After Brexit: An Uncertain New Reality

The United Kingdom referendum on its membership in the European Union has given rise to countless expert opinions, assessments and publications, ranging from moderate to radical, from optimistic to extremely pessimistic predictions that the United Kingdom, the European Union and the entire world order will soon collapse. One thing that all commentators appear to agree on, however, is that the United Kingdom and the European Union have entered a phase of uncertainty, adding a number of new – and for the most part unclear – variables to the already difficult situation in Europe and around the world. Brexit has created a new and unexpected reality in which the roles of certain states in regional and global processes, including that of Russia, could change drastically.

The United Kingdom referendum on its membership in the European Union has given rise to countless expert opinions, assessments and publications, ranging from moderate to radical, from optimistic to extremely pessimistic predictions that the United Kingdom, the European Union and the entire world order will soon collapse. One thing that all commentators appear to agree on, however, is that the United Kingdom and the European Union have entered a phase of uncertainty, adding a number of new – and for the most part unclear – variables to the already difficult situation in Europe and around the world. According to most experts, the situation is likely to develop in the following manner: the longer uncertainty reigns, the worse the consequences will be for all actors, as will the direct and indirect negative effects on integration processes and the global market. Brexit has created a new and unexpected reality in which the roles of certain states in regional and global processes, including that of Russia, could change drastically.

Euro-Integration versus Euro-Scepticism

At first glance, the very fact that a referendum was held speaks to a combination of the political short-sightedness of the British establishment and a flirtation with public opinion, whose influence on politics was, yet again, underestimated. All the rational arguments championing Euro-integration and the free movement of people, goods and services around Europe failed to tip the scales in the “remain” camp’s favour. The referendum played another important role: it finally legitimized the arguments of the populists and Euro-sceptics in the mainstream media who, until recently, had been considered, if not marginal, then at least incapable of casting a serious shadow over the European path of British development.

However, the cautious attitude of the British people towards the European institutions is hardly anything new; it has existed for as long as the idea of a united Europe has, and has reared its head repeatedly during election campaigns. Interestingly, the Conservative Party has not always been the stronghold of Euro-scepticism in the United Kingdom. In the early 1980s, it was the Labour Party that made an exit from Europe a focus of its election campaign. But it was forced to abandon the idea following a crushing defeat at the hands of the Conservatives led by the “progressive Euro-sceptic” Margaret Thatcher in 1983. What is more, it was the Conservative government under Harold Macmillan that took the historic steps towards Euro-integration in the 1960s. Thus there has been little in terms of the parties’ official attitudes towards European integration. After the Maastricht Treaty came into force in 1993, the leading parties favoured continued integration, preferring to mildly criticize Brussels while securing special conditions for London. And while a number of conservatives made attempts to move closer to continental Euro-sceptics in the early 2000s, they received no support from the party’s leaders or from the majority of the Conservatives themselves (including David Cameron).

The only political party that has not only maintained an open anti-European position, but has made it the central focus of its campaigns, is the United Kingdom Independence Party (UKIP). The party was formed in 1991 by a number of university intellectuals and public figures who opposed the signing of the Maastricht Treaty. During the first 15 years of its existence, UKIP received more attention from the tabloids than it did from leading political commentators and respected experts. But that all came to an end in 2006, when Nigel Farage took control of the party. It is under Farage’s leadership that UKIP enacted a small revolution in the seemingly stable political landscape of the United Kingdom, securing the votes of disparate social groups, uniting them not only against European integration, but also against globalization and the influx of foreigners and multilateral corporations, among other things.

REUTERS/Vincent Kessler
Nigel Farage

Farage and his associates did not hesitate to use populist rhetoric, calling for restrictions to be placed on migration, for Britain to be made great again, and for a complete break with the bureaucrats in Brussels – a set of anti-liberal slogans that had begun to gain more and more traction around Europe in the aftermath of the financial crisis of 2008–2009. The UKIP’s success (the party conducted a number of successful regional campaigns before beating out the big three UK parties in the elections to the European Parliament, winning 28 per cent of the votes) has provoked a number of schisms among the conservatives, as well as within the Labour Party. As a result, the right- and left-wing factions within these parties, led by Boris Johnson and Jeremy Corbin, respectively, started to gain popularity.

