Thursday, June 23, residents of the UK in the referendum will answer the question of whether to stay in the EU or not. The Bank of England believes that the outcome of the vote for Brexit — “the largest risk next time” not only for the British, but, perhaps, for the global financial markets. The result of the vote, which will be known on Friday morning, it is impossible to predict is that no camps of supporters of Brexit, nor the camp of opponents ahead of a referendum there is no obvious advantage. At 21:00 GMT on the consolidated data of opinion polls tracked by Bloomberg, for an exit from the EU was ready to vote 43% for the UK remaining in the EU — 41%, 16% undecided. According to bookmakers, Brexit remains an unlikely event according to the bookmaker quotes aggregator Oddschecker, the probability of such an outcome on Wednesday night was estimated at only 29%.
If the British still vote for leaving the EU, the volatility of the financial markets will soar, stocks and commodities can fall, warned governments, Central banks and investors around the world. In Russian business and the authorities also monitoring the vote for Brexit, fearing above all the short-term effects of volatile markets and declining asset prices. If the UK do leave the EU, it will undermine London’s status as a centre of financial and legal services and the city will become less attractive for Russian business people as the main or second residence,” said RBC expert of the British Institute Chatham House Philip Hanson. London has traditionally attracted Russian issuers as a platform for the placement of securities abroad, wealthy Russians buying property here. The UK is the 14th largest turnover and trading partner of Russia according to the Federal customs service, bilateral trade in 2015 reached $11.2 billion However, trade with Russia Brexit will be affected slightly, according to Hanson.
Banks reduce risks
Interviewed by RBC top managers of banks and investment companies in Brexit don’t believe, but still calculate the consequences of its occurrence. “In recent weeks we have reduced the exposure [the potential risk] for the risky assets, primarily stocks American and European companies,” — said the Deputy Chairman of the Board of FG “BKS” retail business Stanislav Novikov. “We hold the minimum number of open positions”, — confirms a top-the Manager of another Russian investment company. The company wants to minimize the risks during the referendum and after it, the main one is the change in the value of assets which “may be unpredictable”.
Brexit will not necessarily lead to the “imminent correction, but the depth of the possible fall of the markets is considerably greater than the growth potential [if the UK will vote to remain part of the EU] on the horizon in one to two months”, says Novikov. If the correction really happens, the BCS will use it to open new positions, he said. “Additional opportunities and additional profit” in the case of voting for Brexit and the subsequent high volatility sees and head of capital markets at investment Bank “Opening the Capital” Igor Burlakov in his words, the business model of “Open Capital” is built in such a way that it earns in the financial markets in conditions of both low and high volatility.
Most of the major Russian investment banks, for example, Sberbank CIB, has offices in London. A source close to Sberbank CIB, told RBC that the Central office and the London office of appointed managers responsible for monitoring the situation with the referendum. “Individual plan for a long period no, but the company has outlined some steps — for example, changes calendar of events — the part is scheduled for later this week was moved to next week, or July,” — he explained.
“We are closely monitoring the situation, keep her under control,” — said the head of global markets, Vice-President of Sberbank CIB Andrey Shemetov. In his opinion, before the announcement of the referendum results, possible volatility in the market, but it is unlikely to be large. Transactions are on normal mode, but with the policy of risk management, as well as done by our analysts assessments of the possible impact of the outcome of the referendum,” said Shemetov.
Earlier, the head of Sberbank German Gref in an interview with Bloomberg said that a British exit from the EU could hit Russian stock market and ruble. “It will be a panic,” he said. Gref is concerned that Brexit may lead to reduction of Russia’s GDP by 1%, shares of Russian companies may fall in price by 5-10%. Disagreed with him, the head of VTB Andrey Kostin in an interview with Bloomberg he said that the direct impact on Russia of the decision of the citizens of the UK will not have. The effect will be only indirect: Brexit would have a negative impact on the European markets and this will affect the value of Russian assets, said the head of VTB. Kostin added that he believes Brexit, but “would buy GBP, sell on Monday” (at a higher rate).
In addition to short-term risk of excessive volatility, which are trying to protect themselves investment companies and banks, there are long — term possible regulatory changes in the industry and the inability to free the “certification” of its activities within the borders of the EU in the event of a Brexit, said boatmen. “In addition, we expect that in the event of a referendum on leaving the EU the actions of the UK in the regulatory framework and changes at the macro level the economies of Britain and the EU will occur no sooner than two years. This provides a significant time buffer to adjust the strategy,” adds boatmen.
Forecast from Credit Suisse
In the event of Brexit implications for the British economy may be more significant than after the “black Wednesday” in 1992, when the decision of the Bank of England to raise interest rates triggered the collapse of the national currency, consider in Credit Suisse. This is because compared to the early 1990-ies, the British pound became the international currency, the economy has become more dependent on portfolio inflows from abroad, and the value of assets since then have grown significantly.
As suggested by the chief investment officer, Credit Suisse Michael O’sullivan, in the event of Brexit the pound may be among the most affected currencies and the rate may drop to $1.2 (now $1,47–1,48). In addition, a number of European markets, especially in the periphery, may fall more than the British stock index FTSE 100. “Protective currency in this case may be the Swiss franc and yen exchange rate which may rise, and the market of instruments with fixed income bonds in Germany and Switzerland, U.S. Treasuries,” he writes in his review.
According to a leading strategist at the investment company “Aton” Alexey Kaminsky, under the main blow will be the markets of Spain, Italy, Portugal.
