Why Russia's Economic Slump Has Been Good For London

Why Russia's Economic Slump Has Been Good For London

3:29am Mar 20, 2015
The view west from London's newest skyscraper looks over the River Thames and St. Paul's Cathedral. Russians have flocked to the English property and banking sectors as the economy crumbles back home.
The view west from London's newest skyscraper looks over the River Thames and St. Paul's Cathedral. Russians have flocked to the English property and banking sectors as the economy crumbles back home.
Peter Macdiarmid / Getty Images
  • The view west from London's newest skyscraper looks over the River Thames and St. Paul's Cathedral. Russians have flocked to the English property and banking sectors as the economy crumbles back home.

    The view west from London's newest skyscraper looks over the River Thames and St. Paul's Cathedral. Russians have flocked to the English property and banking sectors as the economy crumbles back home.

    Peter Macdiarmid / Getty Images

  • Houses along Kensington Palace Gardens in London, which is known as one of Britain's most expensive streets.

    Houses along Kensington Palace Gardens in London, which is known as one of Britain's most expensive streets.

    Oli Scarff / Getty Images

One year ago, the U.S. and Europe started imposing sanctions against Russia to punish it for seizing part of Ukraine. At the time, many British analysts feared the sanctions would hurt London, because of England's close economic ties to Russia.

A year later, with Russia's economy in recession, London is thriving. And this may not be despite the crisis in Russia; London may be doing well partly because of Moscow's economic turmoil.

"There is a paradox, if you like, that the worse the ruble gets, the worse the Moscow market looks, the more attractive London appears," says Yolande Barnes, director of world research at Savills, a real estate company. "The attraction for Russians, therefore, is the underlying stability, transparency and ease of doing business" in the U.K.

But in March 2014, hand-wringing as the sanctions took effect was widespread.

"The true cost of sanctions, if Russia is hit hard, could hurt the U.K. much more than people think," said analyst Joshua Raymond on the British financial news website Cityindex.

"These sanctions are possible, but they're going to hurt us more than they hurt them," an analyst named Ruben Lee told the BBC's Today program.

Those assessments were pretty typical of the news coverage at the time.

A top national security adviser, Hugh Powell, was photographed walking into No. 10 Downing St. — the prime minister's residence — with a private briefing paper.

"U.K. should not support, for now, trade sanctions ... or close London's financial center to Russians," the document read.

Now, the ruble has lost about half its value from a year ago. And in London?

"The U.K. saw its fastest growth since the financial crisis last year, and we think that momentum is going to be more or less maintained in 2015," says economist Scott Corfe of the Centre for Economics and Business Research.

"Unemployment has been falling rapidly," Corfe says. "So I think overall it's a pretty positive picture for the U.K."

On a Monday morning in the fashionable Kensington neighborhood, construction trucks rumble outside a new luxury apartment complex scheduled to open in September. The building overlooks one of London's famous parks, a short walk from Kensington Palace.

Katya Zenkovich runs the Russian desk at a real estate company called Knight Frank. She describes this building as the height of luxury: "Fully serviced concierge, valet parking, gym, spa, and it's also been designed by one of the top British architects. So it ticks off a lot of boxes."

The cheapest units cost more than $3 million, and Zenkovich expects Russians to buy up more than 10 percent of the building.

"The uncertainty that is in Russia at the moment drives a lot of families to think about a residence outside of Russia," she says.

Houses along Kensington Palace Gardens in London, which is known as one of Britain's most expensive streets.

Houses along Kensington Palace Gardens in London, which is known as one of Britain's most expensive streets.

Oli Scarff/Getty Images

Most billionaires and oligarchs bought their London mansions years ago. Now, says Zenkovich, many millionaire 30- and 40-somethings are looking to bring their families over from Moscow.

"There is a substantial increase in the number of people who have bought, but the average sale price has decreased," she says.

A Russian fortune in rubles does not go nearly as far as it used to. But many wealthy Russians keep their money in other currencies, which points to one more way that London is benefiting from this crisis.

"An extremely important element of the whole story is the network of offshore financial centers that have grown out of, essentially, the former British Empire," says Anastasia Nesvetailova, an economist at London's City University.

