Russia and Georgia: A Touch of the Cold War?

Dmitry Medvedev, Russia’s new president, was welcomed with open arms by the Western world. It was hoped that this well-mannered lawyer would usher in a new era of diplomacy and finally allow Russia to step out of the shadow of the cold war.

But did we forget? This is Russia.

In August, Medvedev demonstrated his appetite for war by formally declaring the independence of two Georgian rebel regions. Military action surely followed, and the entire episode incited international condemnation. “We’re not afraid of anything including the prospect of a cold war,” said Medvedev. “Russia is a state which has to ensure its interests along the whole length of its border. This is absolutely clear.”

Economic Power

Since the Cold War, Russia’s economy has undergone an unprecedented transformation: its stock market has mushroomed by 1,922% and growth has averaged 7.5% since 2000. Russia’s new-found prosperity has come from its gas and oil industry. With one of the world’s largest reserves and an estimated 100 billion barrels yet to be extracted, Russia has taken full advantage of the soaring oil price.

So, it seems that Russia holds all the cards in this game. As a major gas and oil supplier to Europe, Russia is in a position to exert its economic and political power with devastating affect. The EU is currently considering sanctions, but Russia’s retaliation could be far more devastating to Europe’s economy. Russia has already proved that it is willing to disconnect gas supplies to whole regions unless its demands are met: in 2006, Russia cut off gas supplies to Ukraine after a price dispute.

Furthermore, two major pipelines run through Georgia supplying gas and oil to Europe from the Middle East. Without these pipelines, Europe is heavily reliant on Russian supplies.

Economic Cost

Economically speaking, Russia’s military action is ill-advised in the long-term.

Since 1991, Russia has attracted $220 billion of foreign investment (much of which is western capital), and many Russian companies are now listed on western stock exchanges. In short, Russia’s economy is much closer to the west than it would like to believe, and the Georgian conflict could therefore have a large economic cost.

According to the Wall Street Journal, the situation has already made it difficult for Russian firms to borrow money because the Georgian conflict has “sparked prohibitive funding costs and an increasingly risk-averse investor base.”

By moving away from a diplomatic relationship with the west, Russia runs the risk of weakening investor confidence and driving money out of the country during a time of global economic uncertainty. According to Deutsche Bank, Russia could loose up to 40% of its foreign investment if the political fallout from the conflict continues to escalate. However, Russia has amassed huge reserves with which to protect its economy. Deutsche Bank also predicts that in the worst case scenario, the Georgian conflict would only slow Russia’s growth by 0.5%.

Russia seems to be having an identity crisis: in one moment they seem to welcome foreign investment into the country, but in another they are pursuing aggressive foreign policies. However, Russia currently holds the ultimate economic weapon: gas and oil. If Russia decides to hold Europe to ransom, then we may well find ourselves on the brink of a new “cold” war.

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