Cash from overseas is used to balance the UK’s massive trade deficit and enables us to live beyond our means
Dirty Russian money has polluted British democracy. The Conservatives have taken donations from Vladimir Putin’s chums without asking enough questions about where the cash is coming from. It is time to clean up Londongrad and also to wave goodbye to a burgeoning list of sanctioned oligarchs that now includes the owner of Chelsea, Roman Abramovich.
That’s all completely true but it also doesn’t tell the whole story, which is that Russian money is just a part of an annual flow of foreign finance that enables us as a country to run permanent and massive trade deficits, where imports of goods and services are higher than exports. Put simply, we have been happy to take oligarch money so that we can live beyond our means. It is not just them, it is us.
There was a time – many decades ago – when trade deficits were a big deal. Politicians used to fret about them. They were front-page news. Famously, a bad set of trade figures was supposed to have cost Labour the 1970 general election (although they probably didn’t). But since the early 1980s, Britain’s trade deficit has got bigger and we have worried about it less. Instead, we worry about why so many of our leading football clubs have foreign owners, or why so many of the utility companies are no longer in UK hands.
A little known – but invaluable – government publication called the pink book helps explain why the two things are linked. The pink book provides an in-depth account of Britain’s balance of payments, which divides things up into a current account – which includes imports and exports of goods such as cars and computers, and trade in services such as banking or management consultancy – and a financial account that simply measures flows of money itself in and out of the country.
The point about the balance of payments is that it has to balance. Countries such as the UK that run permanent trade deficits have to sell assets to foreign buyers to raise the cash to balance the books. Over time, Britain has run a cumulative trade deficit in goods and services of £1.3tn. But in the pink book that outflow has been matched by financial surpluses – cash – of the same amount. Money we got selling British assets to foreign buyers.
The need to import foreign money became more pressing from the 1980s onwards. Britain has not run a surplus on manufactured goods since 1982 but for a time those deficits were more than matched by a surplus on services. But over time the deficit in goods grew bigger, reaching £20bn by 1990, £40bn by 2000 and £98bn by 2010. In 2019, the last year before the Covid-19 pandemic struck, it had climbed to almost £140bn.
Increasingly large amounts of foreign capital were needed to offset these deficits. In some cases, this took the form of direct investment in new British factories, such as the car plants set up by Nissan, Toyota and Honda. In some cases, it took the form of international investors owning a bigger share of the companies quoted on the London stock exchange, which has risen from under 4% at the start of the 1980s to 56% currently.
But oligarch money was also part of this process. Russians who had got rich from the privatisation of state-owned assets during the 1990s found a home for their money in the London property market. Financially, this was a smart move for them, as the limited number of mansions in Belgravia and Mayfair means prices are only ever going to move in one direction: up. Our economy needed the cash, so we were happy to take it.
Russian money – like Middle Eastern oil money – has also found its way into the Premier League. For those football fans wondering why their club used to be owned by local businessmen in the 1970s but is now in the hands of foreign owners, the pink book has the answer.
Mark Carney, when he was governor of the Bank of England, said the UK relied on the kindness of strangers to finance its trade deficit and he was quite right. What he might have added was that some of these strangers were pretty dodgy characters.
The structure of our economy is simple. For decades Britons have consumed more than they have produced. And over the past 40 years the economy’s centre of gravity has shifted from manufacturing to financial and business services, centred on the City. London’s role as one of the world’s financial hubs has made it easy to attract foreign capital.
So while making life as awkward as possible for Putin’s cronies might be a moral necessity given what is happening in Ukraine, two issues need to be addressed. The first is whether the UK should hand back any sequestered assets to any Russian people from whom they were stolen. The second is that even if London ceases to be the destination of choice for mafia bosses and drug dealers, a means will have to be found to balance the books.
Logically, this can only be done in a number of ways. The UK can strengthen its manufacturing sector so that goods exports go up. It can do even better in those parts of the service sector where it already performs well, such as management consultancy and architecture. If it does neither of these things, the import bill can be cut by consuming less. Or we can continue as before and accept that large chunks of prime London real estate will forever remain in foreign ownership.
Larry Elliott is the Guardian’s economics editor
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