Londongrad Calling

The United Kingdom’s Dangerous Dependence on Russian Money

A banker in the City of London, June 19, 2013. (Luke MacGregor / Courtesy Reuters)

In March, a tongue-in-cheek online referendum in the eastern Ukrainian city of Donetsk proposed to resolve the standoff between Kiev and Moscow by joining the United Kingdom, given the Welsh roots of the city’s nineteenth-century founder, the industrialist John Hughes. The referendum, which took the name of the British national anthem, “God Save the Queen,” received a few thousand votes, as well as a good deal of exposure in the foreign media. A rather more plausible scenario, of course, is that this Russian-speaking city will drift into Moscow’s sphere of influence.

Although the Union Jack is unlikely to fly over Donetsk anytime soon, some observers worry about a Russian flag flying over London, at least metaphorically. Wealthy Russian expats seem to wield substantial political influence over the British government, particularly in its approach to the Ukraine crisis. The evidence: on March 3, a government briefing paper, which a foreign policy adviser carelessly brandished to a phalanx of photographers outside No. 10 Downing Street on his way to a meeting, revealed that Prime Minister David Cameron’s government would oppose any sanctions that closed off London’s financial center to Russian money. Russian billionaires currently own two of Britain’s leading newspapers, a couple of its top football clubs, and a large slice of prime London real estate.

In fact, the Ukraine crisis has crystallized a broader trend in British politics: the increasingly subordinate attitude of the government toward the capital’s super-rich, many of whom are not even British citizens. The City of London has long wielded disproportionate influence over Britain’s elected leaders, stemming from the capital’s historic status as the hub of the world’s financial and trading system. Even at the height of social democratic politics in the United Kingdom in the 1960s and 1970s, when the prime minister received trade unionists at No. 10 and the government owned major industries, the City retained decisive influence over British politics. The financial community was able to win favors from even Labour governments, such as the opening up of the Eurodollar markets in the 1960s, or the desperate attempts to shore up the status of the pound in world markets, which wrecked Labour’s reputation for economic competence in the 1970s. Since the 1980s, the City has only grown in importance and changed fundamentally, in a way that has significantly impacted British politics.


Having sold London as a place where oligarchs can invest and spend their money without too many questions being asked, the British government is now too afraid to challenge these privileges for fear of any reversal of the flow of capital.

The Big Bang of 1986, in which Prime Minister Margaret Thatcher’s government liberalized the London exchanges and removed barriers to entry for foreign financial institutions, cemented the financial sector as the main driver of the British economy and established London as the place to be for footloose international capital. Major international financial institutions flooded into the British market, wiping out many of the United Kingdom’s established merchant banks. The City, which had long enjoyed its own separate administrative status — its governing body, the Corporation of London, sits apart from the rest of London’s boroughs, with financial companies, rather than residents, constituting its electorate — only drifted further from the rest of the United Kingdom. Its internationalization, dominated by American, Japanese, and German banks, isolated it from the political drama — and humors — of British society.

As London became a magnet for international capital, it also became home to international capitalists and their families. Visa rules that facilitated entry for the super-wealthy, a light tax regime for non-domiciled residents (who claim a residency or income from abroad), low property taxes, prestigious schools, and proximity to the institutions investing their money have made London an attractive haven for billionaires. Several come from Russia, although the high profile of some Soviet-origin billionaires overstates the true Russian presence: the 2011 census recorded just 26,603 Russian speakers in London, compared with 70,602 Arabic speakers. But Russian capital is more significant. One estimate put Russian purchases of high-end real estate in London (properties worth more than a million pounds) at seven percent of the total, a sizeable amount that appears likely to grow, thanks to the instability in Ukraine. Many of these purchases are investments unconnected to residency, so scores of homes in London’s most exclusive neighborhoods sit emptybut for patrolling security guards.

The reason British policymakers have been so relaxed about London’s status as a kind of offshore financial center is, in part, cyclical. The Conservative-Liberal Democrat coalition elected in 2010 reversed the stimulus measures that Gordon Brown’s Labour government had adopted after the credit crunch. They hoped to eliminate the United Kingdom’s budget deficit by the end of the legislature, in 2015. But amid a global recession and attempts to deleverage the domestic household sector, these policies predictably stopped recovery in its tracks, leading to three years of stagnation. So the Cameron government relaxed fiscal adjustment a littleand encouraged growth in real estate prices by underwriting bank lending to highly leveraged buyers. This backdoor stimulus brought a wave of capital from international investors seeking a safe haven for their assets and helped improve the outlook for a government that had been trailing in the polls for the past three years.


