The sanctions imposed against Vladimir Putin by the EU promise to be the toughest against the Russian bear since the Cold War ended. As far as the UK is concerned, it appears that it will be the London property market that will be affected most and be forced to bear the brunt of these sanctions. Is it even possible to have low deposit mortgages available – a common concern among homeowners?
The main sanctions centre around energy exploration, an embargo on arms and restricting Russian banks from trading in European markets. This strategy is designed to strangle the Russian economy, thus, convincing Putin to drop his support for Ukrainian rebels. Questions are being raised, though, about who will be strangled more by these sanctions.
How this works out is all speculative, of course. BBC interviewed several bankers and revealed the following possibilities:
1. Action against Russian banks could cause the Russian rubble to lose value.
2. The sanctions could force Russia to abandon London and look elsewhere for friendlier financial climates which could include Hong Kong and Shanghai.
In the BBC report, financial analyst Chris Skinner speculated that Russian oligarchs who have invested in London property could reap financial benefits as the value of the rubble falls through foreign exchange fluctuations. These Russian billionaires would come out winners in the sanction game. You can read more about it here.
The Bank of Russia reported that it’s not seeing any ill effects from the sanctions.
As UK Prime Minister David Cameron and the party of French President François Hollande accuse each other of hypocrisy for not imposing tougher sanctions against Putin, it appears that Russia’s oligarchs – so far – are sailing along smoothly in the London realty market.
Francine Carrel, international property reporter for OCC, is reporting that the sanctions will mostly hurt London property owners. In this post, Carrel wrote that Russian money accounts for about 2% of the super-prime capital in the realty market. Quite simply, the Russian oligarchs, as is true of their Chinese counterparts, see London realty as a safe port for their fortunes.
Russian attorney Lyubov Jones, who is familiar with the London property market and Russian buyers, warned that any sanctions that would force the Russians to sell their stake in London property would have immediate and long-lasting negative effects. These include:
1. The purchase of expensive property for cash.
2. These cash purchases could cause an artificial steep and immediate rise in property values.
3. Prices for houses could increase dramatically across the UK.
4. Because of a steep rise in property value, many properties could remain unoccupied and fall into disrepair.
Central London could certainly see some immediate benefit from a weak rubble, according to an unidentified spokesman for Cameron. However, Jones warned that Russian oligarchs build trust slowly with partners. Any sanctions could destroy that trust. Once that trust is dashed, it’s almost impossible to build it up again.
Overall, Russia’s wealthy citizens have placed a good deal of money in the UK. The London property market is quite popular with Russians. What’s more, there are low deposit mortgages available if you shop around diligently. City Index reports that the majority of property valued at more than £2m is purchased mostly by Russian and Chinese citizens.
It’s believed that if sanctions against Russians buying London property are enforced, London’s housing bubble will pop.
Overall, sanctions can be a risky political and economic play. Few know how the game will play out and who will benefit and who will be harmed.