia? Is he going to install a puppet independant government and effectively annex it from Ukraine? My money's on the latter. Whatever he does there is absolutely nothing The West can do as no-one is going to send in the army as no-one really cares that much.

  • rate this

    Comment number 32.

    Good to see our leaders taking principled stands!

    "It's wrong, it should cost you - but not if it costs us a single penny!"
    "We need to bomb Assad to heck and back - but anyone who goes and fights him in person will be arrested on their return!"
    "We'll do anything we can to help the Syrian people - except taking any refugees or anything else that could push up our "immigrant" figures!"

  • rate this

    Comment number 31.

    Beware a policy of appeasement, from Putin’s view it’s a sign of weakness.

    This has all happened before... how quickly we forget.

  • rate this

    Comment number 30.

    The need for the UK economy to reduce its reliance on fossil fuels for reasons of security of supply has been ineptly ignored by successive governments. Now we can't impose economic sanctions on Russia because that would turn the lights off, and we have a government proposing to replace electricity generated using Russian gas with, er, Chinese nuclear power. You couldn't make it up!

  • rate this

    Comment number 29.

    I don't think Putin would be concerned about economic sanctions hurting the Russian people. He'd just ride it out.
    Trying to work out whether they hurt Russia or the West more is absolutely pointless, since they can't help the West achieve it's objectives.

  • rate this

    Comment number 28.

    The hypocrisy of the West is overwhelming.

    our recent foriegn adventures have been nothing short of illegal invasions to rape nations of their resources with civilian casualties in their thousands.

    Now Russia has deployed troops without a shot being fired and the world is up in arms threatening sanctions.

    Western leaders trying to mount the moral horse, that they killed long ago.

  • rate this

    Comment number 27.

    A problem with sanctioning Russia; couldn't that possibly get the ordinary Russian angry against the 'west'. While we would suffer economically far less than Russia if we sanction them but politically? I dunno.

  • rate this

    Comment number 26.

    Everyone loses that's the answer to that conundrum. The only good thing about globalization is conflict is bad for business. Religious wars are the only wars common sense can not control, any others, people should choose the sensible path.

  • rate this

    Comment number 25.

    I am sorry but I just cannot stomach the hypocrisy of all this outrage at what Russia is doing in the Crimea. We and the USA invaded Iraq , destroyed the country and caused the deaths of thousands of Iraqi people purportedly on the basis of our interests and now we have the nerve to criticise Russia. It beggars belief


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