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.

TRIUMPH OF THE CITY

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 empty but 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 little and 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.

FOREIGN FUNDING

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 economy contracted 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.

THE CAPITAL AND INEQUALITY

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.