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Con: Investors will ignore invasion of Georgia and continue investing in booming Russia

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Gene Coyle
October 4, 2008
EDITOR’S NOTE: The writer is addressing the question, Should Vladimir Putin’s autocratic maneuvers stifle foreign investment in Russia?

The brief early-August war between Georgia and Russia brought about a dramatic drop in the value of the Russian stock market from its May high and an estimated $25 billion of foreign capital fled the country.


Recent questionable legal moves by the Putin/Medvedev administration against foreign firms in favor of Russian partners also contributed to these financial setbacks. Thus, the question of whether Western investors should continue doing business as usual in Russia is both a domestic and foreign behavior question.


The fighting in Georgia brought a knee-jerk reaction, but is unlikely to be a major consideration by foreign investors over the longer term, nor should it be.


With all due respect to Republican vice-presidential candidate Sarah Palin’s Russian expertise by virtue of having lived across the Bering Strait from Russia, her ABC-TV interview statement that Russia’s invasion of Georgia was unprovoked is factually incorrect and naive.


President Mikheil Saakashvili started the war by sending Georgian troops and tanks into South Ossetia, a province that broke away from Tbilisi when the Soviet Union collapsed. It has been a de facto separate region ever since and monitored by peacekeepers from the Commonwealth of Independent States.


Russians and Georgians have a long history of bad blood and Moscow has been particularly upset with Georgia over the last decade as it allowed safe haven to Chechen rebels, moved ever closer to the United States and sought to join NATO.


With these background factors, the Georgian attack into South Ossetia, technically still legally Georgian territory or not, presented Russia an excuse to teach the Georgians a lesson through a strong military response.


Russians have never been known for nuanced diplomacy. America was willing to risk World War III in 1962 over Russia’s placement of offensive missiles in Cuba. Are we surprised that Russia views America’s involvement in Georgia and pushing her for NATO membership with equal passion?


Saakashvili is a wily politician and has cleverly maneuvered the Bush administration into a promise of a billion dollars in aid, for “only” the cost of a few hundred lives and permanent loss of two provinces he wasn’t in control of anyway.


However, an unemotional look at the facts of this brief war will not convince European or probably even American investors that there is any moral reason to “punish” Russia by shunning long-term investment there.


And since Russia provides more than a third of Europe’s gas and oil supplies, there’s going to be no real reaction by the European Union, except for hollow rhetoric about respecting existing borders.


Western firms continue to flock to China despite its human rights record and the political issues of Tibet and Taiwan. Why should we anticipate any different behavior toward Russia?


What may give Western investors pause, however, is if Russian governmental agencies at the behest of the Kremlin continue to take blatantly biased tax, visa and regulatory actions against Western partners, as they did to force concessions to the Russian partners of BP and Royal Dutch Shell.


Post-Soviet Russia has been seen to date as a risky investment arena, but still a place to make huge returns on investment even after deducting for the cost of bribery.


But if Russia comes to be seen as a country where the rule of law is undependable, foreign companies will slow or stop investments, particularly in the energy sector where Russia still needs Western capital and know-how to develop new fields.


Fifty percent of Russian tax income in 2007 came from oil sales, so while Europe needs the oil and gas, it is a two-edged sword.


The Russian economy must also diversify if it is to continue to prosper and to do so, it needs the West. It is economic self-interest, particularly with oil prices dropping, that may moderate Russian government behavior, not saber-rattling by the Bush administration.


Gene Coyle, a Russian specialist with the CIA for 30 years, now teaches at Indiana University’s School of Public and Environmental Affairs. Readers may write him at SPEA, Ballentine Hall 502, Bloomington, Ind. 47405.

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