Once the dust settles on the global market earthquake, investors may well decide Russia is just too big to ignore regardless of how far its war in Georgia has damaged its economic and diplomatic relationships. The specific political risks of doing business and investing in Russia will need be tested against the allure of a resource-rich economy with a fast growing middle class hungry for consumer goods. The European Union's economic relations with Moscow could also become a source of transatlantic friction, to judge by US Secretary of State Condoleezza Rice's speech urging Europe to join Washington in standing up to “bullying” by Moscow. The EU's two-way trade with Russia, its biggest energy supplier, reached almost $350 billion last year, more than 10 times the volume of US-Russian trade at $26.7 billion in 2007. That helps to explain why the EU-Russia relationship is one of economic interdependence, while Washington's ties with Moscow remain based on geopolitics and security, and hence more prone to ideology than pragmatism. European governments are split between those, mainly in continental western Europe, who favour engagement and those, mostly in ex-communist central Europe, who advocate a tougher line to isolate and contain a resurgent Russia. Some EU officials say that dichotomy could be exacerbated if Republican John McCain wins the US presidential election and lives up to his anti-Russian campaign rhetoric. The Georgia war does not seem to have changed minds in the governments of France, Germany or Italy, although a pan-European opinion poll showed public concern about Russia's behaviour was growing across Europe as early as June. President Dmitry Medvedev and Prime Minister Vladimir Putin have dismissed suggestions that they triggered a wave of capital flight by sending tanks to crush an Aug. 7 Georgian attempt to recapture the separatist region of South Ossetia. For investors already caught up in a global tide of risk aversion, the war compounded concerns over the treatment of British energy major BP in a dispute with Russian partners in a joint oil venture, and over Putin's threats against coal miner Mechel. Analysts say Moscow could further undermine confidence with more politically related energy supply disruptions this winter. “There is clearly a reassessment of Russia risk and that will make funding conditions for Russian banks and Russian corporates difficult even after the current crisis,” said Shahin Vallee, a currency strategist at BNP-Paribas. Political tension and fear of arbitrary state action against foreign companies will make it hard for Moscow to entice investors back, he argued, even if the government takes business friendly measures and sticks to prudent fiscal management. However, Russia may prove too big and dynamic a market for Western business to shun. “The authorities will now need to take steps to regain confidence – a task that may be more challenging given the conditions in the global economy,” said Tina Fordham, senior political analyst at Citi Economic and Political Strategies in London, part of Citigroup Inc. “But for companies taking a long-term perspective, Russia remains a compelling market.” She noted that Moscow had acted to reassure and lure back investors after the 1998 financial crash and the state-forced bankruptcy of Russian oil giant YUKOS in 2003-04. While EU and NATO policymakers have debated behind closed doors ways of applying economic leverage to influence Russian behaviour, there is no consensus on how this might work. The United States has said Russia has damaged its prospects of joining the World Trade Organisation and the Organisation for Economic Cooperation and Development, a think-tank for advanced industrial nations, by its action in Georgia. But EU Trade Commissioner Peter Mandelson argued it would be counter-productive to withhold WTO membership to punish Moscow. “I don't think it's in anyone's interests to keep Russia out of the WTO for a day longer than is avoidable,” he told Reuters. Many in Brussels and in markets see Russia's integration into the international economic system as a key part of its long-term transition, creating incentives for the Kremlin to live by shared rules. Russian stocks had lost up to 60 percent of their value since May until they rebounded on Friday on a $130 billion state support package. The central bank spent billions of its currency reserves, the world's third biggest, to defend the rouble. – Reuters __