Dysfunctional Democracy

John F. Kennedy once wrote: “The voters selected us, in short, because they had confidence in our judgment and our ability to exercise that judgment from a position where we could determine what their own best interests are, as a part of the nation’s interest. This may mean that we must on occasion lead, inform, correct and sometimes even ignore constituent opinion, if we are to exercise fully that judgment for which we were elected.” [1] The very fact that a referendum on the United Kingdom’s membership in the European Union was called was the result of errors made by a part of the moderate British conservatives led by David Cameron, who stood firm in the belief that they could simultaneously deal with the Euro-sceptics within the country as well as that part of society for whom globalization and integration are synonymous with the failures of the UK economy and the decline of the nation. Although statistics show that the United Kingdom is by no means worse off as a result of its membership in the European Union: GDP per head increased from £5,500 in 1998 to almost £7,000 in 2015, and the number of private companies registered in 2015 reached a record 5.4 million, up from 3.5 million in 2000. The United Kingdom successfully dealt with effects of the 2008–2009 financial crisis. The unemployment rate, which spiked in 2008–2012, returned to a much more manageable 6 per cent in 2014, which is comparable with that of the late 1990s and a far cry from the fluctuations in the labour market that occurred in the 1970s to the 1980s. The British media perpetuated the entirely false stereotype that “Big Business” was leading the campaign to remain in the European Union, while small business owners favoured Brexit. While large enterprises may have stood firm in their support for continuing on the European path, small business owners soon began to show signs of division. Many of them considered the EU rules and standards excessively complicated and wanted greater freedom from the bureaucrats in Europe. At the same time, it is largely thanks to these very same EU standards that the UK economy has become far more competitive over the past 25 years, overcoming the numerous recessions and crises of the 1970s and 1980s.

Ultimately, however, the standoff between the “leave” and “remain” camps had little to do with rational arguments and devolved into the usual fight for votes: the media was as split as the campaigns were themselves; politicians and celebrities gave impassioned speeches; and over-the-top rallies that could rival a ships regatta on the Thames were held. But a dangerous trend was lurking behind these campaigns – the reliance on public opinion at a time when serious and well thought out decisions were required from the country’s top brass. Interestingly, the regions that voted most heavily in favour of leaving the European Union were England and Wales, two countries that, objectively, had suffered the consequences of deregulation and austerity the most. But these arguments were not used by the leaders of the Brexit campaign. On the contrary, the campaign was based on criticism of the European Union and migration, and these issues were singled out as the main reasons for the falling quality of life and growing unemployment in the United Kingdom.

It is clear that, in times of crisis, the public is drawn towards answers that are easier and more understandable. What would happen if there was a referendum in Germany on the issue of providing financial aid to Greece? What would the French people say if they were asked to vote on restricting migration from Muslim countries? The majority of people in these cases would have clear answers. But would these answers be in the best interests of their respective countries, and of Europe in general?

The United Kingdom European Union membership referendum is a clear demonstration of what a dysfunctional democracy is capable of. The plebiscite was used at a time when a balanced parliamentary procedure in which all interested parties could voice their opinions was needed. And it is the lack of serious consultations and expert work that led to one third of the EU countries being wholly unprepared to deal with the United Kingdom’s possible exit from the Union.

The Economic Implications of Brexit

As a rule, financial markets are nervous places – they tend to react to any kind of international crisis with volatility. But Brexit was an unexpected crisis. The willingness of the British people to abandon the accepted rules of the game became a new variable to which the markets, including the UK markets, simply cannot work out a clear position. Now, leading economic institutions, governments and companies are forced to work with a number of possible scenarios simultaneously, from positive to extremely negative. The possibility of any of these scenarios panning out depends on a number of factors, which are mainly linked to the speed and effectiveness with which London and Brussels can reach a new status quo.

Having said this, it would be somewhat premature to suggest that Brexit could act as the propeller of a new global financial crisis. The media is traditional rather fond of painting the bleakest picture possible, but the UK economy is in fairly robust shape. This is supported by the fact that the pound appears to be strengthening and the panic that reigned on the stock markets in the weeks after the shock referendum result has subsided. The International Monetary Fund (IMF) lowered its forecasts for global economic growth in 2017 by 0.1 per cent, with anticipated growth in the Euro zone dropping 0.2 per cent, as a direct result of Brexit. However, these figures are very speculative in nature, as much will depend on which scenario will unfold, as well as on negotiations with Brussels. And it is equally impossible to predict just what the implications for the UK economy will be in the wake of Brexit. A month before the referendum, the Institute for Fiscal Studies in London published a paper quantifying the financial effect of Brexit: in the worst-case scenario, the United Kingdom will owe additional £74 billion; in the best-case scenario, it will have a surplus of £30 billion. The figures are so far apart that no economist worth his or her salt would dare put even an approximate number on the cost of Brexit.