Nesvetailova says British bankers provide professional services for tax shelters all over the world: the British Virgin Islands, the Isle of Man, Guernsey, Jersey and more.

"The U.K. is selling to Russia what the U.K. does best. That is, offshore financial havens and financial services," she says.

There are, of course, other reasons that London is booming while Russia slumps. Oil prices have remained low, which hurts exporters like Russia. The value of the euro is lower than it has been in years, while the pound is strong.

And, as analyst Yolande Barnes puts it, "London's economy is happily dependent on very many different and disparate factors."

In other words, the behavior of a few wealthy Russians would never have been more than a ripple in London's economy anyway.

Copyright 2015 NPR. To see more, visit http://www.npr.org/.

Transcript

DON GONYEA, HOST:

The U.S. and Europe began approving sanctions against Russia a year ago. At the time, many British analysts were afraid the sanctions would hurt London. Now the Russian ruble has lost about half its value. NPR's Ari Shapiro looks at whether the anxious predictions for London turned out to be accurate.

ARI SHAPIRO, BYLINE: This time last year, London's financial titans were wringing their hands over Russia. Analyst Ruben Lee offered the BBC this assessment, which was pretty typical of the news coverage at the time.

(SOUNDBITE OF BBC BROADCAST)

RUBEN LEE: All these sanctions are possible, but they're going to hurt us more than they hurt them.

SHAPIRO: A top British government official was photographed walking into the Prime Minister's residence with a secret briefing paper. It said, no support for trade sanctions and no closing London's financial sector to Russians. Fast forward a year, and Russia's economy is collapsing. So what's the impact on London? Scott Corfe is with a think tank called the Center for Economics and Business Research.

SCOTT CORFE: The U.K. saw its fastest growth since the financial crisis last year, and we think that momentum is going to be more or less maintained in 2015.

SHAPIRO: London is thriving. And this may not be despite the crisis in Russia. London might be doing so well partly because Moscow's economy is collapsing. Yolande Barnes is director of world research at the real estate company Savills.

YOLANDE BARNES: There is a paradox, if you like, that the worse the ruble gets, the worse the Moscow market looks, the more attractive London appears.

SHAPIRO: So it's a Monday morning in London. We're standing here in Kensington overlooking the gorgeous park. It's springtime. Introduce yourself.

KATYA ZENKOVICH: I'm Katya Zenkovich. I run the Russian desk at a real estate company called Knight Frank.

SHAPIRO: Zenkovich has been dealing with Russia's ultra-rich for about a decade, and she's brought us to a new luxury building under construction that'll be finished in the fall.

ZENKOVICH: This is fully-serviced, concierge, valet parking, gym, spa...

SHAPIRO: These apartments start above $3 million. She expects Russians to buy at least 10 percent of them.

ZENKOVICH: I think the uncertainty that is in Russia at the moment drives a lot of families to think about a residence outside of Russia.

SHAPIRO: She says the billionaires and oligarchs mostly bought their London mansions years ago. Now, a lot of millionaire 30 and 40-somethings are looking to bring their families over from Moscow.

ZENKOVICH: There is a substantial increase in the number of people who have bought, but the average sale price has decreased.

SHAPIRO: A Russian fortune in rubles does not go nearly as far as it used to. But many wealthy Russians keep their money in other currencies, which points to one more way that London is benefiting from this crisis.

ANASTASIA NESVETAILOVA: And this is an extremely important element of the whole story - is the network of offshore financial centers that have grown out of the - essentially, British Empire.

SHAPIRO: Anastasia Nesvetailova is an economist at City University in London. She says British bankers manage tax shelters all over the world - the British Virgin Islands, the Isle of Man, Guernsey Jersey.

NESVETAILOVA: U.K. is selling to Russia what U.K. does best. That is offshore financial havens and financial services.

SHAPIRO: There are other reasons London is booming while Russia slumps. Oil prices have not gone up, as many analysts expected. The euro is worth less than it's been in years while the pound is strong. Plus, as analyst Yolande Barnes puts it...

BARNES: ...London's economy is happily dependent on very many different and disparate factors.

SHAPIRO: So, she says, the behavior of a few wealthy Russians would never have been more than a ripple in London's economy anyway. Ari Shapiro, NPR News, London. Transcript provided by NPR, Copyright NPR.

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