President of the Energy Policy Institute Vladimir Milov shared with Novaya Gazeta his vision of infighting at the top and the economic consequences of the Russian-Georgian conflict.
Background to war
The war with Georgia may have been Vladimir Putin's personal project. There are both objective and subjective reasons for that. Speaking about subjective factors, it will be recalled that the "pro-American" Eduard Shevardnadze used to be the Kremlin's enemy, while Mikheil Saakashvili had come to power with Vladimir Putin's support.
Initially the Russian media gave sympathetic coverage of the Rose Revolution, Saakashvili's first foreign visit took him to Moscow; Putin helped him sort out the situation in Adjaria and remove Abashidze from power. Then something changed. Perhaps there was a conflict between two ambitious leaders. The peculiar way in which Putin and his team interpret Russia's geopolitical interests in the Caucasus was a recipe for an escalating confrontation between Russia and Georgia.
There is another reason why Russia was on a collision course with Georgia (of course there were many factors behind Georgia's bellicose behaviour, but that is another matter). Judging from his public speeches, Prime Minister Putin feels uncomfortable being in a secondary role. It looks as if Putin, who became the Russian President riding a crest of warlike sentiments, decided to use the same trick to reassert his unchallenged leadership. Besides, the idea of restoring Russia's geopolitical might is popular in Russia while Saakashvili is extremely unpopular and is thought to be "a foreign stooge".
One should also note that the "old siloviki" who worked under Putin (Viktor Ivanov, Nikolai Patrushev, Viktor Cherkesov and others) have lately lost their influence. I think Putin is forming a new team and he seems to have put his stake on the army. Putin has a good chance of boosting his personal authority with the army: the generals think he has initiated the Georgian campaign. He presided over their promotions; he gave them decorations and boosted the army's status in society. It has to be remembered that we have not engaged in any combat action outside our own territory since 1989. The emerging link between Putin and the army may be a sign that he is forming a "new guard" which will shore up his political positions.
President Medvedev is probably deeply resentful of all this. He was stuck with the ungrateful task of righting the situation, exiting from a conflict that he did not initiate. In assuming this post he agreed to head a country which is stable, whose economy is growing, whose sovereign wealth is huge and foreign debt is small, and where one can happily engage in such projects as the reform of the judiciary and the fight against corruption, but then a conflict arises that changes the situation in the country and in the world and forces him to do work for which he has no appetite.
I think that after Putin dragged Medvedev into a major conflict the relations between them must sour. Probably we will see a showdown between the members of the leading tandem to determine who the real boss is. We will either be back under Putin or else the people who are unhappy about the war (for example those in charge of the government's oil and gas sector and feel the harm it does to their commercial interests) will force Medvedev to take the reins in his hands.
The aftermath of the war
The economic consequences of the Russian-Georgian conflict can be divided into three main categories:
First, direct military cost (for example, losses of combat vehicles) and making good the damage caused by the conflict (Russia has promised to finance the reconstruction of South Ossetia). The damage is variously estimated at between 13 and 20 billion roubles. The figure is likely to grow (in Chechnya the estimates ended up being 2-2.5 times greater than expected) so that the reconstruction of South Ossetia may put the budget back about 40 billion roubles (about $1.5 billion). This is not a critical sum for the Russian economy today, but the country could have been spared the expense if our Caucasus policy had not suffered setbacks.
Second, Russia being drawn into the conflict affects the investment climate inside the country. Foreign investors are removing capital from Russia, which they see as an unstable country whose leadership can become embroiled in military actions in adjoining territories. The US and European armies are fighting far away from home. But in the present conflict, Russia could be exposed to direct strikes on its territory. The Novorossiisk and Tuapse ports, which are close to the conflict zone, are key hubs for Russian oil exports; and Sochi, which will host the Olympics, is just 30 km away from the possible combat zone. All this is not conducive to greater commercial activity.
The immediate military risk for investors is coupled with the generally irrational behaviour of the authorities who initiated the Mechel and TNK-BP case. Regulatory institutions are being used as an instrument of grabbing property.
Dmitry Medvedev talks about "legal nihilism", but investors assessing the overall situation see that the Russian leadership fails to honour the law and international agreements: in Georgia's case it even broke the constitutional provision that forbids the use of armed forces outside Russia without the Federation Council's approval. Investors prefer not to deal with aggressive governments which show contempt for the law and are ready to break the rules to achieve short-term goals. As a result the Central Bank's gold and currency reserves shrunk by more than $16 billion within two weeks. Perhaps the money was used to buttress the rouble. The RTS index has plummeted, as 60-70% of the shares circulating in the Russian market are owned by foreign investment funds.
The third consequence is Russia's integration into the global economy. The authorities declared strengthening the position of Russian companies in the world and their purchase of foreign assets as one of their strategic goals. Now we are waiting for a cold shower. In September 2007 the European Energy Commission tabled the third package of initiatives connected with the reform of the electricity and gas market. It included, among other things, an "anti-gas amendment" to make it more difficult for non-European companies to purchase European strategic infrastructure assets. That initiative provoked a lot of argument at the time. The US is in a particularly aggressive mood, so I believe that Gazprom can forget about buying into the Alaska gas pipeline and its liquefied gas terminals.
It is hard to assess the scale of future financial problems, but if our companies were allowed to freely acquire assets, especially in the European Union and the US, they would have turned from domestic entities into global corporations managing assets across the world. But the chances that we will be allowed to turn Russian enterprises into competitive companies are slim, and it may even happen that in the future, unlike China, the US or Europe, Russia will be unable to strengthen its economy through acquiring foreign assets.
Of course, there will be no cold war; joint economic projects will continue, Nord Stream, for example. But the scale of cooperation will be diminished. It may turn Russia into an isolated Soviet-style enclave living by exchanging oil and gas for consumer goods without any prospect of genuine integration into the world economy. By the way, the Ministry of Economic Development thinks this is a very realistic scenario.