The diplomatic and military consequences of recent events in Salisbury could be truly dramatic. Besides these, economic questions pale into insignificance. Nevertheless, it is clear that economic considerations do play a part. In particular, it has been alleged that the UK cannot make a robust response to Russia because it is dependent upon Russian money. This is completely false.
It is easy to confuse income, wealth and money. Just because large amounts of Russian money enters the United Kingdom, this does not mean that our income, and hence standard of living, is substantially dependent upon these flows continuing.
Many commentators suggest that foreign investment is vital to a country’s prospects. It isn’t. Admittedly, sometimes it can make a large contribution, but the devil is in the detail.
There have been huge amounts of Japanese investment into the UK, particularly in the car industry and other manufacturing, generally involving the construction of new plants, thereby increasing real investment.
Moreover, Japanese investors have brought management expertise and have both sustained and developed the skills of British workers. This has been a boon.
By contrast, I cannot think of a single Russian investment in the UK that falls into this category. Russian financial flows into the UK are precisely and only that – financial.
So the question is: do we need this finance, even though it brings no benefits in regard to skills or real investment? At a superficial level, the answer is yes. After all, the UK runs a huge current account deficit. During the past year, this gap amounted to more than 3pc of GDP. It needs to be financed either by borrowing or by selling assets. Russian inflows into this country are one of the ways of financing the gap.
At one point, Mark Carney, the Governor of the Bank of England, said our deficit made us reliant on “the kindness of strangers”.
This would be an unfortunate position to be in, especially if the strangers were Russian. In fact, though, this pithy phrase misconstrues the issue.
International investors don’t do kindness. We are instead dependent upon their perceived self-interest.
That still makes us potentially vulnerable, but in a different way. Sometimes countries are so fragile that they can hardly get any foreign money on any terms. In those conditions, if a particularly large provider decides to pull the plug then they are practically helpless. Spending can no longer be financed and there could be an economic collapse.
But the UK is nowhere near this position. On the contrary, investors all around the world continue to find the UK an attractive place to put their money.
If Russian investors decided not to invest in the UK, or were prevented from doing so, the pound would tend to be lower than it would otherwise have been in order to induce other investors to provide the money. And someone else would readily do this, so the consequent drop in the pound would probably be minor.
Again, for some countries, and even for the UK in some circumstances, any drop in the currency could be unwelcome.
But this is not the case for us today. Strikingly, for a considerable period it has been a burden for our economy that international investors have found our assets attractive. That has caused our exchange rate to tend to be too high, with the result that our exporters have lost competitiveness. Hence the current account deficit.
Accordingly, it is utterly bizarre for us to worry about some of this international appetite for UK assets being diminished. Far from suffering from this, we are likely to gain.
To read Roger Bootle’s piece for the Daily Telegraph in full, click here.