How Levelling Up, Brexit and the Ukraine War are Intertwined

How Levelling UpBrexit & the Ukraine WarAre Intertwined

Sam Bright explores how Brexit has exposed Britain to the reverberations of the war in Ukraine

The latest sanction to hit Russia has been heralded as the most significant yet. As Vladimir Putin’s forces continue their bombardment of Ukraine, the UK has announced that it will wean itself off Russian oil imports by the end of this year, joined by the US – which is banning Russian oil, gas and energy. The EU intends to stop its consumption of Russian fossil fuels by the end of the decade.

Energy was seen as one of the final frontiers in the economic counter-surge against Russia. The West leans on Russian gas and oil imports – signifying more than 40% of the UK’s imports from Russia – and it was feared that this energy reliance would continue to pay for Putin’s war machine.

The West has effectively cancelled this credit line – compounding a raft of sanctions that have blacklisted Russian oligarchs, including Putin’s inner sanctum, and mark a new economic Cold War between Russia and the West.

Russia’s commercial clout – though often overstated – is still significant, and these sanctions will be felt at home. Leaders across the Western world have cautioned that energy prices will rise further as we transition away from Russia. The Resolution Foundation has forecast that the typical UK household income will fall by £1,000 this year once the effect of inflation is accounted for – the biggest real-term fall in incomes in 50 years.

The immediate prospects of the domestic economy, therefore, seem to markedly diverge from Boris Johnson’s grand promise during his 2021 Conservative Party Conference speech, during which he foresaw the return of a “high-wage, high-skill, high-productivity economy”.

This promise will seem particularly distant for those who will be hit the hardest, notably in the neglected areas of the country that the Conservatives managed to claim during the 2019 General Election – the very places that Johnson has promised to ‘level up’. It’s expected that more than 2.2 million households with children will struggle to pay their electricity and gas bills when the energy price cap rises in April, according to the Fuel Poverty Coalition – a rise of 74% from 2019 when around 1.2 million children were living in fuel poverty.

Indeed, an economic freeze with Russia will hit the UK’s remaining manufacturing heartlands. The region that exported the most goods to Russia in 2020 was the west midlands, its exports worth £441 million, 20.6% of total UK goods exports to Russia. The west midlands was followed by the south-east (excluding London), which exported goods worth £332 million, and the north-west at £226 million.

Goods exports (£2.6 billion) outweighed service exports (£1.7 billion) to Russia in the year ending September 2021 by 61.6% to 38.4% – led by the export of cars, which represented 14.6% of all goods exports. During this period, goods exports to Russia increased by 10.0% or £240 million compared to the previous year, while service exports fell by 11.6%.

In fact, while the economic relationship between Britain and Russia conjures up images of luxury property deals and high-end legal services, our mutual trade in goods is more intertwined than is commonly imagined.

In the year ending September 2021, total UK imports from Russia were £11.6 billion – an increase of 43.6% or £3.5 billion compared to the previous 12 months – constituting £10.8 billion in goods and just £793 million in services.

The UK manufacturing sector, and the automotive industry in particular, therefore faces a moment of jeopardy as we divest from Russia. In 2016, the automotive sector directly employed 159,000 people in the UK, with a further 238,000 in the wider supply chain. Before Brexit, its productivity was 40% higher than other manufacturing sectors and 80% higher than the economy as a whole – generating £40.1 billion in exports, £18.3 billion to the EU.

An estimated 34% of automotive employment is based in the west midlands – by far the highest concentration in the UK – a region that contains eight ‘Red Wall’ seats that flipped from Labour to the Conservatives at the last general election.

The west midlands is the engine of British manufacturing. But, thanks to Brexit and now the Ukrainian war, the region’s economic future seems uncertain.

The UK’s departure from the EU involved navigating the tension between immigration and trade. As per the rules of the EU Single Market, if we sought to end free movement, trade would become more difficult. This isolationist worldview won the protracted debate from 2016 to 2019, sacrificing free trade in exchange for greater control over immigration.

As a result, manufacturing firms have been forced to adjust to these new terms of trade – that have been suffered disproportionately by those in the automotive sector. Indeed, vehicle makers traditionally operate on a ‘just in time’ basis – importing components from across the globe soon before they are required. The trade barriers imposed by Brexit threaten this system – nine in 10 firms in the car industry told the Society of Motor Manufacturers and Traders (SMMT) that costs, measured in time and resources, had increased as a result of leaving the EU.

“Undoubtedly the industry is facing additional cost and complexity; costs which generally have to be absorbed, to maintain competitiveness,” SMMT chief executive Mike Hawes has said.

Prior to Brexit, the EU had accounted for 56% of the UK’s car exports, in terms of volume. The great promise of Brexit was that our departure would open up new, emerging markets for trade. By their very nature, these markets are not liberal democracies.

It seems as though Brexit has coincided with a moment in history when our economic and political alliances with European countries are more important than ever. Foreign Secretary Liz Truss is currently in the United States, arguing that the UK and the Western world must reduce its “strategic economic reliance on authoritarian regimes”.

