Russia is currently just outside the list of the UK’s top ten trading partners, accounting for a little under 2% of exports and a little more of our imports. So they are important, but obviously nothing in comparison to the size or scale of Germany or the United States of America who account for around 13% of our imports and exports respectively.
However Russian links to the UK economy extend to a variety of different sectors, from retail, to consumer goods, to finance and of course into the oil and gas industry. Extending sanctions to cover exports to Russia of technologically sophisticated oil exploration and production equipment, vital to the modernisation of the Russia energy sector is one thing, but a ratcheting up of sanctions further, in extremis could be a problem for BP (BP.). It’s a risk they flagged to investors on Tuesday. As a very large constituent in many UK pension plans, the near 20% stake that they own in the Russian oil company Rosneft accounts for about 10% of BP's total value or current market capitalisation, which is around £90 billion. Any further impairment of this business or a forced cessation of ownership would likely be very negative for BP - and by extension for British pension pots.
Where we don't have to worry in the UK is over the direct supply of natural gas. The Russian company Gazprom owns around a fifth of the world's gas supplies with Russia currently supplying around a third of all of Europe's needs. Approximately half of Russia's budget income comes from the sale of oil and gas to the world, so cutting this link would certainly be impactful and add teeth to the sanctions package, but it’s something that Germany just cannot countenance given their dependence on Russia as a source of energy.
Indeed this is a reliance that is to become more significant, absent any proactive efforts to diversify their energy base, as they move to shut down nuclear power generation in the wake of the Fukushima disaster. In the UK, while we produce much of our own gas, our shortfall requirement is mostly made up of a combination of imports from Norway and directly shipped in Liquid Natural Gas or LNG. Higher global gas prices may impact our bills, but our supply is not directly dependent on Russia.
One sector that will certainly be impacted is Financial Services. HSBC (HSBA) and Barclays (BARC) both service Russia corporate and investment banking clients and this next round of sanctions will it seems prohibit Russian banks from financing themselves, via bond or share sales, in Europe. Of course the hope is that this will indirectly squeeze Russian banks ability to extend credit domestically - but this will take time. And then there is also the London Stock Exchange (LSE). They were symbolic of the push in the mid-noughties to court Russian business and successfully persuaded several dozen Russian companies to list on the London bourse.
At the last count, there were some sixty companies listed in London. Just as the share of UK exports heading to Russia has steadily increased over the last decade, so financial services firms have sought to help finance this expansion.
Lastly, surprising to many, might be the extent of some individual UK company's exposures to Russia. Marks & Spencer (MKS) has about 4% of its operating profits sourced from Russia. They have 41 stores across the country including one as far east as Krasnoyarsk, the city with a population of around a million people, 2,600 miles to the east of Russia. WH Smith last year won a contract to sell newspapers in Russian railway stations. Today, they have just one concession operational, but they have been planning for more.
Many London listed global fast moving consumer goods companies have operations that extend into Russia; SAB Miller (SAB) via a subsidiary investment, Unilever too amongst others. Whatever happens however, we don't need to worry about our vodka. Stolichnaya is made in Latvia and Smirnoff is manufactured right here in Britain. A bit like any hangover, for the UK, escalating sanctions on Russia, is a problem for tomorrow.
