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Could the Scottish Islands become the next Jersey?

Kathleen Brooks, director of research

In less than a year Scotland is voting on whether to leave the UK, but far from being a simple decision on whether Scotland wants to manage its own affairs, there could be a spanner in the works.

Earlier this year the islands of Shetland, Orkney and the Western isles decided to use the independence vote as an opportunity to push for their own constitutional reform; a decision that could have far reaching consequences not only for the islands but also for Scotland’s bid for independence.

To understand this debate it’s worth putting the islands’ concerns into some context.

At least as British as Scottish

These islands have their own cultural and musical traditions that are different from the mainland; they also have a unique history. 

The islands only became part of Scotland in the 15th century when they were given to Scotland as part of a Norwegian princess’s dowry, before that they were part of Norway and spoke a Nordic dialect. That means they’ve spent longer being ruled by Westminster than Edinburgh.

The Scandinavian country is often considered the spiritual home of the islanders, not Scotland. This was in focus 36 years ago when Shetlanders voted overwhelmingly against an independent Scotland.

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Whose oil exactly?

The trouble for Scottish Nationalists is the seas that surround the islands are rich in oil and gas reserves, holding some 20% of all UK reserves.  Shetland is very influential in the North Sea oil and gas industry and the push for Home Rule could give the islands the lion’s share of “Scotland’s” oil and gas reserves.

The islands are also attractive as a renewable source of energy. For example, Orkney has attracted billions in renewable energy investment in recent years. The importance of the islands in Scotland’s energy industry could be what scuppers the Scottish independence lobby’s bid for freedom.

Scottish independence hinges on Scotland being able to fund itself on the back of oil and gas revenues, but the islands are starting to object to the rest of Scotland taking their revenues when the oil is on their lands.

British, Scottish or independent?

The island lobby group has yet to decide on whether it would stay in an independent Scotland, push for full autonomy, or choose to remain part of the UK.

However, the latter option could be an attractive consideration for the islanders due to the proliferation of islands that are also Crown dependences: Think of the Isle of Man, Guernsey and Jersey - all under the control of the British Crown, but with their own taxes and currencies. The Faroe Islands are also a Crown dependency of Denmark.

The benefits of staying within the UK could be numerous for the islands. Low taxes could help it to develop its oil and gas industry even further; it could also become a centre of renewable energy, especially if it had the power to give tax breaks to attract investment.

Jersey and Guernsey, for example, have all managed to grow thriving financial sectors, so could Shetland and Orkney follow suit? The Scottish financial sector has fallen out of favour since the financial crisis and the collapse of Royal Bank of Scotland, which did irreversible damage to the reputation of Scotland’s financial sector.

By sticking with the UK, the islands could become an attractive alternative as a new financial sector for the northern-most parts of the UK.

Firstly, the islands would still be under UK financial sector regulatory bodies, which, although far from perfect, could give them some legitimacy. Secondly, if the islands were to have control of their oil and gas revenues this could give them wiggle room to keep taxes low.

While the weather in Shetland and Orkney is unlikely to compete with Monaco or Jersey as a low tax base for the rich and famous, it could become an attractive destination for corporates to set up base, especially in the green energy space.

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Getting there

Infrastructure is a problem, after all access to the islands is often by ferry and can be dependent on capricious weather in that part of the world. However, breaking away from Scotland would pass control of ferry services to the mainland to the islands themselves.

They could also embark on their own infrastructure projects without having to get the nod from Holyrood first.

The Scottish islanders have an important decision to make in the coming 12 months – to stick with Scotland or break away and become self-governing. The financial consequences of this decision are huge and could have repercussions on all aspects of life on the islands.

And not just there, because if the islands decide to make Scotland smaller a year from now, they could hamstring the newly independent country on the very day of its re-birth.

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Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.