Is The U.K. Seriously Afraid Of Russia?

(Forbes.com) British Prime Minister David Cameron made his case to Parliament for an extra 12 billion pounds ($18 billion) in defense spending on Monday, looking for extra cash to fight…Russia.

Heavy equipment is being revved up in the fight against terrorism and Russian submarines, apparently, while the more useful police forces there brace for more cuts. Cameron is clearly opting to side with Washington’s view that Syria will be taken care of by American foreign policy, not Russian. The latest Russia threat news comes a day before a Turkish F-16 fighter jet shot down a Sukhoi SU-24 for invading its airspace near Syria. Russia is running bombing raids of Islamic State and other anti-government forces in the country. As a result of the shoot-down, the Russia political risk dial got cranked to 10 on Tuesday.

The Market Vectors Russia (RSX) exchange traded fund reacted by falling 2.7%. Russian bond spreads rose by around 9 basis points. The move was not significant, despite being the biggest expansion in spreads over Treasurys today.

Whereas just a week ago it looked like Russia would be a welcome force in the fight against jihadis in Syria, it now looks like the Western powers prefer to isolate Russia instead, with Cameron singling them out in the need for more defense spending. This does not bode well for sanction removal or relief to the Ukraine crisis, as Russia could lash out against the West as it weighs the possible narratives working against it, both real and imagined.

Investors are taking as much note of Russian relations with the West as the foreign policy wonks.

It used to be that sovereign risk contributed over half of the risk factors in emerging markets. Economic and cyclical factors were the next largest components. But over the last three years, political risk has rapidly become an issue with Europe being the star performer. Sentiment drives short-term trades on stocks and bonds. Electoral events are becoming more radicalized, political parties are becoming more strident, and nationalism is gaining momentum in Europe. Recent events in Syria point to the difficulties of combining national and international interests.