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16 Aug, 2008 11:04

Georgia and Russia count the costs

Georgia and Russia are no strangers to the economic costs of war. Although this week's clash in South Ossetia was a short one, the implications for both nations could be lasting.

Any military conflict usually deters investors – instability is their worst fear. The operation in South Ossetia was no exception and has inevitably had an impact on the Russian financial system. Many experts admit that Russia's investment climate has suffered, and time will be needed to restore it.

When news of the conflict broke, the Russian stock market panicked; capital flight and a fall in the value of the Rouble were the immediate reactions. But long-term investors were in no hurry to get rid of Russian assets. Russia's booming economy and rich natural resources outweighed short term political considerations. Yaroslav Lissovolik, Chief Economist at Deutsche Bank says Russia’s macroeconomic strength should see the economy withstand current shocks.

“Russia I think is still fundamentally very attractive in terms of its macroeconomic fundamentals. Even though there have been in recent periods significant blows I think Russia is able to withstand the shocks and will be able to perform strongly in the remainder of this year.”

For Georgia the aftermath may turn out to be more serious. International agencies Fitch and S&P has cut Georgia’s credit rating from B + to B, amid concern the conflict with South Ossetia may cut inflows of foreign investment. Oleg Rykhtikov, from the Institute of Economics ate the Russian Academy of sciences thinks Georgia may face longer term perceptions about its economy.

“I think that the main implication of this conflict will be that investors will be scared of Georgia because any investor needs stable and consistent policy – economic policy, relations with international investors, with other neighbouring countries.”

The stable growth of Georgia's economy that has occurred in the last ten years could be in question. But most analysts think that with external help, and no significant damage to its infrastructure, Georgia is likely to recover within a year.