Business chilled, not frozen in spy row

By Alexander Koliandre
BBC Russian Service

A British engineer in a remote Siberian oil field, or his countryman banker in a sleek Moscow office, might be forgiven for being a bit nervous at the news of the growing diplomatic row between Russia and the UK.

Many Russians covet expensive houses in London

The main fear of both Russian and British businessmen and investors is that economic relations between the two countries might deteriorate.

There is much at stake. With Russia's economy booming, trade between the two countries almost quadrupled in the past six years, growing at 20% annually.

UK companies are trying not to miss the consumer spending frenzy in Russia and to match the growing demand for equipment and services.

UK industry giants such as BP, Shell, HSBC, KPMG, JCB, Rolls Royce, Rio Tinto and Unilever see Russia as an important part of their growth strategy.

With more than $7bn in 2006, Britain is the number one investor in Russia.

Russia's officials were quick to point out that it was business as usual, despite the diplomatic row. Moscow appeared to strike a relatively calm note, suggesting its reaction would be confined to the level of diplomacy.

Anglophiles

One possible reason for this limited reaction might be that despite all the UK interest in Russia, the latter needs the former even more.

In the past several years, London became the financial centre of choice for Russian business.

Russia's companies need access to international capital. As New York tightened listing rules, the Russians flocked to the London Stock Exchange.

The Kremlin wants to exert control over key Russian assets

Russian IPOs reached $4bn in 2005, rose to $15bn the following year, and with a further 30 or so in 2007, might climb even further.

Russian business projects in Britain range from the ill-fated acquisition of the TVR carmaker to state energy behemoth Gazprom's attempts to enter the UK market.

But it's not only business. For today's Russian elite, London is what Paris was for the Russian aristocrats a century ago - a consumer and cultural Mecca.

Everything British is in demand among the Russians who can afford it. They love to wear Burberry trenchcoats, drive Bentleys, drink single malt whisky, acquire MBA diplomas from British universities, shop for London houses and even buy football clubs.

Moscow has more direct flights to London than to any other capital.

To have an office in London is a hallmark of success for a Russian businessman. For his wife, a deep and personal knowledge of London's boutiques is the equivalent.

They don't want to lose all that because of a poisoned spy and a handful of expelled diplomats.

Hand of the Kremlin

Earlier this year, Russia's officials and high-flying businessmen received an unofficial but strong recommendation from the very top to skip the ever-popular investment forum in London.

Few decided to ignore the advice. In today's Russia, a good understanding with those in power is a major business asset.

It is possible in theory that the companies would be advised to avoid the City and the London Stock Exchange. But with alternatives scarce and the need for capital high, it looks highly improbable.

Russia's politicians-cum-businessmen surely remember Comrade Lenin's words that nothing will stop a capitalist when he sees a profit.

Even in much more severe diplomatic quarrels with its former Soviet neighbours, Russia refrained from full-fledged trade wars.

Britain's energy and mining companies might tend to blame the political stand-off for the loss of their lucrative contracts in Russia.

But it is more likely that they have fallen prey to the Kremlin¿s desire to control the commanding heights of the national economy.

The diplomatic chill will strengthen the protectionists on both sides and provide an excuse for those who fail in their expansion overseas.

It may also raise investors' assumption of risks, which would result in slightly lower share prices and marginally higher costs of loans.

But the real test of whether it harms business would be the pace of co-operation between Russia's state-controlled energy giants and British oil and gas companies, as well as the smoothness of future Russian IPOs in London.

Until then, the spy scandal leaves the Russo-British business cocktail slightly shaken, but definitely not stirred.