But the money washing around London’s property hotspots is much more than a cyclical blip. In fact, it reveals deep structural trends with disturbing implications for the British economy and, in particular, British households. The credit crunch came at a time when debt levels in the United Kingdom were at historic highs. Although the government had a relatively low stock of debt, households and, especially, financial institutions were leveraged to the hilt. The impact of a collapsing banking system had a catastrophic effect on consumer confidence and, as a result, the economycontracted by 6.4 percent from mid-2008 to late 2009. But unlike neighboring Ireland, which was constrained by a conservative central bank and a common currency shared with hawkish Germany, the United Kingdom enjoyed a floating currency, which quickly devalued by more than 20 percent, and a Bank of England willing to print money to bail out the banking system. The government then ramped up this policy through quantitative easing to the tune of almost $630 billion, which has allowed the government to swap its debt for cash such that the overall level of debt remains much lower than that experienced by the UK’s austerity-charged European neighbors. Much more than austerity, these measures have allowed the British government to restrain the growth of debt to GDP since 2010.

They have also helped the government weather the crisis by allowing wages to quickly regain their competitiveness in international markets while easing the impact of falling household spending power. But as other debtor nations, such as Ireland, Greece, and Italy, have begun to recover thanks to increased exports, British exports have continued to decline. Indeed, although the British economy started growing again in 2013, the growth was accompanied by an immediate increase of the already chronic current account deficit, which averaged 5.5 percent in the second half of last year, the highest on record. In other words, after a brief period of deleveraging, the United Kingdom is once again relying on foreign lending to expand its economy. Someone, after all, is funding that trade imbalance.

Far from rebalancing the British economy, as it had promised to do, the government has effectively rebuilt the pre-crash growth model with more borrowed money. Just like his predecessors, the current Chancellor of the Exchequer, George Osborne, has ended up presiding over growth driven by increased borrowing (a large chunk of which comes from Russia), a new foreign financed housing bubble, stagnant investment, and declining exports. There is no reason to suppose that the outcome will be different than it has been in the past: when the capital inflows stop, so does the British economy.


Successive attempts to escape this cycle of boom and bust, from Thatcher’s policy of controlling the money supply to tackle inflation to Brown and Blair’s monetary and fiscal rules, have all failed. Under all three, debt-fueled consumer spending and a government-subsidized real estate boom drove the economy forward. The foreign capital on which this this model relies has been attracted in part through institutional arbitrage: light regulation of financial products in the City, tax breaks for wealthy foreign residents, a legal system attractive to the asset-rich, and very low property taxes. Having sold London as a place where oligarchs can invest and spend their money without too many questions being asked, the British government is now too afraid to challenge these privileges for fear of any reversal of the flow of capital.

This highly unequal growth model, in which the share of the economy taken by the top one-hundredth of earners is second only to the United States, has serious political implications. In both domestic and foreign policy, the wealthy hold disproportionate sway, as government caution over financial sanctions on Russia demonstrates. And the government can’t sell this imbalance to voters forever, who are showing signs of having had enough of existing politicians and policies: electoral turnout has fallen by almost 20 percent since the 1980s, and more voters are turning toward populist parties, most notably the UK Independence Party, which has a strong chance of being the largest party in the forthcoming European Parliament elections. UKIP’s focus on immigration and the allegedly overbearing powers of the European Commission are a direct challenge to the policy of openness that has allowed the City of London to prosper and London to become a major world metropolis, although even UKIP leader Nigel Farage, a former banker, is wary of criticizing the City or challenging the fiscal privileges of the international wealthy.

UKIP’s support is strongest in rural and small towns, and growing in the post-industrial north. It has little appeal in the capital itself, but London and the surrounding region — the economic powerhouse of the United Kingdom — account for only around a fifth of the country’s population and even less of its parliamentary seats. For the majority of Britons, a recovery driven by real estate in the center of London is of little help. Worse, the reaction that this boom may provoke could kill any recovery in the rest of the country before it begins. Scotland is voting on the prospect of becoming an independent state in September, and the success of the Scottish National Party feeds on the British government’s lack of concern for life outside London. British political elites’ continued deference to the international super-rich, Russians included, could lead to more nationalist and populist backlashes. The British economic model is fragile, but so is the nation itself.


Want To Become A Billionaire? Just Solve One Of These 10 Problems



We recently gave you a list of 25 trends that would be making people billions. Most of the phenomena will end up benefiting everyone.

But if you fancied yourself as someone who could be turned into a billionaire, you were arguably cheating — these were things everyone has already figured out.

The real challenge, and the greater value and more lucrative pursuit, would be to come up with the solutions to problems that have befuddled engineers for decades or more.