Chief Executive officer of BCS Global Markets (the investment arm of the BCS) novel Suckers also believes that in the event of Brexit the UK would be a few years to adapt legislation. A source in the London office of investorstate one of the Russian banks says that testing on the Brexit scenario showed that a strong influence on the business he will have. “From the point of view of market regulation, we do not expect significant changes,” he added.
The privatization in question
For the second half of this year the Russian government planned large-scale privatisation of state assets, which is planned to cover holes in the budget. High volatility in the markets can be a barrier to this. Brexit can affect the state plans to privatize Sovcomflot, told Bloomberg the head of “Sovcomflot” Sergey Frank: the possible exit of Britain from the European Union, he called one of the excessive factors of uncertainty in the stock market before the sale of shares of “Sovcomflot”. For shipping companies it is important that London continued to operate as an international Maritime hub, not introduce new barriers for shipping companies,” added Frank. The state-owned Sovcomflot cannot sell for several years.
ALROSA (the government can privatize 10.9 per cent of its shares this summer, said economy Minister Alexei Ulyukayev) closely monitors all events that may affect the company’s activities and the situation on the market, said RBC representative of the company, but details were not specified.
Press Secretary of “Rosneft” Mikhail Leontiev (the government plans to sell 19.5% stake in the company, Rosneft is traded on the London stock exchange) told RBC that “there is no reason to believe that the exit of Britain from the EU would entail any economic risks. A source at another large company whose securities are traded in London, RBC has admitted that the likelihood of a British exit from the EU is so small that they don’t even calculate the risk.
Representatives of “Gazprom”, “Bashneft” (being prepared for privatization this year) and NOVATEK (its receipts are also traded in London declined to comment. LUKOIL has requested from consultants information about the possible risks Brexit, but they are no risks not have seen, said RBC senior Vice-President for Finance of LUKOIL Alexander Matytsyn.
However, the oil companies could suffer if the vote on a Brexit would lead, analysts warn, the decline in world oil prices. “Given that commodity markets are still licking their wounds from the deep selloff of the last two years, heightened concern regarding the growth of demand for raw materials could undermine the recent recovery in prices,” wrote June 21, analysts at Citi Research. Brexit would cause the demand for gold as a defensive asset, but will put pressure on the metals, including copper and oil, according to Societe Generale. August futures for Brent crude on Wednesday at 20:00 MSK traded in the red by 1.4% compared to the previous day, at $49,9 per barrel.
For some Russian companies Brexit can even significantly extend the potential, says partner Paragon Advice Group Alexander Zakharov: in the case of the EU the UK will regain the powers which, in 1972, she lost to the EU, including in competition policy. For Gazprom, for example, this would mean that the European Commission, which leads to his relationship with 2012 antitrust investigation, will not be able to continue it in the UK, says Zakharov. However, everything will depend on the timing of the transition, he said.
Based on the S&P Global analysis, the impact of Brexit on Russia will be less significant than in most EU countries, told RBC Director of corporate ratings for S&P Alexander Gryaznov. At risk, according to rating agencies, first of all, there are countries such as Ireland, Malta, Luxembourg and Cyprus. As for Russia, there is only a small risk of a British exit from the EU, with a possible impact on the exchange rate and capital flows, simply because of the uncertainty in the financial markets. However, even these variations will be of short duration. “We believe that even in the case of the EU, London will remain the financial center of Europe and for Russian companies that are traded on the London stock exchange, nothing will change”, — concluded Gryaznov.
The power of calm
At the level of Prime Minister Dmitry Medvedev Brexit question was not discussed, told RBC press Secretary, Natalya Timakova. The Ministry of Finance waits for no serious risks. “In sovereign wealth funds 5% of reserves in pounds sterling [£6.4 billion in the Reserve Fund and national welfare Fund, according to the Finance Ministry]. It’s a little — told RBC Deputy Finance Minister Sergei Storchak. — Why do labor in vain? There is a daily fluctuation of exchange rates that now every day to revalue the dollar or the ruble equivalent of the NWF or the Reserve Fund?” The volatility in the market will be, but short-term, said Storchak. According to him, to react to current market conditions it is impossible “either physically or technically, and required no such”. Finance Minister Anton Siluanov last week said that a possible Brexit is unlikely to affect the Russian financial market and the ruble.
The Ministry of economic development and the Bank of Russia are more cautious. A possible British exit from the EU was already influencing the Russian economy, the budget increases the volatility of oil and other assets, said earlier the Minister of economy Alexei Ulyukayev. However, the possibility of Brexit is already taken into account by the markets, although the consequences of this event is difficult to predict, according to the Minister, nothing dramatic should not happen, reminded RBC representative of the Ministry of economic development. Central Bank also monitors the referendum in the UK. “We do not see the direct impact of this factor on the Russian economy, but some indirect impact is possible”, — have informed RBC in the press service of the regulator. First of all Brexit risks for the EU economy, which is one of the largest trade partners of Russia that ultimately could affect Russian exports, said the Central Bank. Not excluded the volatility in world markets, which may also have consequences for the Russian economy. But “the necessary set of tools for working in the conditions of unstable external markets we have,” assured the Central Bank.
A source close to the Central Bank, said that in the event of a Brexit and volatility in world markets may fall the price of oil: in this case, can be realized in a stress scenario the Bank of Russia, which assumes that oil prices will drop to $25 a barrel and remain close to this level until the end of 2018. According to risk scenario, Russia’s GDP will shrink by 0.9–1.2% in the period of 2016-2017 years, and volatility will lead to a sharp deterioration of the exchange rate and inflation expectations.
With the participation of Milyukovo Yana, Polina Nikolskaya, Lyudmila Podobedova and George Makarenko