Vladimir Milov, president of the Institute of Energy Policy, independent politician, told to a Novaya Gazeta correspondent about economic consequences of Russia-Georgia conflict. 

Underlying reason

One may suppose that the war with Georgia has been a personal project by Vladimir Putin. This may be related to objective and personal factors. Talking of personal factor I shall remind that “pro-American disposed” Eduard Shevardnadze used to be the Kremlin’s enemy, and Mikhail Saakashvili came to power with support from Vladimir Putin. Initially, Russian state television covered with sympathy the “revolution of roses” and his first visit Saakashvili made to Moscow. Putin helped him to arrange the situation in Adzharia and remove Abashidze from power. And then something went wrong. I reckon it was a conflict of the two ambitious men. Being combined with specific understanding by Putin and his team-mates of the Russian geopolitical interests in the Caucasus, all that has led to the increasing opposition by Russia and Georgia.       

There is another underlying motive of the Russia’s willingness for the conflict with Georgia (it shall be noted that there are numerous motives for the Georgian belligerent behavior too, but we shall not consider it here). Judging from his public statements, Vladimir Putin seems to have a great complex because of the fact he has had to go to the background. It looks like Putin, who in his time became the President on the tide of the military feeling in Russia, has decided to repeat that trick for restoring his unconditional leadership. Besides, the idea of restoring the Russian geopolitical power is welcomed in the country, while Saakashvili, as an “agent of the inimical influence”, is very unpopular.   

It should be also considered that the “old enforcers” from the Putin’s team (Viktor Ivanov, Nikolai Patrushev, Viktor Cherkesov and others) have lost their influence lately. I think that Putin is forming a new team now and he seems to have staked on the army. He is likely to strengthen his personal authority in the army: generals consider him to be their man who has initiated the Georgian campaign. He has allowed them to get promotion, decorations, and to better the status of the army within the society: we have not been carrying out military operations outside the country since 1989. The forming liaison between Putin and the army possibly indicates of him building “the new guard” that is to support his political positions.    

What has been happening must be disliked very much by President Dmitry Medvedev. He has had to do hard job for bettering the situation and looking for the way out of the conflict initiated not by him. Entering upon his office, he agreed to hold it in the country with good stability, growing economy and huge gold and currency reserves, and small external debt. He was supposed to be engaged in projects like judicial reforms and struggle against corruption. And now he is dealing with the conflict that changes the situation in the country and in the world and makes him busy with alien to him matters. I believe that after Putin got Medvedev involved in a serious conflict, their relationship is likely to unravel. Possibly, we shall see soon the leaders pass from “tandemocracy” to terminal decision about who is in authority. We either shall come back to ruling by Putin or people discontent with the war (for example, those managing the state oil and gas sector and whose commercial interests are damaged with this war) will make Medvedev take the reigns.          

On war outcomes

The economic outcomes of the Russia-Georgia conflict may be divided into three main groups. 

First, this is about direct military expenses (like damages made to the warlike equipment) and compensation of the damage caused with the conflict. Russia has already stated that she is going to finance restoration of the South Ossetia. The damage is estimated differently from 13 to 20 billion rubles. The figures are like to increase, as in case of Chechnya the final estimations turned out to be higher than the initial ones, with the factor of 2-2.5. Thus, restoration of the South Ossetia may cost the budget about 40 billion rubles (which is about $1.5 Bn). This amount is not critical for the current state of the Russian economy. However, the country could have avoided this expense but for the failures of our politics in the Caucasus.       

Second, getting Russia involved in the conflict influences negatively the investment climate in the country. Foreign investors withdraw their capitals from Russia as from an unstable country where the leadership is capable of getting involved in military operations on the adjacent territory. The armies of the US and European countries carry military operations far from home. And with the present conflict there is immediate threat of direct blows on the Russian territory. Along with that, the ports of Novorossiysk and Tuapse, situated near the zone of the conflict, are the key junctions of the Russian oil export, and the Olympic Sochi is just 30 km away from the potential zone of military operations. All that offers a poor incentive for commercial activities.      

The immediate war risk for investors is combined with the irrational behavior by the authorities having initiated the cases of Mechel and TNK BP. The regulating institutions are used as an instrument in struggle for property. Dmitry Medvedev reasoning about legal nihilism, the investors, looking at the general situation, see the Russian leadership not observe the laws and international agreements: in case with Georgia it did not even comply with the Constitutional provision requiring getting consent from the Federation Council for using the armed forces outside the country. Investors prefer not to deal with aggressive authorities disrespecting the laws and violating the rules in order to achieve some short-term goals. That has already led to a situation where the gold and currency reserve by the central Bank has decreased for over $16 Bn within two weeks. Possibly, that money has been spent on supporting the ruble. The index of the Russian Trading System has fallen too: 60-70% of shares circulating in the Russian market belong to foreign investment funds.      

The third outcome has to deal with the problem of integration of Russia into the global economy. Russian authorities saw strengthening the positions of the Russian companies in the world and acquiring by them the foreign assets to be one of the strategic goals. Now we should expect to have a cold shower. In September 2007 the European Energy Commission presented the third package of initiatives related to the reform of electricity and gas market. In particular, an “anti-gazprom” amendment has been proposed restricting opportunities of acquiring the European strategic infrastructure by non-European companies. The initiative has caused many arguments then, which are lessened now. The US being disposed especially aggressively, I reckon that Gazprom would not get a share in gas pipeline in Alaska and terminals for reception of the liquefied gas.          

It’s difficult to estimate the scale of the future financial problems, but in case our companies were allowed acquiring assets in the EU and in the US, they would be able to grow into global corporations managing their own property all over the world. However, it seems that it is not going to be allowed to make competitive companies on the basis of the home enterprises. It might happen in the future that Russia unlike China, the US or Europe, would not be able to strengthen her economy with foreign assets.    

Of course, there will be no cold war, and the joint economic projects will be developing. However, the scale of cooperation is likely to decrease. This may turn Russia into an isolated enclave of soviet type living off exchanging the oil and gas for consumer’s goods, without prospects of integration into the world economy. Incidentally, the Russian ministry of economic development recognizes a “raw material” scenario to be quite realistic.