We thought of 10 of them:

1. Wireless Power

Digital devices have become so small that it can be cumbersome to plug them into a power source. Longer-lasting batteries? Nope — Apple iPod God Tony Fadell says pursuing greater efficiency in batteries is a trap. The key is to find ways of squeezing more efficiency out of the devices’ other parts — and stealing power from what’s around you. University of Washington engineers, among others, are at work on harvesting existing TV and cellular transmissions and turning them into a power source. “This novel technique enables ubiquitous communication where devices can communicate among themselves at unprecedented scales and in locations that were previously inaccessible,” they say.

2. Rural, Remote Internet

Everyone agrees this is a priority. But there appear to be a hard way and an easier way to achieve it. The former involves lots of expensive regulatory clearance and installations. The latter, currently spearheaded by Google, is called Project Loon. The company plans to send renewables-powered balloons to the edge of space to create an Internet network in remote parts of the world. “We believe it’s possible to create a ring of balloons that fly around the globe on the stratospheric winds and provide Internet access to the earth below,” they say. Whoa.



3. Cheap, Scalable Solar

There are two ways to reduce the cost of raw solar power. One is to have a super-cheap photovoltaic cell, with the tradeoff off that it’s inefficient. Of course, more efficient cells cost more to make. So everyone is racing to find a material or process that eliminates the tradeoffs. We may be close: Australian researchers say they’ve achieved commercial-scale efficiency with a set of dirt-cheap materials first experimented with a century ago but never considered for this use: perovskites. The scientists say they could help cut solar costs by 75% to as low as 10 cents a watt.

4. Clean Coal

The technology was recently the subject of a cover story in Wired, which said carbon capture and storage “may be more important — though much less publicized — than any renewable-energy technology for decades to come,” since it would allow the world to keep burning its most abundant fuel source. But it goes on to note that “developing reliable, large-scale CCS facilities will be time-consuming, unglamorous, and breathtakingly costly.”

5. Super-Low-Cost International Payments

While this isn’t a problem that touches the average consumer directly, the fees paid by financial institutions to wire funds overseas can eventually filter down. Remittances, too, while not over burdensome, would be much cheaper if they were sent over a decentralized or distributed network free from network, acquiring or interchange fees (see the chart below). This, of course, is the problem Bitcoin and Bitcoin-like technologies, like Ripple, are looking to address.

goldman bitcoin

Goldman Sachs


6. A Pill That Really Makes You Lose Weight

The holy grail of modern society, and another that may prove impossible. But there may yet be a way: In 2012, scientists at UCLA say they’d genetically engineered mice brains to a key compound that craves fats. The results, according to The Week, “These mice lived in a ‘hypermetabolic state,’ burning fat calories far more efficiently than normal mice, study researcher Daniele Piomelli said in a statement. They were ‘resistant to obesity,’ staying thin despite a high-fat diet without exercise. They even had normal blood pressure, and showed no increased risk of heart disease or diabetes.”

7. Cheap Desalination

Water shortages continue to make the list of the world’s most pressing issues. This year’s crippling drought in California further drove the point home. But desalination plants have proved way too expensive and inefficient to build. But earlier this year, Business Insider’s Dina Spector profiled the company behind a kind of solar-powered desalination process that uses one-fifth the electricity of methods that use fossil fuels. If something like this doesn’t pan out, we’ll have to keep relying on massive conservation efforts — which basically means we’ve already lost.




A parabolic trough collects energy from the sun. The heat is used to evaporate clean water from the salty agricultural drainage water of irrigated crops.



8. Detecting Or Predicting Major Weather Or Natural Events

A new book about the San Andreas Fault frames the issue like this: “the world community of seismologists remains divided — at times, vehemently — over the issue of whether it will ever be possible to predict earthquakes. It’s a question that’s been raised again as the network of faults in Southern California has awakened with seismic activity in recent months. It is a complex problem. And, to date, no one has yet predicted an earthquake.” Meanwhile the number of billion-dollar meteorological events climbs inexorably higher.



9. Unhackable Passwords

Wired has said 2012 was the year passwords broke. Hackers have, through brute force, so far been able to break through practically every firewall ever invented. There must be a better way. And engineers are working on them. Google, for instance, continues to search for ways to turn your smartphone or some other device into a computer “car key,” Another involves what was once thought the holy grail of cryptography, called obfuscation, which masks the inner workings of a computer program.

10. Death

It’s happening. Google — yes, it has appeared several times on this list, but that’s because it’s interested, and it can — just hired biophysicist Cynthia Kenyon from UCSF to join its Project Calico antiaging team. Her experiments have produced roundworm as old as the equivalent of 80 human years but looks and acts the equivalent of 40. Google admits it’s a moonshot, but it’s proved pretty decent at those.

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