Counting the costs after the conflict

Politically, the most recent news generated by the Russian-Georgian conflict has been relatively positive.

Moscow has committed to withdrawing its troops from Georgia by early October, Tbilisi has foresworn any attempts at using force to reincorporate its two separatist regions, and Washington has said it won't take any unilateral action against Russia.

But the measured hopefulness on the political front may take a while to be transmitted to the economic realm, as concern remains among investors over the long-term effects the clash over South Ossetia will have on trade relations with the West.

Worries persist that events have reinforced Cold War stereotypes among Western investors and could trigger the kind of retaliatory measures and economic isolationism that have often been the Kremlin's response in the past.

Speaking at the Baikal Economic Forum in Irkutsk on Tuesday, First Deputy Prime Minister Igor Shuvalov insisted that Russia had no intention of shutting itself off from the global economy.

Finance Minister Alexei Kudrin put the case more strongly.

"From my point of view, the situation has now been resolved, and political risks have disappeared. The situation is now clear," Kudrin said Tuesday, Reuters reported.

"Investors can now relax and start acting," he said. "If you want to make money in Russia, please, go ahead."

That has not stopped many from worrying that questions of politics might trump those of economics and trade.

"The Russian leadership seems to be willing to maintain massive short-term damage to the economic climate in exchange for political goals," said Alexander Kliment, an analyst at Eurasia Group in New York.

Foreign investors began reducing their Russian holdings as early as June because of financial pressure caused by the global credit crunch, but the increase in perceived political risks appears to have given them additional incentive to leave.

The political undertones to the months-long battle for control at TNK-BP, a British-Russian joint venture, and the battering on stock markets taken by mining and metals company Mechel following blistering public criticism from by Prime Minister Vladimir Putin in July only heightened the worries of foreign investors.

"The war neatly compounded a number of concerns investors had about Russia this summer," Kliment said. "Investors are seeing a level of unpredictability in Russian decision-making, and they're uncomfortable with it."

In an emerging markets note from Goldman Sachs on Monday, the investment bank noted that "ongoing political tensions" would likely influence investor attitudes for at least the next few months, and it could be months before the Russian market is able to shake off the effects of negative political events and larger factors affecting the global economy and markets.

Part of the uncertainty in determining how long the negative effects might last comes from the fact that there are few historical precedents to study. One point of reference, however, might be the fallout from the Kremlin's assault against oil company Yukos beginning in 2004.

That incident, in which CEO Mikhail Khodorkovsky was ultimately convicted on charges of embezzlement and tax evasion of billions of dollars, sending risk premiums to levels that were ultimately only whittled down over the period of the next two years.

While foreign investors are being scared away from the Russian markets, trade relations with the West are being subjected to a cat-and-mouse game between Russia and the EU, as they attempt to settle political differences without harming what Paul Vandoren, the Head of the European Commission Delegation to Russia, stresses is a relationship based on economic interdependency.

Vandoren said the volume of EU-Russian trade has increased at a rate of 25-30 percent annually over the last few years and that the business communities at both ends of that trade would continue to talk to each other, "provided the investment climate remains positive."

One area where Russia and the EU must collaborate significantly is in the transport of oil and gas.

Russia's enormous Shtokman gas field in the Barents Sea, which is slated to begin production in 2014, will depend on significant investment and access to technical expertise if it is to be realized, and the entire gas sector is dependent on the construction of Europe's Nord Stream and South Stream pipelines to give it dependable access to European consumers, its largest foreign consumers.

Vandoren said that although the EU and its member states had been discussing the diversification of new energy routes for years, in the "current political environment" this discussion was now perhaps taking place "more intensely." The temptation will remain for Russia and the West to use oil and oil pipelines as a bargaining chips in future negotiations.

According to Eurasia Group's Kliment, the conflict in Georgia intensified anxiety in the West over the lack of alternative energy routes bypassing Russia and the volatility inherent in regions like the Caucasus, through which many of these routes would pass.

"Who is going to confidently invest in a pipeline that goes across Georgia these days?" Kliment asked.

On the Russian side, it seems unlikely that Moscow would ever completely renege on or pull out of an existing trade arrangement with the EU.

"Russia will never renege on existing contracts with Europe, but what it can do is delay or cancel new projects, and that scares Europe," said Chris Weafer. As an example of one new project that was shelved, Weafer pointed to the cancellation of an international tender in 2006 for part ownership of the Shtokman field.

He said that neither political tensions nor further delays in Russian accession to the World Trade Organization were likely to have a major effect on Russian companies abroad.

"It doesn't suit Russia to push WTO too quickly because they want more time to develop their industry and build up their domestic economy first," Weafer said. "There are certainly organizations that Russia wants and needs to be a member of, but it can afford to wait a couple years."

Weafer said Russia's biggest challenge would be meeting the commitments it outlined at the halfway point of the year, when Russia was enjoying an influx of foreign capital, partly at the expense of competitors like China.

Since July 1, almost $1 billion has been taken out of Russian funds and moved into the markets of the three other so-called BRIC countries: Brazil, India and China. Now, he said, Russia will have to work even harder to recapture this lost "window of opportunity."

"The most important driver will be the government's ability to push forward the promised reforms: rebuilding infrastructure, setting up the basis of new industries and dealing with the corruption of bureaucracy," Weafer said. "We will want to hear not the grand words we heard in the first half, but timetables and specifics."

Playing devil's advocate, George Nianias, chairman of Denholm Hall Capital Markets, suggested that Russia might have decided that short-term economic losses were an acceptable price to pay in establishing itself as a political "force not to be trampled on."

"Russia has probably lost a few tens of billions in new investments over the next year, which is relatively a very small figure compared to Russia's reserves of $600 billion -that's the thinking," Nianias added. "I'm not saying [this reasoning] is absolutely right, but I'm saying that it is an argument that some Russian political leaders may believe has merit."

All rights reserved by Rossiyskaya Gazeta.

This website uses cookies. Click here to find out more.

Accept cookies