Stranded outside the Single Market, with non-European trade looking increasingly precarious, Brexit seems to have left domestic firms with noticeably limited horizons. As the rouble continues to crash, restricting the international spending power of Russian firms, this potentially leaves UK exporters with a multi-billion-pound black hole, blown out of the side of the economy by the Ukraine war – while our trade with Europe continues to falter.

£515 Million-a-Week Hitin UK Exportsto Top European Partners

Sam Bright

Seasonal Shortages

However, the economic impact of the war in Ukraine is not contained to the manufacturing sector.

Due to Brexit, the UK introduced a new scheme that has allowed employers to sponsor seasonal workers to work mainly in the agricultural sector for a limited period. The scheme has a visa cap of 30,000, with an extra 10,000 visas available if needed.

A ‘pick for Britain’ scheme was initially launched in an attempt to incentivise young British people to fill seasonal labour shortages on farms, but of the 88 people who registered for work in 2020, only two stayed for the entire season. The majority left after their first day.

This is where Brexit and the Ukraine crisis closely intertwine. Due to the end of free movement between the UK and the rest of Europe, workers based in the EU now find it comparably easier to find jobs closer to home. With high demand for seasonal workers seen across Europe – with Germany a favoured destination – EU workers have therefore decided against making the trip across the Channel.

Hence, non-EU workers now form the majority of seasonal workers in the UK – with two-thirds (some 20,000) of seasonal workers coming from Ukraine in 2021, and 8% (2,200) from Russia.

It’s unclear how the war will change this balance of seasonal staff. Those fleeing Ukraine may elect to apply for the scheme out of sheer desperation – as has been encouraged by the Home Office. However, while other visa routes are ostensibly free, it still costs £244 to apply for the seasonal worker scheme, while the visa holder must travel alone – without family members.

In the grand scheme of European history, the health of the UK’s seasonal worker scheme is not of acute importance. However, if the number of incoming workers from Ukraine dwindles, this will inevitably impact British farms, that are already suffering from the trade friction and the worker shortages created by Brexit. It’s thought that the majority of farmers voted to leave the EU.

Ironically, Brexit is also being blamed in some quarters for the UK’s slow response in sanctioning Russian oligarchs.

Sources have told Politico that Theresa May’s Government accepted amendments in the House of Lords tabled by senior lawyer David Pannick that – as Pannick put it at the time – beefed up UK laws to ensure they “provided for procedural fairness” for those being sanctioned, strengthened the remedial measures that those sanctioned could take, ensured that sanctions imposed on individuals were done so in a “proportionate manner”, and made sure they accorded with “human rights principles”.

Overall, though Brexit promised to slash government bureaucracy, the EU has acted far more swiftly than the UK during the Ukraine crisis – sanctioning more Russian oligarchs and offering exponentially more support to asylum seekers. While more than 2 million people have now fled Ukraine, the UK has granted fewer than 800 visas to those in need – with most of the burden carried by neighbouring states such as Poland.

Sowing Division

As Peter Jukes has documented in these pages, fomenting Euroscepticism – hoping to destabilise and incapacitate the Western alliance – has been a long-standing ambition of Vladimir Putin. The war in Ukraine – the realisation of Putin’s geopolitical ambitions – therefore cannot be separated from Brexit.

This has been seen on domestic soil – with Kremlin insiders sent to sweet-talk, and potentially compromise, members of the Brexit establishment – alongside efforts abroad.

In France during the mid-2010s, Marine Le Pen’s National Front required funds for its political campaigns. It found its treasure chest in the form of a £9.4 million loan from a bank called First Czech, which was under the personal ownership of a Russian financier. After receiving this financial backing, Le Pen has been broadly supportive of the foreign policy positions taken by Moscow – describing the rigged referendum in 2014, formalising Russia’s annexation of Crimea, as “indisputable” – and vowing to take France out of NATO, if she wins the French presidency later this year.

Le Pen even visited Russia to meet President Putin in the final stages of her 2017 presidential election campaign. “The Vladimir Putin of five years ago is not exactly that of today,” Le Pen has said in recent days, in an attempt to explain her past ties to Russia.

Similarly, in Hungary, President Viktor Orban’s Government has established close ties with Moscow. This has resulted in the relocation of the International Investment Bank from Moscow to Budapest. Unlike the rest of Europe, Hungary has moved towards greater reliance on Russian energy imports and, in exchange for its loyalty, has received a $10 billion credit line from Moscow.

Mirroring Le Pen, Orban has been keen to distance himself from Putin since the invasion of Ukraine, saying that “the unity of the EU is paramount”.

“We condemn the Russian attack,” Orban added. “All of Europe should be working for peace”.

Operating in the shadows, Putin has planted the seeds of political discontent in Europe by supporting rogue, anti-EU campaigns. However, with the Russian President’s aggression now manifesting in its true form – through death, repression and wreckage – his path into Europe has been slammed shut.

As the Western world unifies around the EU and NATO, the UK remains aloof – the only one to have fallen for Putin’s trap.