It should be noted that the Euro zone has more clear-cut risks to be thinking about – risks that are associated with the pre-crisis state of the Italian financial sector and the risky operations of Deutsche Bank. Should anything untoward happen in the Italian or German banking systems, the consequences for the European economy will be more immediate and far more devastating than Brexit. The structural problems related to high levels of unemployment, low productivity and poor credit dynamics remain. Brexit has only added economic uncertainty to the region, which could further increase the burden on the financial sector. The for The United Kingdom’s contributions to the European Union (around 15 billion per year) will have to be made up elsewhere, with the other members – primarily Germany – picking up the slack.

AFP PHOTO
Nikolai Shevchenko:
Britain and EU Stand United on Russia Despite
Brexit

Those who see a clearly thought-out strategy in London’s divorce with Brussels believe that, outside the European Union, the United Kingdom will be free from the burden of the systemic problems that loom over continental Europe and will be able to breathe life back into the country’s economy. The main vulnerability of this position is that independence in today’s world is conditional. Self-sufficient services markets, financial systems, innovation industries, etc., simply do not exist. So the question is: what whole will the United Kingdom want to become a part of?

The most optimistic scenario, as described by the “Out” campaigners, looks like this: now it has the right to enter into trade agreements with whomever it chooses, the United Kingdom will not only remain within the European free trade area (or will sign separate agreements for various sectors), but will also expand its sphere of influence significantly by creating new free trade zones with the world’s major economies – the United States, China, India, etc. In the opinion of one journalist for The Telegraph, this will turn the United Kingdom into a unique trade and financial hub, a new Switzerland or Singapore. One of the nuances of a possible new agreement between London and Brussels is the fact that, as a non-EU member, the United Kingdom will almost definitely not be granted free access to the EU markets. In particular, Switzerland, where financial services account for a greater share of the country’s GDP than in the United Kingdom, has a negative trade balance with the European Union – in the financial services sector. Being a privileged partner of the European Union is not the same as being a full member.

The uniqueness of the United Kingdom before Brexit was that the country served as a kind of investment bridge between the European Union and the rest of the world. The United Kingdom accounted for more direct investments that the rest of the European Union combined. According to research carried out by Ernst & Young in 2015, most investors (72 per cent) cited free access to the European market as one of the major advantages of the United Kingdom. In other words, investors saw the country as more than just a recipient of capital investments, but as an important transit zone as well. So far, the “leave” camp has been unable to convince global investors that the situation will not change moving forwards. This is because, in order for this to be the case, a one-of-a-kind agreement has to be signed with Brussels, the likes of which has never been seen before in Europe. Such an agreement must include free access to the single market and at the same time restrict the movement of people (i.e. migration), which was one of the key policy points of the “Out” campaign. If the victorious fraction of conservatives and Euro-sceptics, as well as the other social and political forces in the countries that supported Brexit abandon this populist point, then they will lose the support of the “disgruntled” part of the population and devalue their own efforts. In a sense, this is the most difficult and unpredictable “fork” in the negotiating process, as Brussels, Berlin and Paris are unlikely to agree to remove the word “people” from the concept of free movement. After all, this would mean violating, or at least revising in part, the legal framework of the entire European Union.

At the end of the day, UK businesses are not interested in losing the European Union as its main market for products and services (44 per cent of exports from the United Kingdom are to the European Union), and investors do not want to cease their activities in London as a leading global financial centre (in 2013, 40.9 per cent of global Forex trade took place in London). Nevertheless, this possibility is being studied by a number of leading multinational banks that are worried about the institutional links between the United Kingdom and continental Europe being destroyed. If the new Theresa May-led government does set the wheels in motion for an exit from the European Union, then it will need to provide certain guarantees – first of all, to global businesses and financial institutions, and secondly to Scotland and Northern Ireland, where neither the elites nor regular people understood the supposed political and economic advantages of leaving the European Union. Of course, no one is in a position right now to give such guarantees, as there is no consensus in the UK establishment or among EU politicians on how the exit should work and how the negotiation process should be handled.

