Russia puts strain on Georgia

August 25, 2008
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, MOSCOW, August 25 – Russia\’s march into Georgia is putting new strains on the love-hate relationship between Russia and Western investors, as some detect a new tilt towards Soviet-style state domination of the economy.

Analysts say Russia\’s military surge into Georgia could alter not only the political map but also the nature of Russia\’s economy, which has boomed in recent years, with the wealth centred on natural resources such as oil.

"This is all about former President Vladimir Putin. Putin\’s group is very much pro-Soviet, protectionist," said economics professor Konstantin Sonin, of the privately run Centre for Economic and Financial Research in Moscow.

"He in a sense becomes more entrenched with this conflict. His hand is stronger politically so everything connected economically is also stronger. The idea of using energy as a global weapon becomes more important," Sonin told AFP.

Defiance has been the main emotion coming from Moscow as President Dmitry Medvedev and his mentor Putin, now in the prime minister\’s post, have defended Russia\’s thrust into Georgia sparked by clashes in the pro-Moscow rebel region of South Ossetia.

But Russian officials have also had to reassure panicky investors.

Following the start of hostilities on August 8, Russia experienced a massive outflow of capital — Finance Minister Alexei Kudrin said capital flight due to the conflict had equalled seven billion dollars (4.7 billion euros).

Foreign currency reserves plunged at least partly due to the conflict, analysts said, falling a massive 16.4 billion dollars in the week after the start of fighting.
"The war in Georgia has dented the international sentiment towards" Russia, said analyst Ed Parker of Fitch Ratings in London.

"Political risk and the poor business climate are long-standing issues…. In the past they\’ve weathered similar sorts of crises but this is a reminder of some of those sorts of risks and will have a lasting impact," he said.
Worries are not shared equally across the board.

With defence exports last year worth some seven billion dollars, that industry can expect rewards from a more anti-Western policy, says Sonin.
And with its vast reserves of oil and gas, few expect interest in Russia\’s energy sector to drop off.

Some may even hope for gains from mayhem in Georgia as it raises the riskiness of several Western-backed pipeline projects there aimed at loosening Moscow\’s grip on energy supply, says Valery Nesterov, an analyst at Moscow-based investment bank Troika Dialog.

"Oil producers — they\’ll have business as usual," he said, adding that gas monopoly Gazprom "might even have some benefits" from a dropping off of Western interest in one gas pipeline project, Nabucco, intended to run through Georgia.

But while Russia may be able to get by on traditional sales of its huge natural resources — everything from oil to timber, coal and gold — a hostile attitude to the West still has negative implications.

On Friday, Putin appeared on television to restate ambitious plans for improving the lives of ordinary Russians and ensuring the "rational integration of Russia into the world trade system" — a reminder that Russia has yet to succeed in joining the World Trade Organisation.

Analysts say that to meet its development goals Russia needs help from well-disposed foreign investors, particularly in hi-tech Europe, and warn that the kind of bad news coming from Georgia could put such help in jeopardy.

Against a background of attacks by the state on foreign investors, notably British-Russian oil venture TNK-BP, the current crisis "could have a very serious longer term impact" on investor confidence, said analyst Chris Weafer of UralSib financial house.

"If there was to be any follow-up — further deterioration, a rift with the European Union — we\’d see a lot of investors either pulling out of Russia or shunning the place," he said, noting that Medvedev came to office in May promising to tackle corruption and improve the business climate.

"One reason why the stock market did very well in the second quarter was the promise we were going to the next phase in developing the economy…. If there\’s a more negative relationship with Europe this changes the plan," said Weafer.

Parker at Fitch Ratings adds that Russia\’s many indebted private companies can ill afford a heightened perception of risk, much of their debt being overseas.

And Sonin warns that oil riches are no shield against inflation, which at around 15 percent is hitting people hard.

He says a current budget surplus is also likely to slip into deficit in a year or two due to the state\’s massive social spending and investment in state companies.

Amid blanket media support for the official line on the conflict — the need to defend Russian citizens in South Ossetia — it is rare for commentators to oppose the military action.

But in an article in the business paper Vedomosti last week, Sonin insisted there were more important things for the Kremlin to be doing.

"Of course one can\’t not protect our citizens and civilians in South Ossetia.

"But rather than spending time and energy on geopolitical — in other words emotionally-charged but not really important — issues, it\’s necessary to return to important things," he wrote.

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