Brexit and Russian Integration

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For Russia, the short-term effects of Brexit will be negligible at best and will be felt primarily through fluctuations in the commodity and currency markets caused by the continuing uncertainty. It is possible that some large companies that have traditionally traded on the London Stock Exchange will want to avoid financial volatility and suspend trading or sell a part of their shares. At the same time, it should be noted that Russian companies had expressed a desire to pull out of the London Stock Exchange long before the referendum took place, and for completely different reasons: the global decline in raw materials prices, the loss of interest on the part of a number of key investors in Russian shares as a result of the recent geopolitical tensions, and the economic stagnation in Russia. These adverse factors are to varying degrees responsible for the delisting of Uralkali, Polyus and Burovaya Kompaniya Eurasia. And a number of Russian companies (Otkritie Bank, for example) have expressed the desire to move their trade operations to the more attractive Asian markets. We should not expect a mass exodus of the remaining Russian companies (31 Russian companies continue to trade on the London Stock Exchange) any time soon, however, as the ties between Russian business leaders and London financiers that appeared as a result of the explosion of Russian IPOs in the mid-2000s would seem to be too strong. If interest does fade – not on the part of the Russian side, but on the part of disillusioned foreign investors – then transferring trade operations to Hong Kong, Shanghai or Singapore is unlikely to save these companies from losing liquidity.

Interestingly, many leading western politicians who backed the “remain” campaign, including David Cameron himself, said that Moscow would be the first to benefit from a Brexit and the subsequent weakening of the European Union. From a rational point of view, this is a weak argument, and was most likely used as a way to give a simple answer to the question on everyone’s lips: “Why is leaving the European Union a bad idea?” In terms of extending or gradually lifting the sanctions against Russia, Brexit will most likely play a role, but not a decisive role. In reality, the European Union continues to extend the sanctions unanimously. Even if the United Kingdom no longer has an official voice in the European institutions after it leaves the EU, there are plenty of countries that are ready to adopt a tough stance towards Russia; and, as a major regional actor, the opinion of the United Kingdom will always be valued. However, the situation seems to be developing in the opposite direction – an increasing number of major political groups and representatives of the business communities in EU member countries are calling for the sanctions regime to be softened. If these groups achieve critical mass, particularly in the economically stronger states, then the pendulum could start to swing backwards. It is clear that the United Kingdom, whether it is part of the European Union or not, will not be able to reverse the situation on its own.

In any case, the sanctions regime is a temporary stumbling block in Russia–EU relations. What is more important is how Russia and the European Union will build their strategic relations moving forward and the role that Brexit might play in the dynamics of these relations. In recent years, Russia has adopted the position of observer, or has remained passive entirely (depending on the connotation), with regard to European integration. The current military and political uncertainty, often bordering on hysteria, does not provide a rational basis for Russia to be more deeply involved.

The often-criticized and still largely misunderstood possibility of linking Eurasia and the European Union continues to have enormous potential. However, if such a project is to see the light of day, then both political will and serious efforts on the part of experts are required. While the Russian elite has for the most part shifted attention to another integration project (with the Silk Road Economic Belt), this does not mean that Russia should turn its back on similar processes in the West.

In this respect, Brexit creates an entirely new reality. Strange as it may sound, this still rather puzzling and largely populist step taken by disparate political circles in the United Kingdom has the potential to change the regional space significantly and open the door to new possibilities, of which Russia could well be a beneficiary. In the context of the shift that has begun in the ruling elite in the United Kingdom and the European Union’s search for new development models and integration projects (such as the proposed Transatlantic Trade and Investment Partnership), the Russian leadership should introduce strategic thinking into the mix and think about extracting, if not Machiavellian (power and influence), then Smith-like (economic rationalism) benefits from the emerging new reality.

Europe has entered a phase of uncertainty, and Moscow needs to start exploring not only the risks, but also the potential benefits – in terms of new trade and finance formats for working with London – of opportunities to reverse, in a constructive way, relations with the European Union and reduce geopolitical tensions.

So far, analysts have only made rather timid attempts to comprehend the potential that economic rapprochement with an independent United Kingdom or reassessing relations with the European Union could have for Russia, even if some of what has been written sounds somewhat like a utopia.

Brexit really does create a number of opportunities – not from the point of view of a weakened European Union, which would supposedly be beneficial for Moscow, but rather in terms of reformatting the European economic space, a space in which Russia could take part on terms that are favourable for Europe.

1. Kennedy J. F. Profiles in Courage. N.Y.: Harper and Row, 1956, p. 15.